Monday, September 17, 2007

More emotion, better decision

Reuters ran a piece a few days back under the title "Hot-headed investors make better decisions". The article covers a recent study, where 101 stock investors were monitored over a four-week trading simulation; the study concludes that

Contrary to the popular belief that the cooler head prevails, people with hot heads -- those who experienced their feelings with greater intensity during decision-making -- achieved higher decision-making performance.

After more carefully reading the piece, it turns out that the title is more than a bit misleading. defines hot-headed as

1. Easily angered; quick-tempered: a hotheaded commander.
2. Impetuous; rash: a hotheaded decision.

Based on that definition, the study does not seem to draw any relationship between hotheadedness and sound decision making. Once deflated from the (very annoying) sensationalism, the conclusions are still pretty interesting, though. Essentially, people whose emotions run high would tend to make better decisions, because they are more aware of their feelings, and have more experience dealing with it. Decision analysis as a discipline does emphasize a rational approach, precisely because important decisions are usually emotional, and to reach a clear conclusion one needs to consider carefully personal biases; but that a more emotional decision-maker may ultimately be better trained to decide, is an unexpected twist!


Tuesday, September 11, 2007

The thrill of the chase

Money has a nice piece by Jason Zweig on the behavior of investors, and more specifically on how greed and fear would be hardwired in the human brain and explain some common irrational decision making patterns.
Zweig describes an experiment which indicates that, while the possibility of receiving a larger gain is strongly exciting, actually receiving a larger gain is only marginally satisfying.
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Why is it so hard for most of us to learn that the old saying "Money doesn't buy happiness" is true?
Our brains come equipped with a biological mechanism that is more aroused when we anticipate a profit than when we get one.
I lived through the rush of greed in an experiment run by Brian Knutson, a neuroscientist at Stanford University.
a display inside the fMRI machine showed me a sequence of shapes that each signaled a different amount of money
If the symbol was a circle, I could win the dollar amount displayed; if it was a square, I could lose the amount shown.

When Knutson measured the activity tracked by the scan, he found that the possibility of winning $5 set off twice as strong a signal in my brain as the chance at gaining $1 did.

On the other hand, learning the outcome of my actions was no big deal. Whenever I captured the reward, Knutson's scanner found that the neurons in my nucleus accumbens fired much less intensely than they had when I was hoping to get it.
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Any person who has played the lottery knows this is true; and I could not help but think that monetary gifts or bonuses also fall in this category, for the opposite reason - I won't ever complain when receiving a bonus check, but somehow, in the back of my mind, I always end up imagining that the check could have been larger, not smaller...


Tuesday, July 24, 2007

Me vs. Myself?

There is an interesting piece by James Surowiecki in this week's New Yorker. The argument that more regulation can (at least in some cases) enable individuals to make decisions closer to what they really want - or, conversely, that an unregulated market may prevent people from doing what they really want to - is in itself interesting. It is also pleasantly refreshing; as of late, one would conclude from reading the mainstream media that being free-market based (or as unregulated as possible) constitutes a valid criterion per se to evaluate the quality of a policy decision.
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Americans may want to buy the biggest and most environmentally damaging vehicles available, but polls show that, given an option, some three-quarters of them vote for dramatic increases in fuel-economy standards
Back in the nineteen-seventies, an economist named Thomas Schelling, who later won the Nobel Prize, noticed something peculiar about the N.H.L. At the time, players were allowed, but not required, to wear helmets, and most players chose to go helmet-less, despite the risk of severe head trauma. But when they were asked in secret ballots most players also said that the league should require them to wear helmets.
The players wanted to have their heads protected, but as individuals they couldn’t afford to jeopardize their effectiveness on the ice. Making helmets compulsory eliminated the dilemma
Without the rule, the players’ individually rational decisions added up to a collectively irrational result. With the rule, the outcome was closer to what players really wanted.
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Sunday, July 15, 2007

The rationally ignorant voter

The New Yorker had a review of “The Myth of the Rational Voter: Why Democracies Choose Bad Politics”, by Bryan Caplan. From what I gather (I only read the review), the book follows a pattern established by Gary Becker - apply the arsenal of economic theory to the analysis of social phenomena typically not considered a part of economics. The results are usually perversely entertaining; this one does not disappoint. It looks into voting, and concludes that, far from being surprising, the apparently irrational outcomes of that system are really not an accident, but rather a logical consequence of the mechanism itself.

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In other words, it isn’t worth my while to spend time and energy acquiring information about candidates and issues, because my vote can’t change the outcome. I would not buy a car or a house without doing due diligence, because I pay a price if I make the wrong choice. But if I had voted for the candidate I did not prefer in every Presidential election since I began voting, it would have made no difference to me (or to anyone else). It would have made no difference if I had not voted at all. This doesn’t mean that I won’t vote, or that, when I do vote, I won’t care about the outcome. It only means that I have no incentive to learn more about the candidates or the issues, because the price of my ignorance is essentially zero. According to this economic model, people aren’t ignorant about politics because they’re stupid; they’re ignorant because they’re rational.
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“Democracy is a commons, not a market.” A commons is an unregulated public resource—in the classic example, in Garrett Hardin’s essay “The Tragedy of the Commons” (1968), it is literally a commons, a public pasture on which anyone may graze his cattle. It is in the interest of each herdsman to graze as many of his own cattle as he can, since the resource is free, but too many cattle will result in overgrazing and the destruction of the pasture. So the pursuit of individual self-interest leads to a loss for everyone.
Caplan rejects the assumption that voters pay no attention to politics and have no real views. He thinks that voters do have views, and that they are, basically, prejudices. He calls these views “irrational,” because, once they are translated into policy, they make everyone worse off. People not only hold irrational views, he thinks; they like their irrational views.
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Sunday, July 8, 2007

One minute to make tough decisions

From Steve Pavlina's blog, via LifeHacker, an interesting - and very lightweight - approach to difficult personal decisions:

Sometimes we face tough decisions that involve one or more unknowns. We can’t know in advance what the consequences of each alternative will be. This is especially true of big decisions like quitting a job, entering or exiting a relationship, or moving to a new city.


Let me give you a very simple method of making these kinds of decisions. In most cases it takes no more than 60 seconds to evaluate any particular path.

For each alternative you’re considering, ask yourself, “Is this really me?”

What you’re asking is whether each path is a fair expression of who you truly are. To what degree does each option reflect the real you?


Tuesday, June 19, 2007

Agitation is not information

Wired Magazine has a small piece on the "almost supernatural" ability some athletes have to "see things that nobody else sees" on the field to make decisions. Scientists are analyzing the phenomenon; and one factor they identified is what they do not focus on:
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Farrow has found that players who make poor decisions tend to glance at targets, rather than pausing on them. They're also more drawn to motion. "In a lot of team sports, you're attracted to the area of greatest movement," Farrow says. "But just be-cause there's a person running fast and waving his arms doesn't mean he's the best person to kick to."

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