Why Smart People Make Big Money Mistakes and How to Correct Them: Lessons from the Life-Changing Science of Behavioral Economics by Gary Belsky & Thomas Gilovich

Author:Gary Belsky & Thomas Gilovich [Belsky, Gary]
Language: eng
Format: azw3
Publisher: Simon & Schuster
Published: 2009-12-25T16:00:00+00:00

With Genghis Khan in charge, the Mongols ruled most of central Asia before their leader led them on an ill-fated campaign into what is now Hungary, where he died. Please answer these two questions:

1. Did these events happen before or after A.D. 151? [Note: The number 151 was chosen arbitrarily by adding 123 to the last three digits of a New York City zip code.]

2. In what year did Genghis Khan die?

Like most behavioral economic principles—which by their very nature are woven together like a tapestry—the confirmation bias is both a cause and a consequence of other mental tendencies. One of them, anchoring, is among the toughest to overcome. Anchoring is really just a metaphoric term to explain the tendency we all have of latching onto an idea or fact and using it as a reference point for future decisions. Anchoring can be particularly powerful because you often have no idea that such a phenomenon is affecting you. To give you an idea of what we’re talking about, let’s return to our little history puzzler. Take another look at it and answer both our questions as best you can.

The first question, as you might have guessed, is nothing more than a straw man, a siren song, if you will. It’s there to put a date into your head, that date being A.D. 151. Chances are that A.D. 151 did not seem quite right to you. Too early. Still, when trying to come up with a more accurate date, the 151 sticks in the mind and weighs down your estimate. The net result, in this case, is that your best guess is too low—too close to A.D. 151. (Genghis Khan actually died in A.D. 1227.)

How do we know this? A few years ago, Russo put a similar problem before five hundred MBA candidates, although Attila the Hun was the pillager du jour and the second question asked participants to speculate on the year he was defeated, not the year of his death. Russo asked the students to generate the first number themselves (the benchmark date in Question 1) by adding 400 to the last three digits of their own phone numbers. Interestingly, when that number happened to range between 400 and 599, the students’ average guess was that Attila had been defeated in A.D. 629. But when the number they concocted was between 1,200 and 1,399, their average guess was A.D. 988. The students knew the benchmark number they had arrived at was meaningless, but it still affected their guess in a meaningful way. The more recent the date, the more recent their estimated year of Attila’s defeat (which actually occurred in A.D. 451).

Clever readers, of course, might ask whether the students thought the trick of adding 400 to the last three digits of their phone number was somehow geared toward providing them with a relatively accurate benchmark date. Hard to imagine, since the last three digits of a phone number could range from 000 to 999. More to the point,

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