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Decision Science

My complete SIG decision science lecture

Todd Simkin

on 26 October 2009

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Transcript of Decision Science

Decision Science Todd Simkin Scientific Method The Problem Economic theory depends on hyper-rational self-interested
decision makers. The problem is that when people make
decisions, they act irrationally.

The good news is that the mistakes people make are
systematic, and therefore predicatable.

Our goal is to be aware of the errors others make so we can
find opportunity, and be aware of the errors we make so we
can avoid those traps. Ultimatum Game You decide how you want to propose
splitting up $100. If your proposal is
accepted, you keep whatever you didn't propose giving to your partner. How much would you propose giving to your partner?

If you were the partner, what is the minimum amount you would have to receive in order to accept the proposal? Deal or No Deal Would you bet $240,000 for a 1/4 chance of winning $1,000,000 and a 3/4 chance of getting 0? Maximizing your expectancy, the answer should be yes. Maximizing utility, the answer is most likely no. Why do people on the TV show "Deal or No Deal" so often make this bet? Ask a question
Do research
Construct hypothesis
Test with experiments
Analyze results
Was the hypothesis wrong? Then go back... Occam's Razor Numquam ponenda est pluralitatis sine necessitate.
Plurality should not be posited without necessity;
The simplest explanation is probably the right one. The Quadro QRS 250G Tracker "[A]ll matter contains exact molecular frequencies. When a magnetic field is created by a contained electrically charged body moving through space at a perpendicular angle moving to its direction, and that field is brought into alignment with another exact field, resonating at the identical frequency modulation, then both objects attract, just as two bodies are attracted toward each other in a gravitational field. " Therapeutic Touch Healers In 1998, 10-year-old Emily Rosa tested 21 therapeutic touch healers with between 1- and 27-years of experience to see you many could correctly identify under which hand Emily placed her own hand (since the assertion was that they could detect a body's energy to find the negative energy to cast aside). They correctly identified her presence 44% of the time — less than would be predicted by chance! But we don't always know the probability... Conditional Probability Assume there is a disease that 1% of the population has, and there is a test for the disease that is right 95% of the time. If you are selected at random to take the test, and the results are positive, what is the probability that you have the disease? Biases Examples Anecdotal Thinking Priming and Framing Dan Simons basketball video MIT Student Choices Internet-only subscription for $59 — 16%
Print-only subscription for $125 — 0%
Print-and-Internet subscription for $125 — 84% Internet-only subscription for $59 — 68%
Print-and-Internet subscription for $125 — 32% MIT Student Choices (irrelevant choice removed) Confirmation Bias Remember the hits, forget the misses
Psychics (love, health, money, career)
Peter Wason's 2-4-6 problem
Wason's selection test
Hempel's paradox — "All ravens are black." The rule: If a card has a vowel on one side, it must have an even number on the other side. Which cards would you need to select to test this rule? 4 E L 7 You are a bartender, and need to make sure nobody under
21 drinks alcohol at your bar. You see the following people,
and you can check either their age or their drink. Who do you need to check? 41 Years Old Drinking a Beer 18 Years Old Drinking a Coke Self-Serving Bias Lake Wobegon effect
Attribution bias
In one College Entrance Examination Board survey of 829,000 high school seniors, 60% put themselves into the top 10% in 'ability to get along with others,' while 0% (not one!) rated themselves below average. —source, Michael Shermer
Nutrisystem Hindsight Bias 9/11 Intelligence reports — Tenet warned Rice about attacks two months earlier
Equity Analysts — Explanations about the market are far more clear than predictions
Impression of inevitability; people think they would have predicted the experienced outcome if given the chance Loss Aversion/
Endowment Effect Anchoring Write down the last 2 digits of your social security number. Is the average annual temperature in Chugwater, WY higher or lower than this number?

What is your best guess at the average temperature in Chugwater? Chugwater, WY example Conjuncture Fallacy Linda is a 31-year-old, single, outspoken, and very bright lady. She majored in philosophy. As a student, she was active in demonstrations protesting Operation Desert Storm (the 1990 war in Iraq). Which is more likely? 1) Linda is a bank teller, or 2) Linda is a bank teller who is active in the feminist movement. Sunk Cost Fallacy Wars
Trading positions Law of small numbers Law of large numbers Groupthink 11:39 am, January 28, 1986
31 degrees at launch
O-rings in the solid rocket booster failed in the cold, causing a flare to breach the seal and ignite the external fuel tanks, as well
The fatal flaw was known in advance by the engineers of the SRB (Morton Thiokol) and by NASA — this was their 1st no-go recommendation in 12 years, and they faxed 13 charts to NASA explaining their misgivings. NASA officials found weaknesses in their charts. New Hampshire schoolteacher Christa McAuliffe was to be the "First Teacher in Space" after a nation-wide search. Forty-eight percent of 9- to 13-year-olds watched the launch live at school. Conditions for Groupthink Directive leadership
Homogeneity within the group
Isolation of the group from outside data and analysis What do you need to do? Change perspectives—look for the gorilla!
Be willing to change your mind. "I could be wrong," and "I don't know" are fantastic answers.
Seek DISconfirmatory evidence
Get peer input and review Reference Line: Candidate Lines: a
c Cognitive Dissonance Leon Festinger's "When Prophecy Fails", 1956
Marion Keech receives "automatic writing" from aliens on Clarion, telling her that the Earth would end in a flood on December 21.
Believers left jobs, colleges, spouses, and gave away money in preparation for their "flying saucer" rescue.
Members looked to enlist others; it became more true when more people believed in it.
At 4:45 am, a new piece of automatic writing stated that everyone was spared because of the strength of the belief of this group.
They became more ardent proelytes.

Requisite conditions for Cognitive Dissonance:
Deeply-held convistions
Action taken
Specific (refutable) belief
Undeniable disconfirmatory evidence
Social support Self Justification
Full transcript