IT鈥橲 Sunday morning and I鈥檓 feeling a bit impulsive, so I head to a cafe near my home in London for breakfast. I open the menu and see the following:
Breakfast Menu
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Full English breakfast 拢9.95
Smoked salmon & scrambled eggs 拢5.95
Waffles with maple syrup 拢4.75
Boiled egg and soldiers 拢4.00
What would you have picked? I went for the smoked salmon and scrambled eggs. And a surprising number of you would have done the same.
Why so? Understanding the often irrational factors that affect how we make decisions has been a key aim of psychologists over the past few decades 鈥� and we鈥檙e just getting to the stage where we can begin to apply their insights.
That menu first. The reason why many of us would plump for the smoked salmon (besides, perhaps, liking smoked salmon) is to do with something called relativity. That鈥檚 not Einstein鈥檚 theory, but rather our tendency to be awful at assessing something鈥檚 value without being given something to compare it with. As of Duke University in Durham, North Carolina, puts it in his book Predictably Irrational, humans 鈥渄on鈥檛 have an internal value meter that tells us how much things are worth鈥�.
鈥淎wareness of mental biases is good for more than just being smart with our money鈥�
In this case, the presence of the rather expensive-looking full English breakfast makes the smoked salmon seem like good value. Take the full English off the menu, and more of us will choose one of the two cheaper options. Regardless of whether anyone actually buys the full breakfast, then, its presence means that we鈥檙e shelling out more than we otherwise would.
A similar effect, known as anchoring, often kicks in when we鈥檙e out shopping. Say we have 拢50 to spend on shoes. We see a pair we like for 拢100, way above our budget. Then we see a similar pair reduced to 拢75, and without much thought snap them up. The first price anchors the idea that the second price represents a bargain: we end up thinking we鈥檝e made a saving when in fact we鈥檝e spent more than we can afford.
Such foibles persist regardless of the size of a purchase. Another phenomenon called hyperbolic discounting means we tend to overvalue what鈥檚 available now relative to what we can have later 鈥� one reason why many people find it hard to invest in a pension scheme (see 鈥�Exponential growth鈥�). Then there鈥檚 the sunk-cost fallacy, the tendency to stick with something we have already invested in even if all the signs point to this being a bad idea. The classic example is the supersonic jet, Concorde, which never made any money in all the decades it was flying.
There are good reasons why such biases are embedded in our psyches. They have evolved to help us make quick decisions with limited information and difficult decisions with large amounts of hard-to-assess information; to continue foraging in an area that鈥檚 becoming depleted of fruit or move on to another part of the forest where richer pickings are not necessarily on offer, for example.
But to make more logical, calculated decisions in the complex modern world we need different mental formulae. And there are some simple ways to construct these. A list might include getting yourself or someone else to play devil鈥檚 advocate to any significant decision; identifying and discounting any sunk costs; and working methodically to eliminate options one by one before coming to a final decision.
Awareness of our cognitive biases is good for more than simply being smart with our money. It might also help limit the scope for mental blips to cause major disasters, for instance (New Scientist, 15 August, p 28). In the wider realm of economics, models that take better account of real humans鈥� irrational decision-making are coming more into vogue to explain events such as the crash of 2008, the better to avoid them in the future. When it comes to improving our futures, it鈥檚 all in the mind.
(Image: Helen Yin/Getty)
Like this? Read: 鈥�Get smarter: 9 ideas to make your life better鈥�
This article appeared in print under the headline 鈥淣eed to know: Cognitive bias鈥�
