Thursday, October 16, 2008

irrational masses and panic selling

Another follow-up on the financial crisis.

Aside, from the decision-making process and loss aversion, there are other psychological reasons to explain the mass panic selling by investors.

Why do people follow the crowd and just sell their stocks?

One possible explanation is the pressure to conform. Following the crowd provides sense of security. ("if everyone is doing it, it must be the safe/logical/good thing to do")

Do not underestimate the pressure to conform

Social pressure exerted by others can seriously impact our own decisions. It can cause us to second-guess even the facts that we hold certain.

According to the Asch Paradigm or Asch conformity experiment, people who are put in a situation where there is a strong conformity among others (usually 3 or more) are more likely to conform the norm, even if the judgment is clearly false.

Essentially, the participants were asked to judge which of the 3 lines in the later card is the same length as the line in the first card shown.

What was found that if there was 3 or more people before who agreed unanimously that a certain wrong line is the correct answer (e.g. line B is correct), the participant will conform and give the wrong answer (line B, instead of the correct answer line C), 37% of the time. (The percentage may not seem a lot but considering that the correct answer is very clear-cut, the impact of social conformity is considerable).

For more information about the experiment and its critique

Irrational markets, loss aversion and financial crisis

The recent financial crisis is big news these days. What insights does psychology have with regards to the fear and irrationality pervading Wall Street and the financial markets?

People are not rational

Despite the drastic moves by central banks to unfreeze credit, the overall sentiment in the market still remains fearful (though there seems to be some abatement in the rampant fear). Investors had escaped the stock market en masse when it seems that even banks are not longer secure institutions against the stock crash. Even markets (like Japan) seemingly uninvolved in the crisis also fell.

Why?
Economists have always made the basic assumption that humans are rational. Yet, psychologists would have told you that this is not the case. People make irrational choices. Given the same expected value, people would much rather avoid losing than press on their chances for gaining.

Would you rather win $900 or have a 90% chance of winning $1000?
Answer this before going on to the next question.
Would you rather loss $900 or have a 90% chance of losing $1000?


Rationally, a person who rather wins $900, should answer "rather loss $900" - the amount of certainty correlates with each other. A person who can handle risk would choose "90% chance of winning $1000" and "90% chance of losing $1000".
Yet, what is found is that a normal person would choose a certain win of $900 and 90% chance of losing $1000. In both cases, the expected value is the same, but the results differ.

People have a more intense reaction to loss compared to gain. - Loss aversion
As such, when investors saw the dive in the stock markets, their immediate reaction is to limit their losses. It does not matter if rationally, their investments are secure or that the investments are unrelated to the crisis or that holding out for the long run would probably mean a return of their stock values. The intense reaction to loss (loss aversion) would have activated their fear response: fight or flight. In this case, many chose flight.

For investors, they would rather sell at low value instead of holding on to their stocks and risk possible zero value (in face of bankruptcy by financial institutions or companies)
For banks, they would rather hoard cash and avoid any possible loss instead of seeking any possible gain by lending.
In both cases, loss aversion contributes to the credit freeze and stock crash.

Prospect Theory
The above questions was actually part of the experiment conducted by Kahneman and Tversky (1979). They came up with a theory about decision-making called the prospect theory. One assumption is loss aversion: the extent of bad feeling in losing $900 is greater than the happiness obtained in winning $900, so people try to avoid a certain loss of $900 by gambling for a 90% chance of losing $1000.
~note: Kahneman won the Nobel prize for Economics. He applied the prospect theory to economic thinking

Citations:
Kahneman, D. & Tversky, A. (1979). Prospect theory: An analysis of decisions under risk.
Econometica, 47, 263-291.

Thursday, October 9, 2008

The Brain and the Brain

Here's the quick and easy (and hopefully painless) introduction to the brain (presented by Pinky and the Brain). Just watch the video.



One cannot talk about Psychology without some reference to the brain itself. The physical structure of the brain is closely interlinked with our thoughts, beliefs and values. Any physical damage to the brain would mean a disruption to our mental faculties. A lot of psychological disorders have some basis in the brain.

Brain-scanning techniques measuring neural activity have allowed psychologists to pin-point what areas of the brain are associated with processes such as memory, learning, emotions, decision-making, movement, etc. One of the most often used technique is the fMRI (functional magnetic resonance imaging).

Unfortunately, biological psychology is not one of my strong points. However, I do see why it is useful and even necessary to learn about it.

Well, now you know the reason why people get so anxious when you hit your head.

Head trauma can actually totally change a person's personality (esp, if the injury is to the prefrontal cortex which is associated with decision-making, rationality). Things like personality and depression can be traced to your physical brain. Things like hostility and aggression are all regulated by the brain. Dementia is reflected in the physical degeneration of grey matter. We can actually predict what faculties you lose as you age.

What do you think about biopsychology? Love it (yes, I know people who do)? Hate it? Just skip the boring parts and give me the REAL interesting stuff!!!?

Sunday, October 5, 2008

Don't Think about the Pink Elephant!

photo taken by JasonJT; http://www.flickr.com/photos/streamishmc/
Let's do a little thought experiment.

Close your eyes. Imagine a pink elephant as vividly as you can. It is hot pink! Does it look like Dumbo? Or it is like an elephant in the zoo?

Now, I want you to NOT think about the pink elephant. Think of anything else but the pink elephant. Try it for a few mins.

What are you thinking of? How many times did the pink elephant cross your mind? Quite a few times, right?

Now, close your eyes again and try to think about what you did for today? Who did you meet? Where did you go? Anything interesting happened when you were traveling? What did you eat for breakfast/lunch? Try it for a few mins.

How many times did you think of the pink elephant? None? Maybe once or twice especially since I asked this question?

This little exercise is proof that suppressing your thoughts doesn't really work.

Often the advice we get when we are upset is "don't think about it". Yet by the very fact that we try not to think about something and try to suppress it, our minds keep going back to the same unhappy thoughts.

Instead, one thing that we can do to take our attention off the things that upset us, is to focus on things that can absorb our whole attention. Immersing yourself in work may be a way, but for some people, it just cannot hold their attention long. In the back of their mind, they are still frustrated with what upset them. A good possible choice is doing something that makes us happy.

Maybe going out with friends for a movie is something that captures your whole attention. For people who like to read, a good book can absorb us wholly for a while. Maybe your thing is playing computer games? Then, go play until a point when you are victorious and on a roll before stopping. By stopping at the point when you are triumphant or happy, your mood will be elevated and you can then proceed to do things that you need to do (e.g. work).

Distraction and concentration can help us move our focus to more pleasant things and enable us to do the things we need to when necessary. Instead of wallowing in our bad mood, by moving our attention to something happy or pleasant, our mood will improve and we can tackle our problems more rationally.

The theory behind:
This is actually an adaptation from the classic study by Wegner, Schneider, Carter, & White (1987)

The experiment was to ask people not to think of a target (e.g. “white bear”) for five-minutes but if they did to ring a bell. After this, participants were told to think about the target for five-minutes more. Compared to those who had not used suppression there was evidence for unwanted thoughts being immediately enhanced during suppression and, furthermore, a higher frequency of target thoughts during the second stage, dubbed the rebound effect (Wegner, 1989)
~ Wikipedia - Thought Suppression

According to the process model of emotional regulation (Gross, 1998), attentional deployment is one of the first emotion regulatory processes. There are 3 main strategies: distraction, concentration and rumination.
  • Distraction focuses attention on nonemotional aspects of the situation or moves attention away from the immediate situation altogether. It also happens when we shift our goals to something more attainable or we think about other unrelated thoughts.
  • Concentration is when our cognitive resources are wholly absorbed into the task we are doing.
  • Rumination involves directed attention, but attention is directed to feelings and their consequences. A caveat here is that rumination on negative emotions can lead to more severe depressive symptoms.

Bibliography:

Wegner, D. M., Schneider, D. J., Carter, S. R., & White, T. L. (1987). Paradoxical effects of thoughts suppression. Journal of Personality and Social Psychology, 53, 5–13
Gross, James J.(1998)The Emerging Field of Emotion Regulation: An Integrative Review. Review of General Psychology, 2(3), 271-299


Any other methods of coping with unpleasant thoughts? What do you do when you are faced with some negative thoughts that you rather avoid?

Wednesday, October 1, 2008

Thought suppression doesn't work

Attempts to regulate negative emotions via thought suppression results in paradoxical increases in negative mood if cognitive load is high. (Wegner, Erber & Zanakos, 1993)

Normally, we would expect that if we suppress an unpleasant thought, it would help reduce the negative emotion associated. However, this research shows that thought suppression doesn't work and may even exacerbate your bad mood, in cases such as when you are stressed. High cognitive load essentially means that you have a lot of things on your mind; your thinking processes are taken up.

Wegner (1994) hypothesises that when cognitive resources are limited, the conscious operating system that seeks out desired mental contents is out-performed by a less cognitively costly monitoring system that flags undesirable mental contents.

Cognitive psychology does utilise quite a few computer analogies.
Our minds find it easier to detect and highlight danger (as it is an evolutionary advantage) and to highlight something already present compared to finding new content.

In this case, when we are low on cognitive resources (like when we have a lot of other things that need our attention), instead of thinking of things that we desire to think about (pleasant thoughts unrelated to the thought we want to suppress), it is easier for our minds to switch to highlighting unpleasant things that are already present. This possibly makes us more aware of the unpleasant thoughts which contributes to the increase in negative mood.


What does this mean in real life?

Try to NOT think about something that distresses you is not going to work in times of stress. Instead, it may be better to do something else as a distraction or concentrate on another issue.
- read Don't Think about the Pink Elephant! for more details.

However, thought suppression may actually work in cases when you are not stressed or doing something that needs a lot of attention. A possible scenario is when you are travelling on the bus/train/car and you remember something that upsets you. Perhaps, telling yourself not to think about it (consciously suppressing thought) may work to keep you from the upsetting thought.