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Group polarization and Adverse selection May 14, 2007

Posted by Sharath Rao in economics, ideas, intellectual.
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Two of these appear to be as being similar. I had heard about adverse selection in the context of “used cars” and insurance policies before. It is infact one of the commonly cited market failures. But Gresham’s law, or rather a variant of Gresham’s law ( law of group polarization) is something I came across now, and it seems rather true in general experience. So here goes :

Adverse selection :

The term adverse selection was originally used in insurance. It describes a situation where, as a result of private information, the insured are more likely to suffer a loss than the uninsured. For example, suppose that there are two groups among the population, smokers and non-smokers. An insurer selling life policies can’t tell which is which, so they each pay the same premiums.

Non-smokers are likely to die older than average, while smokers are likely to die younger than average. So the life policy is a better buy for the smokers’ beneficiaries. The insurance company anticipates or learns that the mortality rate of the combined policy holders exceeds that of the general population, and sets the premiums accordingly. The result is that non smokers tend to go uninsured though if they could buy a policy on terms that are actually fair given their characteristics, they would do so. So market failure is involved.

A related idea is the law of group polarization. ( though adverse selection happens for a different reason – lack of information )

 In a striking empirical regularity, deliberation tends to move groups, and the individuals who compose them, toward a more extreme point in the direction indicated by their own predeliberation judgments. For example, people who are opposed to the minimum wage are likely, after talking to each other, to be still more opposed; people who tend to support gun control are likely, after discussion, to support gun control with considerable enthusiasm; people who believe that global warming is a serious problem are likely, after discussion, to insist on severe measures to prevent global warming. This general phenomenon — group polarization — has many implications for economic, political, and legal institutions. It helps to explain extremism, “radicalization,” cultural shifts, and the behavior of political parties and religious organizations; it is closely connected to current concerns about the consequences of the Internet; it also helps account for feuds, ethnic antagonism, and tribalism.

And as Mark Lieberman says here, the other dynamic is that “people with a taste for the rational evaluation of evidence are likely to withdraw from a forum whose participants are so obviously uninterested in the facts of the matter. As a result, as the group opinion becomes more extreme, the standards of evidence get worse and worse…”. Read Mark’s complete post to get a good idea.

The original Grisham’s Law which talks of money itself might explain how a college lowers academic standards, goes lax on hooliganism etc. which scares off academically inclined students and attracts hooliganism inclined types.

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Comments»

1. Randomizer - May 14, 2007

This Group polarization law is totally true, and can be observed in even the simplest of group events.

If you are beginning to dislike a person , say X , and you meet a bunch of your buddies , all of whom incidentally hate the life out of X, a mere session of gossip is enough for you to end up with a bias very strongly against X – though in all probability , arriving at this would be more or less impossible by independent interactions with him/her!

I think human beings like feeling ‘on top of things’ all the time ( incidentally, exactly like I am feeling right now when trying to explain this phenomenon 😛 ) .. and like to feel that ‘they are right’ about their opinions. This leads to two things – Birds of a feather flocking together .. i.e. you make friends who are more likely to agree with you , and polarization , where all of us end up asserting each other’s opinions and thus each one ends up feeling much ‘stronger’ about his/her opinion than he/she would have felt independently.

2. Randomizer - May 14, 2007

Just a thought – but doesn’t polarization also work when opposing factions interact ?

For instance, if I’m a ‘sort of liberal’ and another guy is a ‘sort of conservative’ , and we end up debating , I will come out feeling completely liberal while the other guy will probably come out feeling totally conservative… or our beliefs will get polarized because we are being attacked by the opposition.

Is there a phenomenon to explain this as well ?

3. Abhinav - May 18, 2007

Hiatus redux?

4. Sharath Rao - May 19, 2007

Its an interesting point you make aswin….both extremes are probably not so favorable to bring about a change of minds/hearts.

but i guess being with people you disagree every once a while ( rather than mostly ) you give yourself ( and the other person gives him/herself ) a chance at least …

@abhinav – is what *turned about to be* a “Hiatus redux”. 🙂

5. Sharath Rao - May 19, 2007

…to add to what i said in reply in aswin, some people love to be challenged, love to be around with people that challenge their thought process …irrespective of whether positions change significantly. 😉


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