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.

We Think We Know What Will Make Us Happy, But Are Bad Predictors of What Actually Will

Mind Shadows Home We Think We Know What Will Make Us Happy, But Are Bad Predictors of What Actually Will

My cat Sebastian likes food in his bowl, a warm lap, and a hand stroking his head. After I pet him for a while, he settles into a purr of perfect contentment while I read a book. For him, the future doesn't exist. It is one continual series of now. So much for living in the present. His brain has a limited frontal cortex while ours, yours and mind, is large. Like him, we have a limbic system deep in our brains, and there lies our problem as so-called rational human beings. To use some short-hand here, the cortex reasons, the limbic system emotes. The cortex prepares for the future while, in a cat, the limbic system lies on your lap and purrs, so to speak.

We all want to be happy. Aristotle long ago said it is the ultimate good, and not to be questioned as it is an end unto itself. Buddha taught that people can become happy by developing skillful means (upaya) to see through the tricks mind plays on them. The mind plays tricks aplenty. We think we know what will make us happy but we don't, not really. We think we know what has made us happy but that too is often wrong. So the question becomes, If happiness is so important to us, why are we not any better at finding it?

Recently considerable research has been spent on this question, and in several fields of inquiry. One of the fields is Behavioral Economics. A different field, Neuroeconomics, explores competition between the cortex and the limbic system. My cat Sebastian, though, does not buy things. Living in the Long Now, he does not have the least curiosity in how food gets to his bowl. You and I must deal with getting and spending and, like Wordsworth, we sometimes fret that the world is too much with us. We are not always happy, maybe never, and we wonder why.

It seems that people make bad life choices because they have faulty estimations of their future emotional state. Overall, they are poor judges of future events, good or bad, which prove less intense and more transient than they predicted. (Read Misconceptions About Happiness (Maybe You'd Really Rather Have A Candy Bar) )

Behavioral Economics helps us understand how to better manage and predict our own and others' happiness. It begins with an observation that the traditional, classic view of economic science is flawed. What does that mean?

Our free market system is based on the view that we are rational, all human beings, and free agents acting in our own rational self interest. That is the premise of orthodox economics. In his 1776 The Wealth of Nations, Adam Smith wrote that "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard for their self-interest."

Rational? Well, over two hundred years later, that is still the prevailing doctrine taught in economics classes. It's not wholly accurate, though.

Behavioral economics, looks at the irrational side of things. People buy, but they often buy what they should not. Consider the following comment:

"People very robustly want instant gratification right now, and want to be patient in the future. If you ask people, ‘Which do you want right now, fruit or chocolate?’ they say, ‘Chocolate!’ But if you ask, ‘Which one a week from now?’ they will say, ‘Fruit.’ Now we want chocolate, cigarettes, and a trashy movie. In the future, we want to eat fruit, to quit smoking, and to watch Bergman films." More

The video below has Daniel Gilbert in a very interesting presentation of findings on happiness. Watch it to discover a few mind hacks and learn something about your brain.