THE ROUGH GUIDE TO PSYCHOLOGYknows this, so there’s a particularly shiny model on display for £2000 or
more. Although there’s a bike for just £150, the presence of that pricier,
snazzy model suggests you really ought to plump for something more
in the middle, and you end up walking away with a £500 bike. If you’re
honest, you’ve no idea how much you ought to have spent, but the clever
decoy dragged up your naïve estimate of the value of a decent bike.
From megapixels to megabytes, the modern technology consumer is
confronted by a bewildering array of data on what the latest gadgets can
and can’t do. According to a 2008 study, the dazzle of these specifications
is another factor that can sway consumer judgement. In a 2008 study,
Christopher Hsee at the University of Chicago got people to choose
Can psychology explain the global financial crisis?
The global financial system was founded on the principles of tradi-
tional economics, which characterize humans as rational agents who
always make decisions in their own best interest. However, the work
of economic psychologists has shown that human financial decision-
making is far from rational. We’re overconfident, myopic and prone to
numerous biases. In 2009, the MIT behavioural economist Dan Ariely
published a supplementary chapter to his best-selling 2008 book
Predictably Irrational, in which he argued that many of the events that
led to the global financial crisis are understandable in light of these
psychological findings.
For example, the deregulated financial system allowed for people to
make their own decisions about how large a mortgage to borrow. When
confronted with this decision, Ariely’s research has shown that, thanks to
our short-sightedness and unrealistic optimism, most people generally
look to borrow as much they can, rather than the “optimum” amount.
Perhaps it’s no wonder that the sub-prime mortgage bubble burst.
Ariely also points to the role played by the vast multi-million dollar
rewards that were made available to bankers. If doctors’ or teachers’
judgements were subject to such huge financial influence, it wouldn’t
be surprising if they were tempted not to make optimum decisions. Yet
this is exactly the situation that confronted bankers.
In fact, Ariely’s research has undermined the very notion that large
bonuses are a good idea in business. When participants in India were
offered the chance to win five months’ pay on challenging tests of
memory and concentration (low wages made this a feasible research
strategy), their performance was actually worse compared with other
participants who were offered more modest rewards.