The Brainy Business | Understanding the Psychology of Why People Buy | Behavioral Economics 242. Biases -- Math Is Hard (Refreshed Episode)
Explore how cognitive biases shape our perception of numbers and decision-making in everyday life. Delve into the psychology behind money and value, revealing why we sometimes misjudge worth. The hot hand fallacy and gambler's fallacy help explain our misconceptions about probability. Unpack ambiguity aversion and see how fear of the unknown can lead to poor choices. Finally, discover the impact of personal biases on business processes and the importance of objective evaluation.
37:31
Brains Prefer Lazy Math
- Our brains are lazy and prefer quick, "good enough" answers rather than doing exact math.
- This laziness makes us rely heavily on presented numbers or sources without questioning them.
Less Is Better Effect
- People pay more for a smaller intact dinner set than a larger one with broken pieces when evaluated alone.
- Side-by-side comparison reveals people prefer the larger set despite broken pieces, showing context changes preference.
Avoid Denomination Effect
- Do not let the physical form of money (coins vs bills) affect your spending decisions.
- Recognize that $20 bill and its equivalent in smaller forms hold the same value despite our brain's perception.
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Intro
00:00 • 10min
Psychology of Money and Value Perception
09:48 • 10min
Understanding Hot Hands and Probability Biases
19:37 • 2min
Navigating Ambiguity: Understanding Biases in Decision-Making
22:03 • 11min
Understanding Biases and Time Management in Business
32:39 • 5min
Behavioral Science in the Wild
Nina Mazar
Dilip Soman
What Your Employees Need and Can't Tell You
Melina Palmer
Thinking, Fast and Slow
Daniel Kahneman
In this book, Daniel Kahneman takes readers on a tour of the mind, explaining how the two systems of thought shape our judgments and decisions.
System 1 is fast, automatic, and emotional, while System 2 is slower, effortful, and logical.
Kahneman discusses the impact of cognitive biases, the difficulties of predicting future happiness, and the effects of overconfidence on corporate strategies.
He offers practical insights into how to guard against mental glitches and how to benefit from slow thinking in both personal and business life.
The book also explores the distinction between the 'experiencing self' and the 'remembering self' and their roles in our perception of happiness.
Today’s episode is one that originally aired on June 14, 2019, as part of an 8-part series I called “All the Biases” which took hundreds of biases and sorted them into different categories. Because our brains are complex interconnected webs, this could have been done in many ways and the biases mentioned could belong in multiple areas. I selected groupings based on what I thought would make the most sense to this audience and applying the information about our biased brains into business.
This episode goes through a lot of concepts at a very high level. Unlike the foundations episodes of the podcast, which sometimes have a full hour dedicated to a full concept, many of these will get a sentence or only a few points. This episode is more about bringing your attention to the concepts, what is out there, and to scratch the surface of the complexity of our brains. I chose this episode as the refresh for this week because it mentions ambiguity and uncertainty aversion, which is the topic for this coming Friday’s brand new foundations episode, so it felt like a nice way to set the stage for that. Ready to dig in on all the biases? Let’s go…
Show Notes:- [00:39] Today’s episode is one that originally aired on June 14, 2019, as part of an 8-part series I did called “All the Biases” which sorted hundreds of biases into different categories.
- [03:14] Our brains are lazy and they like to take the path of least resistance to get to what they believe to be a good enough answer as quickly as possible.
- [04:51] Because we are particularly lazy with math, we rely on the source of whatever is thrown our way. The brain would rather risk being wrong than take the time to do the numbers in everyday interactions.
- [07:17] It is important to know what people care about when you set up your messaging.
- [08:25] Due to “the less is better effect”, our preference changes when we evaluate things alone versus comparing them against others.
- [10:23] Due to the money illusion we tend to concentrate on the nominal or face value of our money instead of thinking of it in terms of how much it can get for us. We are more likely to spend money in smaller denominations.
- [13:09] Due to the IKEA effect people will value things more that they made themselves or partially assembled than things they did not. The endowment effect is where we value things we own more than things we do not.
- [15:45] Playing to win is not the same as playing not to lose (game theory).
- [15:58] We have all sorts of bad habits when it comes to placing a value on time.
- [18:20] If you have something people will be excited about you can make the wait a little more enjoyable to increase the experience. With a mundane task, reducing the wait as much as possible is key (or, often even better as discussed with Dilip Soman in episode 241, is to look at the opportunity within the wait).
- [20:44] “Hot hands” are not real (hot hands fallacy) but our brains like to think this is true due to the clustering illusion. Our brains like to look for patterns.
- [22:27] People are more likely to prefer the things they know to things that are unknown. We are much more likely to choose an option that we know the odds for even if they are terrible because we are so afraid of the unknown (ambiguity / uncertainty aversion).
- [24:36] Consider the known and know that the unknown doesn’t negate everything else when making a decision.
- [25:59] When we want something today, we value it differently than tomorrow (time discounting). When we look at tomorrow or things we don’t know about we expect the worst even when there is nothing to make us feel that way other than our own natures.
- [26:55] Most of us don’t properly understand how averages impact our lives every day and this can impact the decisions we make in business.
- [27:15] Melina shares a story from Thinking Fast and Slow about regressive bias.
- [29:47] The instructor has attached a causal interpretation to the inevitable fluctuations of a random process.
- [32:00] Everything we know to be true is not necessarily true. It is easy to find the right answer to the wrong question.
- [33:25] The lesson is to know that our brains like to tell us stories. They write their own rules and details that serve what the subconscious thinks is best. Taking a little extra time and being a little more open can change your view and your success rate.
- [34:00] Melina’s closing thoughts
- [35:02] Adapting your lenses and looking from multiple angles and depths is really important to make that possible, which is why an episode like this is so valuable.
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Get the Books Mentioned on (or related to) this Episode:
- What Your Employees Need and Can’t Tell You, by Melina Palmer
- Behavioral Science in the Wild, by Dilip Soman & Nina Mazar
- Thinking Fast and Slow, by Daniel Kahneman
- Nudge, by Richard Thaler & Cass Sunstein
- Freakonomics, by Steven Levitt & Stephen Dubner
Top Recommended Next Episode: Behavioral Science in the Wild with Dilip Soman (episode 241)
Already Heard That One? Try These:
- Overview of Personal Biases (ep 45)
- Biases Toward Others – Including Groups (ep 46)
- An Overview of Memory Biases (ep 48)
- Present Versus Future Biases (ep 49)
- Selective Attention Biases (ep 50)
- Biases Toward Novelty and Stories (ep 54)
- Anchoring & Adjustment (ep 11)
- Loss Aversion (ep 9)
- IKEA Effect (ep 112)
- Time Discounting (ep 51)
- Booms, Bubbles, and Busts (ep 30)
- Mental Accounting (ep 56)
- Endowment Effect (ep 139)
- Negativity Bias (ep 223)
- The Cobra Effect (ep 220)
- Game Theory (ep 228)
- Duration Neglect and the Peak End Rule (ep 97)
- Planning Fallacy (ep 114)
- Status Quo Bias (ep 142)
Other Important Links:
- Brainy Bites - Melina’s LinkedIn Newsletter
- Less Is Better: When Low-value Options Are Valued More Highly than High-value Options
- The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence
- Treatment Decisions Under Ambiguity
- Ambiguity and Nonparticipation: The Role of Regulation
- Risk, Ambiguity, and the Savage Axioms
- Statistics How To
- How to Feel Like You Have All the Time in the World (even If You Don’t)