Sunday, July 06, 2008

The endowment effect, and other defects of human reason

In an article on the "endowment effect" (apparently hard coded in our genes) the Economist provides a nice list of our irrational features.

If I can keep this list in mind, maybe I can recognize the behaviors in myself, and adjust for them. Apparently successful professional traders learn to overcome to endowment bias ...
The endowment effect | It’s mine, I tell you | Economist.com:
... once someone owns something, he places a higher value on it than he did when he acquired it—an observation first called “the endowment effect” about 28 years ago by Richard Thaler, who these days works at the University of Chicago. ...
... Other “irrational” phenomena include confirmation bias (searching for or interpreting information in a way that confirms one’s preconceptions), the bandwagon effect (doing things because others do them) and framing problems (when the conclusion reached depends on the way the data are presented)...

1 comment:

  1. Robert Cialdini would suggest that these traits are selected (and adaptive) for in social organizations, participation in which confers survival advantage.

    His 'principles of influence' are analagous to some of the defects noted by the author in the economist.

    We value things that are scarce. We trust authority. We do what others are doing. We do for others who do for us. We do what we say we'll do. We are influenced by those we like, and who are like us.

    Like most traits, context matters.

    http://en.wikipedia.org/wiki/Robert_Cialdini

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