Zero-Sum Bias

The zero-sum bias is a cognitive conclusion that causes people to view (inaccurately) certain situations as being “NIL-return” – they believe that one party’s gains are directly off-set by another party’s losses. For example, the zero-sum bias can mislead people to thinking there is competition for a resource that they feel is limited in one location, whereas the resource is actually freely available elsewhere. Think mad-rush, last-minute Christmas shopping and the must-have toy that is all the rage. It seems everybody is scrambling to purchase the last item – but actually that may not be the case.

The predisposition also extends to the approach we take in evaluating products and services. We may incorrectly assume that superior service must cost more – or that environmentally-friendly compostable bags are less durable – or that a product in plain wrapping invariably is less expensive.

The off-set we perform in our minds is sometimes more helpfully referred to as trade-off consistency. We compare products by assessing the pros and cons but then we conclude that these balance-out overall – the negatives in one product are compensated by the positives in another product. But it is often the case that no such compensatory calculation can be inferred. Overall both products may have good and bad qualities; but the advantages in one may have no correlation to the disadvantages in the other. But our biased minds prefer to calculate to zero-sum.

Finance reinforces this illusion because of traditional double-entry book-keeping. For every debit there is an opposite credit. For every purchase there is an equivalent sale. For every asset there is a compensating liability. Consumers would be better advised to be less black and white.

The bias also evidences itself in the way we conduct conversations with others. If somebody disagrees with our view we often mistakenly believe their conviction is equally as strong as ours. At a crossroads we might decide that the right-turn is absolutely correct. Somebody with a different view may simply be encouraging us to exercise caution – whereas, we often misinterpret their views as diametrically opposed to ours.

Failing to see what different reasons might be at play is a constant issue for financial markets. Consumers must be vigilant that they don’t incorrectly assume that purchasers and sellers are motivated by the same factors. Consumers might view purchasers as ones who have absolute confidence in the investment and sellers as those who are equally opposed to it. But the purchaser could be a 40-something who is negative in the short-term but is taking a 25-year view on retirement planning; while the seller could be one who strongly believes in the investment, having held it for several years, but is now contented to take profit. It is wrong to assume that both are equally motivated in their opposing views.

Societies display zero-sum bias by behaving in herd-like fashion driven by misconceptions. They even take it to the ballot box. A vote for A is an equally-weighted vote against B. It ain’t necessarily so!

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