“Learn how to master mysterious mental phenomena like reactivity, self fulfilling
prophecy, reactance, hyperbolic discounting and placebo effect to your advantage in
business, career, personal, and investment success, even while steering clear of equally
intriguing phenomena like gambler’s fallacy, halo effect, herd mentality and escalation of
commitment”.
The human mind is a wonderful thing. Cognition, the act or process of thinking,
enables us to process vast amounts of information quickly. For example, every time
your eyes are open, your brain is constantly being bombarded with stimuli. You may
be consciously thinking about one specific thing, but your brain is processing
thousands of subconscious ideas. Unfortunately, our cognition is not perfect, and
there are certain judgment errors that we are prone to making, known in the field of
psychology as cognitive biases. They happen to everybody regardless of age, gender,
education, intelligence or other factors. Some of them are well known, others not,
but all of them are interesting. I am sure everyone will find that one has happened
to them, and now will recognize when they are making an error in the future.
Gambler’s Fallacy
The Gambler’ fallacy is the tendency to think that future probabilities are altered
by past events, when in reality, they are not. Certain probabilities, such as getting a
heads when you flip a (fair) coin, are always the same. The probability of getting a
heads is 50%, it does not matter if you’ve gotten tails the last 10 flip. Thinking that
the probabilities have changed is a common bias, especially when gambling. For
example, I am playing roulette. The last four spins have landed on black, it has to
be red this time right? Wrong! The probability of landing on red is still 47.37% (18
red spots divided by 38 total spots). This may sound obvious, but this bias has
caused many a gambler to lose money thinking the probabilities have changed.
Reactivity
Reactivity is the tendency of the people to act or appear differently when they know
that they are being observed. In the 1920s, Hawthorne works (a manufact uring facility) commissioned a study to see if different levels of light influenced worker
productivity. What they found was incredible, changing the light caused
productivity to soar! Unfortunately, when the study was finished, productivity
levels decreased to their regular levels. This was because the change in productivity
was not due to the light levels, but to the workers being watched. This
demonstrated a form of reactivity; when individuals know they are being watched,
they are motivated to change their behavior, generally to make themselves look
better. Reactivity is a serious problem in research, and has to be controlled in blind
experiments (“Blind” is when individuals involved in a research study are purposely
withheld information so as not to influence the outcomes).
Pareidolia
Pareidolia is when random image or sounds are perceived as significant. Seeing
clouds in the shape of dinosaurs, a diety on a hot pocket, or hearing message when a
record is played backward are common examples of pareidolia. The common
element is that the stimulus is neutral, it does not have intentional meaning; the
meaning is in the viewer’s perception.
Interesting Fact: the Rorschach Inkblot test was developed to use pareidolia to tap
into people’s mental states. Testees are shown images of ambiguous pictures and
asked to describe what they see. Responses are analyzed to discover the testee’s
hidden thoughts.
Self-fulfilling Prophecy
Self-fulfilling Prophecy is engaging in behaviors that obtain results that confirm
existing attitudes. A self-fulfilling prophecy is a prediction that causes itself to
become true. For example, I believe that I am going to do poorly in school, so I
decrease the effort I put into my assignments and studying, and I end up doing
poorly, just as I thought. Another common example is relationships; I think my
relationship with my significant other is going to fail, so I start acting differently,
pulling away emotionally. Because of my actions, I actually cause the relationship
to fail. This is a powerful tool used by “psychics” they impact an idea in your mind,
and you eventually make it happen because you think it will.
Interesting Fact: Economic Recessions are self- fulfilling prophecies. Because a
recession is 2 quarters of Gross Domestic Product (GDP) decline, you cannot know
you are in a recession until you are at least 6 months into one. Unfortunately, at the
first sign of decreasing GDP, the media reports a possible recession, people panic
and start a chain of events that actually cause a recession.
Halo Effect
The Halo effect is the tendency for an individual’s positive or negative trail to “spill
over” to other areas of their personality in others’ perceptions of them. This bias
happens a lot in employee performance appraisals. For example: my employee, Biff,
has been late to work the past three days; I notice this and conclude that Biff is lazy
and does not care about his job. There are many possible reasons why Biff was late,
perhaps his car broke down, his babysitter did not show up, or there has been bad
weather. The problem is, because of one negative aspect that may be out of Biffs’
control, I assume that he is a bad worker.
Interesting Fact: The Physical Attractiveness Stereotype is when people assume
that attractive individuals possess other socially desirable qualities, such as
happiness, success and intelligence. This becomes a self-fulfilling prophecy when
attractive people are given privileged treatment such as better job opportunities
and higher salaries.
Herd Mentality
Herd mentality is the tendency to adopt the opinions and follow the behaviors of the
majority to feel safer and to avoid conflict. Also known as “Mob Mentality”, this is,
at its most common form, peer pressure. Herd mentality explains why fads get so
popular. Clothes, cars, hobbies, styles, all it takes is a group of people who think
something is cool, and it catches on.
Interesting Fact: things that are unattractive, or that would never seem cool or
popular now have had huge followings due to herd mentality. Examples include
parachute pants, pet rocks, mullets, cone bras, tie-dye, sea monkeys, and the 1980s
(by the way, that is an ‘80s guy in the picture above).
Reactance
Reactance is the urge to do the opposite of what someone wants you to do out of a
need to resist a perceived attempt to constrain your freedom of choice. This is
common with rebellious teenagers, but any attempt to resist authority due to
perceived threats to freedom and/or choice is reactance. The individual may not
have a need to do the specific behavior, however the fact that they cannot do it
makes them want to.
Interesting Fact: “reverse psychology” is an attempt to influence people using
reactance. Tell someone (particularly children) to do the opposite of what you really
want, and they will rebel and actually end up doing what you want.
Hyperbolic Discounting
Hyperbolic discounting is the tendency for people to prefer a smaller, immediate
payoff over a larger, delayed payoff. Much research has been done on decisionmaking,
and many factors contribute to the individual decision making process.
Interestingly, delay time is a big factor in choosing an alternative. Put simply, most
people would choose to get 20 dollars today instead of getting 100 dollars one year
from today. Normally it makes sense to choose a greater amount of money
immediately than less in the future, as the value of a dollar is worth more today
than it is tomorrow. Assume that the interest rate is 9%, at this interest rate, a
rational person would be indifferent to taking $91.74 now, or $100 a year from now.
However, it is interesting how much less we are willing to take immediately rather
than wait, would you rather have $100 a year from now, or $50 immediately? How
about $40 immediately? Where do you draw the line?
Escalation of Commitment
Escalation of commitment is the tendency for people to continue to support
previously unsuccessful endeavors. With all the decisions people have to make, it is
unavoidable that some will be unsuccessful. Of course, the logical thing to do in
these instances is to change the core strategy. However, sometimes individuals feel
compelled not only to sick with their decision, but also to further invest in that
decision because they have sunk costs. For example, say you use half of your life
saving to start a business. After 6 months, it is evident that the business is going to
be unsuccessful. The logical thing to do would be to “cut your losses”, and change
your strategy. However, due to the sunk costs of your life savings, you feel
committed to the original business plan and invest even more money into the
project hoping that the additional cash will turn the business around.
Placebo Effect
The Placebo effect is when an ineffectual substance that is believed to have healing
properties produces the desired effect. Especially common with medications, the
placebo effect has been observed when individuals given a sugar pill for a real
ailment report improvement. Placebos are still a scientific mystery. It is theorized
that placebos cause an “Expectancy Effect”, (In case of uncertainty, expectation is
what is most likely to happen) individuals expect the pills to cure their ailments, so
they feel cured. However, this does not explain how the ineffectual pills actually
cause a reduction in symptoms.
Interesting Fact: The term “Placebo” is used when the outcomes are considered
favorable, when the outcomes are negative or harmful; the term is “Nocebo”.
