18.11.

23, 19:54 Human Nature #18: Reactive Devaluation – Wiser Daily

Wiser Daily

Human Nature #18: Reactive Devaluation

Posted on January 12, 2017 by David Shahrestani, CFA

Back in 2013, the Washington Post ran a poll (https://www.washingtonpost.com/politics/polling/post-poll-obama-endorsement-drag-
path/2013/02/12/3230d18a-750b-11e2-9889-60bfcbb02149_page.html?tid=a_inl) asking if people were in favor or opposed to certain policy positions.
For example, one question was “Do you favor or oppose creating a way for illegal immigrants already here to become citizens if they meet certain
requirements?” About 60% of republicans polled responded in favor.

A different group was asked a similar but slightly different question: “Obama has proposed creating a way for illegal immigrants already here to
become citizens if they meet certain requirements. Do you favor or oppose this?” This time, only 39% of republicans polled responded in favor.

Reactive devaluation is a cognitive bias that occurs when a proposal is devalued simply because it comes from another party, especially if it comes
from an adversary. In the above example, the value of the proposal depended more on the source of the idea, rather than the idea itself.

Studies

The idea of reactive devaluation was first put forth in a paper that surveyed opinions regarding a possible arms reduction treaty between the U.S.
and the U.S.S.R (Stillinger 1991 (http://onlinelibrary.wiley.com/doi/10.1111/j.1571-9979.1991.tb00634.x/abstract)). Respondents were asked to
evaluate the same proposal, with the added exception of who was claimed to originate the idea. One proposal was said to be originated by the U.S.,
another by the U.S.S.R, and the third by an independent third-party. 90% of respondents thought favorably of the U.S. proposal, 44% of the U.S.S.R
proposal, and 80% of the third party proposal. The results weren’t that surprising. Without the specifics of a proposal, it makes sense to assume the
balance of gains would fall to the author of the proposal.

In another study, Stillinger and co-authors sought to isolate the effect’s irrationality. During a period of controversy at Stanford over the university’s
investments in apartheid South Africa, Students were asked to rank two divestment plans (instant divestiture or deadline divestiture). In the control
case, students would rank the two plans with no added information. About 69% of students went with the instant divestiture plan. In another case,

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students were told which plan the trustees of the investment fund were in favor of. When the trusties were said to be in favor of the deadline plan,
85% of students preferred the instant plan. When the trusties were said to be in favor of the instant plan, now only 40% of students were in favor of
the instant plan.

This study was taken even further when the experimenters learned of the actual unannounced plan that Standford would be going with. A survey
was prepared asking students to rank hypothetical compromise plans, including the one that the school was actually going to implement. After the
actual plan was announced, the same survey was given to the students again. The rankings of all the hypothetical plans remained nearly
unchanged, but the ranking of the actual plan fell significantly. The subjects seemed to be fine with compromise, so long as it wasn’t the
compromise the other side wanted.

Source of the bias

Over the years a lot of work has been put into figuring out why reactive devaluation is so prevalent. Loss aversion
(https://en.wikipedia.org/wiki/Loss_aversion) is probably the most prevalent reason. People tend to see an exchange as a zero sum game. If the
other side is offering something, it must mean they win from the exchange and we lose from it. This was also the idea behind mercantilism, up until
Adam Smith and David Ricardo demonstrated that everyone could benefit from trade.

Another cause is attitude polarization (https://en.wikipedia.org/wiki/Group_polarization#Attitude_polarization), in which a disagreement spirals to

extremes as each party considers the evidence provided. With a bit of confirmation bias, each side will cherry pick the facts that support their view
and further entrench their position.

Another cause is naive realism (https://en.wikipedia.org/wiki/Na%C3%AFve_realism_(psychology)), in which we tend to believe that we see the
world around us objectively, and that anyone who disagrees with us must be uninformed or biased. We believe that if they are just given enough
time and the same information as us, they will eventually come around to our conclusions. But our brains didn’t evolve to favor an objective view of
reality. Because of this, two sides, with the same facts, often come to different conclusions.

Consider the example of an NBA trade. Team A offers a player for Team B’s player, and the Team B has to decide whether or not to accept it. The
first thing that Team B might think to themselves is: Why this offer? Why now? They must know something that we don’t. Team B doesn’t want to
lose out so they decline the trade (loss aversion). A week goes by, and Team A’s player dominates the box score. Team A comes back to Team B and
says look at the evidence, this trade is good for you. Team B looks at the same box score and only sees a hot player that is bound to regress. Team B
rejects the offer again (attitude polarization). Team B doesn’t understand why Team A would make the offer in the first case, it is clear to anyone that
it is a bad deal. Team A doesn’t understand why Team B won’t take the offer, it is clear to anyone that Team B needs a point guard anyway (naive
realism).

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Overcoming reactive devaluation

So far, we’ve laid out a story where negotiation between adversaries is futile. In reality, these negotiations happen and are completed all the time.
Consider bitter fights over federal budgets, that almost always seem to be finished by a deadline. The same is true for labor-management disputes,
or even selecting the next Pope.

Deadlines are a useful way to promote compromise. Congress will often not act unless a deadline is explicitly written into law (i.e. the sequester
(https://www.whitehouse.gov/issues/sequester)). It is also important to explicitly state the values and preferences of the opposing parties with one
another. This allows us to offer up a menu of concessions that we know the other party should value. It is also important to communicate what we
gain from the process so the other party doesn’t have room to let their imagination run wild. If all else fails, a third-party can be involved as a
mediator. Congress often does this with bi-partisan panels (i.e. Bowles-Simpson plan
(https://en.wikipedia.org/wiki/National_Commission_on_Fiscal_Responsibility_and_Reform)).

Conclusion

In theory, when two parties are engaged in negotiations, unless the status quo already represents a Pareto-efficient state, there is always some
combination of concessions that will make both parties better off. In practice, the parties usually see the negotiation as a zero-sum game instead, in
which any gain achieved by one side is a loss to the other.

Valuing an offer in this environment becomes more psychological than empirical. Reactive devaluation complicates things further by altering the
value of proposals based simply on where they originated from. This can lead us to reject an offer that strictly benefits us when it comes from
someone we oppose, and accept an offer that strictly hurts us when it comes from someone we support.

References:
https://en.wikipedia.org/wiki/Reactive_devaluation (https://en.wikipedia.org/wiki/Reactive_devaluation)
https://en.wikipedia.org/wiki/Loss_aversion (https://en.wikipedia.org/wiki/Loss_aversion)
https://en.wikipedia.org/wiki/Group_polarization#Attitude_polarization (https://en.wikipedia.org/wiki/Group_polarization#Attitude_polarization)
https://en.wikipedia.org/wiki/Na%C3%AFve_realism_(psychology) (https://en.wikipedia.org/wiki/Na%C3%AFve_realism_(psychology))
http://law.stanford.edu/wp-content/uploads/sites/default/files/child-page/370999/doc/slspublic/Reactive%20Devaluation.pdf
(http://law.stanford.edu/wp-content/uploads/sites/default/files/child-page/370999/doc/slspublic/Reactive%20Devaluation.pdf)

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https://www.washingtonpost.com/news/the-fix/wp/2013/02/12/what-president-obama-should-and-shouldnt-say-in-the-state-of-the-union/?
utm_term=.705a6d25ddba (https://www.washingtonpost.com/news/the-fix/wp/2013/02/12/what-president-obama-should-and-shouldnt-say-in-the-
state-of-the-union/?utm_term=.705a6d25ddba)
Posted in Human NatureTagged Attitude Polarization, Cognitive biases, Human Nature, Naive Realism, Negotiation, Psychology of Misjudgement, Reactive
Devaluation, Stillinger

Published by David Shahrestani, CFA

"I have the strength of a bear, that has the strength of TWO bears." https://www.amazon.com/Navigating-Street-Better-Approach-
Investing/dp/1098356403 View all posts by David Shahrestani, CFA

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