Saturday, February 5, 2011

Moral Hazard, But Thanks For All The Fish

Via The Psy-Fi Blog (H/T Abnormal Returns).
A number of different types of behavioral bias are implicated in these failures. The researchers point to three classes of problems as being major factors: Complexity Biases, Incentive Biases and Asymmetry Biases. Complexity biases occur where an individual fails to analyse all of the information available: we've described confirmation bias, for instance, where people only take into account information that confirms their opinions is an example. Another is authoritarian bias, where undue weight is given to supposedly expert sources.
Incentive biases are all about self-interest and avoiding the nasty feelings that come out of trying to match one’s expectations with contradictory information. As we also shown, loss aversion is a typical example, as people try to find ways to avoid accepting a loss. Asymmetry biases occur when people bring their expectations to the table and try to make reality align with it – status quo bias for instance, where the tendency is to stick with what you "know" rather than adjust your thinking to a new reality.
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