Abstract: Our perceptions of what other people do often affect what we do. In these situations, perceptual biases can affect what everyone does. By combing the psychology of bias and the economics of equilibrium, we construct a model to predict how individual biases affect aggregate behavior. Psychologists have found at least two systematic biases in the perception of social and legal norms. Empirical studies often find a general tendency to over-estimate how much other people violate social norms – a bias toward moral pessimism. We show that persistence of this bias causes more people to violate the norm than if the bias were corrected. In addition, this bias increases the probability that behavior will settle into a "bad" equilibrium with many wrongdoers, instead of settling into a “good” one with few wrongdoers. Empirical studies also find that a person often over-estimates how many other people act the same as he does – a bias towards social projection. We show that persistence of this bias does not change the number of people who violate the norm. Pessimism thus undermines conformity to social norms, whereas social projection leaves aggregate conformity unchanged. We apply these predictions, and some others, to empirical studies in psychology. We conclude that researchers who found false pessimism with respect to protection of trade secrets, tax compliance, alcohol abuse, and water conservation are right to predict that this bias will cause more people to do wrong, whereas researchers who found social projection bias with respect to water conservation, smoking, and drugs were wrong to predict that this bias will cause more people to do wrong. Source: Berkeley Program in Law & Economics, Working Paper Series.
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