I Don’t Know What I Like (And I Don’t Know What It’s Worth, Either)

Axiomatic

One of the fundamental axioms of economics is that we know what we like: we have preferences, they're consistent across time and they can be revealed by careful experimentation. This, of course, is utter nonsense. Yet it's not just a guiding principle of economics but is also a rough and ready rule we live our lives by. We make decisions and then we justify them, after the event, because to do otherwise would make a mockery of our choices.

But because we do actually make decisions we must, in a sense, really know what we like, even if we're habitually inconsistent. Unfortunately, outside of our own specialised areas of expertise we don't know how to absolutely value things and all too often we assign a value based on entirely superfluous data intermingled with a bit of relative valuation, reckoning that a Porsche 911 Carrera is worth more than a child's teddy bear. We exhibit coherence but in an arbitrary fashion – a behavior known, rather unoriginally, as coherent arbitrariness.

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P is for Priming

Priming is a psychological sleight of hand, a method of the brain preparing itself for what is about to happen. It's a bit like predictive text, very useful when it works but utterly awful when it goes wellythrowing (*). And, if you know what you're doing, you can prime people to get them to make the decision you prefer. Great for influencers, not so good for the influenced.

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Birds, Bees and Decoy Effects

Fleeced

If there's one message I hope to get across here it's that we're our own worst enemy when it comes to making decisions if we're anywhere in the vicinity of money.  If there's a second one it's that if we don't damage ourselves with our behavioral biases then someone else will try and do it for us.  Nowhere is this more evident than with the fiendishly devilish decoy effect.

The decoy effect was made salient by Dan Airely in Predictably Irrational, presumably as a warning for us all about the dubious machinations of marketing departments.  In a world where no good deed goes unpunished it's promptly spawned a thousand websites excitedly describing how to fleece their customers.  You've got to love the entrepreneurial spirit even if the moral outlook is distinctly cloudy.

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To Boldly Go: Risk and the Prime Directive

Danger of Exposure

If you prime people by exposing them to information that advocates taking risks it causes them to boldly go out and start taking more risks with their investments. This is no real surprise.  Of course, if they’re a professional their behavior is different.

They’re more likely to take risks.  

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