Wednesday, February 26, 2020

Behavioural Biases are in All of Us

The findings of behavioural economics are often cast as the ways that we’re irrational. This allows us to laugh at the foolish things other people do and know that “since I’m rational, none of this applies to me.” But this isn’t true. Many of these biases are baked into all of us.

Consider the tendency to heavily discount the future. To take a cookie now instead of two cookies in a year is to give up a 100% return. However, look at this from the point of view of our distant ancestors who lived on the edge of starvation. They couldn’t afford to plan too much for the future and possibly starve today.

When people refuse a 50/50 coin flip to either lose $100 or gain $200, they are using a rule of thumb that appears to be baked into all of us to avoid a loss even at the expense of the possibility of a much larger gain.

We seem to have many such rules of thumb baked into the automatic part of our brains. These rules of thumb have served us well throughout human evolution, but they sometimes give us the wrong answer to modern questions such as “should I save some of my windfall or just go blow it all on a wild trip to Las Vegas?”

When we discover a rule of thumb people use that gives poor answers to some questions, we call it a behavioural bias and declare people to be irrational. I’ve done this myself. However, I now just think of it as a useful short-cut rule that my brain misapplies sometimes. Viewed this way, it’s easier to accept that these behavioural biases are part of me and not just other people.

Rather than label others as irrational, I’m better off accepting that behavioural economics applies to me, and that I need to look out for situations where my first quick answer isn’t the best one.

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