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Paying for "Transparently Useless Advice"

According to a new study, people do. Even when they know that the advice is useless.

Researchers Nattavudh Powdthavee and Yohanes E. Riyanto investigated why people pay for advice about the future, particularly since the future is generally unpredictable (see our  “Folly of Prediction” podcast on this topic). Their starting point:

Why do humans pay for advice about the future when most future events are predominantly random? What explains, e.g., the significant money spent in the finance industry on people who appear to be commenting about random walks, payments for services by witchdoctors, or some other false-expert setting?

The researchers ran a series of experiments in Thailand and Singapore. Participants were asked to bet on a series of five coin flips; prior to betting, they were offered a chance to pay for a prediction of the outcome of each toss. The researchers noted that the predictions were random, and the coin toss fair. Hence, the prediction was essentially useless. However, participants were happy to pay for the predictions — particularly if the predictions in the earlier rounds had been correct. The authors conclude:

Did people who randomly received correct predictions perceive in a hot hand of the nonexistent expert and in turn pay for such useless information later? If so, how long was it before they started buying? The answers are: yes, and not long. 

We conducted possibly one of the strongest laboratory tests on people’s pre-existing beliefs to show that an average person is often happy to pay for what could only be described as transparently useless advice.