Melbourne Cup day, whether you are at the course, enjoying the public holiday or interstate celebrating all things horse-y, is a prime opportunity to hone your behavioural skills while sipping champagne. Here are two behavioural biases to look out for.
Endowment effect is how we attach ourselves to something we own and tend to value it more highly than if it were someone else’s.
See it in action: Randomly drawn cup sweeps
After someone draws their horse for the sweep but before they look at it (so they don’t know whether they have a good horse or not), offer to swap it with yours.
Typically people will find it difficult to swap something they now ‘own’ without placing a value on it, so don’t be surprised if they agree but demand that you pay them something. The strange thing of course is that you are just as entitled to ask them a fee to swap – after all, neither of you know which scrap of paper contains the better horse – but they will likely insist on a premium to give up their selection.
Listen out as friends, family and TV commentators showcase “Confirmation Bias”, which is our tendency to latch on to information that supports our view of the world.
See it in action: Pre and post-race justification
When it comes to horse racing, before the race you’ll hear lots of reasons to support a tip – and that’s what we expect to hear from experts.
After the race however, you are likely to hear more about reasons why selections for winners were right than why selections of losers were wrong.
And when people are asked to explain why they picked a loser, listen for situational factors being blamed – the weather, the horse, the jockey – rather than the decision-maker’s poor judgment. (This is the “Fundamental Attribution Error” at work.)
For your business
Now that you’ve had fun spotting a couple of behavioural biases, look out for them in your workplace. The Endowment Effect, for example, plays out in things like:
- Desk and/or seat allocations – even when randomly allocated, people can become very territorial with desk space and get upset when they have to move (unless it is perceived as an upgrade of course).
- Retail – once people have tried on an off-the-rack item, and despite there being multiple of the same, they will imbue the item with their personality and be loath to swap it.
- Real estate – when selling a home people are prone to price it above what buyer’s expect. It’s usually the hand of a skilled agent that manages expectations of both.
And Confirmation Bias impacts things such as:
- Market Research – deliberately or unwittingly seeking answers from research that supports a position, and ignoring findings that don’t.
- Business cases – if the author is also the advocate then the business case will most certainly have a distorted bias toward supporting their objectives. Fine as long as it is seen as such, but if you require an objective, impartial perspective you will need to create safeguards and processes around seeking contradictory inputs.
- Sharemarket decisions – why is it that finding reasons to buy stocks you like is easy but finding reasons against is hard? Probably because you are not looking.
When you boil it down, the key lesson is that people get attached to stuff and that interferes with their decision-making. We can’t stop it from happening but we can understand why and design mitigations if we want to. Good luck on and off the track for Cup Day, and for those whose randomly selected horse wins, it was well deserved!
P.S. Read about more behavioural biases in the Behavioural Economics of Cup day.
Bri Williams runs People Patterns Pty Ltd, a consultancy specialising in the application of behavioural economics to everyday business issues.