10 reasons people make stupid decisions

Have you ever wondered why most of the people you know (and probably your elected representatives) insist on making dumb decisions when they are so clearly wrong? Below are ten reasons that they act like idiots without even knowing it. And as they say in poker, if you can't spot the sucker at the table, then it's probably you...

10. We’ve come this far… (sunk cost bias) - We all know that the past is past and we can’t get back money or time that we already spent. But many people irrationally take sunk costs, time, money, or other resources which have already been spent and can't be recovered, into their decision making. Barry Schwartz from Swarthmore College, author of The Paradox of Choice, in an LA Times op-ed piece highlights examples of sunk costs used in decision making, such as how much you spent to get your car fixed last time, how long you have been dating someone, how much you invested in a stock, or how many troops have been lost in Iraq so far.

9. Me me me! (egocentric bias) - Putting yourself in another person’s shoes is harder than it sounds for most people. Consider the example from an op-ed piece in the NY Times by Daniel Gilbert from Harvard, author of Stumbling on Happiness. In a study conducted by Sukhwinder Shergill and colleagues at University College London, pairs of volunteers were connected to a device that allowed each of them to exert pressure on the other volunteer’s fingers. The researcher began by exerting a fixed amount of pressure on the first volunteer’s finger. The first volunteer was then asked to exert the same amount of pressure on the second volunteer’s finger. The second volunteer was then asked to exert the same amount of pressure on the first volunteer’s finger, and so on. Although volunteers tried to respond with equal force, they typically responded with about 40 percent more force than they had just experienced. Each time a volunteer was touched, he touched back harder, which led the other volunteer to touch back even harder. Is this why parties in a conflict invariably think they are both "right"?

8. That just proves my point. (confirmation bias) - Isn't it a coincidence that no matter what happens in the world, politicians can spin it to show why that confirms their opinions? A cynical explanation is that politicians twist the truth to get what they want. But a more subtle explanation is that our brains tend to search for and interpret information in ways that support our pre-exisiting opinions. As explained in a Scientific American article by Michael Shermer, publisher of Skeptic, a study before the 2004 presidential election had 30 participants view statements by Kerry and Bush in which both men clearly contradicted themselves. The 15 of the participants who were strong Republicans were critical of Kerry but let Bush off the hook, and vice-versa. In addition, neuroimaging results showed that the part of the brain most associated with reasoning, the dorsolateral prefrontal cortex, was inactive. Most active were the orbital frontal cortex (processing of emotions), the anterior cingulate (conflict resolution), the posterior cingulate (making judgments about moral accountability), and the ventral striatum (reward and pleasure).

7. That’s easy. (overconfidence) - According to a famous survey of drivers conducted by Ole Svenson in 1981, 80% of respondents rated themselves in the top 30% of all drivers. And anyone who doesn't see that as a strange finding probably rated themselves in the top 30% in math also. While overconfidence is definitely a good thing in many situations, it probably means people don't work on their weaknesses as much as they should. Do overconfident drivers practice safe driving given their lack of abilities? Do overconfident doctors, discussed in this HealthDay article, get the proper training? Do overconfident public officials realize when they are making bad foreign policy decisions?

6. I’m #1! I’m #1! (dysfunctional competition) - Have mixed feelings when you find out your co-workers get a promotion that you weren't even interested in? You're not alone. People's happiness is often a function of what they have relative to others. Your co-workers might be just as happy with you getting a pay cut as they would with getting a raise themselves. In a Q&A with Max Bazerman from Harvard, "When I ask people whether they would prefer a) $7 for themselves and for another person or b) $8 for themselves and $10 for the other person, people choose "b." However, when people are simply given "a" or "b," "a" makes them happier."

5. Mine mine mine! (endowment effect) - Why is it so hard for people to throw, give away or sell things that are past their prime? One theory is that people tend to place a higher value on objects they own relative to objects they do not. As explained on behaviouralfinance.net, an experiment by Kahneman, Knetsch and Thaler found that randomly assigned owners of a mug needed to be paid around $7 for it, while randomly assigned buyers were only willing to pay around $3. So it's likely that your neighbor values things they already have more than they would if they didn't already own them. If you have ever tried executing a trade in fantasy football right after the draft, you understand this irrationality well.

4. Watch out for sharks. (availability bias) - People are suckers for recent and memorable events. So much so, that they think these types of events are more likely to happen than they actually are. An article in Wired Magazine by Ryan Singel ranked the odds of someone dying over the past 10 years from various causes, from terrorism to a hernia to accidental poisoning. Despite the focus that terrorism has gotten in the past several years, the risk of dying from terrorism is very low compared to much more mundane ways to die such as driving off the road (80 times more likely to kill you) or even a hernia (5 times more likely to kill you). A Motley Fool article even explains how misleading vividness can cause major errors in investing (all my friends have a Treo .... I should invest in Palm!). How much of a problem is this? Well, if the world has limited resources to invest, where do you think people are going to want to spend it? Stopping the slow and steady march of global warming that won't affect any of us during our lifetimes? Or more graphic threats like terrorism?

3. If everybody else think so… (conformity) - People make decisions based on what they think and not what everyone else thinks, right? Well, a famous experiment by Solomon Asch, explained on Answers.com, had one participant and several experimenters in disguise were asked to announce their judgement about the length of several lines (such as which line was longer then the other, etc.) The experimenters in disguise were instructed to give incorrect answers to these easy questions. Surprisingly, a third of respondents gave wrong answers because of the pressure of their peers. Are these types of pressures enough to get people to do things that they know are wrong (shoplifting, accounting fraud, genocide...)?

2. Lets go hard 8! (illusion of control) - We all know that there’s no difference between my chances in craps if I have the dice or someone else at the table does, right? As explained in Wikipedia, Ellen Langer from Harvard famously showed that people rolling the dice in craps threw harder on average when going for high numbers and softer when going for low numbers. And they tended to bet more when they were rolling relative to others. This may be one reason that people know gambling doesn't pay on average, yet gladly gamble their own money. It should also cause you to question the confidence of your co-workers who know they will hit an aggressive deadline even though there are many factors out of their control.

1. He's just a moron. (attribution error) - Is the driver that cut you off a jerk? Or is he a good guy who didn't see you because he's distracted by something else going on in his life. Judging by the finger that you chose to hold up, you think he's a jerk. That's about par for the course, as most people tend to over-emphasize personality-based explanations for the actions of others. A NewYorker article by James Surowiecki discusses a classic experiement where "subjects shown a person shooting a basketball in a gym with poor lighting and another person shooting a basketball in a gym with excellent lighting assume that the second person hit more shots because he was a better player." So maybe it's better to withhold judgement about a person until you've actually talked to them. Even if they did cut in front of you in line at McDonalds.