Human emotions and behaviors are hard to understand. In order to truly understand why someone did something, it may critical to understand the influencers and biases of human behaviors. This is “System 1” thinking driving behavioral biases. This blog is an attempt to list out the various behavioral influences that force us human beings into doing things that may look irrational but are ultimately driven by biases and tendencies that are well established.
I am hoping that this list will serve as a checklist for me to avoid these behavioral pitfalls and understand human behavior. These are not my ideas – this blog is a compilation of what other people have said, with most of the ideas anchored around Charlie Munger’s Human Psychology of Misjudgment. This last statement will also serve to deflect blame in case any real psychologist stumbles upon this post.
- Incentive driven bias and behavior: Human beings will respond strongly to rewards and punishments in place. Incentives also results in bias in their behavior. As a result, when you are looking into a transactional arrangement with people need to consider the bias through incentives that exist.
- Liking / Loving bias: People will ignore faults and distort facts to favor people they like. If you had a hunch that your teacher was partial towards your mortal enemy in the class and always favored him, you may be right.
- Disliking / Hating tendency: This is the counter to the previous bias. You can see this most in politics – most people cannot bring yourself to liking the other party candidate, especially if you hold a dislike towards the other candidates.
- Confirmation Bias: People unconsciously filter out information that don’t support their original position. In order to avoid confirmation bias which can lead to bad investment decisions Warren Buffet insists on a decision process in which everyone must explore reasons not to make an investment and listen to people who oppose it.
- Doubt avoidance tendency: Humans dislike doubt and they will reach a decision quickly to avoid doubt. An investor may think of pulling the trigger soon to avoid doubts, but recognizing this bias, it may make sense to force some delay in the decision making process.
- Inconsistency avoiding tendency: People seek views that are consistent with their beliefs. Human beings behave in a consistent way and think consistently. “Human mind is a lot like the human egg, and the human egg has a shut-off device. When one sperm gets in, it shuts down so the next one can’t get in.” An investor needs to really look for facts that are opposite to the investment hypothesis – and only when they understand the other side of the argument well (i.e., the risks are manageable), should they start to believe in their hypothesis.
- Commitment Tendency: Consistency and commitment may be similar. But if you commit to something, you work to adopt it thoroughly. Actors who adopt method acting commit themselves to the role. In order to really make people believe in something, a trick is to ask the students act the teach that belief to others.
- Sunk cost driven bias: Most people can’t ignore sunk costs – they do cry over spilt milk, even if that may be irrational.
- Curiosity tendency: Human beings are curious and this curiosity is a good antidote to bad decision making, especially as once accrues wisdom in the quest to quench curiosity.
- Kantian fairness tendency: Typically, people will follow behaviors, which if everyone else followed, will make the world a better place. However, this may work only in situations where people are super-rational and the community is small. Consider the situation of people watching a ballgame in the stadium. If one person rises up they will be able to see better. However, the person behind the standing person is in a losing situation since they cannot watch the game anymore. In the end, everyone will be standing and the situation is the same as if everyone was sitting. If everyone was super rational, they will figure this out and will remain seated. You don’t see the fairness tendencies in situations where people do not know each other, where people can hide behind the crowd and where people are less than rational. You also need to be aware of the one person who exploits the fairness tendency to switch lanes in merging highway.
- Envy / jealous tendency: Warren Buffet said that the world is not driven by greed but envy. The reasons for envy and jealousy are driven unconsciously and may reveal what really drives someone. From an evolutionary perspective, the feeling of envy may be to motivate you into action. That is why one may not be envious of people who are “off-scale”. It appears that envy is driven by “social cues” rather than some abstract state of happiness. There is also an element of relevant social circle – a salaried person (or a beggar) is more envious of another higher paid salaried person (or a richer beggar) vs. a billionaire. This relevant social circle is dependent on a number of things including experience, social, cultural, racial, and geographical proximity.
- Reciprocation Tendency: If you proactively give something to someone, the genetics of a normal person will force them to reciprocate. This is even demonstrable in babies. That is why people tend to avoid the flowers given by Hare Krishna followers, as accepting something as little as a small flower will force the brain subconsciously to reciprocate in charity. The demonstration of courtesy and kindness by a salesperson may orient you towards paying more. This also happens in reverse – you are inclined to respond to overactive hostility.
- Influence from mere association tendency: The commercials that you like have something exhilarating, something exciting or funny, which makes you associate happy feelings with that product. If you hang out with someone too much, you start getting seen as similar. You start to associate something which is more expensive as something which is “better”.
- Simple pain avoiding psychological denial: People will avoid doing things that remind them of the reality that causes them pain. Or they would distort reality to avoid the painful reality or recollection.
- Excessive self-regard tendency / Endowment effect: You regard what you have as much better than what other people have. When someone owns something they have a strong positive bias toward it. This also results in you associating with people who are like you (“Conformity Bias”). You also think your opinions and your bets have higher odds than others. This results in a lot of irrational bets. You also tend to ignore your shortcomings.
- Over-optimism tendency (primarily driven by overconfidence bias): Overconfidence drives optimism that leads to bias in human judgement. You’re not always right when things go your way and not always wrong when they don’t. Adopting Bayes theorem in general life may help you understand the odds a bit better. Similarly adopting Ulysses contract which is a buffer you erect against your own irrational behavior including “barrier-inducing” and “barrier-reducing” contract, including not betting on a poor hand.
- Loss Aversion or Deprival-super-reaction tendency: Loss in $100 results in much greater magnitude of pain than the magnitude of joy in a gain of $100. This pain may result in responses that may not be commensurate with the loss occurred. This has resulted in super-responses against heretics and super-responses against people who go against an ideological view.
- Social proof tendency: People seem to think and act as they see people around them doing and acting. Parents may be able to influence a teenager by working on adjusting the peer group than by exhorting their wards. This may also drive the result of better than average performance of momentum trades, and rise of equity prices due to indexing. This also makes it harder to change the fabric of society and pursuing a direction that may appear logical but is against the going trends.
- Contrast misreaction tendency: If you have a bad job, you will rush to select only a slightly superior job as it contrasts better than your current situation. You will contrast your decision against current backdrop and environment. Real estate salesman first show you an overpriced ugly house, so that the next showing will standout and impress you. It might be better to go in the club with a less better looking companion than yourself as it improves your attractiveness. Price is artificially inflated and then marked down to trigger contrast against a higher price. Similarly, low contrast might not drive any reaction, when some might be needed. E.g., a frog in a slowly rate of water temperature increase might boil the frog.
- Stress influence tendency: A little stress is good for you, but a lot of stress can cause breakdown and dysfunction. People under extreme stress can thereby take decisions that they may regret later.
- Availability misweighing tendency: People will generally work with what is most closely available to them.
- Authority Misinfluence tendency: If the person in authority is doing something idiotic or asking you to do something horrible, you might let it pass and follow along as a respect for authority. There have been situations, e.g., in Miligram’s experiments, where volunteers have without guilt electrocuted (from their perspective) other volunteers just because some authority figure told them so.
- Use it or lose it tendency: Even if someone was an expert in some specific skill long time back, a disuse of it leads to atrophy and attenuation of the skill. As a result, you need to continue using skills that you can’t afford to lose. One good thing about the skills that are acquired over time and where one becomes fluent, is that those skills are lost slowly and can come back faster.
- Bias caused by distortion due to drugs and age/ cognition / senescence: These effects just dull the understanding and may not lead to the best decisions
- Twaddle tendency / Dunning Kruger: Some people like to make stuff up and talk even when they don’t know what they are talking about, and yet cannot stop speaking. The gift of language is misused in this situation. This situation may happen with people who are more confident even with little understanding (which is called the peak of Mt. Stupid in the Dunning Kruger effect).
- Reason respecting tendency: Its much easier for someone to do something if you provide a reasoning. Some people take it further and add more dimensions (e.g., 5 W – Who needs to do What, Where, When and Why). Its a bit of a conditioned response in societies where respect for logic and reason is common. People have jumped the queue by explaining that “they need to get ahead”.
Obviously, human behavior is not a ipso facto experiment. A number of these factors will combine and cause what Charlie Munger calls a Lollapalooza impact. E.g., there can be a super-response as a result of bias from consistency, commitment tendency and tendency to resolve cognitive dissonance.
Its said that car dealership make 50% of their money from 10% of the most gullible buyers. Appealing to people’s System 1 preference for simple, memorable information, using a bold font, rhyming slogans in your advertising drives persuasion. I hope that I can start to use a bit more of “system 2” thinking and avoid being “phished for a phool”.