Most professions these days require more than general intelligence. They require in addition the ability to collect, analyze and think about data. Personal life is enriched when these same skills are applied to problems in everyday life involving judgment and choice. This course presents basic concepts from statistics, probability, scientific methodology, cognitive psychology and cost-benefit theory and shows how they can be applied to everything from picking one product over another to critiquing media accounts of scientific research. Concepts are defined briefly and breezily and then applied to many examples drawn from business, the media and everyday life. What kinds of things will you learn? Why it’s usually a mistake to interview people for a job. Why it’s highly unlikely that, if your first meal in a new restaurant is excellent, you will find the next meal to be as good. Why economists regularly walk out of movies and leave restaurant food uneaten. Why getting your picture on the cover of Sports Illustrated usually means your next season is going to be a disappointment. Why you might not have a disease even though you’ve tested positive for it. Why you’re never going to know how coffee affects you unless you conduct an experiment in which you flip a coin to determine whether you will have coffee on a given day. Why it might be a mistake to use an office in a building you own as opposed to having your office in someone else’s building. Why you should never keep a stock that’s going down in hopes that it will go back up and prevent you from losing any of your initial investment. Why it is that a great deal of health information presented in the media is misinformation.
Loss Aversion
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En provenance du cours de University of Michigan
Mindware: Critical Thinking for the Information Age
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À partir de la leçon
Lesson 7: Choosing and Deciding
How to conduct a cost-benefit analysis. Why you should throw the analysis away after doing it if the decision is personal and very important. How to avoid throwing good money after bad. How to avoid doing something that will prevent you from doing something more valuable. Why it can be expensive to try to avoid the possibility of loss. Why incentives can backfire.
Rencontrer les enseignants
Richard E. NisbettTheodore M. Newcomb Distinguished University Professor
Department of Psychology
If you were to ask an economist.
How do you know that cost benefit theory and its corollaries of sunk cost and
opportunity cost are the way to live your life.
How do you know that's the right way to handle your finances and
the way you organize yourself?
Economists will say well,
it can be mathematically proved from the axioms of cost-benefit theory.
And corporations pay for decision analysts.
Is that convincing to you?
It's not to me.
Logical consistency doesn't prove practical utility.
And remember, optimizing was considered the thing to do until Simon came along and
said no it's satisfied, satisfies him you ought to be doing.
And corporations do pay for decision analysts, but
they also pay for handwriting analysts, lie detectors,
motivational speakers to hop around a stage and tell jokes.
And they hire on the basis of interviews.
What if you knew though, that the greater your familiarity with
cost-benefit principles, the more likely you are to use them, that's including
the some cost principle and the opportunity cost principle well, in fact,
I know from research I've done, economists are much more likely to live their lives
in line with cost-benefit theory than other professors at my university.
Students who've had an economics course do a little better.
Not much.
And, as a matter of fact, you've learned much more in this little lesson today,
then students get from an entire microeconomics course,
the text used at my University has precisely one example of some cost,
and it's not even a very good example.
When I teach the principles and this is important to deciding whether they're
right or not, it has an impact on people.
I know that because weeks later, I test you know how they make
their decisions in context they don't even know they're in a psychology experiment.
And it has an impact.
And finally, people who report making the kinds of decisions that are encouraged
by cost benefit theory do better in life.
At any rate, professors live their lives
in accord with cost-benefit theory, make more money and get higher raises.
Students who live their lives in light of cost-benefit theory get higher grades.
Including higher grades then they should get.
Based on their entrance exam aptitude scores.
The overachievers are people who overuse, so to speak, cost benefit theory.
And that makes sense because violations of sunk cost and
opportunity cost principles usually involving wasting time or resources.
Well, a final topic I want to discuss is some foibles that have been
discovered by people who work in a discipline at the margin of economics and
psychology, and they've discovered choice and
decision quirks that cost money, and sometimes even lives, suppose
you need some money and you have to sell one of the two stocks that you own.
Which stock should you sell?
One that's been going down in hopes that the one that's going up
will keep going up?
Or one that's been going up so
that you won't lock in your losses on the stock that's going down?
Most people say, they sell the one that's going up.
But selling your winners and keeping your losers leads to the poorhouse.
Whether you retire rich or not rich, poor or not poor depends on
making sure that you keep winning stocks and get rid of losing stocks.
Suppose that out of the kindness of my heart, I give you 100 dollars,
and then I say, I'm a betting man.
I propose we have a bet here.
I'm going to let you toss the coin and If it comes up heads,
you give me back that $100.
So you don't have anything.
If it comes up tails, you get to keep that $100 I gave you,
plus X, some amount of additional money.
What would X have to be in order for you to take that bet?
Notice that 0 would be fair.
That's $100 versus $100.
Even one dollar would be in your favor.
That's $100 versus $101 dollars.
That's a bet with an expected value of $0.50, one-half times $1.
What amount would tip you over to take that bet?
$5?
$10?
$20?
The average that people hold out for is $100.
If you don't take the bet at $99, you've thrown away $49.50.
That's one half times 99.
So, why do people makes these kinds of mistakes?
It's because of something called loss aversion.
A loss seems to be about twice as painful as the same gain is pleasurable.
This cause people to forego lots of opportunities that they shouldn't forego.
People pick the wrong stock to sell, because if they pick the one that's
going up, which they probably know is going to continue to go up.
They lose some money for sure.
People hold out for a ridiculous amount of money on that $100 bet
because the prospect of loss is so costly, psychologically.
Loss aversion underlies what's called the endowment effect.
People demand more money for a thing than they paid for it.
Often a lot more.
Imagine you paid $50 for a ticket for a football game and a couple of
days before the game tickets are selling for a lot more than there face value,
suppose you see offers of $200 for your ticket on the Internet.
Would you sell?
Maybe not.
But you should, if the game was worth no more than $50 for you initially,
and things haven't really changed you should be willing to sell that ticket.
The following experiment has been done by now hundreds of times in business schools.
You give half of the students in the class a mug
with the school logo on it and you ask the other
half how much they would pay one of the owners in the room to get their mug.
And you ask the owners how much they would demand to get to sell their mug.
Owners demand twice as much as non-owners are willing to pay.
So I didn't really care all that much about that coffee mug.
And you give it to me now.
That's great.
I'm going to keep this thing.
Don't try to take it away from.
My university's musical society did a fascinating experiment recently.
They advertised a new concert series, and
they included in the envelope either a letter with a promo code for
$20, and you get $20 off the series if you, if you tell people this promo code.
Or they gave them a piece of paper which said, $20 voucher.
They got 70% more people buying the concert series with the voucher.
Then with the promo code.
So I can tear up that letter or promo code, the heck with it.
The $20 voucher, I'm going to tear up this $20 voucher,
[LAUGH] it doesn't seem reasonable.
So, the bottom line for all of this is what am I losing to avoid this loss?
Just how much do I really want this mug, the soccer ticket.
Am I buying this thing just because I got a discount?
And retailers should take notice of give coupons not promo codes.
The last topic I want to discuss is what the behavioral
economists call choice architecture.
You might be surprised to know that only 12%
of Germans allow harvesting of their organs for
use for other people in the event of their death.
99% of Austrians allow harvesting of their organs.
Bet you never would have guessed how much nicer and
more generous Austrians are than Germans.
Well actually, we have no reason to assume.
There's any difference.
The difference is that for in Germany,
you have to check a box if you are willing to donate your organs.
And then Austria,
you have to check a box if you're not willing to donate your organs.
That results in a huge difference in compliance.
Or here's another example of the same point.
Sometimes, some people are hired on a job.
One of the forms they have to fill out, they have to check a box
if you want the company to contribute money to your retirement account.
Or they have you check a box if you don't want the company
to contribute to your retirement.
That's the difference between 20% people signing up initially and 90%.
So, how much choice is enough?
I have a German friend who came to work in my department.
And after he'd been here for
a while he said, why do you Americans need 50 kinds of breakfast cereal?
I didn't have an answer.
Retailers, at least in America,
consistent with good economic theory give people lots of choice.
The Coca-Cola company thinks you want a lot of choices, that's for sure.
Which do you prefer, Coca-Cola, Diet Coke, Coca-Cola Light, caffeine free Coca-Cola,
caffeine free Coke, caffeine free Coca-Cola Light,
Cherry Coke, Coke Zero, Vanilla Coke, Diet Vanilla Coke,
Diet Cherry Coke, or Diet Coke with Lime, in a green can by the way.
Or maybe you'd really just rather have a Dr Pepper.
There's an upscale grocery store in Silicon Valley,
which offers 75% of all olive oil.
250 types of mustard.
300 types of jam and social psychologists set
up a tasting table to see do people really want all this juice?
How well does the retailer do?
We've given people a huge amount of joy versus a small amount.
So they set up a tasting table which either some days
had six types of jam on it and other days had 24 types of jam on it.
Ten times as many people bought a jar,
if there were only six types of jam at the tasting table.
So there are two morals here.
Don't overestimate people's willingness to consider alternatives.
There's a cost to that, that can result in big losses.
In the next lesson, we'll talk about two very different approaches
to critical thinking: logic and dialectical reasoning.
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