How Cognitive Biases Can Undermine Program Scale-Up Decisions Susan Mayer, Rohen Shah, and Ariel Kalil University of Chicago Au
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The Endowment Effect and Environmental Discounting
The endowment effect and environmental discounting Simon Dietz and Frank Venmans March 2017 Centre for Climate Change Economics and Policy Working Paper No. 264 Grantham Research Institute on Climate Change and the Environment Working Paper No. 233 The Centre for Climate Change Economics and Policy (CCCEP) was established by the University of Leeds and the London School of Economics and Political Science in 2008 to advance public and private action on climate change through innovative, rigorous research. The Centre is funded by the UK Economic and Social Research Council. Its second phase started in 2013 and there are five integrated research themes: 1. Understanding green growth and climate-compatible development 2. Advancing climate finance and investment 3. Evaluating the performance of climate policies 4. Managing climate risks and uncertainties and strengthening climate services 5. Enabling rapid transitions in mitigation and adaptation More information about the Centre for Climate Change Economics and Policy can be found at: www.cccep.ac.uk. The Grantham Research Institute on Climate Change and the Environment was established by the London School of Economics and Political Science in 2008 to bring together international expertise on economics, finance, geography, the environment, international development and political economy to create a world-leading centre for policy-relevant research and training. The Institute is funded by the Grantham Foundation for the Protection of the Environment and the Global Green Growth Institute. It has nine research programmes: 1. Adaptation and development 2. Carbon trading and finance 3. Ecosystems, resources and the natural environment 4. Energy, technology and trade 5. Future generations and social justice 6. -
The Status Quo Bias and Decisions to Withdraw Life-Sustaining Treatment
HUMANITIES | MEDICINE AND SOCIETY The status quo bias and decisions to withdraw life-sustaining treatment n Cite as: CMAJ 2018 March 5;190:E265-7. doi: 10.1503/cmaj.171005 t’s not uncommon for physicians and impasse. One factor that hasn’t been host of psychological phenomena that surrogate decision-makers to disagree studied yet is the role that cognitive cause people to make irrational deci- about life-sustaining treatment for biases might play in surrogate decision- sions, referred to as “cognitive biases.” Iincapacitated patients. Several studies making regarding withdrawal of life- One cognitive bias that is particularly show physicians perceive that nonbenefi- sustaining treatment. Understanding the worth exploring in the context of surrogate cial treatment is provided quite frequently role that these biases might play may decisions regarding life-sustaining treat- in their intensive care units. Palda and col- help improve communication between ment is the status quo bias. This bias, a leagues,1 for example, found that 87% of clinicians and surrogates when these con- decision-maker’s preference for the cur- physicians believed that futile treatment flicts arise. rent state of affairs,3 has been shown to had been provided in their ICU within the influence decision-making in a wide array previous year. (The authors in this study Status quo bias of contexts. For example, it has been cited equated “futile” with “nonbeneficial,” The classic model of human decision- as a mechanism to explain patient inertia defined as a treatment “that offers no rea- making is the rational choice or “rational (why patients have difficulty changing sonable hope of recovery or improvement, actor” model, the view that human beings their behaviour to improve their health), or because the patient is permanently will choose the option that has the best low organ-donation rates, low retirement- unable to experience any benefit.”) chance of satisfying their preferences. -
Cognitive Bias Mitigation: How to Make Decision-Making More Rational?
Cognitive Bias Mitigation: How to make decision-making more rational? Abstract Cognitive biases distort judgement and adversely impact decision-making, which results in economic inefficiencies. Initial attempts to mitigate these biases met with little success. However, recent studies which used computer games and educational videos to train people to avoid biases (Clegg et al., 2014; Morewedge et al., 2015) showed that this form of training reduced selected cognitive biases by 30 %. In this work I report results of an experiment which investigated the debiasing effects of training on confirmation bias. The debiasing training took the form of a short video which contained information about confirmation bias, its impact on judgement, and mitigation strategies. The results show that participants exhibited confirmation bias both in the selection and processing of information, and that debiasing training effectively decreased the level of confirmation bias by 33 % at the 5% significance level. Key words: Behavioural economics, cognitive bias, confirmation bias, cognitive bias mitigation, confirmation bias mitigation, debiasing JEL classification: D03, D81, Y80 1 Introduction Empirical research has documented a panoply of cognitive biases which impair human judgement and make people depart systematically from models of rational behaviour (Gilovich et al., 2002; Kahneman, 2011; Kahneman & Tversky, 1979; Pohl, 2004). Besides distorted decision-making and judgement in the areas of medicine, law, and military (Nickerson, 1998), cognitive biases can also lead to economic inefficiencies. Slovic et al. (1977) point out how they distort insurance purchases, Hyman Minsky (1982) partly blames psychological factors for economic cycles. Shefrin (2010) argues that confirmation bias and some other cognitive biases were among the significant factors leading to the global financial crisis which broke out in 2008. -
Is the Endowment Effect Due to Loss Aversion Or Mere Ownership? Lisa L. Shu Harvard University
Is the Endowment Effect Due to Loss Aversion or Mere Ownership? Lisa L. Shu Harvard University ABSTRACT The endowment effect—the observation that buyers and sellers value the same good at different prices—is an important problem for economists as it presents a violation of the Coase Theorem. In experimental settings, people who are arbitrarily assigned to be buyers or sellers exhibit very different behavior in willingness to pay and willingness to accept prices. On average, buyers are willing to pay only half has much as the price at which sellers are willing to part with their possession. The standard explanation for this price gap is the asymmetry in the subjective impact of losses and gains. Simply put, an equivalent loss feels worse than an equivalent gain feels good; therefore, sellers are more reluctant to give up their possession than buyers are eager to acquire it. However, previous studies have never tested the effect of ownership on valuation, independent of the frames adopted by buyers and sellers. This paper examined the separate effects of ownership and framing. Experiment 1 demonstrated that loss aversion was not necessary for the endowment effect to occur. Experiment 2 showed that the endowment effect, if not completely explained by mere ownership, is at least dominated by an ownership as opposed to a framing explanation. Taken together, the two experiments suggest that mere ownership sufficiently accounts for the endowment effect, whereas the standard framing explanation does not. 1 Is the Endowment Effect Due to Loss Aversion or Mere Ownership? Imagine you are trying to sell your car. -
The Endowment Effect: Loss Aversion Or a Buy-Sell Discrepancy?
Journal of Experimental Psychology: General © 2021 American Psychological Association 2020, Vol. 2, No. 999, 000 ISSN: 0096-3445 https://doi.org/10.1037/xge0000880 The Endowment Effect: Loss Aversion or a Buy-Sell Discrepancy? Gal Smitizsky1, Wendy Liu1, and Uri Gneezy2 1 Department of Marketing, Rady School of Management, University of California, San Diego 2 Department of Economics and Strategy, Rady School of Management, University of California, San Diego In a typical endowment effect experiment, individuals state a higher willingness-to-accept to sell an object than a willingness-to-pay to obtain the object. The leading explanation for the endowment effect is loss aversion for the object. An alternative explanation is based on a buy-sell discrepancy, according to which people price the object in a strategic way. Disentangling these two explanations is the goal of this research. To this end, we introduce a third condition, in which participants receive an object and are asked how much they are willing to pay to keep it (Pay-to-Keep). Comparing the three conditions we find no evidence for loss aversion in the endowment effect setting. We found support for the buy-sell strategy mechanism. Our results have important implications for the understanding of buyer and seller behaviors, subjective value, and elicitation methods. Keywords: endowment effect, loss aversion, buyers versus sellers, utility theory, preference elicitation The endowment effect refers to the observation that “goods that compatible mechanisms, such as price lists, second price auctions, are included in the individual’s endowment will be more highly or the Becker-DeGroot-Marschak paradigm. -
Explanations of the Endowment Effect: an Integrative Review
Review Explanations of the endowment effect: an integrative review 1 2 Carey K. Morewedge and Colleen E. Giblin 1 Boston University, Questrom School of Business, Department of Marketing, Boston, MA, USA 2 Carnegie Mellon University, Tepper School of Business, Pittsburgh, PA, USA The endowment effect is the tendency for people who and policy governing the allocation and distribution of own a good to value it more than people who do not. Its entitlements [2,14,18,19]. economic impact is consequential. It creates market Loss aversion has traditionally been used to explain the inefficiencies and irregularities in valuation such as dif- endowment effect [1,2], but does not specify its underlying ferences between buyers and sellers, reluctance to trade, cognitive and neural processes. Evidence elucidating and mere ownership effects. Traditionally, the endow- those processes has accumulated. A considerable amount ment effect has been attributed to loss aversion causing is inconsistent with loss aversion. In this article, we sellers of a good to value it more than buyers. New describe the loss aversion explanation and five major theories and findings – some inconsistent with loss process accounts: evolutionary advantage, strategic mis- aversion – suggest evolutionary, strategic, and more representation, reference prices, biased information pro- basic cognitive origins. In an integrative review, we cessing, and psychological ownership. We organize these propose that all three major instantiations of the endow- theories and new evidence into an integrative framework, ment effect are attributable to exogenously and endog- attribute sampling bias. Attribute sampling bias is a enously induced cognitive frames that bias which cognitive process account that can connect these findings, information is accessible during valuation. -
Cognitive Bias in Emissions Trading
sustainability Article Cognitive Bias in Emissions Trading Jae-Do Song 1 and Young-Hwan Ahn 2,* 1 College of Business Administration, Chonnam National University, Gwangju 61186, Korea; [email protected] 2 Korea Energy Economics Institute, 405-11 Jongga-ro, Jung-gu, Ulsan 44543, Korea * Correspondence: [email protected]; Tel.: +82-52-714-2175; Fax: +82-52-714-2026 Received: 8 February 2019; Accepted: 27 February 2019; Published: 5 March 2019 Abstract: This study investigates whether cognitive biases such as the endowment effect and status quo bias occur in emissions trading. Such cognitive biases can serve as a barrier to trade. This study’s survey-based experiments, which include hypothetical emissions trading scenarios, show that the endowment effect does occur in emissions trading. The status quo bias occurs in only one of the three experiments. This study also investigates whether accumulation of experience can reduce cognitive bias as discovered preference hypothesis expects. The results indicate that practitioners who are supposed to have more experience show no evidence of having less cognitive bias. Contrary to the conventional expectation, the practitioners show significantly higher level of endowment effect than students and only the practitioners show a significant status quo bias. A consignment auction situation, which is used in California’s cap-and-trade program, is also tested; no significant difference between general permission trading and consignment auctions is found. Keywords: emissions trading; cognitive bias; consignment auction; climate policy 1. Introduction Emissions trading allows entities to achieve emission reduction targets in a cost-effective way through buying and selling emission allowances in emissions trading markets [1,2]. -
The Endowment Effect on Entrepreneurs: a Risky Attachment*1 El Efecto Dotación En Emprendedores: Un Apego Muy Riesgoso
TheEstudios endowment de Economía. effect… Vol. 45 / Isabela - Nº 2, Echeverry Diciembre Peñón, 2018. Santiago Págs. 231-249 Reyes Ortega 231 The endowment effect on entrepreneurs: A risky attachment*1 El efecto dotación en emprendedores: Un apego muy riesgoso Isabela Echeverry Peñón** Santiago Reyes Ortega*** Abstract This paper presents evidence on the role of the endowment effect in shaping the risk-taking behavior of entrepreneurs, and how the potential of losing their firms lead them to take higher risks. This study uses an experimental design with 466 entrepreneurs in Cali, Colombia. Results show that entrepreneurs are more likely to accept riskier bets when those are related to the possession of their companies than in non-framed lotteries. The data shows that the existence of the endowment effect increases the certainty equivalent of a lottery, for the median entrepreneur, by 36.5%. This could explain why many entrepreneurs prefer to continue operating their underperforming firms, as well as why many entrepreneurs overvalue their firms during investment processes. This paper presents an alternate view on the drivers behind entrepreneurs’ risk-taking behavior and opens a door for future research on the role of biases on entre- preneurs’ decision-making processes. Key words: Endowment effect, cognitive biases, entrepreneurship, risk behavior, investment decisions, experimental design. JEL Classification: L26, G41, D91, C91. * The authors that contributed to this article did it in their personal capacity. The views expressed are their own and do not necessarily represent the views of their Institutions. This research was possible thanks to the financing of the Cali Chamber of Commerce, as part of its knowledge creation strategy. -
Emotional Reasoning and Parent-Based Reasoning in Normal Children
Morren, M., Muris, P., Kindt, M. Emotional reasoning and parent-based reasoning in normal children. Child Psychiatry and Human Development: 35, 2004, nr. 1, p. 3-20 Postprint Version 1.0 Journal website http://www.springerlink.com/content/105587/ Pubmed link http://www.ncbi.nlm.nih.gov/entrez/query.fcgi?cmd=Retrieve&db=pubmed&dop t=Abstract&list_uids=15626322&query_hl=45&itool=pubmed_docsum DOI 10.1023/B:CHUD.0000039317.50547.e3 Address correspondence to M. Morren, Department of Medical, Clinical, and Experimental Psychology, Maastricht University, P.O. Box 616, 6200 MD Maastricht, The Netherlands; e-mail: [email protected]. Emotional Reasoning and Parent-based Reasoning in Normal Children MATTIJN MORREN, MSC; PETER MURIS, PHD; MEREL KINDT, PHD DEPARTMENT OF MEDICAL, CLINICAL AND EXPERIMENTAL PSYCHOLOGY, MAASTRICHT UNIVERSITY, THE NETHERLANDS ABSTRACT: A previous study by Muris, Merckelbach, and Van Spauwen1 demonstrated that children display emotional reasoning irrespective of their anxiety levels. That is, when estimating whether a situation is dangerous, children not only rely on objective danger information but also on their own anxiety-response. The present study further examined emotional reasoning in children aged 7–13 years (N =508). In addition, it was investigated whether children also show parent-based reasoning, which can be defined as the tendency to rely on anxiety-responses that can be observed in parents. Children completed self-report questionnaires of anxiety, depression, and emotional and parent-based reasoning. Evidence was found for both emotional and parent-based reasoning effects. More specifically, children’s danger ratings were not only affected by objective danger information, but also by anxiety-response information in both objective danger and safety stories. -
Dunning–Kruger Effect - Wikipedia, the Free Encyclopedia
Dunning–Kruger effect - Wikipedia, the free encyclopedia http://en.wikipedia.org/wiki/Dunning–Kruger_effect Dunning–Kruger effect From Wikipedia, the free encyclopedia The Dunning–Kruger effect is a cognitive bias in which unskilled individuals suffer from illusory superiority, mistakenly rating their ability much higher than average. This bias is attributed to a metacognitive inability of the unskilled to recognize their mistakes.[1] Actual competence may weaken self-confidence, as competent individuals may falsely assume that others have an equivalent understanding. David Dunning and Justin Kruger of Cornell University conclude, "the miscalibration of the incompetent stems from an error about the self, whereas the miscalibration of the highly competent stems from an error about others".[2] Contents 1 Proposal 2 Supporting studies 3 Awards 4 Historical references 5 See also 6 References Proposal The phenomenon was first tested in a series of experiments published in 1999 by David Dunning and Justin Kruger of the Department of Psychology, Cornell University.[2][3] They noted earlier studies suggesting that ignorance of standards of performance is behind a great deal of incompetence. This pattern was seen in studies of skills as diverse as reading comprehension, operating a motor vehicle, and playing chess or tennis. Dunning and Kruger proposed that, for a given skill, incompetent people will: 1. tend to overestimate their own level of skill; 2. fail to recognize genuine skill in others; 3. fail to recognize the extremity of their inadequacy; 4. recognize and acknowledge their own previous lack of skill, if they are exposed to training for that skill. Dunning has since drawn an analogy ("the anosognosia of everyday life")[1][4] with a condition in which a person who suffers a physical disability because of brain injury seems unaware of or denies the existence of the disability, even for dramatic impairments such as blindness or paralysis. -
Why the WTA–WTP Disparity Matters
Ecological Economics 28 (1999) 323–335 SURVEY Why the WTA–WTP disparity matters Thomas C. Brown a,*, Robin Gregory b a Rocky Mountain Research Station, US Forest Ser6ice, 3825 E. Mulberry Street, Fort Collins, CO 80524, USA b Decision Research, 1124 West 19th Street, North Vancou6er, BC V7P 1Z9, Canada Received 6 November 1997; received in revised form 17 April 1998; accepted 22 April 1998 Abstract The disparity between willingness to pay (WTP) and willingness to accept compensation (WTA) has been demonstrated repeatedly. Because using WTP estimates of value where a WTA estimate is appropriate tends to undervalue environmental assets, this issue is important to environmental managers. We summarize reasons for the disparity and then discuss some of the implications for management of environmental assets. We end by suggesting some approaches for dealing with the lack of credible methods for estimating WTA values of environmental goods. © 1999 Elsevier Science B.V. All rights reserved. Keywords: Economic value; Willingness to pay; Willingness to accept compensation; Resource allocation; Damage assessment 1. Introduction the maximum monetary amount that an individ- ual would pay to obtain a good. The other is Interesting anomalies act as a magnet on our willingness to accept compensation (WTA), which curiosity, encouraging us to try to make sense of reflects the minimum monetary amount required something that is surprising. One of the more to relinquish the good. WTP therefore provides a popular anomalies, at least among resource purchase price, relevant for valuing the proposed economists and behavioral psychologists, is the gain of a good, whereas WTA provides a selling observed disparity between two familiar and sup- price, relevant for valuing a proposed relinquish- posedly equivalent measures of economic value. -
Desperate Housewives a Lot Goes on in the Strange Neighborhood of Wisteria Lane
Desperate Housewives A lot goes on in the strange neighborhood of Wisteria Lane. Sneak into the lives of five women: Susan, a single mother; Lynette, a woman desperately trying to b alance family and career; Gabrielle, an exmodel who has everything but a good m arriage; Bree, a perfect housewife with an imperfect relationship and Edie Britt , a real estate agent with a rocking love life. These are the famous five of Des perate Housewives, a primetime TV show. Get an insight into these popular charac ters with these Desperate Housewives quotes. Susan Yeah, well, my heart wants to hurt you, but I'm able to control myself! How would you feel if I used your child support payments for plastic surgery? Every time we went out for pizza you could have said, "Hey, I once killed a man. " Okay, yes I am closer to your father than I have been in the past, the bitter ha tred has now settled to a respectful disgust. Lynette Please hear me out this is important. Today I have a chance to join the human rac e for a few hours there are actual adults waiting for me with margaritas. Loo k, I'm in a dress, I have makeup on. We didn't exactly forget. It's just usually when the hostess dies, the party is off. And I love you because you find ways to compliment me when you could just say, " I told you so." Gabrielle I want a sexy little convertible! And I want to buy one, right now! Why are all rich men such jerks? The way I see it is that good friends support each other after something bad has happened, great friends act as if nothing has happened.