Tuesday, April 23, 2019

Individual outcomes of irrational thinking, including belief in the paranormal and non-scientific thinking: althought it diminishes financial profitability, the component of belief in the paranormal improves the psychological state

Is irrational thinking associated with lower earnings and happiness? Shoko Yamane, Hiroyasu Yoneda, Yoshiro Tsutsui. Mind & Society, Apr 23 2019. https://link.springer.com/article/10.1007/s11299-019-00213-4

Abstract: This study investigates the individual outcomes of irrational thinking, including belief in the paranormal and non-scientific thinking. These modes of thinking are identified through factor analysis of eleven questions asked in a large-scale survey conducted in Japan in 2008. Income and happiness are used as measures of individual performance. We propose two hypotheses. Previous studies in finance lead us to consider Hypothesis 1 that both higher belief in the paranormal and non-scientific thinking are associated with lower income. Literature on the association between religion, the paranormal, and happiness suggest Hypothesis 2 that higher belief in the paranormal is associated with greater happiness, while higher non-scientific thinking is associated with greater unhappiness. To examine these hypotheses, we regress income and happiness on belief in the paranormal and non-scientific thinking with appropriate control variables. We employ the Mincer-type wage function as the income equation. Income, sex, and age are controlled in the happiness equation. Analysis supports both hypotheses, which highlights the complex features of irrationality. Although irrationality results in diminishing financial profitability, the component of belief in the paranormal improves the psychological state.

Keywords: Irrational belief Happiness Paranormality Factor analysis Income

1 Introduction

This study aims to discover whether rational thinking is necessary for better human performance (income and happiness), using Japanese data. Rationality is the essen-tial assumption of traditional economics, meaning that based on facts, agents think and act logically, in order to achieve their goals, given their constraints.1

The consequences of irrationality, i.e., violating requirements of logical rationality, have been studied in the field of behavioral finance. Shumway and Wu (2006) empirically analyzed the Shanghai stock exchange and found that traders who display the disposition effect, i.e., exhibit a greater propensity to realize gains compared to losses, earn less profits. Barber and Odean (2001) showed that men transact too often because of their overconfidence, leading to low profitability. These empirical results are consistent with the hypothesis that irrationality reduces profitability. However, there exists the possibility that irrationality works in an opposite direction. DeLong et al. (1990) theoretically analyzed the efficiency of a financial market that consists of a mix of rational and irrational agents and showed that this market can be inefficient if irrational agents comprise a substantial fraction of market participants.2 Thus, if irrational agents dominate, behaving irrationally in concordance with many other irrational agents can be profitable.

On the contrary, it is not known how irrationality is associated with happiness.3 In this study, we measure individuals’ degree of logical thinking by assessing the extent to which they believe in science and paranormal phenomena. Although these may seem to be two sides of the same coin, they essentially have different characteristics, as is demonstrated in Sect. 2.4 Many studies reported that those individuals who are deeply religious are happier (Koenig et al. 2001). Wills (2009) reported that higher satisfaction with spirituality and religiosity brings about significantly higher well-being (see also Cohen 2002), suggesting that those who believe in paranormal phenomena may be happier, since belief in religion overlaps, in part, belief in paranormal phenomena (see Sect. 2.2).

In order to address the question as to whether irrational thinking leads to lower profitability measured by income and happiness, we conducted an original survey in Japan. Of all the questions, 11 deal with paranormal phenomena and scientific facts. Using factor analysis, we extract two factors, namely, belief in paranormality and non-scientific thinking. We analyzed the association between these two factors and individual outcomes in terms of income and happiness.1 For more discussions on rationality, see Wilkinson (2008).2 The authors assume that rational agents are risk averse, which restricts them from carrying out unlimited arbitrage.3 Nevertheless, how happiness depends on various attributes and traits has been extensively investigated (see, e.g., Frey and Stutzer 2002). For example, based on a dictator game experiment, Konow and Earley (2008) found that more generous people report greater happiness.4 Lindeman and Aarnio (2007) offered some support for this; they reported that superstition is well predicted by ontological confusion, but not by analytical thinking.

1 Spirits and ghosts exist
2 Heaven exists
3 God or Gods exist
4 Life after death exists
5 God knows about all the wrong things we’ve done
6 It is possible to move an object by using psychokinesis
7 I believe in fortune telling
8 A person’s blood type indicates their character

Non-scientific thinking
1 Human beings evolved from other living things
2 You should place a greater value on thinking with your head than with your heart
3 What is written in science books is true

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