All Decisionmaking is Doomed to Failure: Questions for the Bias Industry

May 11, 2010

by Mario Rizzo  

Behavioral economists have an embarrassment of biases. They have discovered many cognitive and behavioral biases which plague human decisionmaking. By one count there are nearly a hundred of them.  

A cognitive bias is a systematic departure from rational decisionmaking. For example, a person may react differently if he is told that a drug has a 90% cure rate or that it has a 10% failure rate. A behavioral bias is the systematic inability to act in accordance with one’s true preferences. For example, I resolve to stop drinking but I don’t have the willpower.  

But what does all of this add up to? I suggest that behavioral economics has missed the forest for the trees (itself a bias). There is an academic myopia that looks at each bias in isolation and then tries to generalize about the impact on human decisionmaking. But if you list (or sing about, as in the attached YouTube clip) many of these, you understandably wonder:  

1. How is it that we ever make good decisions?  

There are so many biases and little evidence about when, in real-world decisionmaking, they are present. There is also scant evidence on the degree to which they are present. But if we simply look at the results of experiments and generalize to everyday life, we get a very pessimistic view of the ability of people to adapt to their current or expected environment.  

2. What is the effect on decisionmaking of a number of biases interacting?  

People may be subject to optimism bias (“Bad things won’t happen to me”) and availability bias (“Wow, what an awful plane crash”) and myopia (“The future is so far off that it is irrelevant”) and hyperopia (“Work today, no fun until some day far down the road). So should I get on an airplane to go on vacation next week? Who knows?  

3. If policy-makers are human they also must have these biases. How does that affect their de-biasing activities? 

Politicians and myopia, optimism, and availability biases: perfect together. So what puts them a position to debias the rest of us?  

There is nothing wrong with psychologists and behavioral economists studying the quirks of human decisionmaking. But they ought to be very careful using these results to form the basis for government policy.

9 Responses to “All Decisionmaking is Doomed to Failure: Questions for the Bias Industry”

  1. chidemkurdas Says:

    Your third question is the key issue for policy. The existence of cognitive biases does NOT by itself imply that the government should barge in to make us behave differently. Hayek recognized the limits to rational decision making but he applied this insight consistently, to policy makers as well as the rest of humanity. Due to this consistent application, he reached diametrically opposite conclusions from those espoused by behavioral economists today.

  2. Dave Pullin Says:

    Shouldn’t we just call the “Decision Illiteracy” and the fix should be to teach rationale decision making?


  3. “The curious task of economics is to demonstrate to men how little they know about what they imagine they can design.”

    — F.A. Hayek, The Fatal Conceit

    (HT: Pete Boettke)

  4. Daniel Kuehn Says:

    I’m one that thinks these biases and other sorts of “market failures” are probably very important, but I agree with you that a lot of people that emphasize them largely miss the point and are far too myopic about such biases and failures.

    To me, these things are important for understanding the difference between where we are and where we could have been. In that sense, the sub-optimality they introduce is very real. But since this is the only universe we really know, the practical importance of this is limited. There is nothing really in these biases or failures that overturns the fundamental logic of the market or free society. We may be targeting some sub-optimal solution because of them, but we’re hitting that target efficiently and we’re making progress efficiently.

  5. Richard Ebeling Says:

    The presumption is that various “objective” standards and/or measurement methods are and should be the benchmarks for judging the bias or non-bias of decision-making choices by actual individuals in the real world.

    But what if the ways people actually do make decisions (however different from these standards formulated and proposed by the Behaviorist critics) are part of the evolved mental make-up of people that serve useful “survival” purposes? (I’m using these terms in the way that, say, Hayek or sometimes Douglas North have spoken about such things.)

    That is, what if these are appropriate HUMAN ways of thinking that enable us to better guard ourselves against harmful decisions? Criticizing people’s actions on this Behaviorist basis may be another form of the error of what Hayek has called the misplaced application of ways of thinking about the natural sciences in the social sciences.

    I, also, consider Mario’s third point to to be a crucial one. It is a variation of the question of “who guards us against the guardians”?

    Richard Ebeling

  6. Efinancial Says:

    I agree with DK who wrote:”There is nothing really in these biases or failures that overturns the fundamental logic of the market or free society.” The protocols that Behavioral Economists develop to offset the “biases” they have identified seems more like a new decision making technology than economics. So is economics the “forest” that Prof Rizzo thinks they’re missing?

    Perhaps Rothbard was right when he wrote: “The economist is not a business technologist.”

  7. Roger Koppl Says:

    Richard asks, “But what if the ways people actually do make decisions (however different from these standards formulated and proposed by the Behaviorist critics) are part of the evolved mental make-up of people that serve useful “survival” purposes?”

    The answer is that they may do “Better than Rational.” See
    “Better than Rational: Evolutionary Psychology and the Invisible Hand,” by Leda Cosmides & John Tooby AER, 1994, 84(2): 327-332. Todd and Gigerenzer are on to more or less the same point, but tend to just assume that “fast and frugal” algorithms are functional. Cosmides and Tooby are more sensitive to the difference between modern life and the “Environment of Evolutionary Adaptedness.”

    FWIW, I think all this Kahneman-type stuff is a permanent contribution to economics even though some of it abstracts too much from the social context of action and some applications are rather facile. I think Mario makes a great point about interacting biases. His point illustrates the gap between a solid result in the lab and policy implications for the real world.

  8. Troy Camplin Says:

    1. How are you defining “good”? Good for me? Good according to someone else who is not me and wants to judge what I do and how I make my decisions? Good at the time? Good with the knowledge I had? Good in such a way that I’m happy with my decision?

    2. What if interacting biases in fact average out? What if those biases in fact help us make good decisions rather than hinder good decision-making, especially if and when they interact?

    3. Exactly why we should now have people in government in charge of our lives and mkaing decisions for us. More, their decision biases won’t be in our favor, but in theirs.

  9. Hume Says:

    This is completely off topic, but . . .

    If you were forced to choose two books/articles to recommend to a statist “liberal” in hopes of converting such person, what would they be?


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