Posts Tagged ‘fallacy’
Spend a Five or Break a Twenty? The Denomination Effect
I’m sure many of us understand the denomination effect on a visceral level. If you’ve ever been in a store, saw something you wanted, but hesitated to buy it because you’d have to pull out a big bill, you’ve experienced this effect. Why did you hesitate? Because you knew that breaking that $20, $50 or $100 bill made it that much easier to spend your change.
Perhaps that’s why prices near a dollar amount, particularly $4.99, $9.99, $19.99, and $99.99 are so attractive to the consumer’s eye. You’re trading one physical item (a printed piece of paper) for another (perhaps a flash drive) and getting a tiny bit of money back. I wonder how much of the attractiveness of prices just below a currency denomination depends on the fact that you’re getting some change back as opposed to the first number being one less (e.g., $19.99 versus $20.00). I bet the two phenomena are intertwined in some interesting psychological ways.
You also see the denomination effect at work in gambling, but the effect works differently there depending on the game and situation. Knowledgeable poker players experience the reverse effect, becoming less likely to get involved in hands when they have fewer chips in their stack. They hesitate to invest in a hand because, when you are low on funds, the relative value of each chip goes up. Other players can use this hesitancy to their advantage and bet big to drive the small stacks out of a pot, but the small stacks can make a modest bet to induce a bluff raise from a big stack, but the big stacks can raise and hope the small stacks will think they’ve fallen into their trap, but…
You get the idea. Poker’s fun, but bring aspirin.
Memory and the Recency Effect
It’s tempting to think that knowing about a cognitive bias or logical fallacy makes them immune to it. I’m no exception, but I constantly find myself falling prey to the recency effect, or recency bias. The good news is that I catch myself from time to time — the bad news is that I have no idea how many instances slip through.
The recency effect describes a condition where the most recent information you learned has a disproportionate impact on your opinion about a topic. I find myself watching TV programs or reading articles where the author sets out arguments on an issue and I often think, “Oh, I didn’t know that. I’ll have to revise my opinion.” The rest of the time I think, “Yeah, right” and move on with my day. If the topic’s one I don’t know much about, the information I just learned will affect my view more than it would if I knew a lot about the issue.
As I mentioned in my review of The Gamble, published here and on Technology and Society Book Reviews, the Romney 2012 presidential campaign managers attempted to use the recency effect to their candidate’s advantage. The authors cited a significant body of research showing that political ads sway opinion, but only for a few days at most before viewers’ opinions revert to their personal baselines. The Romney campaign took out a large number of ads in the days before the election in hopes of using the recency effect to their advantage. In fact, the campaign bought the entire available ad inventory in several states. Rather than leave the money in the bank, they bought ads in states they deemed less important.
If you really want to see the recency effect in action, watch the U.S. stock markets whenever major events occur. Every bit of news causes the markets to move as investors try to out-guess each other and make a profit on competitors’ decisions. I’m not sure how much of the action is individual speculators trying to get a jump on the market and others trying to guess the reactors’ reactions (and so on up the chain), but the short-term volatility can be astonishing.
Confirmation Bias Proves What You Already Knew
Human beings deal with complexities by creating mental models. Our models are necessarily simpler than reality and are based on our experiences. These considerations imply two things. First, models are intensely personal constructs. Second, personal models are difficult to change. When we find something that works, we’re reluctant to change it.
There’s a strong temptation to fit what we see into our models rather than invest the effort (and ego) into admitting our model is wrong, or at least incomplete. Oswald and Grosjean define confirmation bias as “the tendency to search for, interpret and remember information in a way that confirms one’s preconceptions.” You probably know someone who engages in impressive mental gymnastics to fit everything into their world view.
In business, falling prey to confirmation bias can cost you money. If you developed a process that worked for years but doesn’t meet your company’s needs, you must be open to change. If you interpret critiques as personal attacks, you’re much less likely to improve your processes.
You can take advantage of confirmation bias to create interesting characters or “find the game” within an improv scene. Improv scenes run on justifying why something someone else said or did is true and important. If your character’s perspective uses “Yes, and…” to bring everything into his or her world view, you can be an interesting character and entertain your audience. Like in business, you have to be careful not to let your internal game hurt your team’s performance, but it’s a fun approach to take on occasion.
The exercise “Your Place or Mine?” provides an interesting context for justification and fitting incidents into your character’s world view. In this exercise, you and a scene partner play characters in two different locations. For example, one of you might be a fast food worker in McDonald’s and the other an archery instructor on the range. If the fast food worker hands the archer a french fry, the archer could interpret it as a small arrow and shoot it into a target, which the fast food worker could interpret as throwing the food into a customer’s mouth.
Improspectives 