Monday, May 15, 2017

Cognitive Biases

Anchoring or focalism is a term used in psychology to describe the common human tendency to rely too heavily, or "anchor," on one trait or piece of information when making decisions.

During normal decision making, individuals anchor, or overly rely, on specific information or a specific value and then adjust to that value to account for other elements of the circumstance.

Usually once the anchor is set, there is a bias toward that value.

Take, for example, a person looking to buy a used car - they may focus excessively on the odometer reading and the year of the car, and use those criteria as a basis for evaluating the value of the car, rather than considering how well the engine or the transmission is maintained.

Availability heuristic

Availability is a cognitive heuristic in which a decision maker relies upon knowledge that is readily available rather than examine other alternatives or procedures.
"There are situations in which people assess the frequency of a class or the probability of an event by the ease with which instances or occurrences can be brought to mind. For example, one may assess the risk of heart attack among middle-aged people by recalling such occurrences among one's acquaintances. Similarly, one may evaluate the probability that a given business venture will fail by imagining various difficulties it could encounter. This judgmental heuristic is called availability. Availability ia a useful clue for assessing frequency or probability, because instances of large classes are usually reached better and faster than instances of less frequent classes. However, availability is affected by factors other than frequency and probability. Consequently, the reliance on availability leads predictable biases,[...]"  Tversky and Kahneman (1974)

It is easier for us to recall information which has recently arrived. Stocks with very high levels of press coverage underperformed in the subsequent two years

"We find that overestimation of the subjective probabilities can cause overreaction and underreaction of expectations and, subsequently, asset prices."Chiodo et al. (2002)

Bandwagon effect

When people see some new idea or product and wonder if they should adopt it, evidence of others enjoying and having fun is highly influential.

Numbers are important for the bandwagon effect to take hold. If we see three people on the bandwagon and know that hundreds have not joined, then the reverse effect will take place and we will be loathe to join. If, on the other hand, we see the wagon nearly full with lots of people we know or admire, then we will desperately try to grab the 'final' places.

Once bandwagons have enough participants they are often self-sustaining and people get on board for social rather than ideological reasons.

Bandwagons often have limited lifetimes and eventually run out of steam. People will quickly abandon the 'sinking ship' if they see others leaving.

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Blind spot bias

The bias blind spot is the cognitive bias of recognizing the impact of biases on the judgement of others, while failing to see the impact of biases on one's own judgment. The term was created by Emily Pronin, a social psychologist from Princeton University's Department of Psychology, with colleagues Daniel Lin and Lee Ross.  The bias blind spot is named after the visual blind spot. Most people appear to exhibit the bias blind spot. In a sample of more than 600 residents of the United States, more than 85% believed they were less biased than the average American. Only one participant believed that he or she was more biased than the average American. People do vary with regard to the extent to which they exhibit the bias blind spot. It appears to be a stable individual difference that is measurable (for a scale, see Scopelliti et al. 2015).

The bias blind spot appears to be a true blind spot in that it is unrelated to actual decision making ability. Performance on indices of decision making competence are not related to individual differences in bias blind spot. In other words, everyone seems to think they are less biased than other people, regardless of their actual decision making ability.

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