Revealed preference, is a theory offered by the American economist Paul Samuelson in 1938. The theory asserts that consumers’ behavior – assuming a constant income and an item’s price – is the best indicator of their hidden preferences. In short, that is how people reveal what they really want.
Aspect
Explanation
Revealed Preference
Revealed Preference is an economic theory that suggests that the preferences of consumers can be inferred from their actual purchasing decisions. It is based on the idea that individuals reveal their true preferences through the choices they make when faced with different options in the marketplace. The theory was developed by American economist Paul Samuelson in 1938.
Consumer Choices
– Consumer Behavior: Revealed preference theory focuses on studying the choices consumers make when selecting goods and services. These choices reflect individual preferences. – Utility Maximization: Consumers are assumed to make decisions that maximize their utility or satisfaction given their budget constraints and the prices of goods.
Assumptions
– Transitivity: If a consumer prefers option A to option B and prefers option B to option C, then they should prefer option A to option C. – Completeness: Consumers are assumed to have complete and consistent preferences. They can rank all possible options. – Non-Satiation: More is preferred to less. Consumers prefer having more of a good to less, all else being equal.
Market Equilibrium
Revealed preference theory has implications for market equilibrium. When consumers make choices based on their preferences and budget constraints, it contributes to the determination of market prices and the allocation of resources.
Preference Maps
Preference maps are graphical representations used to depict consumer preferences. These maps show how consumers make choices when faced with different combinations of goods and their respective prices. They help economists analyze and understand consumer behavior.
Applications
– Consumer Demand Analysis: Revealed preference theory is used to analyze consumer demand for various goods and services. It helps businesses understand which products consumers prefer and at what price points. – Welfare Economics: It is employed to assess consumer welfare and make policy recommendations related to taxation, subsidies, and market regulations.
Limitations
– Incomplete Information: In some cases, consumers may not have complete information about all available options, leading to incomplete preferences. – Violations of Assumptions: In practice, consumers may not always exhibit transitive or complete preferences, making it challenging to apply revealed preference theory in all situations.
Hicksian Demand Curve
In the context of revealed preference, economists often use the Hicksian demand curve, also known as the compensated demand curve. It shows the quantity of a good that a consumer would demand at different price levels while maintaining the same level of utility or satisfaction as in their initial choice.
Consumer Surplus
Revealed preference theory plays a role in the concept of consumer surplus. Consumer surplus represents the difference between what consumers are willing to pay for a good and what they actually pay. It is a measure of the net benefit consumers receive when purchasing a product.
Behavioral Economics
In recent years, behavioral economics has expanded on traditional revealed preference theory by incorporating insights from psychology and behavioral science. Researchers examine how cognitive biases and heuristics influence consumer choices, sometimes deviating from rational utility maximization.
Policy Implications
Revealed preference theory informs various economic policies, particularly in the areas of pricing, taxation, and market regulation. It helps policymakers understand how changes in prices and policies impact consumer behavior and welfare.
Future Developments
As the field of economics evolves, revealed preference theory continues to be a foundational concept. Future developments may involve integrating behavioral insights and advanced econometric techniques to provide a more nuanced understanding of consumer choices.
The axiom of revelation of preferencesstates the following: you will not have an idea about what people really think, what predicts people’s actions, merely by asking them –they themselves don’t know.
There is no such thing as “rationality” of a belief, there is rationality of action
The rationality of an action can only be judged by evolutionary considerations
This theory of rationality moves around a few key points which can shift your perspective and make you a better business person.
Science and scientism
As science has been so successful in certain fields (take physics) over the centuries, we matured the belief that scientific principles developed by hard sciences could be applied to soft sciences, or to human nature in general.
This belief brought to the rise of scientism, or the core belief that things could be stripped from their “irrational” part to make them rational.
Here rationality, though, is measured in terms of beliefs rather than the actions that come from those beliefs.
And this is the primary fallacy scientism falls into.
A person imbued with scientism will criticize religion, yet she will believe in economic theories that narrow down reality to a model that is not only far from it, but that from the collective standpoint might have negative consequences for society overall.
Domain dependence
Understanding that the scientific method can be used in certain fields, but it loses value in other domains, is critical. In the realm of human, messy affairs, it is essential to have a different mindset. While experimentation, it’s still the key, it will have a different meaning.
Experimentation won’t be tied to a narrow domain, but close to creativity and the ability to draw ideas from fields and domains that are far off from the one where you’re trying to apply a solution. Thus, it will require a broad range of creativity, a lot of experimentation, and the ability to have a broad spectrum of experiments.
Rationality based on survival of fit actions
Your eyes are not sensors aimed at getting the electromagnetic spectrum of reality. Their job description is not to produce the most accurate scientific representation of reality; rather the most useful one for survival.
Still, in his article “How to be Rational about Rationality,” Taleb highlights how eyes are wired to survival rather than giving an accurate or scientific representation of reality.
This view highlights how rationality is not about logical explanations. As many things in the real messy world can’t be explained, as there is a hidden meaning, which might not be revealed.
We need to trust more the subconscious side, which calls up to look us for actions that survive time, rather than explanations and how those might fit the current context or prevailing intellectual view.
Skin in the game
What matters, in the end, is what they pay for goods, not what they say they “think” about them, or what are the reasons they give you or themselves for that. (Think about it: revelation of preferences is skin in the game).
Another core concept connected to this revealed preference view is that of skin in the game or the fact that in order to reveal what people really want.
One way is to have them pay for something, as this implies an action, which isn’t frictionless, thus if performed might reveal strong subconscious preferences, hard to explain rationally, but work as a strong hidden signal.
Beliefs are cheap; actions do cost
For beliefs are … cheap talk. A foundational principle of decision theory (and one that is at the basis of neoclassical economics, rational choice, and similar disciplines) is that what goes on in the head of people isn’t the business of science. First, what they think may not be measurable enough to lend itself to some scientific investigation. Second, it is not testable. Finally, there may be some type of a translation mechanism too hard for us to understand, with distortions at the level of the process that are actually necessary for think to work.
For the sake of understanding this theory, it’s essential to look at actions!
Key takeaways
Revealed preferences can help us uncover what people really want.
Revealed preferences are about what people do when they are skin in the game.
It’s also about rationality meant as the survival of actions that gain us fit in the real world.
It’s not about elegant theories or beliefs, but it’s about those beliefs that lead to actions that make the collective survive.
In short, that is about uncovering hidden cues from the subconscious mind, so that we avoid attaching rationality to things in hindsight.
Case Studies
Purchasing Behavior:
Decision: Consumers claim they prioritize eco-friendly products.
Action: However, when shopping, they consistently choose cheaper, non-eco-friendly alternatives.
Revealed Preference: Price is more important to these consumers than eco-friendliness.
Transportation:
Decision: A city’s residents often voice support for public transportation.
Action: Yet, when public transit is available, many continue to use their personal vehicles.
Revealed Preference: Convenience or personal space might be more valued than supporting public transport.
Dietary Choices:
Decision: Individuals frequently state a desire to eat healthily.
Action: However, fast-food chains have consistent long lines and booming sales.
Revealed Preference: Taste and convenience may be more important than health considerations.
Work-Life Balance:
Decision: Employees express the importance of work-life balance.
Action: Yet, when offered overtime or promotions that require longer hours, many accept.
Revealed Preference: Financial incentives or career progression might be valued more than personal time.
Online Privacy:
Decision: Internet users claim to value online privacy and data security.
Action: However, they frequently use and sign up for platforms and apps without reading terms of service.
Revealed Preference: Using the platform or app immediately might be more valuable than ensuring data privacy.
Education:
Decision: Students say they are committed to their studies.
Action: Many skip classes or don’t study regularly.
Revealed Preference: Leisure or other activities might be more appealing than academic diligence.
Environmental Concerns:
Decision: People voice concerns about plastic waste.
Action: They continue to buy bottled water and use single-use plastics.
Revealed Preference: Convenience may outweigh environmental concerns.
Social Activism:
Decision: Many express support for various social causes online.
Action: Fewer participate in physical rallies, donations, or volunteer work.
Revealed Preference: Online expression might be easier and more appealing than on-ground activism.
Fitness Goals:
Decision: Individuals purchase gym memberships at the start of the year as a New Year’s resolution.
Action: A significant portion stops attending after a few weeks.
Revealed Preference: The idea of fitness might be more appealing than the actual effort required.
Real Estate:
Decision: Homebuyers claim they want a house in a quiet, suburban area.
Action: They end up buying homes in bustling city centers.
Revealed Preference: Proximity to work, entertainment, or urban lifestyle might be more important than tranquility.
Key Highlights
Revealed Preferences: Revealed preferences theory suggests that consumers’ behavior, assuming a constant income and item price, is the best indicator of their hidden preferences. It means people reveal what they really want through their actions.
Nassim Nicholas Taleb’s View: Taleb’s perspective on revealed preferences revolves around the idea that judging people solely on their beliefs is not scientific. Rationality of action can only be judged by evolutionary considerations, and it’s not about elegant theories or beliefs, but about the actions that lead to survival in the real world.
Scientism and Domain Dependence: Scientism, the belief that scientific principles can be applied to all areas, including human nature, can lead to fallacies. In domains like messy human affairs, a different mindset is needed, relying on creativity and broad experimentation.
Rationality Based on Survival: Rationality is not always about logical explanations; it’s about actions that lead to survival and adaptation over time. Trusting the subconscious and focusing on actions that have stood the test of time can be more reliable than trying to explain everything rationally.
Skin in the Game: Revealed preferences are best observed when people have skin in the game, i.e., when they have a personal stake or financial commitment to their choices. Actions that require commitment and resources can reveal strong subconscious preferences.
Beliefs vs. Actions: Beliefs are cheap and may not be measurable or testable enough for scientific investigation. In understanding revealed preferences, the focus should be on actions rather than beliefs.
Uncovering Hidden Cues: Revealed preferences help us uncover hidden cues from the subconscious mind, allowing us to understand what people truly want, avoiding attaching rationality to things in hindsight.
Related Frameworks
Description
When to Apply
Stated Preference Methods
– Research techniques used to directly ask individuals about their preferences, attitudes, or choices regarding specific products, services, or policies. Stated Preference Methods include surveys, questionnaires, and choice experiments.
– When seeking to understand individuals’ preferences or attitudes. – Using Stated Preference Methods to gather data on consumer preferences, perceptions, and willingness to pay for products or services, informing marketing strategies, product development decisions, and policy design.
Conjoint Analysis
– A market research technique used to measure consumers’ preferences and trade-offs for different product attributes or features. Conjoint Analysis presents respondents with hypothetical product profiles and asks them to make choices, revealing their preferences based on trade-offs.
– When evaluating product features or attributes. – Conducting Conjoint Analysis to identify the relative importance of different product attributes, assess market demand, and optimize product design and pricing strategies, informing Revealed Preference models and decision-making processes.
Market Basket Analysis
– A data mining technique used to analyze patterns of co-occurrence or association between products purchased by customers. Market Basket Analysis identifies frequently co-purchased items or product combinations, revealing consumers’ preferences and purchase behavior.
– When analyzing consumer purchase behavior and preferences. – Applying Market Basket Analysis to identify cross-selling opportunities, understand consumer preferences, and personalize marketing strategies and product recommendations based on revealed purchase patterns, supporting Revealed Preference modeling and decision-making processes.
Choice Modeling
– A quantitative research method used to model and predict consumer choices or decisions based on observable attributes, preferences, and contextual factors. Choice Modeling encompasses various techniques such as discrete choice models, multinomial logit models, and random utility models.
– When predicting consumer behavior or preferences. – Using Choice Modeling techniques to estimate choice probabilities, forecast market demand, and simulate consumer decisions under different scenarios, guiding Revealed Preference analysis and informing strategic decision-making in marketing, product development, and pricing.
Preference Mapping
– A statistical technique used to visualize and analyze consumers’ preferences and perceptions regarding products, brands, or attributes. Preference Mapping identifies underlying dimensions of preference and segments consumers based on their preferences.
– When analyzing consumer preferences or perceptions. – Conducting Preference Mapping to identify key dimensions of preference, visualize consumer segments, and understand the relationships between products, attributes, and consumer preferences, supporting Revealed Preference analysis and strategic decision-making in market segmentation, product positioning, and brand management.
Demand Estimation
– Involves quantifying the relationship between product demand and various factors such as price, income, demographics, and marketing activities. Demand Estimation helps businesses forecast sales, optimize pricing strategies, and allocate resources effectively.
– When analyzing market demand and consumer behavior. – Estimating demand functions using econometric techniques to quantify the responsiveness of demand to changes in prices, incomes, or other variables, informing Revealed Preference models and strategic decision-making in pricing, product planning, and resource allocation.
Discrete Choice Experiments
– A research method used to elicit individuals’ preferences and choices among a set of alternatives with varying attributes or levels. Discrete Choice Experiments present respondents with choice scenarios and ask them to select their preferred option, allowing researchers to estimate choice probabilities and attribute preferences.
– When assessing consumer preferences or trade-offs. – Conducting Discrete Choice Experiments to design choice scenarios, measure attribute importance, and estimate choice models, revealing consumers’ preferences and trade-offs, informing Revealed Preference analysis and strategic decision-making in product development, marketing, and policy design.
Hedonic Pricing Model
– A statistical model used to estimate the value of goods or services based on their attributes, characteristics, or quality. Hedonic Pricing Models analyze how variations in product attributes affect prices and consumer preferences.
– When pricing products or valuing attributes. – Applying Hedonic Pricing Models to estimate the implicit prices of product attributes, amenities, or features, quantify consumer preferences, and assess the value of quality improvements or changes in product specifications, supporting Revealed Preference analysis and pricing strategy formulation.
Brand Equity Analysis
– Involves assessing the value and strength of a brand based on consumers’ perceptions, attitudes, and associations with the brand. Brand Equity Analysis measures brand awareness, brand loyalty, perceived quality, and brand associations.
– When evaluating the strength and value of a brand. – Conducting Brand Equity Analysis to measure brand performance, assess consumer perceptions and preferences, and identify opportunities to enhance brand equity through marketing initiatives, informing Revealed Preference analysis and strategic decision-making in brand management and marketing strategy.
Experimental Economics
– A branch of economics that uses controlled experiments to study individual behavior, decision-making, and market outcomes in controlled laboratory or field settings. Experimental Economics provides insights into consumer preferences, decision-making processes, and market dynamics.
– When studying consumer behavior and preferences in controlled environments. – Conducting controlled experiments to elicit consumer preferences, test economic theories, and analyze decision-making processes, providing empirical data for Revealed Preference analysis and informing strategic decision-making in marketing, pricing, and policy design.
Convergent thinking occurs when the solution to a problem can be found by applying established rules and logical reasoning. Whereas divergent thinking is an unstructured problem-solving method where participants are encouraged to develop many innovative ideas or solutions to a given problem. Where convergent thinking might work for larger, mature organizations where divergent thinking is more suited for startups and innovative companies.
The concept of cognitive biases was introduced and popularized by the work of Amos Tversky and Daniel Kahneman in 1972. Biases are seen as systematic errors and flaws that make humans deviate from the standards of rationality, thus making us inept at making good decisions under uncertainty.
Second-order thinking is a means of assessing the implications of our decisions by considering future consequences. Second-order thinking is a mental model that considers all future possibilities. It encourages individuals to think outside of the box so that they can prepare for every and eventuality. It also discourages the tendency for individuals to default to the most obvious choice.
Lateral thinking is a business strategy that involves approaching a problem from a different direction. The strategy attempts to remove traditionally formulaic and routine approaches to problem-solving by advocating creative thinking, therefore finding unconventional ways to solve a known problem. This sort of non-linear approach to problem-solving, can at times, create a big impact.
Bounded rationality is a concept attributed to Herbert Simon, an economist and political scientist interested in decision-making and how we make decisions in the real world. In fact, he believed that rather than optimizing (which was the mainstream view in the past decades) humans follow what he called satisficing.
The Dunning-Kruger effect describes a cognitive bias where people with low ability in a task overestimate their ability to perform that task well. Consumers or businesses that do not possess the requisite knowledge make bad decisions. What’s more, knowledge gaps prevent the person or business from seeing their mistakes.
Occam’s Razor states that one should not increase (beyond reason) the number of entities required to explain anything. All things being equal, the simplest solution is often the best one. The principle is attributed to 14th-century English theologian William of Ockham.
The Lindy Effect is a theory about the ageing of non-perishable things, like technology or ideas. Popularized by author Nicholas Nassim Taleb, the Lindy Effect states that non-perishable things like technology age – linearly – in reverse. Therefore, the older an idea or a technology, the same will be its life expectancy.
Antifragility was first coined as a term by author, and options trader Nassim Nicholas Taleb. Antifragility is a characteristic of systems that thrive as a result of stressors, volatility, and randomness. Therefore, Antifragile is the opposite of fragile. Where a fragile thing breaks up to volatility; a robust thing resists volatility. An antifragile thing gets stronger from volatility (provided the level of stressors and randomness doesn’t pass a certain threshold).
Ergodicity is one of the most important concepts in statistics. Ergodicity is a mathematical concept suggesting that a point of a moving system will eventually visit all parts of the space the system moves in. On the opposite side, non-ergodic means that a system doesn’t visit all the possible parts, as there are absorbing barriers
Systems thinking is a holistic means of investigating the factors and interactions that could contribute to a potential outcome. It is about thinking non-linearly, and understanding the second-order consequences of actions and input into the system.
Vertical thinking, on the other hand, is a problem-solving approach that favors a selective, analytical, structured, and sequential mindset. The focus of vertical thinking is to arrive at a reasoned, defined solution.
Metaphorical thinking describes a mental process in which comparisons are made between qualities of objects usually considered to be separate classifications. Metaphorical thinking is a mental process connecting two different universes of meaning and is the result of the mind looking for similarities.
Maslow’s Hammer, otherwise known as the law of the instrument or the Einstellung effect, is a cognitive bias causing an over-reliance on a familiar tool. This can be expressed as the tendency to overuse a known tool (perhaps a hammer) to solve issues that might require a different tool. This problem is persistent in the business world where perhaps known tools or frameworks might be used in the wrong context (like business plans used as planning tools instead of only investors’ pitches).
The Peter Principle was first described by Canadian sociologist Lawrence J. Peter in his 1969 book The Peter Principle. The Peter Principle states that people are continually promoted within an organization until they reach their level of incompetence.
The straw man fallacy describes an argument that misrepresents an opponent’s stance to make rebuttal more convenient. The straw man fallacy is a type of informal logical fallacy, defined as a flaw in the structure of an argument that renders it invalid.
The Google effect is a tendency for individuals to forget information that is readily available through search engines. During the Google effect – sometimes called digital amnesia – individuals have an excessive reliance on digital information as a form of memory recall.
The Streisand Effect is a paradoxical phenomenon where the act of suppressing information to reduce visibility causes it to become more visible. In 2003, Streisand attempted to suppress aerial photographs of her Californian home by suing photographer Kenneth Adelman for an invasion of privacy. Adelman, who Streisand assumed was paparazzi, was instead taking photographs to document and study coastal erosion. In her quest for more privacy, Streisand’s efforts had the opposite effect.
Single-attribute choices – such as choosing the apartment with the lowest rent – are relatively simple. However, most of the decisions consumers make are based on multiple attributes which complicate the decision-making process. The compromise effect states that a consumer is more likely to choose the middle option of a set of products over more extreme options.
In business, the butterfly effect describes the phenomenon where the simplest actions yield the largest rewards. The butterfly effect was coined by meteorologist Edward Lorenz in 1960 and as a result, it is most often associated with weather in pop culture. Lorenz noted that the small action of a butterfly fluttering its wings had the potential to cause progressively larger actions resulting in a typhoon.
The IKEA effect is a cognitive bias that describes consumers’ tendency to value something more if they have made it themselves. That is why brands often use the IKEA effect to have customizations for final products, as they help the consumer relate to it more and therefore appending to it more value.
The overview effect is a cognitive shift reported by some astronauts when they look back at the Earth from space. The shift occurs because of the impressive visual spectacle of the Earth and tends to be characterized by a state of awe and increased self-transcendence.
The house money effect was first described by researchers Richard Thaler and Eric Johnson in a 1990 study entitled Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice. The house money effect is a cognitive bias where investors take higher risks on reinvested capital than they would on an initial investment.
As highlighted by German psychologist Gerd Gigerenzer in the paper “Heuristic Decision Making,” the term heuristic is of Greek origin, meaning “serving to find out or discover.” More precisely, a heuristic is a fast and accurate way to make decisions in the real world, which is driven by uncertainty.
The recognition heuristic is a psychological model of judgment and decision making. It is part of a suite of simple and economical heuristics proposed by psychologists Daniel Goldstein and Gerd Gigerenzer. The recognition heuristic argues that inferences are made about an object based on whether it is recognized or not.
The representativeness heuristic was first described by psychologists Daniel Kahneman and Amos Tversky. The representativeness heuristic judges the probability of an event according to the degree to which that event resembles a broader class. When queried, most will choose the first option because the description of John matches the stereotype we may hold for an archaeologist.
The take-the-best heuristic is a decision-making shortcut that helps an individual choose between several alternatives. The take-the-best (TTB) heuristic decides between two or more alternatives based on a single good attribute, otherwise known as a cue. In the process, less desirable attributes are ignored.
The bundling bias is a cognitive bias in e-commerce where a consumer tends not to use all of the products bought as a group, or bundle. Bundling occurs when individual products or services are sold together as a bundle. Common examples are tickets and experiences. The bundling bias dictates that consumers are less likely to use each item in the bundle. This means that the value of the bundle and indeed the value of each item in the bundle is decreased.
The Barnum Effect is a cognitive bias where individuals believe that generic information – which applies to most people – is specifically tailored for themselves.
The anchoring effect describes the human tendency to rely on an initial piece of information (the “anchor”) to make subsequent judgments or decisions. Price anchoring, then, is the process of establishing a price point that customers can reference when making a buying decision.
The decoy effect is a psychological phenomenon where inferior – or decoy – options influence consumer preferences. Businesses use the decoy effect to nudge potential customers toward the desired target product. The decoy effect is staged by placing a competitorproduct and a decoy product, which is primarily used to nudge the customer toward the target product.
Commitment bias describes the tendency of an individual to remain committed to past behaviors – even if they result in undesirable outcomes. The bias is particularly pronounced when such behaviors are performed publicly. Commitment bias is also known as escalation of commitment.
First-principles thinking – sometimes called reasoning from first principles – is used to reverse-engineer complex problems and encourage creativity. It involves breaking down problems into basic elements and reassembling them from the ground up. Elon Musk is among the strongest proponents of this way of thinking.
The ladder of inference is a conscious or subconscious thinking process where an individual moves from a fact to a decision or action. The ladder of inference was created by academic Chris Argyris to illustrate how people form and then use mental models to make decisions.
Goodhart’s Law is named after British monetary policy theorist and economist Charles Goodhart. Speaking at a conference in Sydney in 1975, Goodhart said that “any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.” Goodhart’s Law states that when a measure becomes a target, it ceases to be a good measure.
The Six Thinking Hats model was created by psychologist Edward de Bono in 1986, who noted that personality type was a key driver of how people approached problem-solving. For example, optimists view situations differently from pessimists. Analytical individuals may generate ideas that a more emotional person would not, and vice versa.
The Mandela effect is a phenomenon where a large group of people remembers an event differently from how it occurred. The Mandela effect was first described in relation to Fiona Broome, who believed that former South African President Nelson Mandela died in prison during the 1980s. While Mandela was released from prison in 1990 and died 23 years later, Broome remembered news coverage of his death in prison and even a speech from his widow. Of course, neither event occurred in reality. But Broome was later to discover that she was not the only one with the same recollection of events.
The bandwagon effect tells us that the more a belief or idea has been adopted by more people within a group, the more the individual adoption of that idea might increase within the same group. This is the psychological effect that leads to herd mentality. What in marketing can be associated with social proof.
Moore’s law states that the number of transistors on a microchip doubles approximately every two years. This observation was made by Intel co-founder Gordon Moore in 1965 and it become a guiding principle for the semiconductor industry and has had far-reaching implications for technology as a whole.
Disruptive innovation as a term was first described by Clayton M. Christensen, an American academic and business consultant whom The Economist called “the most influential management thinker of his time.” Disruptive innovation describes the process by which a product or service takes hold at the bottom of a market and eventually displaces established competitors, products, firms, or alliances.
Value migration was first described by author Adrian Slywotzky in his 1996 book Value Migration – How to Think Several Moves Ahead of the Competition. Value migration is the transferal of value-creating forces from outdated business models to something better able to satisfy consumer demands.
The bye-now effect describes the tendency for consumers to think of the word “buy” when they read the word “bye”. In a study that tracked diners at a name-your-own-price restaurant, each diner was asked to read one of two phrases before ordering their meal. The first phrase, “so long”, resulted in diners paying an average of $32 per meal. But when diners recited the phrase “bye bye” before ordering, the average price per meal rose to $45.
Groupthink occurs when well-intentioned individuals make non-optimal or irrational decisions based on a belief that dissent is impossible or on a motivation to conform. Groupthink occurs when members of a group reach a consensus without critical reasoning or evaluation of the alternatives and their consequences.
A stereotype is a fixed and over-generalized belief about a particular group or class of people. These beliefs are based on the false assumption that certain characteristics are common to every individual residing in that group. Many stereotypes have a long and sometimes controversial history and are a direct consequence of various political, social, or economic events. Stereotyping is the process of making assumptions about a person or group of people based on various attributes, including gender, race, religion, or physical traits.
Murphy’s Law states that if anything can go wrong, it will go wrong. Murphy’s Law was named after aerospace engineer Edward A. Murphy. During his time working at Edwards Air Force Base in 1949, Murphy cursed a technician who had improperly wired an electrical component and said, “If there is any way to do it wrong, he’ll find it.”
The law of unintended consequences was first mentioned by British philosopher John Locke when writing to parliament about the unintended effects of interest rate rises. However, it was popularized in 1936 by American sociologist Robert K. Merton who looked at unexpected, unanticipated, and unintended consequences and their impact on society.
Fundamental attribution error is a bias people display when judging the behavior of others. The tendency is to over-emphasize personal characteristics and under-emphasize environmental and situational factors.
Outcome bias describes a tendency to evaluate a decision based on its outcome and not on the process by which the decision was reached. In other words, the quality of a decision is only determined once the outcome is known. Outcome bias occurs when a decision is based on the outcome of previous events without regard for how those events developed.
Hindsight bias is the tendency for people to perceive past events as more predictable than they actually were. The result of a presidential election, for example, seems more obvious when the winner is announced. The same can also be said for the avid sports fan who predicted the correct outcome of a match regardless of whether their team won or lost. Hindsight bias, therefore, is the tendency for an individual to convince themselves that they accurately predicted an event before it happened.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
