Behavior Economics and Information Processing

Oct 2012 //
Behavioral Finance

Not only is investing difficult in the best of circumstances (complete transparency of information, a clear future outlook, rational markets and investors, etc.), but most of us have certain inbred tendencies to process information with certain biases.  For example, consider the mathematical expression “8!”  This is pronounced “eight factorial,” and it’s equal to 1 x 2 x 3 x 4 x 5 x 6 x 7 x 8.  Researchers asked a group of subjects to estimate 1 x 2 x 3 x 4 x 5 x 6 x 7 x 8, and their median answer was 512.  However, when these researchers asked another test group to estimate 8 x 7 x 6 x 5 x 4 x 3 x 2 x 1, the median answer was 2,250.  Since the product of a series of numbers is the same regardless of their order, it seems that the test subjects “anchored” on the first few numbers estimates.  That is, they had an unconscious bias.  This is just one example of how our minds can trick us.  By the way, 8! is actually equal to 40,320.