What is Authority Bias?

[vikasbargale]

What is Authority Bias?

As per Wikipedia, Authority bias is the tendency to attribute greater accuracy to the opinion of an authority figure (unrelated to its content) and be more influenced by that opinion.

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This is a very common cognitive bias. It’s a mental shortcut to conserve our brain energy. We tend to blindly believe in what an Authority says and don’t bother to check the facts.

As human beings, we have evolved over millions of years as a herd, led by a leader. The leader alone made the big decisions and the rest followed him.

As a result, we have a deeply rooted sense of duty to follow Authority. In the age-old days, kings, queens & ministers played the role of authority. But nowadays politicians/businessmen/professionals/ Social Media Influencers fit in the role of authorities.

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In age-old days, as the authorities had superior information and knowledge, it made sense to follow them blindly. But in today’s digital age, nearly every person has access to a vast amount of information along with education to make decisions for themselves. So to follow the authorities blindly can be harmful.

Authority bias can’t be explained without the Milgram Experiment. Here is the link for a short 5 Minute video on the same.

The Milgram Experiment: Would You Do It?

Basically in Authority Bias, the SYETEM-1 comes into play and the detailed thinking and analysing by SYSTEM -2 are bypassed.

In investing, such authorities can come from many places. They may be business news anchors, celebrity MF managers, big analysts and now even YouTube / Instagram / Twitter Influencers.

Of course, you have to be very careful while following their advice as we don’t know their INCENTIVES. It may be some simple prediction or some ‘ Pump & Dump’ strategy also.

A countless number of people have lost a major chunk of their investment by following the advice of people they consider an authority on the subject.

One other classical example of Authority Bias is, after the COVID times, when there was an ample amount of liquidity in the system, all the cryptocurrencies started shooting up. And during that time few Bollywood celebrities and a few YouTube influencers had done advertising about those cryptocurrencies.

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And many followers of these authorities did invest in cryptos only to lose their capital in the coming months. Here the authorities had different incentives for doing those advertisements. But their followers didn’t realise it and lost their hard-earned capital.

Authority bias can be damaging because it limits the individual’s decision-making, which is bad when the leader is wrong, or when the leader’s ideas are misunderstood.

In investing, this authority bias may push you to invest in businesses that are out of your circle of competence. So you will invest with borrowed conviction and may get confused if the investment starts going down. And in such cases, the worst thing can be Loss Aversion and if you average your investment down, you fall prey to the Suck Cost Fallacy.

So How to overcome authority bias?

Compared to the other cognitive biases, the authority bias is easier to overcome.

1. Think logically

Whenever you have to follow any instruction, think with an open mind if you are doing the right thing.

One very simple logic I want to put forward here about all the predictions. We have seen many analysts and company management predicting their future sales / EPS.

Here I want you to do a simple exercise. Suppose you are going out for the job in the morning and have a certain amount in your wallet. Now can you surely predict how much cash will be there in your wallet when you come back at night? It’s so difficult to predict our daily cash flows. So how can these analysts/managers be able to predict such numbers with so much confidence?

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So, When it comes to predictions, they are the most UNPREDICTABLE.
So don’t believe in all these predictions blindly.

2. Assume the same recommendation to come from a person of lower authority

When Usain Bolt drinks a chilled Coca-Cola after a sweaty run, you feel like drinking one too. If your neighbour did the same after his morning run, would you feel the same? I don’t think so.
When you picture a common man recommending you a product or an action, you question the action and think straight.

Same way don’t believe in any stock recommendation / any management commentary/analyst predictions blindly. Think as if your friend/colleague is suggesting the same. Will you act on it?

And when it comes to direct stock investing, nothing can be as important as Check-List.

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YOUR CHECK-LIST is one of the BEST weapons against all these biases. It will convert your SYSTEM 1 intuition to SYSTEM 2 analysis.
So PLEASE do take some special efforts and make one for your own. And most importantly follow it.

Hope you found this write-up on Authority Bias useful.

Regards,

dr.vikas

[karanthharsha999]

A detailed explanation of biases and several others like
Survivorship Bias - Survivorship bias is a form of selection bias . It occurs when a dataset only considers existing (or “surviving”) observations and fails to consider observations that have ceased to exist.

Social Proof - Social proof is a psychological and social phenomenon wherein people copy the actions of others in choosing how to behave in a given situation.

Clustering Illusion - The clustering illusion is the tendency to erroneously consider the inevitable “streaks” or “clusters” arising in small samples from random distributions to be non-random.

Reciprocity - Reciprocity, is a social psychological phenomenon where people feel a natural tendency to return a favor or respond in kind when they receive something from others .

Confirmation Bias - The tendency to interpret new evidence as confirmation of one’s existing beliefs or theories.

Contrast Bias - Contrast effect is an unconscious bias that happens when two things are judged in comparison to one another, instead of being assessed individually.

Our perception is altered once we start to compare things to one another. We tend to judge them relative to each other rather than on their own merit.

Contrast effect can occur at different points in time - I may compare an object I’m looking at to one I saw yesterday.

This effect can be both conscious and unconscious, since we might not even be aware that we’re making a comparison.

There a two types of contrast effect:

• Positive contrast effect: something is viewed as better than it would usually be when being compared to things that are worse.
• Negative contrast effect: something is viewed as being worse than it would usually be when compared to something better.

Hindsight Bias - Hindsight bias, also known as the knew-it-all-along phenomenon or creeping determinism, is the common tendency for people to perceive past events as having been more predictable than they were.

Outcome Bias - Outcome Bias, also known as the Disparity Fallacy and Equity Fallacy, is a form of confirmation bias, and by extension a cognitive bias. This error arises when a decision is based on the outcome of previous events, without regard to how the past events developed.

Endowment effect - The endowment effect refers to an [emotional bias] that causes individuals to value an owned object higher, often irrationally, than its market value.

• The endowment effect describes a circumstance in which an individual places a higher value on an object that they already own than the value they would place on that same object if they did not own it.
• Endowment effect can be clearly seen with items that have an emotional or symbolic significance to the individual.
• Research has identified “ownership” and “loss aversion” as the two main psychological reasons causing the endowment effect.
• The endowment effect is closely tied to marketing in which companies often try to take advantage of this cognitive bias.
• Investors can overcome the endowment effect by having a clear investment strategy with a plan on when to sell specific investments.

Group think effect - Groupthink is a phenomenon that occurs when a group of individuals reaches a consensus without critical reasoning or evaluation of the consequences or alternatives . Groupthink is based on a common desire not to upset the balance of a group of people.

Base Rate neglect - Base rate neglect, an important bias in estimating probability of uncertain events, describes humans’ tendency to underweight base rate (prior) relative to individuating information (likelihood) . However, the neural mechanisms that give rise to this bias remain elusive.

Conjunction fallacy -The conjunction fallacy is an inference from an array of particulars, in violation of the laws of probability, that a conjoint set of two or more conclusions is likelier than any single member of that same set. It is a type of formal fallacy.

Action bias -Action bias is the psychological phenomenon where people tend to favor action over inaction, even when there is no indication that doing so would point towards a better result. It is an automatic response, similar to a reflex or an impulse and is not based on rational thinking.

Beginners luck - Beginner’s luck refers to the supposed phenomenon of novices experiencing disproportionate frequency of success or succeeding against an expert in a given activity .

Decision fatigue - Decision fatigue is “the idea that after making many decisions, your ability to make more and more decisions over the course of a day becomes worse ,” said Dr. MacLean, a psychiatrist. “The more decisions you have to make, the more fatigue you develop and the more difficult it can become.”

Information bias- Information bias is a distortion in the measure of association caused by a lack of accurate measurements of key study variables . Information bias, also called measurement bias, arises when key study variables (exposure, health outcome, or confounders) are inaccurately measured or classified. An example of information bias is believing that the more information that can be acquired to make a decision, the better, even if that extra information is irrelevant for the decision.

Primacy and Recency effect - The Primacy/Recency Effect is the observation that information presented at the beginning (Primacy) and end (Recency) of a learning episode tends to be retained better than information presented in the middle .

Fear of regret - Regret theory refers to human behavior regarding the fear of regret, which stems from people anticipating regret if they make the wrong choice. This fear can affect a person’s rational behavior, impairing their ability to make decisions that would benefit them as opposed to those that would harm them.

Procrastination - Researchers have defined procrastination as the present bias in preferences, on account of which agents delay doing unpleasant tasks that they themselves wish they would do sooner.

Planing fallacy -The planning fallacy is a phenomenon in which predictions about how much time will be needed to complete a future task display an optimism bias and underestimate the time needed.

and many others are covered in the book.
The Art of thinking clearly
by Rolf Dobelli

https://www.amazon.com/Art-Thinking-Clearly-Rolf-Dobelli/dp/0062219693