Behavioral Biases
HERD BEHAVIOR—The tendency to be influenced by
social effects and follow the crowd. Explained both
by peer pressure and by the tendency to assume
that others have information that you don’t have.
Herd behavior and availability cascades may partially
explain the regular appearance of bubbles in financial markets.
Similarly, classical microeconomic theory assumes that the
demand for a good is objective and independent of the supply
of that good. But as Ariely’s wine and chocolate experiment
shows, the anchoring effect calls this into question. The demand side can be manipulated by fairly arbitrary supply-side
anchors such as the manufacturer’s suggested retail price or the
most expensive item on a menu or wine list. Therefore, Ariely
says that contrary to the axioms of microeconomics, “demand
is not a separate force from supply.”
People’s beliefs and decisions are also affected by the way
the relevant options are framed. Thaler and Sunstein give the
example of an energy conservation campaign. The following
two campaigns convey precisely the same information:
■ If you use energy conservation methods, you will save $350
per year.
■ If you do not use energy conservation methods, you will
lose $350 per year.
It turns out that the latter is the more effective campaign.
Similarly, telling people that performing a self-examination for
examples). But even these few examples suffice to illustrate
how fundamentally and systematically actual human behavior
diverges from the Homo economicus ideal articulated by Gary
Becker. Recall that Becker posited that economic actors have
a “stable set of preferences.” This seems doubtful in light of
the large body of evidence amassed over the past 30 years that
people’s decisions are powerfully affected by arbitrary anchors,
defaults, reference points, and even the semantic connotations
of the ways their choices have been framed.
For example, Ariely’s Economist subscriptions story flies in
the face of the assumption that people have stable, well-ordered
preferences. If magazine readers had stable preferences, the
presence of the decoy Option 2 would not affect their purchasing
behavior. Yet it does. It appears that when we make decisions,
we do not merely consider an abiding set of well-ordered preferences. Ariely comments, “We look at our decisions in a relative
way and compare them locally to the available alternative.”
