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>> So you have just answered a quiz,

let me briefly remind you what the question was.

We asked you to pick a number between 0 and 100,

then we we're going to select the winner of that game in the following way.

First, we would compute the average of all the selected numbers and

then the winner would be the individual choosing the number closest to two

thirds of that average.

Unfortunately, we couldn't process all your answers immediately, so

we don't really know who won the game.

However, this experiment has been played quite a number of time and

we have data from previous experiments and Kerstin actually has some data that

described the result of a previous experiment.

>> Okay, so let's take a look.

The most important thing first, what would have been the winning number?

So in this experiment that we're looking at here, the average number was 23.08,

which means two-thirds of that would have won the price.

But what do people do as a group?

So the graph show a histogram of the responses that people gave in this

experiment.

On the x-axis, we see that numbers that people could choose from 0 to 100.

And on the y-axis, we plot how many people actually chose that number.

So what we observe is most people choose a number less than 50, but

we also there is a few clusters here.

So a lot of people seem to like the number around 33,

another group of people seem to like numbers around 22 and

then there is a quite a few people who also choose a number around 0.

And this is a behavior we typically see in these kinds of experiments.

But Tony, from a purely rational point of view,

what do you expect a player to do in this experiment?

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>> So, the outcome of this game as you can see,

does not uniquely depend on your answer but on other people's answers.

So you not only have to pick a number, but

make assumptions about what other people are choosing.

So if you think that you're the smartest individual in the group and everybody else

chooses a number at random, you'd expect the average to actually be 50.

And you would be selecting the number 33, which is two-third of 50 and

this is probably what explained this cluster around 33.

But if you take this reasoning one more step and you assume that other people

also think they are the smartest in the room, they would all select 33 and

then you would beat them by selecting 22, which is two-third of 33.

If you keep on reasoning like that, you end up to the conclusion that the only

optimal decision is to select the smallest available number, which is zero.

So, the rational decision here would actually to play zero.

And if everybody plays zero, there is no winner.

There is just a tie between every players.

So if you choose the rational decision, which is zero, you do not necessary win.

Because again, the outcome here does not depends on your decision, but

on everybody's decision.

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>> So, what if you were to repeat this experiment?

And I ask you to do this again now that you know what the outcome was.

So basically, what happens is that people tend to pick smaller and smaller numbers.

So here, we see a graph of a repetition of this game where people are informed about

the outcome of previous games,

and you see they slowly reduce the number that they pick.

And over time,

approach the actual rational solution that Tony just described.

So, they're going towards zero.

So what we learned from this is that if you are aware of the rules of the game and

you learn what other people are doing,

you can also learn what the best decision is going to be.

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So now what do we learn about this general about decision-making,

is there any particular way to approach the decision making process?

So Tony, how would you think about the decision-making process in general?

>> Well, if you were to think of a number of steps that are usually taken when

facing a decision similar to the game we asked you to play,

you see that first, there is a stage of information gathering.

So the first idea is just to gather information related to the task,

to get an idea of what is being asked, what you can do, and

get a general idea of the environment of the task.

Then there is a second step where all that information is processed.

This might involve computations.

So for example, in our game, if you were to compute the fraction of the average.

So this is information processing.

Once all this information is processed, you have to come up with a decision.

This decision in the game was just picking a number.

But in general, the type of decision you will be making,

in particular in investment decision, is much more complicated and

involves many different elements.

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In the previous lessons, you've learned a lot of things about financial assets,

their definition, their characteristics, how we measure their performance,

and these elements are typically the type of information that one needs to gather.

And in a financial decision process, the first step would be to gather

information regarding the available financial assets.

And data related to their past performance, for example, in order to

measure their risk and the potential gains we can obtain by investing in them.

Then the second step in a financial decision situation

would be to process the information again.

The processing of that information involves computation related

to the valuation of some securities.

Are they under or over valued?

Measurements of dependence between financial assets.

Do they move together or do they move independently?

And once all this information is processed,

we finally come to the financial decision, which typically involves

maximizing some objective in terms of your future wealth, and maybe respecting

some form of financial constraint related to your personal situation.

But this is the way I would view this type of a decision as an economist,

but I'm pretty sure that as a neuroscientist,

you might see other dimensions there in that process.

>> Yes. As you already suggested, that's correct.

From neuroscience and from psychology, we know that you don't just evaluate

the numbers when you try to put together a portfolio, for instance.

But instead, your decision-making is influenced by other processes as well.

It's influenced, for instance,

by how much sleep you got last night, by the stress you're experiencing.

Maybe by your social background, your cultural background, by your gender.

You may also experience something that we call cognitive biases and

that we are going talk about a little bit more in the next few videos.

All of these things will influence how you make a decision and as such,

it becomes an extremely complex process that we analyze in the next few videos.

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