Social dynamics of cognitive heuristics and biases

What is it about?

This article discusses the social origins and dynamics of the ways we form mental models and short cuts (heuristics) in our judgement and decisions. Using the situated cognition framework, that is, judgements and decisions take place in a socio-material context with particular histories and extant social, economic and cultural resources, we demonstrate how retail investors and brokers in a market come to pass narrative judgments about market volatility, and act on them. We then relate these judgments to well-known short-cuts such as representativeness and anchoring, and biases such as overconfidence. We also discuss their potential econometric effects such as co-movements among markets.

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Why is it important?

We go beyond asocial accounts of heuristics and biases, which are generated mainly in experimental settings. We demonstrate how socio-material dynamics in a given social setting shape universally latent heuristics and biases in our minds, with particular outcomes for particular settings. We also demonstrate how naturally occurring narratives can be collected and analysed to study heuristics and biases.

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