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2/24/10

Cognitive Biases, Politics, & Free Markets

You strike up a conversation with somebody while standing in line at the bank or the store checkout line. Your talk about the weather, the slowness of the line, the accident outside on the street, but you--and most people--avoid talking politics. You don't because you have no idea of the other person's political viewpoint and politics is a touchy subject.

It is touchy in good part because people have their minds made up about what they believe. Depending on viewpoint, the Democrats are crazy or the Republicans are stupid. Not all opinions are that generalized but all are well entrenched as emotional furniture of the mind. Notice that: emotional furniture. Senators and Representatives--all politicians--come equipped with emotional furniture just as do voters. Cognitive psychologists have a name for what happens when people talk politics, not that the term applies only to that situation. They call it confirmation bias, or myside bias.

This bias describes the tendency to prefer information confirming one's own preconceptions or hypotheses. No matter, whether they are true or not. Put differently, people search for and select evidence that supports what they already believe. Or, if they come up against some evidence, they will pick from it what is supportive of their views, regardless of the whole picture they encounter.

Take another example of human bias. You know what something is worth when you look at it, right? Well, behavioral economist Dan Ariely found out that his students did not. In class, he had them jot down the last two digits of their social security number. Okay, that done, he then asked how much they would pay for wine, a bottle of Côtes du Rhône 1998. Would they pay, say, $79 or $12? The outcome? Not wine experts, they offered prices in relation to their social security numbers. Those with lower numbers offered lower prices, those with higher numbers, higher prices. The number also affected how much they would pay for a bottle of 1996 Hermitage Jaboulet La Chapelle. Statistically significant, the social security number affected the prices for either bottle of wine, with a correlation of 0.33.

Cognitive psychologists know this as anchoring bias. Roughly put, people see something that acts as an anchor for comparison to what they next encounter. The students' social security numbers provided anchors for wine prices. This is also regarded as arbitrary coherence, and it calls into question the entire concept of free trade and a free market. The classic concept of rational money is obsolete.

Clearly, as shown by Ariely's experiment and countless commercials, people can be manipulated to value things in arbitrary ways. Values are not simply matters of supply and demand. Human beings do not rationally evaluate what the market offers--what they want, how much they will pay.

Here is Dan Ariely's Website.

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