You’re So Irrational and That’s ok!

We like to think of ourselves as rational creatures overall. We want to believe our opinions and choices come from a place of logical cost-benefit analysis. That we make our decisions using the neocortex of our brain and not the messy feelings of our more primitive limbic system.

But this is not the case. The limbic system is old, powerful, and as seen in our article on ingroup bias it is often prepping our choice before the neocortex is even involved. There is an entire field of study devoted to our tendency towards irrational choices. Behavioral Economics blends insights of psychology and economics and provides valuable insights into how individuals are not always behaving rationally or in their best interest. These insights can be used to create environments that nudge people towards wiser decisions and healthier lives.

Insights for Wiser Decisions

In 1974 Amos Tversky and Daniel Kahneman’s paper on heuristics and biases explored what is known as “anchoring bias or anchoring effect”. This is most commonly associated with purchases. “People make estimates by starting from an initial value that is adjusted to yield the final answer,” they explained, “The initial value, or starting point, may be suggested by the formulation of the problem, or it may be the result of a partial computation. In either case, adjustments are typically insufficient. That is, different starting points yield different estimates, which are biased toward initial values.”

This bias reveals itself whenever you are susceptible to sale signs and is generally associated with making purchases.

Say you saw something at a store marked down from $200 to $150. You purchase it. Later you see the same item at a different store for $90. Because you were primed for the higher $200 number $150 seemed like a good deal though it was not.

The research of Kahneman and Tversky found that even arbitrary numbers could lead people to make incorrect estimates. For example, experiment participants were asked to spin a wheel to select a number between 0 and 100. The volunteers were then asked to adjust the number up or down to indicate how many African countries were in the U.N. Those who spun a high number gave higher estimates while those who spun a low number gave lower estimates. In each case, the participants were using that initial number as their anchor point to base their decision.

Given that arbitrary numbers (which participants knew were arbitrary numbers) could make such a difference when guessing the number of African countries in the U.N.  it should come as no surprise that anchoring bias influences more than money.

What age do you expect you’ll live to? Your answer most likely forms itself from assumptions based on older people in your family.

What should your 13-year-olds curfew be? If yours was 8:00 pm you might think 10:00 pm sounds very late. If yours was 11:00 pm you might think you’re being a bit strict with a 10:00 pm curfew.

What illness is responsible for a patient’s chronic pain? Unfortunately, the anchoring effect can influence a physician’s ability to accurately diagnose an illness. Their first impressions of a patient’s symptoms can create an anchor point for all subsequent assessments.

Awareness of this tendency and being willing to put in the work of researching products and perspectives are important aspects of making wise choices.

Your Health

In previous articles we addressed procrastination and breaking bad habits. Both important areas of study for behavioral economists and both key elements in living healthy productive lives.

Results from similar thought-provoking studies on loss-aversion can also provide useful tools for staying on a healthy track.

One recent study used a control group of smokers setup to monitor how successful they were at not smoking for 6 months. They were given information on traditional methods to quit and free nicotine patches. Their success rate was six percent.

The second group of smokers was called “the reward group”. They were offered $800 if they were smoke free for six months. Seventeen percent quit for the six months.

The third group is interesting. They were asked to put down a deposit of $150 dollars and if they were smoke free at the end of six months they received the deposit back along with $650. Fifty-two percent were successful.

Such is the power of loss-aversion.

Having someone hold you accountable is important in goal setting. Perhaps it’s beneficial to expand on this and have a deposit program with such a person to keep your diet, exercise, or unhealthy habits under control.

It’s Ok

Noted behavioral economist Dan Ariely’s book on The Upside of Irrationality examines the way we work, and how to override irrational impulses with our knowledge of them. But it also begs some forgiveness for the human condition of irrationality.

That we are not like the character of Spock on Star Trek has contributed much to our development, complexity, and growth. And being irrational also made us an adaptable species, and therefore a very successful one.

A particularly poignant study of Ariely’s looks at the importance of meaning in work. Participants in two groups were asked to assemble lego robots. All participants were told that the robots would be taken apart after for the study, and were given a little less money with each robot made. The individual participants could decide for themselves when it was no longer worth it monetarily for them to continue making the robots and would chose when to stop.

The only difference between group one and group two was that group two would witness the researcher taking apart the robot they had just made.

Group one made an average of 10.6 robots earning $14.40. Group two made an average of 7.2 robots earning $11.52.

Participants were later given outlines of these studies and asked to guess the results regarding the two groups. While they were correct in their answers regarding group two making less robots they drastically underestimated by how much (answers being closer to a difference of one robot).

It isn’t logical that we should attach so much importance to meaning, to feeling worthy and like we accomplished something. Our modern survival is so tied into the financial benefits. But meaning is that important to us, because we are not animatrons. And our silly irrationality in such cases is what makes us beautifully human.

We hope to welcome you back to this space with our next article exploring optimism bias.

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Sources:

1. The Upside of Irrationality, by Dan Ariely

2. How Anchoring Bias Affects Decision Making,by  Kendra Cherry in Very Well Mind

3. The Behavioral Economics Diet, by Nir Eyal in Nir and Far