We make thousands of decisions every day. Do I cross the road now, or wait for the oncoming truck to pass? Should I eat fries or a salad for lunch? How much should I tip the cab driver? We usually make these decisions with almost no thought, using what psychologists call “heuristics” – rules of thumb that enable us to navigate our lives. Without these mental shortcuts, we would be paralyzed by the multitude of daily choices. But in certain circumstances, these shortcuts lead to predictable errors – predictable, that is, if we know what to watch out for. Did you know, for example, that we are naturally biased towards selling investments that are doing well for us, but holding on to those that are doing poorly? Or that we often select sub-optimal insurance payment plans, and routinely purchase insurance that we don’t even need? And why do so many of us fail to enroll in our employer’s corporate retirement plans, even when the employer offers to match our contributions? Behavioral finance is the study of these and dozens of other financial decision-making errors that can be avoided, if we are familiar with the biases that cause them. In this course, we examine these predictable errors, and discover where we are most susceptible to them. This course is intended to guide participants towards better financial choices. Learn how to improve your spending, saving, and investing decisions for the future.
Belief Perseverance and Confirmation Bias
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Del curso dictado por Duke University
Behavioral Finance
861 calificaciones
De la lección
Week 2
Welcome to the second week. In this session, we will discover how our minds are inclined to distort probabilities, and either underestimate or overestimate the likelihood of certain outcomes. We’ll also learn about “heuristic-driven bias”: the tendency to use rules of thumb that simplify the process of making decisions, but can also lead to predictable errors. These biases negatively affect our decision-making far more than we might expect; especially when the outcome of the decision has great significance for us.
Conoce a los instructores
Emma RasielAssociate Chair and Professor
Economics
So we've been looking at overconfidence and its many manifestations and how that
tends to make us feel more sure about what we think we know than we really should be.
Overconfidence, like many of these biases, has great positive benefits to it.
If inventors were not overconfident, their first two or
three failures would drive them away from trying to invent anything new.
Everything that we hear about people making huge amounts of money in
Silicon Valley because they come up with these amazing new products and creations,
almost all of them will have had several failures along the way.
Without over confidence and belief in oneself that one can still do it,
those people would give up trying to invent stuff.
So overconfidence absolutely has its place, especially in an economy like
ours which simply rewards effort that leads to a great outcome.
And if you can create an incredible product that solves a lot
you will make money.
And that will make up for the years when things weren't going so
well because you were having failures but
in a market economy like ours it's worth persevering because if you
can get it right at the end the rewards are huge, and that's reasonable.
However, there are ways in which overconfidence tends to hurt us and
can affect our ability to make money and we'll look at some these shortly.
But let's add a couple more biases in
here that can make the overconfidence problem even worse.
The first of these is something that we call belief perseverance, and
I'm going to explain that better with a quote from someone
else than anything I could ever say.
So you may have heard of Francis Bacon, there are theories out there that
he's the one who wrote all the Shakespeare plays, who knows.
The point I'm trying to make here is this is a very old quote.
This is something people have been aware of for hundreds of year.
And that's this, the human understanding when it has once adopted
an opinion draws all things else to support and agree with it.
Once we've decided that this is what we're going to do, especially if we've put money
behind that decision, everything that we look at, everything that we pay attention
to, all the conversations that we have are about it are about how great it is.
We do this with everything.
Women buying a wedding dress,
they may choose between five dresses, ten dresses, whatever.
But by the time they've come out of the store, after that incredibly important
purchase, they're busy calling their mom and their friends and
talking about all the great things about the dress that they bought.
And if there's anything that they weren't happy about that dress,
they're not even talking about.
They're not even thinking about it.
When you buy shares in a particular company that you're excited about,
every time you read the news and that company appears in the news and
it's good news, you're going to be making a lot of noise about it.
And if the news on that company is bad, I guarantee you the first thing you'll do
is find ways to explain why that's a short term problem that will go away.
Why you're absolutely sure that something else will change to bring that decision
that you've made and put money behind, back in the direction that you want to go.
Take it to the most extreme and we get to confirmation bias.
Confirmation bias is where even bad news gets twisted around in your head so
that you can present it to yourself and others as good news.
This is one of the downsides of being overconfident.
And inevitably it can cause us to hold onto investments that are doing badly and
likely to continue to do badly because we're finding ways to
continue to justify holding onto those investments.
Remember all the stuff that we looked at about risk seeking over losses?
Belief perseverance and
confirmation bias make risk seeking over losses even more extreme.
It's not just the psychological pain of not wanting to sell that
bad investment and realize the loss, it's all this mental trickery that we do with
ourselves to explain why we shouldn't have to get out of that investment.
Why we should wait until it gets back to flat so
that we don't have to realize the loss.
Now, sometimes belief perseverance and confirmation bias
can put us into absolutely ridiculous, absurd situations.
And shortly after this short video,
you're going to see another example of this that's not in the area of wealth.
It's actually in the area of health like some of the other examples that
we looked at.
And it's kind of a scary outcome about something that's
still going on at the moment to do with childhood vaccinations.
So you'll hear about that later.
But here's a sort of a prequel to that example, a little joke example that will
set you up for the serious vaccination example that'll come up in a few minutes.
So here's the joke example.
The data in this graph that you're looking at are absolutely true.
Okay, the data in this graph is sales of VCRs,
video cassette recorders throughout the course of the 80s and 1990s.
VCR, no one uses VCRs anymore.
We use DVDs, we use all kinds of other technology.
VCRs have gone the way of wireless radios.
But back in the 80s and 90s, they were the technology.
If you wanted to watch a movie at home, you bought a video cassette.
If you wanted to record something because you were going to be out that evening,
you had to buy a VCR in order to do the recording.
So the dark, thick line simply reports sales of VCRs
from the mid 1980s to the late 1990s, and as you'll see when they first came
in there was a period of time where people began to understand what they could do.
And then, a big run up to buy them.
And by the early 90s, better technology was taking the place
of VCRs to the point where by 2000, almost no one was buying a VCR.
The other dashed line is HIV
incidence in the US population over about the same time period.
It was in the early 80s that the whole story about AIDS,
the whole understanding of AIDS, really hit the public consciousness.
And all of a sudden incidence of AIDS and HIV positive
went roaring up throughout the 80s and into the early 90s.
And by the mid 90s, there were both
treatments that people with HIV could take that were
beginning to hold off the problem, but also there were big behavioral changes.
By the early 90s, people had a much better understanding of
how HIV was transmitted, and people were tending to be a lot more careful about
behaviors that were likely to transmit it.
Now let's look at these two graphs together.
They look pretty similar.
These are two completely separate sets of data.
Both of which happen to be going up during the 80s and early 90s.
And then, at about the same time they turned around and went down again.
There is no reason to suppose that there's
anything whatsoever that relates these two phenomena.
It's all about coincidence.
But as you'll see in the next example, coincidence
can be enough to make societies over multiple years
make very bizarre decisions about correlation and
causation that's essentially random.
Like I said, the example we're going to show you because it's the most vivid one
that we can think of relates to health, not wealth.
But there are many such circumstances that you will see in the wealth area or
in the area of investment.
Just because two things look correlated,
it could be complete coincidence like HIV and VCRs.
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