Wednesday, September 28, 2011

What to do about psychological biases? The answer tells a lot... about you.

There are many documented cases of behavior deviating from the normative "rational" prescription of decision sciences and economics. For example, in the book Predictably Irrational, Dan Ariely tells us how he got a large number of Sloan School MBA students to change their choices using an irrelevant alternative.

The Ariely example has two groups of students choose a subscription type for The Economist. The first group was given three options to choose from: (online only, $\$60$); (paper only, $\$120$); or (paper+online, $\$120$). Overwhelmingly they chose the last option. The second group was given two options : (online only, $\$60$) or (paper+online $\$120$). Overwhelmingly they chose the first option.

Since no one chooses the (paper only, $\$120$) option, it should be irrelevant to the choices. However, removing it makes a large number of respondents change their minds. This is what is called a behavioral bias: an actual behavior that deviates from "rational" choice. (Technically these choices violate the Strong Axiom of Revealed Preference.)

(If you're not convinced that the behavior described is irrational, consider the following isomorphic problem: a waiter offers a group of people three desserts: ice cream, chocolate mousse, and fruit salad; most people choose the fruit salad, no one chooses the mousse. Then the waiter apologizes: it turns out there's no mousse. At that point most of the people who had ordered fruit salad switch to ice cream. This behavior is the same -- use some letters to represent options to remove any doubt -- as the one in Ariely's example. And few people would consider the fruit salad to ice-cream switchers rational.)

Ok, so people do, in some cases (perhaps in a majority of cases) behave in "irrational" ways, as described by the decision science and economics models. This is not entirely surprising, as those models are abstractions of idealized behavior and people are concrete physical entities with limitations and -- some argue -- faulty software.

What is really enlightening is how people who know about this feel about the biases.

IGNORE. Many academic economists and others who use economics models try to ignore these biases. Inasmuch as these biases can be more or less important depending on the decision, the persons involved, and the context, this ignorance might work for the economists, for a while. However, pretending that reality is not real is not a good foundation for Science, or even life.

ATTACK. A number of people use the existence of biases as an attack on established economics. This is how science evolves, with theories being challenged by evidence and eventually changing to incorporate the new phenomena. Some people, however, may be motivated by personal animosity towards economics and decision sciences; this creates a bad environment for knowledge evolution -- it becomes a political game, never good news for Science.

EXPLOIT. Books like Nudge make this explicit, but many people think of these biases as a way to manipulate others' behavior. Manipulate is the appropriate verb here, since these people (maybe with what they think is the best of intentions -- I understand these pave the way to someplace...) want to change others' behavior without actually telling these others what they are doing. In addition to the underhandedness that, were this a commercial application, the Nudgers would be trying to outlaw, this type of attitude reeks of "I know better than others, but they are too stupid to agree." Underhanded manipulation presented as a virtue; the world certainly has changed a lot.

ADDRESS AND MANAGE. A more productive attitude is to design decisions and information systems to minimize the effect of these biases. For example, in the decision above, both scenarios could be presented, the inconsistency pointed out, and then a separate part-worth decision could be addressed (i.e. what are each of the two elements -- print and online -- worth separately?). Note that this is the one attitude that treats behavioral biases as damage and finds way to route decisions around them, unlike the other three attitudes.

In case it's not obvious, my attitude towards these biases is to address and manage them.