Fallacies of Research

Researchers tend to generalize theories based on their observations and experiments. Sometimes these generalisations are too general, seeing things from the very high and assuming a dream world to be of any help in solving the real world phenomena and sometimes these generalisations are based on limited data that make these research meaningless in our day to day life. Take the case of Capital Structure theories in Finance, there is no link to real world and interaction of human beings who are not so rational and the markets are not so efficient.

Behavioural Finance has come to rectify this anomaly. But it also have its limitations. Here is an excerpt from an article that shows what these are

The behavioural revolution in economics and psychology has successfully identified and named close to three dozen biases (my favourite behavioural folk song defines them in verse).  I had thought that these biases transcended issues of culture.  Indeed, both neoclassical and behavioural economists were united in a belief that cultural variables were of secondary importance when it came to the deep drivers of behaviour.  But a series of experiments now has me thinking that the underlying heuristics are less universal.

The article, “The Weirdest People in the World” (ungated working paper), has the startling thesis that social scientists in trying to investigate basic psychology may have erred by oversampling outlier populations.  The “Weirdest People” of the title are Western, Educated, Industrialized, Rich, and Democratic.  (The cuteness of the title is not one of the article’s strengths.)  But the idea that “we” are the exotics usefully jars one from complacency.

The heart of the review is a catalogue of experiments where the results differ markedly across different societies.

Take, for example, the Müller-Lyer illusion, which I would have bet dollars to doughnuts would be a universal trick of the eye:

Turns out not only that different societies display different degrees of illusion bias, but the U.S. subjects (represented here by subjects in Evanston, Illinois) are outliers when researchers tested for the prevalence of the illusion across more than a dozen societies throughout the world.  The WEIRD subjects, as expected, require “segment a” to be on average 20 percent longer than “segment b” before they subjectively assess the two to be the same length.  But other cultures exhibit markedly less bias.  Indeed, the “San foragers of the Kalahari seem to be virtually unaffected by the illusion”: