Biases and Economic Development

Perhaps the largest single factor impacting any economy in the United States are emotions. This is because while infrastructure, education, etc all have an impact most U.S. economies have the opportunity to attract educated people and have fairly good infrastructure in place already. Further in a democracy the type and amount of infrastructure created and educational opportunities available come from the decisions which people make.


It's often times people's biases that get in the way of good economic growth, biases which are difficult to overcome and so need to be mitigated by those trying to improve the economy. Even for those doing careful analysis biases can present a serious problem. McKinsey points out that “good analysis and good judgment don’t naturally lead to good decisions as the process is also crucial.” In other words, no matter how smart and capable you are, you don’t necessarily make good strategic choices. So you must “Never trust your gut. You need to take your gut feeling as an important data point, but then you have to consciously and deliberately evaluate it.”


You can see my list of biases for businesses 

List of Biases

Bias Blind Spot
Everyone sees themselves as less biased than they actually are, as less biased than other people. People will often think of those who disagree with them as stupid or worse, evil and uncaring. This seems to especially hold true for economic matters. So people continue to make the same mistakes over and over again because their brains tend to be structured the same way as those of other humans. 

Anchoring
This bias could also be called the bubble making bias, it's the tenancy for people to obsess over a single piece information. It's the reason so much of economic development became focused on increasing property prices, the reason so many bad businesses receive government loans in industries that should otherwise be growing. 

Confirmation Bias
There is a tendency to see anything which occurs as confirming existing beliefs. In other words people's world view determines their beliefs, and reality has little to do with it. This is a problem because many of the generally held economic assumptions are wrong but no matter how often they fail to work, fail to prove fruitful people will continue to believe that they are effective. We see this in Argentina where no matter how often the economic system crashes the people still support those who back the failed system.
This is why diversity can be an important part of a strong economy, because new ideas can help prevent the reuse of failed ideas over and over again. The danger when planning for diversity is to presume that alternative ideas come from demographic diversity. However, demographics are not an indicator of diversity in thinking; thus, it’s important then to think about psychographic rather than demographic diversity within a community.

Irrational Escalation
People grow obsessed with recovering the investments they make from their project and so the more time and money people put into a project the more likely they'll be to continue to invest in it even if its clear the project is failing. This results in more wasted money and more wasted effort that could have been better applied to something else.


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Negativity Bias 
When people have a negative experience with something, they will tend to give more weight to that experience than they will to positive experiences or statistics. So if a tactic is normally sound, but you’ve had a bad experience with it, you are less likely to try it again regardless of the likelihood of statistical success or changes in the environment. This bias can be especially useful in predicting what your competitors will likely do or how they’ll react as it may be possible to see which of their tactics have failed and so predict that they’ll be slower to respond to similar tactics. 

Normalcy Bias 
People tend to focus only on what their experience has shown them is likely to happen and so won’t plan for disasters which haven’t happened. This, for example, is one reason why people have tended to underestimate the impact of some of the major disasters we’ve had recently. It’s also why many businesses underestimated the impact which the recession, changes in technology, gas prices, and globalization would have on their business. 

Status Quo Bias 
Many people don’t like change. Once they’ve established a rhythm, they want it to continue on forever. This is why so many strategies remain rigid even as the world changes around them depleting their resources. 


Ambiguity Effect
When people avoid doing something new or something because they feel they don’t have all the information for it, they have fallen victim to this bias. It’s important to remember that there is no such thing as perfect information, and you have to do something different from what’s being done in order to pull ahead of your competitors. 

An example of this is the reason companies were slow to begin running Internet marketing campaigns. Indeed, most companies have only recently jumped in even though the cost of search ads, for example, has more than tripled. Any business which had tried this method of marketing sooner was more successful. 


Ostrich Effect 
I have noticed that almost all the businesses which started to slide into the red would tend to ignore what was happening and continue to pretend that they didn’t need to immediately implement some form of emergency strategy to deal with the problem until it was too late. This is why so many music retailers and book retailers seemed to ignore the impact that the Internet would have on their strategies until it was too late. It is also why so many businesses ignored the impact the recession was having on their strategy until it was too late. You cannot hide from a negative situation, nor can you assume that a negative situation will simply turn itself around. You need to be adaptable, to be able to change your structure in order to remain in business.


Disregard of Regression Toward the Mean
We tend to believe that whatever situation is occurring is likely to continue to occur no matter what is statistically likely. This is why we presume that we should continue to gamble during a winning streak, for example, even though we eventually have to lose and our chances of winning are the same regardless. This is also why people continued to think that the housing market would continue to increase in value forever even though most industries will eventually have to level off or decrease in value. Never assume that growth or other impressive events will simply continue on. You must plan to find ways to replace existing growth or deal with problems that arise because they will eventually happen.