Reciprocity Law Failures

Part of a series exploring how economic thought leads to cognition and cognitive behaviour

 

We expect many of the things in our environment to be commutative. We expect the same purchasing power from one $5 note as from five $1 notes.

Making a risky decision requires an estimation of uncertainty and capital.

Sometimes our ability to estimate the environment lets us down.

We experience a reciprocity law failure and our decision making may appear irrational.

There are several ways in which our decision making can appear irrational. Those involving reciprocity law failures generally involve estimations of our environment with magnitudes which are greater than those in the environment we have evolved for.

National and State lotteries are a great example.

Logically it wouldn’t be in the organiser’s interest if they didn’t profit from running the draw. People play because they over estimate their chance of winning the jackpot (the chance to dream of winning it big is a slightly different issue which I’m ignoring for convenience here).

There is about a 1-in-14 million chance of matching with 6 numbers drawn out of a pot of 49. So if everyone in the United States bought a ticket about 23 people out of the entire population would be jackpot winners. Germany, maybe six. The UK, five if we’re lucky.

Lottery ticket buyers consistently fail to accurately estimate their chances. But why should they?

We have evolved in an environment where we don’t experience decisions of a 1-in-a-few-odd-million occurrence. As humans estimating chance is something that we’re bad at.

Once we come to a conclusion that something is probable we assume it “should” happen. If something has a 90% chance of occurring we’re surprised when it doesn’t, rather than just accepting it as an instance – that we were told of beforehand – when it doesn’t.

 

 

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