lacking control and pattern illusions
One of the amazing things about the current market situation is the subjective frenzy it has created in the financial media. Financial media coverage has gone into overdrive trying to make sense of the chaos in the credit and stock markets. All of the downward spiraling whips them into a state of teeth grinding and hair pulling, and any brief upward blips create momentary surges of joy. Seriously, the commentators at CNBC have more mood swings than my 7-year old daughter.
Part of what’s going on here is an attempt to give meaning to an essentially unpredictable environment over which the prognosticators have very little personal control. Rather than simply sit back and admit that nobody knows what is going on, their general inclination is to try to find patterns.
A new set of experimental studies by recent Kellogg graduate Jennifer Whitson and my colleague Adam Galinsky shows that this kind of pattern attribution is a normal human reaction to a feeling of lacking control. In a paper published in the October 3 issue of Science, Jennifer and Adam show that “lacking control increases illusory pattern perception,” which is defined as “the identification of a coherent and meaningful interrelationship among a set of random or unrelated stimuli.” Now, of course, the current market declines are not entirely random, but it’s safe to say that nobody can truly predict where the market is going at any given moment. There is a tremendous feeling of lack of control in the marketplace, which is probably causing people to make lots of incorrect attributions.
Their paper is getting a lot of buzz right now, especially since one of the experiments looks at the relationship between lacking control and pattern illusions in stock market data. For example, check out these articles in the NY Times, Newsweek, and the Wall Street Journal. Here’s a direct quote from the Science paper:
We propose that when individuals are unable to gain a sense of control objectively, they will try
to gain it perceptually. Faced with a lack of control, people will turn to pattern perception, the
identification of a coherent and meaningful interrelationship among a set of stimuli. Through pattern perception, individuals can make sense of events and develop predictions for the future. For instance, spontaneous causal attributions (identifying a cause-and-effect pattern in a sequence of events) are best predicted by unexpected events rather than negative ones, suggesting that a major determinant of sense-making behavior is whether an individual lacks control. Indeed, researchers have designated “desire for control as a motivational force behind
the attribution process”….Because these feelings of control are so essential for psychological well-being, our main
hypothesis is that lacking control will lead to illusory pattern perception, which we define as
the identification of a coherent and meaningful interrelationship among a set of random or unrelated stimuli (such as the tendency to perceive false correlations, see imaginary figures, form
superstitious rituals, and embrace conspiracy beliefs, among others).
The Chart Men never really left us, Fama et al notwithstanding.
The paper seems to be rediscovering the concept of magical thinking, more or less — it’s a small step from illusory pattern perception to the illusion that one can effectively intervene in circumstances through ritual/magical means.
Bear in mind, though, that the emotional frenzy of the current crisis has a symmetrical analog in the behavior of analysts and commentators during the upswing, prior to the collapse. When things were going well and everyone believed in the bubble and its wonderful properties, the widespread efforts to divine patterns, assert understanding and ritually signal control over that stage of the process was less frantic than the present panic, but it seems to me no less illusory.
Kieran
October 10, 2008 at 4:38 pm
The overlap of ideas between their studies and magical thinking is certainly there but they argue that nobody has ever demonstrated a direct link between these perceptions and a lack of control. Their experimental methods allow them to isolate the mechanism that helps explain the other findings. Referring to Malinowski and Redfield, in particular, they say:
These anthropological observations and correlational studies all provide suggestive but nonconclusive evidence that lacking control leads to the perception of illusory patterns. To test whether a lack of control directly increases illusory pattern perception, we conducted six experiments that used multiple methods to induce a lack of control and measured illusory pattern perception by using a variety of stimuli.
brayden
October 10, 2008 at 7:55 pm
I’ve glanced through that article once before, but it wasn’t immediately clear to me just how much of the difference in pattern detection appeared to be explained by variations in levels of control (I didn’t see any measures of effect size, and most of the means didn’t seem to lend themselves to intuitive judgements of size if only because they were taken from survey contraptions the predictive validity of which wasn’t gone into in the article in detail); it seems pretty strongly speculative (not that that’s a terrible thing, just sayin’) to extend that explanation to market behavior without considering just how strong the phenomenon is (in different situations and for different people as well, of course).
RabidAltruism
October 11, 2008 at 4:47 pm