3. Cognitive Science & Economics

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To gain a better understanding of one’s daily experiences, I feel one must know of cognitive science, economics and philosophy. We have covered philosophy. This covers c ognitive science and economics.

Know Yourself: Cognitive Science

Cognitive Science is the study of your mind. I found cognitive science immensely helpful in understanding the inherent flaws in the way my mind works. Here a quick list of important biases and flaws that the mind is prone to. A full list is here [1]. These biases are of course the result of heuristics the brain has evolved to deal with information received. The brain evolved these biases to quickly deal with situations. However, by virtue of being heuristic biases they are blunt instruments. The brain does not always apply them correctly. Knowing these biases helps to rationally navigating arguments.

Availability Cascade | Bandwagon Effect | Groupthink

Muhammad Ali said,”I figured that if I said it enough, I would convince the world that I really was the greatest”. That sums it up. An idea that explains something complex with a simple explanation gains currency and is repeated enough times to gain widespread acceptance, whether it is actually true or not. Urban myths are a good example. Wiki Entry[2].

This feeds into the bandwagon effect where things can happen because ‘everyone else is doing it’. A perfect example is how fund managers who rightly go against the market are punished [3] [4] .

Status Quo and Time Discount Bias

Status Quo Bias is resistance to change. People can inherently oppose change because change is uncomfortable and unknown.

Time discounting” is a “the present is important / the future is not” bias. We much prefer instant rewards and are bad at delaying rewards into the future. Global warming’s effects are said to be a few decades off, but we’re taking our time about it. Or, retirement is decades off when you’re in your 20s and you don’t plan for it. You would rather have 10 bucks now than 20 bucks after a year. Delaying gratification and planning into the far future are things we aren’t designed to do.

Statistical Biases

Large numbers are confounding. How do you grasp the visceral, physical difference between a billion and a trillion. Sure a trillion is a ‘thousand’ times bigger than a billion but what does that mean? Our minds fail when numbers or systems scale up. For example, it’s unhelpful to know that your hard disk size is ‘934 gigabytes’ if you don’t have a visceral experience to go with that notion of ‘934 gigabytes’. Or, our problems with probability. Our chance of dying in a car crash is much higher than of dying from a terrorist incident. Yet more money is spent on anti-terrorist measures. See here for more.

Good examples of this abound. The Clustering Illusion where you see patterns where none exist. Then the Base Rate Fallacy where one misses the overall context when looking at the probability of something. Similarly, the Gambler’s Fallacy where one event is thought to affect subsequent events when there is no connection. “If you don’t get a six five times, you should get a six the next time”. We often also do not take sample size into account.

Confirmation Bias

Ever noticed that conservatives will watch Fox News and liberals will watch MSNBC? Or the respective biased TV programs in your country. Everyone wants to be validated, to feel that they are correct, and they seek out evidence that supports their view. This is Confirmation Bias. It helps to seek out opposing views and try get to people to explain them to you. This is along the lines of Internet Bubble” we inhabit — visiting only those sites that confirm our beliefs. This also feeds into our bias towards the members and the ethos of our “group”, thinking of it more highly than it deserves.

Or have you ever entered a debate with someone, and tried your best to convince them, only for them to walk away feeling more secure about their beliefs? Perhaps this has happened to you yourself. When debates get personal, and become arguments, leaving both sides only more deeply rooted in their convictions. This is the Backfire Effect.

Fallacious Reasoning

We have a tendency to strongly prefer not losing to gaining. Called Loss Aversion. Things we own have a higher value than that we do not own. Talking about aversion brings us to our Negativity Bias. We pay far more attention to bad news than good news. Which is why people think the world is getting worse when it is in fact getting better. Now Pareidolia is making associations from vague stimuli. For example, the ‘Face on Mars’ example in the link above.

Cognitive Dissonance

This, in colloquial use, means you hold two contradictory views without seeing the contradiction between them. Examples from American politics. People who say they are scientific and then protest against the science of GM food. Or those who are for individual rights and then want to restrict the rights of women and those who are gay. When one does not see, or wilfully ignores, the contradiction between two views one holds, that is cognitive dissonance.

Memory

Memory can be unreliable [5]. Your brain only remembers what it has to. Details fade. Time sequences warp. Names and people disappear. Your brain makes up memories to fill the gaps. Memories are messy!

Projection Bias

This one’s pretty straightforward. We find it hard to estimate and understand how others think, and imagine their world through our own thought process. It’s extremely hard to get out of your skin and actually model how another person sees the world. Thus, the projection bias. Assuming other people see the world the way we do.

That’s your quick and dirty introduction to cognitive biases!

Logical Errors

Ad Hominem Argument

When the person making the argument is attacked instead of the argument itself. “Galileo says the Earth revolves around the Sun! Well, Galileo’s an idiot.” We do this all the time. In politics it’s called character assassination. Why bother with your opponent’s arguments when you can make him out to be heartless and out of touch? Thus, it helps to separate the argument from the person making it.

Strawman Argument

Repeat the argument in such a way that it appears to be saying something it is not (the strawman) , and then attack the strawman. “Healthcare reform? It means death panels!” when in fact that is an exaggeration. The simplest strawman arguments are gross exaggerations.

Pathos: Appeal to Emotion

The easiest kind of logical fallacy. When you’re not using logic at all. “Nuclear power? I don’t like ‘radiation’ or anything ‘nuclear’”. Here, no rational argument has been provided at all. It’s an emotional appeal.

Slippery Slopes

When a possibly reasonable argument leads to unreasonable arguments by extensions of its premise. “Criminals use guns. Thus, people need handguns to defend themselves. But criminals will then use assault rifles. Hence, owning assault rifles should be legal.” Essentially, the argument is extended to an irrational degree on the basis of a seemingly rational premise.

Appeal to Tradition or Populism

We should do ‘X’ because we have always done ‘X’ / everyone thinks ‘X’ should be done.” When tradition/custom/popular opinion is held to be why something is true. For example,”Do not break a red light because it’s illegal” rather than “Do not break a red light because it’s dangerous”.

Argument to Ignorance

Assuming something is true because it has not been proven false. “Science cannot explain the Big Bang, hence God exists!”. Just because the Big Bang hasn’t been explained does not mean a creation myth is true.

Either/Or Arguments

Here, the argument is framed such that no other options appear possible. “Do you think Marijuana should be legal or illegal?” which leaves out other options such as medical marijuana, regulated dispensaries etc.

Correlation does not imply Causation

More Barbie dolls were sold when temperatures in Antarctica dropped, hence low temperatures in Antarctica increase Barbie doll sales.” Essentially, when two things happen simultaneously and a link is drawn between them in absence of any connecting evidence.

Naturalistic Fallacy

That which is ‘natural’ is better. “GM foods are bad for you because they are not natural.” This view is widely held despite there being no evidence to back it up, with all the evidence showing that GM food is better for the environment and you.

Red Herring

Introducing a completely unrelated argument/fact to distract attention from the actual argument. “The Boston Red Sox lost because the traffic that day was bad”. There is no reason to suppose a link between their performance and the traffic.

That’s your quick and dirty introduction to logical fallacies!

Economics

The other piece of the puzzle is economics. Economics studies our social transactions everyday. How much does food cost? Why is gold more expensive than water? What should taxes be used for? There are a couple of simple concepts that elucidate this.

Supply & Demand

The more there is of something (supply) the less valuable it is, and vice versa. The more something is wanted (demand) the more valuable it is, and vice versa. Now, the supply of something (say rice), has to satisfy the demand. But what if there is great demand? Then the price of rice rises till demand begins to fall. At some point, supply and demand will meet. This is how markets work. Prices rise and fall to bridge supply and demand. And this is why gold is more expensive than water.

Regulation & Government

This is explored fully in my essays under ‘Society’, but in a nutshell we need regulation and governments. Why? Because markets only satisfy human desire. However, not all human desires should be satisfied. Undesirable behaviors, such as violence, need to be controlled, and so we end up with regulation. To align the aims of the market with society’s best interests. We also need governments to keep free markets free. That is, to break up monopolies, conduct anti-trust investigations, ensure the barriers to entry are not exceedingly high and so on such that the market remains competitive and free. Governments also levy taxes to raise the money needed to run, and also to penalize undesirable behaviour. For example, taxes on cigarettes or pollution. See the essays under ‘Society’ for more. But this is the role of government in society.

Smithian Growth, Free Trade, Economics of Scale

In his 1776 magnum opus, Adam Smith noted that specialization leads to growth. What that means is that each stage of production of a good or service is carried out by specialists in that stage. And for progress to occur, that stage itself must be subdivided and each sub-stage specialized in. Hence, France makes great wine, Japan makes great cars, America makes great software and every country trades what its best at for what others are best at. This is the case for free trade. You receive the best goods from around the world, and send your best in return. And thus, the standard of living is raised and progress occurs.

Psychological & Behavioural Aspects of Economics

Marginal Utility is a great example. If you have 1 car, that car is tremendously useful to you. Your second car is less useful since you already have 1 car. The 3rd one even less. This is marginal utility. Every successive item has diminishing value. Similarly, humans have many intuitive ways of decision making which influence economic decisions. You’ve already seen some of these in the ‘Cognitive Biases’ section. For example, $10 now is preferable to $20 a year later.

The Social Good

There are some desirable ends which markets are unable to fulfil. This is because markets will not undertake risky or unprofitable ventures. More importantly, markets are exceedingly bad at an operation which lacks competition. Thus, markets cannot raise an army because you only need 1 army, not many competing armies. The government ends up being the ‘market’ that raises 1 army. Society has to raise an army and defend itself. Markets are bad at self-regulating themselves. For example, in reducing pollution. A factory has no incentive to reduce pollution if its competitors are not. Hence, society must enforce the social good, in the form of government. This is the reasoning for the ‘social contract’ [6].

Conclusion

I hope that quick and dirty introduction to Cognitive Science and Economics was helpful!

References

  1. http://en.wikipedia.org/wiki/List_of_biases_in_judgment_and_decision_making
  2. http://en.wikipedia.org/wiki/Availability_cascade
  3. http://www.economist.com/node/10926344?story_id=E1_TDJNGPQQ
  4. http://www.economist.com/node/12957761?story_id=12957761
  5. http://www.psychologytoday.com/blog/hidden-motives/201203/unreliable-memory
  6. http://en.wikipedia.org/wiki/Social_contract

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