What Cost for Irrationality?


62


Kaj_Sotala

This is the first part in a mini-sequence presenting content from Keith E. Stanovich's excellent book What Intelligence Tests Miss: The psychology of rational thought. It will culminate in a review of the book itself.

People who care a lot about rationality may frequently be asked why they do so. There are various answers, but I think that many of ones discussed here won't be very persuasive to people who don't already have an interest in the issue. But in real life, most people don't try to stay healthy because of various far-mode arguments for the virtue of health: instead, they try to stay healthy in order to avoid various forms of illness. In the same spirit, I present you with a list of real-world events that have been caused by failures of rationality, so that you might better persuade others of this being important.

What happens if you, or the people around you, are not rational? Well, in order from least serious to worst, you may...

Have a worse quality of living. Status Quo bias is a general human tendency to prefer the default state, regardless of whether the default is actually good or not. In the 1980's, Pacific Gas and Electric conducted a survey of their customers. Because the company was serving a lot of people in a variety of regions, some of their customers suffered from more outages than others. Pacific Gas asked customers with unreliable service whether they'd be willing to pay extra for more reliable service, and customers with reliable service whether they'd be willing to accept a less reliable service in exchange for a discount. The customers were presented with increases and decreases of various percentages, and asked which ones they'd be willing to accept. The percentages were same for both groups, only with the other having increases instead of decreases. Even though both groups had the same income, customers of both groups overwhelmingly wanted to stay with their status quo. Yet the service difference between the groups was large: the unreliable service group suffered 15 outages per year of 4 hours' average duration and the reliable service group suffered 3 outages per year of 2 hours' average duration! (Though note caveats.)

A study by Philips Electronics found that one half of their products had nothing wrong in them, but the consumers couldn't figure out how to use the devices. This can be partially explained by egocentric bias on behalf of the engineers. Cognitive scientist Chip Heath notes that he has "a DVD remote control with 52 buttons on it, and every one of them is there because some engineer along the line knew how to use that button and believed I would want to use it, too. People who design products are experts... and they can't imagine what it's like to be as ignorant as the rest of us."

Suffer financial harm. John Allen Paulos is a professor of mathematics at Temple University. Yet he fell prey to serious irrationality which began when he purchased WorldCom stock at $47 per share in early 2000. As bad news about the industry began mounting, WorldCom's stock price started falling - and as it did so, Paulos kept buying, regardless of accumulating evidence that he should be selling. Later on, he admitted that his "purchases were not completely rational" and that "I bought shares even though I knew better". He was still buying - partially on borrowed money - when the stock price was $5. When it momentarily rose to $7, he finally decided to sell. Unfortunately, he didn't get off from work until the market closed, and on the next market day the stock had lost a third of its value. Paulos finally sold everything, at a huge loss.

Stock market losses due to irrationality are not atypical. From the beginning of 1998 to the end of 2001, the Firsthand Technology Value mutual fund had an average gain of 16 percent per year. Yet the average investor who invested in the fund lost 31.6 percent of her money over the same period. Investors actually lost a total of $1.9 billion by investing in a fund which was producing 16 percent of a profit per year. That happened because the fund was very volatile, causing people to invest and cash out at exactly the wrong times. When it gained, it gained a lot, and when it lost, it lost a lot. When people saw that it had been making losses, they sold, and when they saw it had been making gains, they bought. In other words, they bought when high and sold when low - exactly the opposite of what you're supposed to do if you want to make a profit. Reporting on a study of 700 mutual funds during 1998-2001, finanical reporter Jason Zweig noted that "to a remarkable degree, investors underperformed their funds' reported returns - sometimes by as much as 75 percentage points per year."

Be manipulated and robbed of personal autonomy. Subjects were asked to divide 100 usable livers to 200 children awaiting a transplant. With two groups of children, group A with 100 children and group B with 100 children, the overwhelming response was to allocate 50 livers to each, which seems reasonable. But when group A had 100 children, each with an 80 percent chance of surviving when transplanted, and group B had 100 children, each with a 20 percent chance of surviving when transplanted, people still chose the equal allocation method even if this caused the unnecessary deaths of 30 children. Well, that's just a question of values and not rationality, right? Turns out that if the patients were ranked from 1 to 200 in terms of prognosis, people were relatively comfortable with distributing organs to the top 100 patients. It was only when the question was framed as "group A versus group B" that people suddenly felt they didn't want to abandon group B entirely. Of course, these are exactly the same dilemma. One could almost say that the person who got to choose which framing to use was getting to decide on behalf of the people being asked the question.

Two groups of subjects were given information about eliminating affirmative action and adopting a race-neutral policy at several universities. One group was told that under race-neutral conditions, the probability of a black student being admitted would decline from 42 percent to 13 percent and the probability of a white student being admitted would rise from 25 percent to 27 percent. The other group was told that under race-neutral admissions, the number of black students being admitted would decrease by 725 and the number of white students would increase by 725. These two framings were both saying the same thing, but you can probably guess the outcome: support for affirmative action was much higher in the percentage group.

In a hypothetical country, a family with no children and an income of $35,000 pays $4,000 in tax, while a family with no children and an income of $100,000 pays $26,000 in tax. Now suppose that there's a $500 tax reduction for having a child for a family with an income of $35,000. Should the family with an income of $100,000 be given a larger reduction because of their higher income? Here, most people would say no. But suppose that instead, the baseline is that a family of two children with an income of $35,000 pays $3,000 in tax and that a family of two children with an income of $100,000 pays $25,000 in tax. We propose to make the families with no children pay more tax - that is, have a "childless penalty". Say that the family with the income of $100,000 and one child has their taxes set at $26,000 and the same family with no children has their taxes set at $27,000 - there's a childless penalty of $1,000 per child. Should the poorer family which makes $35,000 and has no children also pay the same $2,000 childless penalty as the richer family? Here, most people would also say no - they'd want the "bonus" for children to be equal for low- and high-income families, but they do not want the "penalty" for lacking children to be the high for same and low income.

End up falsely accused or imprisoned. In 2003, an attorney was released from prison in England when her conviction of murdering her two infants was overturned. Five months later, another person was released from prison when her charge of having murdered her children was also overturned. In both cases, the evidence presented against them had been ambiguous. What had convinced the jury was that in both cases, a pediatrician had testified that the odds of two children in the same family dying of infant death syndrome was 73 million to 1. Unfortunately, he had arrived to this figure by squaring the odds of a single death. Squaring the odds of a single event to arrive at the odds for it happening twice only works if the two events are independent. But that assumption is likely to be false in the case of multiple deaths in the same family, where numerous environmental and genetic factors may have affected both deaths.

In the late 1980s and early 1990s, many parents were excited and overjoyed to hear of a technique coming out of Australia that enabled previously totally non-verbal autistic children to communicate. It was uncritically promoted in highly visible media such as 60 Minutes, Parade magazine and the Washington Post. The claim was that autistic individuals and other children with developmental disabilities who'd previously been nonverbal had typed highly literate messages on a keyboard when their hands and arms had been supported over by the typewriter by a sympathetic "facilitator". As Stanovich describes: "Throughout the early 1990s, behavioral science researchers the world over watched in horrified anticipation, almost as if observing cars crash in slow motion, while a predictable tragedy unfolded before their eyes." The hopes of countless parents were dashed when it was shown that the "facilitators" had been - consciously or unconsciously - directing the children's hands on the right keys. It should have been obvious that spreading such news before the technique had been properly scientifically examined was dangerously irresponsible - and it gets worse. During some "faciliation" sessions, children "reported" having been sexually abused by their parents, and were removed from their homes as a result. (Though they were eventually returned.)

End up dead. After 9/11, people became afraid of flying and started doing so less. Instead, they began driving more. Unfortunately, car travel has a much higher chance of death than air travel. Researchers have estimated that over 300 more people died in the last months of 2001 because they drove instead of flying. Another group calculated that for flying to be as dangerous as driving, there would have to be an incident on the scale of 9/11 once a month!

Have your society collapse. Possibly even more horrifying is the tale of Albania, which had previously been a communist dictatorship but had made considerable financial progress from 1992 to 1997. In 1997, however, one half of the adult population had fallen victim to Ponzi schemes. In a Ponzi scheme, the investment itself isn't actually making any money, but rather early investors are paid off with the money from late investors, and eventually the system has to collapse when no new investors can be recruited. But when schemes offering a 30 percent monthly return began to become popular in Albania, competitors offering a 50-60 or even a 100 percent monthly return soon showed up, and people couldn't resist the temptation. Eventually both the government and economy of Albania collapsed. Stanovich describes:

People took out mortgages on their homes in order to participate. Others sold their homes. Many put their entire life savings into the schemes. At their height, an amount equal to 50 percent of the country's GDP was invested in Ponzi schemes. Before the schemes collapsed, they actually began to compete with wage income and distort the economy. For example, one business owner saw his workforce quickly slip from 130 employees to 70 because people began to think they could invest in the Ponzi schemes instead of actually working for their income.

The estimated death toll was between 1,700 and 2,000.