Biased: Economics in Everyday Life, #1

By HENRY PRIEST

Homo sapiens, the biological name for humans, literally means discerning, wise or sensible human beings. But, are humans really sensible or rational?

Researchers in psychology and economics have found that human beings are systematically irrational. Not only do they misjudge situations, but they do it in fairly predictable patterns.

This compilation of academic research by eminent social psychologists and behavioral economists presents their findings as easy-to-use tools or 'Biases-in-Action' to help us deal with our biases arising out of our bounded rationality.

• Language: English
• Publisher: HENRY PRIEST
• Release date: May 4, 2019
• ISBN: 9781386227724

Book preview

More Intelligent  ≠  More Rational

The more intelligent a person is, the more rational she is. That sounds like good common sense. But is that really so? Unfortunately, smarter is not always equivalent to more reasonable. Research suggests that intelligence and rationality are weakly correlated. Or, to put it simply, being more intelligent doesn’t necessarily mean you’re more rational.

Take the case of Linda. One of the earliest and most influential studies exploring the phenomenon was conducted in the 1970s by psychologists Daniel Kahneman and Amos Tversky. In one of their tests, they had university students read a personality sketch about an individual named Linda:

Linda is 31 years old, single, outspoken and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in antinuclear demonstrations.

The participants were then asked to judge which one of the following two statements was more likely to be true:

(A) Linda is a bank teller

(B) Linda is a bank teller and is active in the feminist movement

Eighty-five percent of the volunteers selected (B).

In CAB, we replicated the study among banking professionals. Surprisingly, 77% of respondents selected (B), and only 23% selected (A).

The problem presented in the above choice is called ‘conjunction fallacy’, which is when we mistakenly believe that two events occurring together is more probable than only one of those events occurring. The fact is that there isn’t any evidence in the personality sketch that proves that Linda is both a bank teller and a feminist. So statement A would have been the more logical choice.

But four out of five people chose otherwise. This means that even experienced agents like bankers, who are supposed to be trained to be rational thinkers or decision makers, are not really so.

As you could see, Kahneman and Amos Tversky’s studies revealed that even intelligent people can have irrational thoughts and beliefs. Our own study corroborated the findings among trained banking professionals. The problem is, instead of using reason or rational thinking, we often resort to intuition when making economic