Thursday, November 28, 2013

The Pyschology & Economics Of Decision Making Under Uncertainty (With Snoopy's Version From 1966)

See You’re So Self-Controlling by MARIA KONNIKOVA. From the 11-16 NY Times. She has a Ph. D. in psychology from Columbia University and is the author of the book Mastermind: How to Think Like Sherlock Holmes.

Also see A Talk With Lars Peter Hansen, Nobel Laureate. Also from the 11-16 NY Times. He won the economics prize for "contributing to the study of asset prices." It is related to the debate on theory of efficient markets. The idea is that stock prices make sense based on publicly available information. They won't be priced too high or too low.

Here is what Hansen says about "Decision Making Under Uncertainty."
"Yes, people struggle with how to cope with uncertainty; it’s not so easy for them to build probability models about the future in very complicated environments. That’s not realistic. We’re very much interested in rational agents who are coping with uncertainty.

What do you want to call behavior under those conditions? Well, you can call that irrational. I’m not sure that I want to do that; maybe it’s a useful term, maybe it’s not, I’m not quite sure.

How to cope with the uncertainties under complexity is a very important question that we’ve just scratched the surface of."

"Yes, the key thing there, too, is we were driven by empirical evidence, about how people behave. We were driven partly by that and partly by other insights coming out of decision theory — broadly conceived in terms of how people might cope with uncertainty. One thing I loved about rational expectations was that it said, to what extent is public policy grounded on being able to fool people systematically?"
The first article, discusses some recent research from psychology on "Decision Making Under Uncertainty." It looks into how people make decisions in the short-run based on expectations of the long-run. We might eat a slice of chocolate cake because that is great in the short-run but if we have a long-run goal to lose weight, it might seem like it is irrational or a case of low willpower if we eat the cake.

But what if it is uncertain as to how long it will take for a person to reach their weight loss goal? Once you are not sure when the payoff will come, you might think it will never come. So it is better, and perhaps rational, to at least have the cake now and get some pleasure because the weight loss may never come. Excerpt:
"A failure of self-control, suggest the University of Pennsylvania neuroscientists Joseph W. Kable and Joseph T. McGuire, may not be a failure so much as a reasoned response to the uncertainty of time: If we’re not quite sure when the train will get there, why invest precious time in continuing to wait?

Mr. Kable, who has been working on the psychology and neuroscience of decision making for more than a decade, argues that the truth is that in real life, as opposed to the lab, we aren’t nearly as sure we’ll get our promised reward, or if we do, of when it will come

“The timing of real-world events is not always so predictable,” he and Mr. McGuire write. “Decision makers routinely wait for buses, job offers, weight loss and other outcomes characterized by significant temporal uncertainty.” Sometimes everything comes just when we expect it to, but sometimes even a usually punctual bus breaks down or an all-but-certain job offer falls through. 

When we set a self-control goal for ourselves, we often have specific time frames in mind: I’ll lose a pound a week; a month from now, I’ll no longer get cravings for that cigarette; the bus or train will come in 10 minutes (and I’ve committed to taking public transportation as part of lessening my carbon footprint, thank you very much). 

But what happens if our initial estimate is off? The more time passes without the expected reward — it’s been 20 minutes and still nothing; I’ve been dieting for a week and a half now and still weigh the same — the more uncertain the end becomes. Will I ever get my reward? Ever lose weight? Ever get on that stupid train?
In this situation, giving up can be a natural — indeed, a rational — response to a time frame that wasn’t properly framed to begin with, according to a series of new studies conducted by Mr. Kable’s decision neuroscience lab at the University of Pennsylvania and published in Cognition and Psychological Review

There are lots of situations, probably the majority of situations, in the real world,” Mr. Kable told me, “where waiting longer is actually a valid cue that the reward is getting further and further away.""
They have also done some experiments that back this up. Now here is the Peanuts comic which was originally from 1966, although it appeared again on 11-23. I think what Snoopy does and says is what the article was all about.


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