Whenever I give give a talk about behavioral economics or behavioral finance, one of the questions that inevitably comes up is whether learning about the cognitive biases that people exhibit make the biases go away. The answer to this question is probably less satisfying than my audiences would like, since the most correct response I can give is “sometimes.” As I’ve been asked this more and more, however, I figured I should put a bit more structure to my answer. Here’s what I’ve come up with so far, albeit based on mostly anecdotal evidence:
- Some biases do actually go away once you learn that they exist. (Easy, right?)
- Some biases still show up in people’s intuitive responses to questions and choices based on gut reactions (i.e. the “fast” response, as described by Daniel Kahneman in Thinking, Fast and Slow), but people can learn to not go with their initial reactions and instead make choices in a more rational manner (i.e. encourage the “slow” response system to take over).
- Some biases are almost impossible to make go away, since the self-control required and the psychological cost of not succumbing to the bias is very high.
Unfortunately, I don’t have a complete taxonomy for determining which biases fall into which category (though this is an interesting area for further research!), but there is evidence that at least some people believe that biases can be coached away. From the NYT:
To cater to this demand, a whole new cottage industry has cropped up in which statisticians track performance data, and coaches and psychiatrists work to help hedge fund managers make smarter decisions by getting them to talk about their personal histories and biases. The thinking goes that if an athlete can use coaches, why not traders?
Two decades on, aided by the growing popularity of literature on the behavioral science of decision making, the idea that self-awareness can lead to better decisions in business and finance is beginning to be accepted on Wall Street. Borrowing from books like Daniel Kahneman’s “Thinking, Fast and Slow,” trading coaches talk about the systemic, recurrent and predictable mistakes to which humans are prone.
The article goes on to mention that there are over 50 behavioral biases that people are susceptible to…hmph- according to my Twitter contacts, they are missing quite a few:
— Mark Egan (@Makeuya) November 12, 2013
(You can also find more info at the Sterling Behavioural Science Blog.)
So I took a look at this self-proclaimed “Nudge Database,” and it’s pretty great- it’s got overviews, it’s got charts, it’s got citations, it’s basically got most of what a behavioral nerd could possibly want. (It’s also causing me to see any semblance of free time I may have had slip-sliding away.) In case you’re still not convinced, here’s an example of how the information is presented:
Fun, right? On one hand, I was going to say “you’re welcome” for providing this information, since it’s possible that knowledge leads to less biased behavior. On the other hand (there are no one-handed behavioral economists either), I’m not entirely convinced that being immune to nudges makes one better off, since the nudges help people overcome other suboptimal or biased behaviors. So…wellry? Sorrcome? I will have to think about this further.