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TEDx Talks
Published: 2017-01-26
Source: https://www.youtube.com/watch?v=-Lg7G8TMe_A
how to make good decisions now if you open a book on rational choice you will likely read to following message look before you leap analyze before you act list all alternative both conferences and estimate the utilities and do the calculation this is a beautiful mathematically scheme but it doesn't describe how most people actually make decisions I'm not even ho does make decisions who write these books
the following story illustrates a professor from Columbia University hadn't offer one important from a rival university any could not make up its mind was it to accept check go stay click took him aside and said what's the problem just maximize your expected utility you always write about doing this exasperated such spawned come on this is serious the method of listing pros ankles and doing the calculation
is an old one Benjamin Franklin %HESITATION once in a letter to his nephew recommended exactly thought so listing all pros and cons and in waiting and either and at the end of his letter he wrote the following is it if you don't learn it I apprehend you will never get married did you choose your partner buy a calculation no I I lost my friends who teach
this method only mess with two rational choice how they chose their partner if they had any choice at all all of them said no no no there was one exception and he told me that he applied his own theory so explain to me that he listed Orgel contests well the consequences for instance will she still talked to me off that being married would you take care
of the kids and let me work in peace and then he estimated for each of those women the probability that it will actually occur I'm multiplied it by the utilities and made the calculation then he proposed to the brim of his to highest expected utility she accepted he never told her how he had chosen her I met him recently now they are divorced so I will
talk to day about two ways of making to six one is the one that it's told with academia it is has many names it Benjamin Franklin's keeping meth photo expected you told the theory and this is a mess so that works in a world of risk that is when the probability is the consequence and alternative are known I'm here statistically thinking is enough key examples lotteries
or if you play the casino anything calculate how much of a loose in a different world devote of uncertainty copulation is not enough you need smart rules of thumb that are technically called hubris sticks and good intuitions which also based on smart rules of thumb another will talk today a a boat issue making under uncertainty and also about the dangers to use a systems that work
for risk for known risk and apply them to develop uncertainty so choices dream two chops or between partners are all into a world of uncertainty I can't calculate everything you don't know the consequences and there will be surprises I will make four points and that illustrate them ways to examples first the best decision on the risk is not the best efficient and uncertainty segment juriste stakes
did you need order to make good decisions on the uncertainty are indispensable for quick decision making done not as it's often claimed a sign of a kind of mental retardation or off just mental laziness third complex problems do not always why are complex solutions and that's a game in the world of uncertainty and finally more information more calculation more time is not always better less can
be more so let's go to the first example this is sports so how does the outfielder touch flyball in baseball cricket well maybe Masako where the goalie has to get it so how does he or she know where to run noted two theories about that one is it's a complex problem you need accomplice the mental processes and the other one is it's a complex problem and
uncertainty and you need to find a simple method for that so let's look for the first one %HESITATION D. but Richard Dawkins in his famous book too selfish genes proposes the complex math so what does the outfit that do he or she pack relates to protect the have you ever calculated a trajectory okay that's what you do I'm this formula doesn't even have dreamed in it
or skin so it's not enough but what else could it be what do you see here is the I. dear to apply I theory that works if you know everything like on the known risks two devoid of uncertainty are the key idealist then you say %HESITATION he behaves as if and Tolkien's put indeed as if a O. D. player would calculate the what's the alternative how
do real players touchable that's my question and a number of experiments show that real players use a number of simple should rest I'll show you one this one works when the ball is already high up in the air it's called the case your wrist and it has three steps first fixate your eye on the ball stopped running and finally the trusted running speed so that the
angel of peace remains constant display here does exactly that so he runs so that the angle of gays remains constant it brings him till woulda bold building do you want to see it again here is important fatally the player can eat more to estimate or cuckold every variable that's necessary to estimate the project everyone and it's a humorous deep that belongs to a family of futuristic
which just look at one good reason and then you get there but you'll find the same jurisdiction in evolutionary history soul dots and fish when they a the Hon a phrase or a mate sometimes not so foreign a they just keep to optical into constant in three dimensional space and that's enough no particular correlations this futuristic is used by players unconsciously if you ever have interview
player I'd ask him how he's doing this so well what he can do so well then you get yep intuition and it's intuition meaning the person knows what to do but the Snow White but how does this intuition function and as you said see here funk's both simple rules the same rule can be used deliberately every ruled it restarted Kane used also be deliberately and that's
very different from the what you might hear name some came support decision making who think that your research or unconscious and so Justin thinking is conscious don't believe that here's an example remember the miracle or the Hudson River what hip hop a plane hit shortly after takeoff of a formation of Canadian geese and if you impose engines and silence both engines pilots turned around to see
whether they could get back to La Guardia airport or they would have to do something more risky like the Hudson River how did that make this decision did the do calculations didn't have much time they use the same heuristic no deliberately the case or a stick how does it work in this case no you fixate the tower through your windshield that's what the pilots did and
if the tower is slowly moving up for its you won't make and that's exactly what Jeffrey scopes to cope with it is saying in other words I'm here is another instance where he restricts can help us to make a to a get a safer world and the decisions are done very fast okay my second illustration is the world of finance we know now but the theory
of finance he's part of the problem old boss part of the problem of the financial crisis noted solution why because it's a theory about the risk about known risk and it's applied to the rules of uncertainty and so chess certainties that are illusory so calculation of value priced innocent I'll give you one example a I assume you want to invest money and you don't want to
put everything in one basket but you want to diversify but how Harry Markowitz from the universe of Chicago got his noble prize for finding a solution so when Harry Markowitz made his own investments for the time after his retirement he E. osis noble prize spinning optimization method so we might think no he did not he relied on a simple humoristic that vehicle one over in so
you did violate your assets equally for instance if you've just two alternatives you divide your money fifty fifty and so on no the interesting question is hope goat is this simple heuristic it doesn't need much calculation in the real world of investment as opposed to the theory of investment and I studied by demi grill it all looked at dot I'm Dave the complex a Nobel Prize
winning massive ten years of data to estimate its parameters and then to estimate what's happening to following months and the vendor Boston shifted until there was no data left what was the result according to common measures one over in made more money then the noble prize bringing mean variance model the interesting question is no not just showed that something simpler does something better but the real
question is can be identified a world where implicitly pace or were the complex calculations picks another show you here three features of this world where one over in outperforms mean variance or at least very likely outperforms me very one feature is predicted uncertainty is large and that's a case for stocks the second one is the number of alternatives is large and you can say this because
the complex methods need to estimate more parameters one away not I'm then generate more arrows and finally to learning simply smiled it was ten years no one can I ask the following question if it would have fifty alternatives how many years of data to a need so would that mean variance actually gets better been won over and what do you think ten years is too little
eleven twelve the best estimate is five hundred years so in the year two thousand five hundred we can switch from our intuitions one away into to doing the calculations provided that the same stocks are still around in the stock market in the first place do our beings understand dot no I recently got a letter from my internet bank so it was no prize winning strategy to
success in investment and then I read it do you know Harry Markowitz no you should know him and then the story was told but he won the Nobel Prize for solving the problem and the bank has now adopted his methods and there was a warning about people's interest what do spank has not understood is that the center Linda five hundred years too early so this is
my second illustration a about Paula of simple rules in an uncertain world and also about the damage that can happen when you rely on missiles that work very well and risk but apply them blankly two variable ask your own bank account what they use but this is not just a one shot a is shown by these slight build previous studies and what you see here we
have an optimization model that's vital use multiverse lesson and we have freed her wrist X. the minimalist is too simple it's just pick something randomly the other two he respects if a different philosophy you already know one over in your truck strode awaits away into equally and one good reason is a humoristic that goals was to first good reason that he can find and then it
Sir I'm not going into details they'll hold a mathematically studied and what you see here is something important Britain you know all the ready all the data that's cold fitting then the complex model is the best one so you can you're flexible enough and you explain the hindsight when you have to predict then something interesting happens a cross over and everyone of to simplifications is more
accurate not just more frugal and fast so this condition is like hindsight for instance like here of often on the radio a finance %HESITATION financial adviser being asked why did Microsoft go down yesterday and he has always an answer this is hindsight if you will be asked is Microsoft going up or down to a moral that would be perfect prediction is heart so that's an illustration
so let me get the general picture what are you studying at the Max Planck institute is how do people and shoot people make decisions and uncertainty and the first Christians a descriptive one what's in the adoptive toolbox until many more humorous six that I came a tell you today and lots of social heuristic so people trusted doctor and the study of ecological rational of the us
to question him what situation is a good idea and when not so if your doctor knows the medical evidence has no conflicts of interest and doesn't do defends its decision making that means to %HESITATION up just a house and fear that you might turn into a plaintiff that's a good idea but that's not the case in most countries most doctors we have studies don't know the
evidence they have conflicts of interest aren't they too defensive position so and finally how to create situations environments and also strategies good how intuitive and that help people to make better decisions so let me finish decision making and the uncertainty is different from decision making on the risk I'm a humorous Nicks or not if certain best strategies that we often hear we can do better that
