I love you because you’re predictable – I hate you because you’re irrational. The list, Part 2

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[tweetmeme] If you read Part 1, you’ll know that modern societies are organised around the assumption that we all think rationally. Sometimes we do – but we do not behave perfectly rationally. However, it’s no idiosyncrasy of yours, because we can accurately predict irrational behaviour across entire populations.

As we grow up we learn to judge risk, have self-control, and make reflective decisions. Yet bias toward the predictable irrationalities is endemic. And endemic bias is what we should expect, given that the relevant neural networks we use for decision-making are partly learned, and partly innate: Certain irrationalities, at a population level, tend to be widespread.

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Some companies have long exploited this widespread bias: contract design in the US credit card industry – and the gambling, life insurance, and mobile phone industries – clearly targets consumer misperception of future consumption (Malmendier & DellaVigna, 2004).

And while commercial markets have long understood human irrationality, public institutions often incorrectly assume that people are perfectly rational – leaving a gaping chasm for those choice architects who know otherwise to sell the short-term over the long-term, with little regard for better outcomes.

Knowing what we know, can we use this predictable irrational bias to leave an inhabitable land for generations to come? A tentative ‘yes’, but if left unchecked it’s easy to see how the alarm-clock bias from part 1 shows us how easy it is to set a (distant) global carbon-reduction deadline, but how difficult it is to (near-term) act on it.

In this case, knowing the problem is only half the solution.

Here’s the second 10 of 20 predictable irrationalities.

11. Irrational escalation: the tendency to make irrational decisions based upon rational decisions in the past, or to justify actions already taken. The dollar auction is a thought exercise demonstrating the concept.

12. Loss aversion: the tendency to fear losses more than to value gains of equal size.

13. Neglect of probability: the tendency to disregard probabilities for absolutes when making a decision under uncertainty.

14. ‘Not Invented Here’: the tendency to ignore an idea or solution because its source is seen as unfamiliar.

15. Planning fallacy: the tendency to underestimate the time it takes to complete tasks.

16. Post-purchase rationalisation: the tendency to rationalise your purchases as ‘good buys’ merely based on the fact that you purchased them – and the reason why a 110% money back guarantee works.

17. Pseudo-certainty effect: the tendency, when seeking positive outcomes, to make only risk-averse choices; but to make risk-seeking choices to avoid negative outcomes.

18. Selective perception: the tendency for expectations to shape perceptions.

19. Wishful thinking: the formation of beliefs according to what is pleasant to imagine rather than based on evidence or rationality.

20. Zero-risk bias: the preference for reducing a small risk to zero over a greater reduction in a larger risk.

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