Friday, November 7, 2008

Endowment Effect

The endowment effect is one of many cognitive biases recognized by the behavioral camp of economics. I like the name "ownership bias" better (I think its clearer). In short, the ownership bias results in the placement of greater value in goods that are owed as opposed to ones not owned, but rather out in the marketplace somewhere.

My question is: can this bias be applied to ideas?

Well, first of all, how can we "own" ideas? I'll define the ownership of an idea as the state where an individual moves beyond a stage of fact gathering and has reached a conclusion on the relevant issue.

The consequences of such a bias would be that the individual no longer views all ideas fairly, but disproportionately values the ideas in which he has determined to be "correct" in the past. Such as state would pose a dilemma regarding the individual's hopes for rationality in the consideration of alternative ideas.

Obviously, I haven't tested this. Nor have I checked for similar concepts throughout prior literature. On merely intuitive grounds it seems to make some sense. Observationally, it seems that people exert resistance to changing their minds (of course the variance in resistance must be massive concerning different types of issues). Also when a mind is confronted with unfalsifiable evidence of a mistaken belief, severe cognitive dissonance is the usual symptom. Such a reaction would coincide with the destruction of a large value (the owner's idea) and the gain of a small value (the new idea), resulting in a net pain or loss, even though this new idea must be superior based on the evidence.

With this in mind, how can we restore some semblance of rationality? The first logical answer is to not be hasty towards conclusions. This is good advice, but quite well known and, therefore, boring. At some point for some issues we will inevitably be forced to reach a conclusion. No matter how well thought-through the process of acceptance, according to the ownership bias theory, the end result will be a disproportionate assignment of value to the idea's merit, validity, truth, etc. However, it does stand to reason that on issues where one is relatively uninformed the best policy may be not to reach a conclusion.

Upon reaching a conclusion, a good technique may be to take inventory of the likely truth of your ideas. Assign some sort of probability toward their correctness. It seems that when most utilize this advice they come up with a distribution where a 99% probability is reserved for those ideas of the utmost certainty and a 51% percent probability reserved for issues of a tenuous nature. However, this would only apply to simpler true false questions, where there are only two options. It is important to note that for real world issues there will be infinitely many possible solutions. It is only through the correct framing (e.g. will the human race become extinct in the next 100 years?) that the problem can be circumvented. But this framing often removes much of the importance of the initial inquiry.

The point is that when you consider the probability that your view is correct think of all the possible alternatives. It may be very realistic to hold a 5% chance that your view is correct. This may be a view you have thought very long and hard about. You may be relatively more confident in your correctness on this issue than most of the conclusions you indulge. However, given the complexity of the problem, it is very likely that you are wrong (95% chance). Yet the view you have chosen remains the most likely winner of all possible candidates.

Without resisting the urge to wildly speculate, 5% seems a much more realistic probability than 51% on many social science questions (and the 5% may not even be a relatively tenuous position as the 51% was).

Whether this type of "realistic" probability distribution assignment has the power to overcome the endowment effect or ownership bias, is a question I will not answer.

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