A cognitive bias is any systematic deviation from a normative criterion that affects thinking, often leading to errors in judgment. Affect, in particular, may bias cognition, both by altering depth of cognitive processing and by impacting the content of cognitions. A useful example of emotion altering depth of processing appears in studies by Bodenhausen et al (1994). Happy individuals demonstrated less depth of processing than individuals in a neutral affective state, evidenced by their reliance on simple mental categories rather than on complex stimuli. A useful example of emotion altering the content of thought appears in studies on the affect-as-information model (see affect-as-information). Individuals in a positive mood judged their overall life satisfaction more positively than did individuals in a negative mood. That is, their temporary positive mood altered the content of their thoughts about satisfaction as a whole.
4 Demonstrations of Emotional Biases (via Oxford)
1. Judgment lacks correspondence with a criterion. The most direct way to measure a bias is to compare human judgment to a known normative criterion. For example, Bechara et al. (1997) examined the decision making of patients with lesions in their pre-frontal cortex – an area that integrates emotion with cognition. They
2. Judgment lacks correspondence with judgments of others. Another way to measure a bias is to compare the judgment of different groups on a task. If the groups’ judgments fail to cohere, then one can infer that at least one of the groups must be biased. When using this approach, it is especially useful to identify one group as expert, so it can serve as the standard for comparison.
3. Judgment relies on bad information. The existence of cognitive bias can also be inferred from individuals’ reliance on a bad judgmental cue.
4. Judgment fails to use good information. Finally, one can infer a bias if individuals fail to utilize a good judgmental cue. In Lerner et al’s (1998) study of legal decision making, participants were randomly assigned to an anger condition or a neutral condition.
You shouldn’t judge a book by its cover, but you can probably judge political partisans by theirs. Psychologists at Tufts University showed people photos of white Democratic and Republican politicians and college students. People were able to guess the political affiliation of the person in the photo at a rate significantly better than chance. There was no significant difference in how accurately people perceived the political affiliation of men vs. women. When asked to assess the traits of people in the photos, people perceived powerful-looking individuals to be Republicans and warm-looking individuals to be Democrats, though only perceptions of having a powerful appearance actually correlated with political affiliation.
Additional Excerpts (Via Boston.com)
Rule, N. & Ambady, N., “Democrats and Republicans Can Be Differentiated from Their Faces,” PLoS ONE (January 2010).
In prices, precise is nice
Note to real estate agents: You’re leaving money on the table! Researchers at Cornell University conducted multiple experiments and analyses to demonstrate what they call the “price precision effect.” When people are presented with comparable prices, the one that is rounded (i.e., has more zeros) is perceived to be bigger, even if it’s slightly smaller. People seem to be thrown for a loop by a large, yet precise, number, causing them to misinterpret it as a smaller number and, thus, be willing to pay more. The same pattern was found in a survey of prospective home buyers and in transaction data from the Multiple Listing Service. According to the authors, if there are two comparable homes listed for $485,000 and $484,880, the latter can be expected to sell for about $1,200-$1,450 more.
Thomas, M. et al., “The Price Precision Effect: Evidence from Laboratory and Market Data,” Marketing Science (January-February 2010).
Power corrupts, starting with you
Hardly a day goes by without us hearing about the hypocrisy of some powerful person. But are these just a few bad apples? To find out, researchers primed people to think about power and then asked them to report how acceptable it would be for others or themselves to entertain unethical behavior, such as over-reporting travel expenses, breaking traffic laws, under-reporting income, or stealing a bike. Those who were put in a powerful frame of mind were significantly more hypocritical – in other words, they demanded better behavior from others than from themselves. In contrast, those who were put in a low-power or illegitimate-power frame of mind exhibited what the authors call “hypercrisy” – demanding more from themselves than from others.
Lammers, J. et al., “Power Increases Hypocrisy: Moralizing in Reasoning, Immorality in Behavior,” Psychological Science (forthcoming).
Research shows both pro-Arabs and pro-Israelis watching the same news reports think it is biased against their own side.
Introduction (Via PsyBlog)
The media may well be biased, in fact it would be a miracle if it were permanently and perfectly balanced, that isn’t what this post is about.
Instead this is about how you and I perceive the presence or absence of bias in the media.
This study, conducted in the 1980s, helps to explain a lot of the heat and light that gets produced by those commenting on media bias across the political spectrum, including the remarkably vitriolic outpourings often seen in the comment sections of newspaper websites and across the internet.
Key Lessons (Via PsyBlog)
The study demonstrates what the authors call the ‘hostile media phenomenon’: people’s tendency to view news coverage about which they hold strong beliefs as biased against their own position.
There were two mechanisms at work here:
The truth is black and white: partisans generally thought that the truth about the Arab-Israeli debate was black and white. Any hint of shades of grey in the news reports was interpreted by partisans as bias towards the other side. In other words: any balanced report will seem biased to partisan viewers.
The news report was too grey: as well as thinking the Arab-Israeli issue was either black or white, partisans also perceived that the specific news report they watched was too grey.
Put simply: when we care about an issue, we tend not to notice all the points we agree with, and focus on the ones we don’t.
Admitting bias
Whether the news actually is biased in one particular outlet about an issue that you care about can be very hard to quantify.
What we can say from this study is that people who care about a particular issue will tend to find media bias everywhere, whether or not it really exists. Not only that but they are unlikely to admit this fact to themselves since this study, amongst others, also shows how remarkably resistant we are to admitting to our own biases, even when they are categorically demonstrated to us.
The financial market was well developed in France in the years before World War I, and there were many newspapers that provided information to investors. Yet commentators at the time faulted the financial press for inaccuracy and biases, which they linked to the existence of payments made by companies for coverage in the editorial section. This paper tests whether the payment scheme induced a systematic bias in the coverage of companies listed on the Paris stock exchanges by newspapers. The results show that, although firms’ media coverage was affected, the performance of firms actually touted by the press was good. Thus, the media bias can also be explained by newspapers choosing the companies’ exposures according to their editorial policy.
Excerpts (Via SSRN)
This paper provided quantitative evidence on how four financial newspapers chose the information they published on listed firms in early-twentieth-century France. It shows that editors used varying financial criteria when choosing companies, thereby competing on various dimensions to attract readers. The results also show that the media were biased toward some subsets of companies but that this did not have a negative effect on their readers. Moreover, we have shown that independent newspapers were not the Holy Grail of unbiased information, because bank-owned newspapers did not underperform when compared to their independent counterparts. This stands in sharp contrast with the judgments of many observers writing at the time. The results also suggest that the newspaper market was segmented between risk-averse and risk-seeking investors and that the selection of the firms covered in the media varied according to the targeted readership. Notice that the increasing digitalisation of newspapers’ content will allow future research to broaden the sample of newspapers tested and consequently to assess the generic character of our results.
Although each conclusion is not surprising in itself, the broader picture that they suggest is that the importance of media bias was clearly overemphasized in the historical literature and that the dissemination of information on listed companies must have undoubtedly contributed to the development of the financial markets. The payments to newspapers could, however, have a negative impact, notably because of the transaction cost they imposed on listed firms. In particular, following the literature on corruption, small firms, those that were not able to afford paying the numerous intermediaries involved in the information market, certainly suffered from the peculiarities of the process through which information made its way into the newspapers. We let to future research the estimation of this possible impact of media bias on the overall stock market performance.
Driving home from the Yale event last night (which was packed, and filled with all kinds of interesting traffic types, ranging from Norman Garrick to Anne Lutz Fernandez), as I was listening to various renditions of La Boheme on Doug Fox’s wonderful program (Mr. Fox, I didn’t catch the details on that second act), which I discovered for the first time, a warm presence amidst the eerie fog-tinged, arc-lighted Stygian gloom of I-95, I was thinking back to Donald Shoup’s reply to a question I had posed to him, which itself was related to Brian Pijanowski’s study of parking-lot sprawl in Indiana. Despite a huge and quantifiable overabundance of parking in the county he studied, he was interested to note that people still complained “there wasn’t enough parking.”
I asked Shoup, who of course from the groves of academe has helped ignite a quiet but fomenting revolution in parking policy, to what extent this question of perception in the parking equation had been studied or quantified — keeping in mind that perception is a crucial, if often under-appreciated part of the traffic/planning nexus (e.g., commute times, etc.). One part of Shoup’s answer stuck with me: He talked of studying a parking garage in West Hollywood. On the bottom floors, there were cars, and in the empty spaces, plenty of oil stains to indicate past users. On the upper floors, he noted, it looked as if the spaces had never been graced by a single car. And yet the word from drivers was that there was ‘nowhere to park.’ But the problem, Shoup noted, is that drivers’ perception parking supply is informed by the parking spaces they can actually see. Call it “parking availability bias” (ode to Tversky and Kahneman). And the spaces that are most easily seen, of course, are curb spaces, hence the importance of rational market pricing policies to ensure turnover and vacancy. A few empty spaces (15%) can go a long way.
Projecting the charisma of a newly hired Chief Executive Officer often leads financial analysts to make crucial errors in forecasting the company’s future performance, according to a new study in the current issue of Organization Science, a journal of the Institute for Operations Research and the Management Sciences (INFORMS).
Important Excerpts (Via Phys Org)
At the same time, “analysts covering firms with higher CEO charismatic visions were more prone to misestimating future performance than those following firms with less charismatic CEO visions,” the authors explain.
Thus, the use of charismatic language in CEO vision statements can lead investors to make poor decisions about their purchase of securities.
The authors’ research completely supported their first two research hypotheses:
that CEO charismatic visions as expressed in their inaugural letters to shareholders persuade individual analysts to make positive recommendations
that these charismatic messages further influence a herd effect, with the preponderance of analysts writing favorably about the company
The authors’ third hypothesis has important implications for investors and the analyst community. It says that CEO charismatic visions are related to analysts making forecasting errors. The authors’ research partially supports this hypothesis, leading them to conclude that in the one-year period following a higher frequency of CEO charismatic communication (CCV), analysts make larger errors in their forecasts, either overestimating or underestimating the firms’ performance.
First I posted about the Pygmalion effect, now its nemesis the Golem Effect!
Definition: Golem Effect (via Goliath.ecnext.com) - The Golem effect is the negative or dark version of Pygmalion: behavior reflecting low or negative supervisory expectations generates negative results in subordinates’ performance. Babad, Inbar, and Rosenthal (1982) used the term Golem for this effect, drawing from Hebrew slang, where the word means oaf or fool. The term originates from Jewish legend wherein a creature was created to eradicate evil but ultimately became a monster owing to its increasingly strong, corrupting power (Collins & Pinch, 1998).
The outcome of the Golem effect is manifest either as net declines in subordinates’ performance or simply lower performance than would be otherwise attainable. With few exceptions, the majority of recent evidence in the literature is anecdotal, drawing on extrapolations from Pygmalion experiments. Even Babad et al. (1982) opted not to apply a treatment of artificially lowered teacher expectations regarding students; rather, the researchers experimentally raised teachers’ expectations toward some students and compared the performance results with students for whom teachers had either naturally occurring high or low expectations.
Definition Pygmalion effect – refers to the phenomenon that the greater the expectation placed upon people, often children or students, the better they perform. The effect is named after Pygmalion, a Cypriot sculptor in a narrative by Ovid in Greek mythology, who falls in love with a female statue he has carved out of ivory. (Via Wikipedia):
SimoleonSays: Often times the different behavior is explained by different treatment.
The Pygmalion Effect In The Workplace (Via Aftau.org):
Study results indicate that when a manager expects a lot from an employee, the manager’s leadership style changes and subsequently boosts the employee’s self-confidence. “If your boss believes you can excel, you are more likely to believe in your own capacity to succeed,” says Prof. Eden.
Conclusion: (Via Accel-Team)
Consciously or not we tip people off as to what our expectations are. We exhibit thousands of cues, some as subtle as the tilting of heads, the raising of eye brows or the dilation of nostrils, but most are much more obvious. And people pick up on those cues.
From billboards and newspapers to TV commercials and online advertisements, references to time and money are commonplace in marketing and advertising campaigns. A survey of the recent issues of four popular, high circulation magazines (New Yorker, Cosmopolitan, Money and Rolling Stone) revealed that out of a total of some 300 advertisements almost half employed a reference to time or money in their message. But does mentioning time or money influence peoples’ evaluation of the product or service concerned? And if they do which is more persuasive – time or money?
Campaigns that promote certain brands of beers have long used references to time and money in their advertisements. Take for example Miller and their “It’s Miller Time” commercials. In contrast Stella Artois take a money led approach by informing potential consumers that “perfection has its price” and that Stella Artois is “reassuringly expensive”. It’s not just beer manufacturers that employ such approaches. Citibank, one of the world’s largest banking corporations, chose to focus on time rather than money in a campaign that proclaimed “there is no preset limit when it comes to spending time with your family”.
Additionally: (Via Inside Influence Report)
There can be little doubt that employing references to time and money in an attempt to influence and persuade are commonplace. But exactly how effective are such strategies and specifically which is the more effective strategy? Making a reference to time or to money? In order to answer these questions a team from Stanford University’s Graduate School of Business created a series of experiments to test the time v money effect starting with the setting up of a lemonade stand in a busy park one sunny afternoon.
Results (Via Inside Influence Report)
The results showed that significantly more people (14% v 7%) purchased lemonade when they were exposed to the sign mentioning time compared to the sign mentioning money. There was no significant difference in the number of lemonade purchases made by those people who saw the money sign compared to those exposed to the control condition sign. The researchers also reported that those people who stopped to make purchases were representative of a range of ages (14 – 50 years old), gender (58% male v 42% female) and occupations. This suggests that people in general are more influenced to make a product purchase when they are primed to think about time rather than money.
These results then suggest that irrespective of the amount of money an individual might spend on a product (after all lemonade and iPods have significantly different price points) making references to time can influence people’s perception of a product’s attributes. Therefore it would seem to sense to initially include references to time rather than money when influencing others to consider your offers and proposals. With one exception.
The researchers found that when the products concerned are considered ‘prestigious possessions’ and your influence target is more ‘materialistic’, then making references to money rather than time should be more persuasive due to the fact that in this group the feeling of personal connection would more likely stem from possessing the product rather than the experience itself.
A fallacy of composition arises when one infers that something is true of the whole from the fact that it is true of some part of the whole (or even of everyproper part).
Examples (Via Wikipedia)
In Keynesian macroeconomics, the “paradox of thrift” theory illustrates this fallacy: increasing saving (or “thrift”) is obviously good for an individual, since it provides for retirement or a “rainy day,” but if everyone saves more, it may cause a recession by reducing consumer demand.
The thrift of any member of a group is beneficial to that member.
Therefore, the thrift of the group as a whole is beneficial to that group as a whole.
Another example is the Tragedy of the Commons where an individual would benefit from his unlimited access to a finite resource but the collective unrestricted demand from the whole group would eventually doom the resource through over-exploitation.
SimoleonSays:
The fallacy of composition can also be used to understand certain elements of bubbles & panics. For example if there is a fire in a theater, it’s in the best interest for each person to run to the exit. If everyone runs for the exit at the same time, a disastrous situation is likely to brew.
Similarly, in a market panic it’s in the interest of each person to exit positions as quickly as possible unfortunately mass behavior (like this) results in a feedback loop and further declining prices.
