Cognitive bias.

 


So my post about cognitive dissonance and partisan think tanks got me interested in talking about one of the most important fields to emerge from economics in recent decades. Behavioral economics.

Now, as I pointed out earlier, models are essentially what you put into them. They're the assumptions and logic of your hypothesis. Well, the basic models are built around perfectly rational human beings that are able to compute problems down to decimal places and make decisions based off of miniscule differences.

Well, that's not too reasonable, but it has proven to be useful, and definitely mathematically tractable. So what do we do? Well, behavioral economists, using tools and insights from psychology, are trying to figure out the details of how exactly people think. A large portion of the focus has been on bias, or why people deviate from these perfectly rational models. Wiki defines it as:

"A cognitive bias is a pattern of deviation in judgment. Whereby, inferences of other people and situations may be drawn in an illogical fashion. Individuals create their own “subjective social reality” from their perception of the input. An individual’s construction of social reality, not the objective input, may dictate one’s behavior in the social world. Thus, cognitive biases may sometimes lead to perceptual distortion, inaccurate judgment, illogical interpretation, or what is broadly called irrationality"

Once they find it, they apply it to actual models so that their assumptions are much more cohesive with reality. Good stuff. I hope to cover some specific ones, since they're easy topics to talk about and are immensely interesting.