Cognitive bias [wk32]

I have been researching cognitive bias. Fascinating stuff.

We have a common tendency to acquire and process information by filtering it through our own likes, dislikes and experiences. This bias might then create what an economist would call “irrational behaviour”.

A few weeks back (week 28), I raised the issue of whether the price of a product could be a signal of quality so strong in the mind of the consumer that it could create behaviour that goes against the fundamentals of supply and demand. That is to say, an example of irrational behaviour would be a willingness to purchase that goes up as price increases.

Since those initial reflections, somewhat oddly, I have been tasked with looking into how one particular form of cognitive bias would affect the demand curve for a particular product. My choice of bias will be the positive associations we place on certain brands.

In my mind, inherent cognitive biases are what good advertising and marketing are trying to tap into. We might not know it, but we encourage ourselves to make decisions based on evidence. I regularly make a routine decision to buy a particular brand of shower gel. It has never let me down. My purchase is not based on research into which brand is best value or any empirical evidence on which is best for my skin. However, the purchase is anything but time-consuming. So my bias has its purpose, and my behaviour is predictably irrational.

The list of cognitive biases is extensive.

One surprising bias is the Dunning–Kruger effect. It describes how an unskilled person might make poor decisions and arrive at erroneous conclusions, but their incompetence denies them the ability to realise their mistakes. The unskilled therefore suffer from illusory superiority, rating their own ability as above average, much higher than it actually is, while the highly skilled underrate their abilities, suffering from illusory inferiority. This leads to the perverse situation in which less competent people rate their own ability higher than more competent people. It also explains why actual competence may weaken self-confidence: because competent individuals falsely assume that others have an equivalent understanding.

In their definitive paper, Dunning and Kruger quote Charles Darwin: “Ignorance more frequently begets confidence than does knowledge”. If Socrates is right, and our first step towards knowledge is the recognition of one’s ignorance, any sense that we should stand still for our own good would surely be unpredictably irrational.

If you are interested in predictable irrationality, check out Dan Ariely‘s observations.

Very amusing examples of a subscription to the Economist and who to take bar-hopping with you:
Cognitive limitations – Dan Ariely 2008

Very amusing examples of our greater propensity to cheat a little if we are still able to feel good about ourselves and the importance of which business school sweatshirts we wear:
Cheating – Dan Ariely 2009


3 thoughts on “Cognitive bias [wk32]

  1. Pingback: Halo effect [wk57] | Cass Reflections

  2. Pingback: For synergy’s sake [wk62] | Cass Reflections

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