Two Heads are Better than One



René Descartes

The workings of the human mind have posed puzzling questions for many great thinkers, from the great philosophers of ancient Greece, to Descartes who hypothesised that the body and mind are separate.  In more recent times, philosopher Gilbert Ryle mocked Descartes' idea, calling it "the ghost in the machine".  In the six decades since, science has made great progress in understanding how humans think and this progress supports Ryle.  Current research suggests that the brain is an entirely physical entity, subject to the process of natural selection.  This discovery has lead to a new field within social science - evolutionary psychology.







In his book "Risk: The Science of Politics and Fear" , Dan Gardner provides an in-depth commentary on the latest theories on the human mind.  He explains how the brain is essentially divided into two systems.  The first system is subconscious, what we commonly call "gut instinct".  Gardner describes this system as "the more ancient.  It is intuitive, quick, and emotional".  The second  system is the one referred to when someone tells you to "use your head".  This is conscious thought.  Gardner calls it "calculating, slow and rational".








The rest of the book is then focused on the problems that arise as this ancient, evolved way of thinking struggles in modern society.  I think, of the features associated with this system, two in particular are worth mentioning, so I'll introduce one now and the other in subsequent posts.




Confirmation Bias



Once a belief is in place, we screen everything we see and hear in a biased way, paying attention only to the information that serves to strengthen our beliefs.




The evolutionary rationale for confirmation bias is that the collection of examples not only strengthens our beliefs but makes us better at arguing the point and convincing others.  But this trait leaves us somewhat blind to the logic of counterexamples.  Try it yourself:



Is the following statement true?

"No C are B; all B are A; therefore some A are not C."

Apparently, fewer than 10% of people figure out that it is.  Interestingly enough, the problem seems much easier when A, B and C are swapped for something more real:

"No flying things are penguins; all penguins are birds; so some birds cannot fly."

If everyone is prone to confirmation bias  then it follows that financial traders may hold beliefs that are irrational (or were once rational but aren't any longer) and convince themselves that they are perfectly rational.  Such beliefs could then influence behaviour and this kind of behaviour could most certainly contribute to a bubble.