Posts Tagged ‘decisions’
“We cannot reason ourselves out of our basic irrationality. All we can do is to learn the art of being irrational in a reasonable way.”*…
Classical economists posit that investment decisions are driven by rationality — a clear-eyed evaluation of risks and rewards… but then, meme stocks.
Kwabena Donkor, an assistant professor of marketing at Stanford Graduate School of Business has just unveiled some new research that suggests that identity distorts our financial choices, leading us to overvalue investments that reinforce our sense of self…
People don’t just invest with their wallets — they invest with their identity,” says Donkor, a faculty fellow at the Stanford Institute for Economic Policy Research.
In a novel field study involving soccer fans, Donkor and several colleagues uncover evidence of how identity can skew economic thinking. The researchers ran a series of experiments focused on fans who placed nearly 40,000 bets on English Premier League matches during the 2021-22 season. Participants — nearly 800 from Kenya and 1,600 from the United Kingdom — were given a budget and asked to place bets on upcoming matches. They received winnings based on the outcomes of randomly selected games.
Most of the participants were longtime supporters of a particular team. (Manchester United was their top favorite.) They were more optimistic about their favorite teams, betting 20% more on them. They rated their teams as having a 10% to 18% higher chance of victory than other teams, even when presented with forecasts from professional oddsmakers suggesting otherwise. These results persisted even after accounting for factors such as personal beliefs and appetite for risk.
The study also finds that participants placed a lower value on gains not aligned with their identity — what the researchers referred to as an “identity tax.” Fans effectively devalued these neutral bets by 17% to 27%. For poorly performing teams, this “tax” could soar as high as 47%, reflecting a strong emotional impulse to support their favorite team even when the odds were against it
The research, detailed in a paper cowritten with Lorenz Goette of the National University of Singapore, Maximilian Müller of the Toulouse School of Economics, Eugen Dimant of the University of Pennsylvania, and Michael Kurschilgen of UniDistance Suisse, shows that identity-driven preferences explain much of the gap in bettors’ behavior. Simulations showed that distorted beliefs due to identity account for as much as 44% of the difference in fans’ betting behavior. The remainder stemmed from preferences rooted in identity itself — people were willing to sacrifice potential gains to support options that aligned with who they are…
… The study’s findings have far-reaching implications for understanding economic behavior, particularly in areas like consumer finance, brand loyalty, and even political decision-making…
… the research hints at how consumers view different products. Items that align with a person’s identity are likely to be seen as complements rather than substitutes. For example, Donkor says a consumer who identifies strongly with sustainability might view eco-friendly products as essential enhancements to their lifestyle, even if they’re similar to comparable, less expensive goods.
Ultimately, these findings could improve our thinking about the biases that influence our financial lives. As the researchers point out, acknowledging the role of identity in decision-making is one key to designing better policies, creating more effective financial products, and ultimately improving individual welfare. “If we ignore identity,” Donkor concludes, “we miss the bigger picture in decision-making.”…
Understanding the choices that we, and those around us, make: “What Soccer Fans Can Teach Us About Making Irrational Decisions,” from @SIEPR.
* Aldous Huxley
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As we ponder the price (and as a reminder that there are other kinds of irrational decisions and that sometimes returns do matter to investors), we might recall that it was on this date in 2008 that Bernard “Bernie” Madoff was arrested and charged with defrauding investment clients of as much as $65 billion. A pioneer in electronic trading and chairman of the Nasdaq stock exchange in the early 1990s, he had turned to money management. By 2008, Madoff was running a huge and growing fund that promised its investors high and stable returns… the problem: it was a Ponzi scheme, the largest known Ponzi scheme in history.
“The whole problem with the world is that fools and fanatics are always so certain of themselves, and wiser people so full of doubts”*…
In a recent post we considered “agnotology”—the study of ignorance. Today, John Timmer unpacks a related phenomenon…
The world is full of people who have excessive confidence in their own abilities. This is famously described as the Dunning-Kruger effect, which describes how people who lack expertise in something will necessarily lack the knowledge needed to recognize their own limits. Now, a different set of researchers has come out with what might be viewed as a corollary to Dunning-Kruger: People have a strong tendency to believe that they always have enough data to make an informed decision—regardless of what information they actually have.
The work, done by Hunter Gehlbach, Carly Robinson, and Angus Fletcher, is based on an experiment in which they intentionally gave people only partial, biased information, finding that people never seemed to consider they might only have a partial picture. “Because people assume they have adequate information, they enter judgment and decision-making processes with less humility and more confidence than they might if they were worrying whether they knew the whole story or not,” they write. The good news? When given the full picture, most people are willing to change their opinions…
[Timmer explains the experiment and runs through the particulars of the results]
… This is especially problematic in the current media environment. Many outlets have been created with the clear intent of exposing their viewers to only a partial view of the facts—or, in a number of cases, the apparent intent of spreading misinformation. The new work clearly indicates that these efforts can have a powerful effect on beliefs, even if accurate information is available from various sources…
The full PLOS One paper is here.
When given partial info, most feel confident that’s all they need to know: “People think they already know everything they need to make decisions,” from @jtimmer.bsky.social in @arstechnica.com.
* Bertrand Russell
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As we read widely, we might spare a thought for a victim of just this sort of misplaced confidence, John Scopes; he died on this date in 1970. A teacher in Dayton, Tennessee, he was prosecuted in 1925 for teaching evolution in the local high school.
… [Scopes] was accused of violating Tennessee’s Butler Act, which had made it illegal for teachers to teach human evolution in any state-funded school. The trial was deliberately staged in order to attract publicity to the small town of Dayton, Tennessee, where it was held. Scopes was unsure whether he had ever actually taught evolution, but he incriminated himself deliberately so the case could have a defendant.
Scopes was found guilty and was fined $100 (equivalent to $1,700 in 2023), but the verdict was overturned on a technicality. The trial served its purpose of drawing intense national publicity, as national reporters flocked to Dayton to cover the high-profile lawyers who had agreed to represent each side. William Jennings Bryan, three-time presidential candidate and former secretary of state, argued for the prosecution, while Clarence Darrow served as the defense attorney for Scopes. The trial publicized the fundamentalist–modernist controversy, which set modernists, who said evolution could be consistent with religion, against fundamentalists, who said the word of God as revealed in the Bible took priority over all human knowledge. The case was thus seen both as a theological contest and as a trial on whether evolution should be taught in schools…
… In 1958 the National Defense Education Act was passed with the encouragement of many legislators who feared the United States education system was falling behind that of the Soviet Union. The act yielded textbooks, produced in cooperation with the American Institute of Biological Sciences, which stressed the importance of evolution as the unifying principle of biology. The new educational regime was not unchallenged. The greatest backlash was in Texas where attacks were launched in sermons and in the press. Complaints were lodged with the State Textbook Commission. However, in addition to federal support, a number of social trends had turned public discussion in favor of evolution. These included increased interest in improving public education, legal precedents separating religion and public education, and continued urbanization in the South. This led to a weakening of the backlash in Texas, as well as to the repeal of the Butler Law in Tennessee in 1967…
I choose… me!
People in Western countries drown in choice. Want a T-shirt? Thousands of alternatives await you. Want some toothpaste? Sit down, we could be here a while. Many people see these options as a good thing – they’re a sign of our independence, our freedom, our mastery over our own destinies. But these apparent positives have a dark side.
Krishna Savani from Columbia University has found that when Americans think about the concept of choice, they’re less concerned about the public good and less empathic towards disadvantaged people. His work supports the idea that endless arrays of choice focus our attention on individual control and, by doing so, they send a message that people’s fates are their own concerns. Their lives are not the business of the state or public institutions, and if they fail, it is their own fault. With choices at hand, Americans are more likely to choose themselves.
Savani’s experiments and their results make for pretty bracing reading. Still, he notes, not all cultures react the same way. And as for Americans,
… Savani points out that the US is one of the world’s most charitable countries. He writes, “If Americans believe that they are choosing to help other people out of their free will, or if they can affirm their selves through making choices for other people, they may be even more charitable.” The problem lies more with “choice for choice’s sake.”
Read the whole story in Discover.
As we resolve to simplify, we might recall that it was on this date in 1718 that London lawyer, writer, and inventor, James Puckle patented a multi-shot gun mounted on a stand capable of firing up to nine rounds per minute– the first machine gun.
Puckle’s innovation was as formative in the realm of intellectual property as it was in the martial arena: Quoth to the Patent Office of the United Kingdom,”In the reign of Queen Anne of Great Britain, the law officers of the Crown established as a condition of patent that the inventor must in writing describe the invention and the manner in which it works.” Puckle’s machine gun patent was among the first to provide such a description.
Beyond Rochambeau…
There are times when Rock-Paper-Scissors just doesn’t have the… well, gravity that one feels is appropriate to the question being decided. Happily, author and blogger Mark Rayner has ridden to the rescue with an altogether apt alternative: Monkey-Pirate-Robot-Ninja-Zombie…
Mark explains:
Each thing can beat two other things, and is, in turn beaten by two other things.
The players both count to five (three), though it is obviously better to repeat the name of the game (Monkey! Robot! Pirate! Ninja! Zombie!). Each time you raise your fist and swing it down. On the fifth (third) count, you form your hand into one of the five gestures. (It is recommended that in addition to the hand gesture, you also add an aural component to this — see below for suggested noises.)
So, what beats what, and what are the gestures? What?
* Monkey fools Ninja
* Monkey unplugs Robot
Suggested noise: ee-ee-eek!* Robot chokes Ninja
* Robot crushes Zombie
Suggested noise: ex-ter-min-ate!* Pirate drowns Robot
* Pirate skewers Monkey
Suggested noise: arrrrr!* Ninja karate chops Pirate
* Ninja decapitates Zombie
Suggested noise: keeee-ah!* Zombie eats Pirate
* Zombie savages Monkey
Suggested noise: braaaaaaaaaainsss!
See the hand gestures illustrated here.
As we approach big decisions with a deeper sense of propriety, we might recall with horror that it was on this date in 1613 that The Globe Theatre, which had been built in 1599 by Shakespeare’s company, the Lord Chamberlain’s Men, was destroyed by fire. Shakespeare had retired to Stratford in 1611.
A second Globe was built on the same site; it opened in June, 1614, and closed in 1642.
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