1 Miscalculations, Cognitive Illusions, Misjudgments, and ‘Effects’ (1/7) -- A Practicum in Behavioral Economics

1 Miscalculations, Cognitive Illusions, Misjudgments, and ‘Effects’ We begin by considering some well-known miscalculations that bedevil and typify Homo sapiens. (Relatively Simple) Miscalculations Answers Box 1 — The ball costs $0.05. Box 2 — It would take 5 minutes. Box 3 — The syllogism is not valid. Box 4 — It would take 47 days. Homo economicus would have scored a perfect four out of four. What was your score? (Relatively Complex) Miscalculation Wason (1968) proposed the following test of formal operational thought. Suppose you are shown four cards with the faces showing respectively “D,” “3,” “B,” and “7,” as displayed in the figure below. You are told that a card with a number on one side (e.g., 3 or 7) has a letter on the reverse side (e.g., D or B). You are then asked which of the cards you would need to flip over to test the hypothesis that “If there is a D on one side of any card, then there is a 3 on its other side.” Answer To test this hypothesis, you would need to flip the D card. However, you would also need to flip over the 7 card as well. If the letter on the opposite side of the 7 card is D, then the hypothesis would be false. Cognitive Illusions Ready to be weirded out? Which of the two horizontal lines is the longest? Are the sides of this cube bent inward? Which of the black circles is the largest? Do you see a rabbit or a duck in this drawing? Answers 1. Take a close look. The two lines are identical in length. 2. The sides of the cube are not bent inward. 3. Neither. The black circles are identical in size. 4. You can see both a rabbit and a duck in the drawing. Homo economicus would provide correct answers to each question, no problem. How did you do? Biederman (1972) and Palmer (1975) contend that our visual perceptions are affected by both our prior conceptual structures and the characteristics of the visual stimulus itself. This would explain why you may have struggled to answer some of questions correctly. Heuristics A heuristic is a practical, problem-solving method that is not guaranteed to lead to an optimal or rational solution but is nonetheless deemed sufficient by an individual or organization for obtaining a short-term goal or approximation (Myers, 2010). Heuristics can lead Homo sapiens to misjudge situations that more reasoned thought or research would otherwise improve upon.[1] Affect Heuristic Have you ever based a decision upon your like or dislike of the object in question rather than on more objective information and logical reasoning? For example, maybe you’ve based your decision of whether to purchase stock in a company based upon your like or dislike of the company rather than whether the company’s stock price is under- or over-valued? The key to distinguishing this heuristic is the absence of any information or evidence that might otherwise be used to render judgment or make a decision. We might, therefore, call this the ignorance-is-bliss heuristic. Availability Heuristic Have you ever judged the f