SforSingularity comments on Financial incentives don't get rid of bias? Prize for best answer. - Less Wrong

3 [deleted] 15 July 2010 01:24PM

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Comment author: Vladimir_M 15 July 2010 05:51:49PM *  8 points [-]

Well, if someone knows about systematic biases that don't go away with incentivization, they're probably too busy making money off that insight to comment here!

In practice, when the stakes are high, it is not so much that people start thinking more accurately -- though this will happen to some extent, and for some people dramatically so -- but rather that they become more cautious.

If you take ordinary folks into the lab and ask them questions they don't care about, it's easy to get them to commit all sorts of logical errors. However, if you approach them with a serious deal where some bias identified in the lab would lead them to accept unfavorable terms with real consequences, they won't trust their unreliable judgments, and instead they'll ask for third-party advice and see what the normal and usual way to handle such a situation is. If no such guidance is available, they'll fall back on the status quo heuristic. People hate to admit their intellectual limitations explicitly, but they're good at recognizing them instinctively before they get themselves into trouble by relying on their faulty reasoning too much.

This is why for all the systematic biases discussed here, it's extremely hard to actually exploit these biases in practice to make money. It also explains how market bubbles and Ponzi schemes can lead to such awful collective insanity: as the snowball keeps rolling and growing, people see others massively falling for the scam, and conclude that it must be a safe and sound option if all these other normal and respectable folks are doing it. The caution/normality/status quo heuristics break down in this situation.

Comment author: SforSingularity 15 July 2010 09:11:21PM 2 points [-]

People hate to admit their intellectual limitations explicitly, but they're good at recognizing them instinctively before they get themselves into trouble by relying on their faulty reasoning too much.

Yeah... this is what Bryan Caplan says in The Myth of the Rational Voter