Thursday, January 19, 2012

Irrational decision-making as evolutionary survival

One of the key fallacies of orthodox economics is that people are rational decision-makers with perfect information.

We can knock "perfect information" in so many ways, but a recent New Scientist article* reminded me how irrational we are, too.

Inter alia, the article points out something quite meaningful: that we have "a brain shaped by natural selection to see us through this messy world".

Think about that.  Although survival-wise it helps to be capable of rational thought (and all that goes with it, such as thinking ahead, concept-of-self, etc), that doesn't ipso facto mean that our brains evolved in the unitary direction of rationality only.  That's a very good explanation for an awful lot of human foibles.

Some examples of decision-making factors we probably inherit in an evolutionary sense are: existing biases, emotions, expectations, co-operation and conformity (sometimes you just follow the herd).  Altruism too: the article suggests that the consequent feel-good is "evolution's reward to team players".

A good example of irrationality in decisionmaking: discounting the future: the strong preference for small gains in the present over large gains in the more distant future.  This is a great factor in the sub-optimal global response to environmental threats.

Some of the not-entirely-rational mechanisms mentioned by the article include:

- confirmation bias: our propensity to be taken in by something that confirms our pre-existing biases;
 - loss aversion: it feels worse to lose something small than to risk it to gain something large;
 - the anchoring effect: basing decisions in novel situations on random, loose, or irrelevant connections;
 - the sunk-cose fallacy: deciding whether to continue [expending resources] on the basis of what's already been put in it (a common trap for many investors and poker players alike);
 - inconsistent preferences: preferring a over b, b over c, but c over a.

For the last one, it is suggested that we are likely to be making choices based on several different factors that may be decided by different areas of the brain, so ultimately "your preference will depend on the region that dominates at the time" - that is, when you are faced with such a binary decision.

At various times, these "tricks" can all be seen as useful survival mechanisms - and sometimes this means survival in a group sense rather than individual.

so it's noto necessarily a problem: it's just that as individuals we're not as rational as we'd like to think.

And the article says we face between 2,500 and 10,000 decisions every day.  Daunting, if we didn't use short cuts.

*"Making Your Mind Up" by Kate Douglas in the 12 November 2011 issue.  Oh all right, it's not recent, but I'm a bit behind, and I only just unsealed it recently.

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