I Would Gladly Pay You Tuesday for a Hamburger Today (Part 9 of Cognitive Biases)

A cognitive bias is a pattern of deviation in judgment that occurs in particular situations, and boy howdy, are there a lot of them!

This week, meet the Hawthorne effect (being watched makes you work harder), the herd instinct (tendency to follow the crowd), hindsight bias (I knew it all along), and hyperbolic discounting (I would gladly pay you Tuesday for a hamburger today.)

Part 7 has links to all the previous installments. Part 8 is here.

Hawthorne Effect

The Hawthorne effect is often portrayed as aa sort of Heisenberg uncertainty principle for the social sciences: observer interacts with observed through the process of observation. In practice, almost any sort of internal improvement effort will have a short-term positive effect on performance, a placebo effect that benefits all of us in the management consulting world.

The original experiments on which the Hawthorne effect is based took place from 1924 to 1932 at the Hawthorne Works, a Western Electric plant outside of Chicago. A group of six women worked in a special room assembling telephone relays and dropping them down a chute. The most famous and oft-cited of those experiments involves a study of how illumination levels affected the rate with which these women dropped finished relays down the chute. Over a five year period the researchers also changed pay rules, varied break frequency and duration, and shortened and lengthened the workday, all to the tune of the drip-drip-drip of falling relays.

There was, interestingly, no double blind in the experiments. The women were fully aware they were being studied, and even suggested some of the experiments themselves. The lack of control over the numerous variables has led to a wide range of interpretation about what — if, indeed, anything — the studies really mean.

Herd Instinct

Herd behavior was well-known to exist in animals, but Friedrich Nietzche was the first to use the concept of “herd instinct” as one more reason to have contempt for the human species. There’s nothing inherently wrong, however, with acting as part of a group. In many circumstances, the natural tendency of a group to move in the same direction can increase safety. Of course, sometimes herds head over the edge of the cliff.

As noted earlier, calling something a cognitive bias isn’t the same as calling a biased decision wrong or stupid. If a crowd is fleeing in a particular direction, it may be a false alarm, but then again, they may know something you don’t. If danger doesn’t appear imminent, taking a few minutes to look around is a better way to balance your risks.

Hindsight Bias

Once you know how it turned out, a certain sense of inevitability creeps in. The signs were always there, and the people in charge should have known the truth all along.

The frequently repeated libel that FDR, for example, knew in advance about the impending Pearl Harbor attack and remained silent for political reasons is a case in point. (I won’t rehash the argument in detail, but I’m always appreciative of the Straight Dope’s accuracy and balance on almost any topic.) The argument relies on the idea that in the mass of raw data, decision-makers could have recognized in advance exactly which bits of information were salient. This is nonsense. Reading the future forward is orders of magnitude more difficult than reading it backward.

This particular bias is aided by our own tendency to believe that when we turn out to have been right that we “knew it all along.” Before-and-after measures of certainty tend to vary a lot.

Hyperbolic Discounting

“I would gladly pay you Tuesday for a hamburger today.” Wimpy, the hamburglar pal of Popeye the Sailor Man, liked his rewards up front and his penalties delayed. People in general tend to prefer the bird in the hand to a flock in the bush. That’s a fairly well-known cognitive bias.

What’s not so well known is the amount of the discount — how much will you give up in the future to receive the benefit today? Behavioral economists believe the relationship is hyperbolic. We’ll take a dollar today in preference to three dollars tomorrow.

But given a choice between a dollar 365 days from now and three dollars 366 days from now, we’ll gladly wait the same extra day for three times the payoff. Our choices are inconsistent over time: we’ll commit our future self to a course of action (waiting a day) that we aren’t willing to follow today.

This is often irrational, but not always. Depending on the uncertainty of the reward, a definite dollar today may be preferable to the possibility of three dollars tomorrow.

This particular cognitive bias shows up in studies of how people save for retirement, borrow on their credit cards, procrastinate on important tasks, and deal with the consequences of addiction. Especially where hamburgers are concerned.

Risk Management, Cognitive Bias, and the Global Warming Debate

The debate on global warming tends to revolve completely around the science. Is it good? Is it bad? Is it meaningful? Is it corrupt? Everyone has an opinion on the quality of the science, and once those opinions are formed, they’re almost impossible to shake.

A wide variety of potential cognitive biases complicate the picture. Notice there’s enough here for everybody — no one’s being singled out.

• Base rate fallacy — ignoring statistical data in favor of particulars

• Confirmation bias — interpreting information to confirm your preconceptions

• Experimenter’s bias — with about sixty subsets

• Focusing effect — putting too much emphasis on a single aspect of a situation or event

• Framing — viewing through a perspective or approach that is too narrow

• Hyperbolic discounting — the preference for more immediate payoffs over the long term

• Irrational escalation — making irrational decisions based on rational decisions in the past, or to justify actions already taken

• Information bias — seeking more information even when it cannot affect action or decision

…the list goes on. Recognize some of these biases? If you’re like most of us, you recognize them in the other side more than you see them in yourself or those who agree with you.

Part of the reason why cognitive bias is at work is that the question isn’t really clear. We’re all arguing about the science, though few of us are truly entitled to an educated opinion on the subject.

But what’s the question?

It’s not about whether a scientific opinion is correct or incorrect. That sort of thing only interests specialists. No, the question has to do with what (if anything) should we do about it, based on the potential cost and consequences.

In other words, it’s a question of risk management. And to the extent that it’s a question of risk management, it’s phrased wrong.

A risk, as you’ll remember, is a future event with some probability of happening that if it happens will have a meaningful impact on your situation. If the impact is negative, it’s a threat. If the impact is positive, it’s an opportunity.

Risks, like Gaul, can be divided into three parts. The first part is probability. How likely is it that the risk will happen?

The second part is impact. If the risk should happen, what would be its effects?

Those two parts combine in the formula R = P x I to calculate a risk score, the value of the risk.

We care about the value of the risk because that helps us make a rational decision about the third element: the cost of reducing or eliminating the negative risk, or the cost of obtaining or exploiting the positive risk.

Probability

The argument about the science of climate change is at root an argument about probability. The process of science involves collecting data, discovering patterns in that data, and developing and testing hypotheses and theories about that data. Over time, the process of peer review creates a consensus in the scientific community, and at any moment in time, that’s the state of scientific knowledge.

Let’s sidestep the discussion about whether the consensus of current scientific knowledge is accurate or inaccurate, and merely assess how our own feeling and opinions influence our judgment of probability. Taking as a guide the legal standards of proof, we might fall somewhere on the following spectrum. For a rough calculation, I’ve put in some percentages.

Degree of Belief (Probability You Think It's True)

True beyond any doubt (99+%)

True beyond a reasonable doubt (95%)

True by the preponderance of the evidence (75%)

Unable to tell (50%)

False by the preponderance of the evidence (25%)

False beyond reasonable doubt (5%)

False beyond any doubt (>1%)

This is about what you believe about the science, and a corresponding figure that relates to how likely it is that the threat is true. If you don't like the choices, add one of your own and choose your own probability number.

Notice that the evidence won't stand still. Over time, science will inevitably get better, regardless of your perspective. Either the evidence of catastrophic global climate change will mount so high no sane person can deny it, or global warming will become the Comet Kohoutek of crises, a non-event. Or maybe something in between.

The problem is by the time the facts become incontrovertible, the moment for decision will have passed. If we guess wrong, there are two possibilities: (a) we will be in a significantly worse position to deal with the resultant impact, or (b) we will have wasted significant resources.

Impact

This leads us to the second item, the question of impact. Impact is the effect of the threat or opportunity if it happens — even if you believe the chance is remote at best. So we have to set probability aside temporarily. We’ll come back to it in a moment.

In addition to arguments about how likely it is that the scientific consensus on global warming is in fact correct, there is a range of opinion as to what that means in practical terms: a range of impact. I've specified a set of potential impact levels and set costs for each. Remember, the issue isn't whether these are going to happen. They're simply descriptions of the potential level of impact that different parties suggest are possible.

So choose from the list below. What, in your opinion, is the worst possible potential outcome if global warming happens?

• Catastrophic. Global warming effects will kill tens or hundreds of millions of people directly and indirectly, wipe out tens of thousands of species, and be an economic and social catastrophe to those who survive. Repair or rebuilding may or may not be possible. (Cost = $Quadrillions)
• Serious. Major weather events, such as hurricanes and tsunamis will be more prevalent, tens and hundreds of thousands will die, economies will suffer. (Cost = $Trillions)
• Moderate. Managing environmental issues will be a consuming issue, but better management and improved technology will make this a background costs. (Cost = $Billions)
• Minor. Insignificant costs. (Cost < $Millions)

Notice the impact could also be positive.

Value of the Risk

Just because you aren't convinced the evidence in favor of a risk is certain doesn't mean you don't act on it. We take everyday precautions to avoid low probability or highly uncertain risks with potentially high impact all the time — every time we drive on a freeway, for example. But there's a limit. How does the value of the risk compare to the cost of mitigation?

The value of the risk, as we’ve noted, is the probability times the impact. From our earlier work, we can construct this table. The risk score in each case is what you should reasonably be willing to spend if necessary to mitigate the degree of risk you personally believe is present.

Catastrophic

95% confident, $Quadrillions

75% confident, $Low Quadrillions

50% confident, $1 Quadrillion

25% confident, $High trillions

5% confident, $Low trillions

Serious

95% confident, $Up to 1 Quadrillion

75% confident, $750 trillion

50% confident, $500 trillion

25% confident, $250 trillion

5% confident, $50 trillion

Moderate

95% confident, $Up to 1 Trillion

75% confident, $750 billion

50% confident, $500 billion

25% confident, $250 billion

5% confident, $50 billion

Minor

95% confident, $Possibly a few billion

75% confident, $Less than a billion

50% confident, $500 million

25% confident, $250 million

5% confident, $Low millions

Cost of Mitigation

The value of the risk is what you’re willing to spend if necessary. Depending on how you assessed probability and impact, you ended up with some amount of money (perhaps $0) that's appropriate as a maximum to spend on the risk.

Of course, you need to compare that to the cost of mitigating or eliminating the risk. Sometimes, it’s not worth it. If I offered to save you from a $1,000 risk in exchange for $2,000, it’s not much of a deal. In general, if the cost of getting rid of the risk exceeds the cost of living with it, you’re better off living with it.

On the other hand, if I can save you from a $1,000 risk (say, a 25% chance of losing $4,000) for only $500, that's a pretty good deal. If the risk happens, you've saved $3,500. But if the risk doesn't happen, you're still out $500.

It's true that not all costs of a risk (or costs of a risk mitigation) can be easily translated into dollar terms — or even should be. That doesn’t change the basic principle, though: the cost of dealing with the risk has to be less than the cost of living with the risk.

There’s an important qualification when it comes to risk mitigation. Some risks you can get rid of altogether if you’re willing to pay the price. Other risks you can reduce, but not eliminate. You can lower the probability of the event occurring, or you can lower the impact if it should occur.

That’s not a bad thing, mind you, but you have to take into account the residual risk when deciding if the strategy is worth it. The value of that risk is the difference between the cost of the original risk and the cost of the residual risk.

The Right Question

To have a reasoned discussion on the subject of global warming, you have to figure out where you are on five issues, not merely one.

1. How correct is the scientific consensus on global warming?

2. What is the impact of global warming if it should occur?

3. What is the value of the risk (probability times impact)?

4. What is the cost of mitigating or eliminating the risk, and how much residual risk would remain?

5. In balance, what level of action on global warming (if any) is warranted?

To change someone’s opinion, you have to change that person’s evaluation of at least one of these issues.

As people on all sides have found, it’s nearly impossible to change anyone’s evaluation of the quality of science, which is our probability benchmark. There’s often more consensus of what global warming might mean if it happens, which is why it’s so important to separate discussion of probability from the discussion of impact.

But the real opportunity has to do with the issue of cost. The best current framing of the debate comes from the argument that dealing with global warming and environmental issues can be relatively low in cost, or ideally profitable.

If the cost to deal with global warming is low enough, it's a good idea even for those who think the probability is low.