Friday 17 August 2012

Book Review - Thinking, Fast and Slow

 

Daniel Kahneman is a world-renowned psychologist who won the Nobel Prize for Economics in 2002 for his contribution to behavioural economics. Thinking, Fast and Slow is his summary of his lifetime's work into understanding the human brain - it is required reading for anyone who wishes to understand how we make decisions. Kahneman effortlessly keeps you gripped as he conducts his whistle-stop tour of your mind. Reading this will improve how you understand the decision-making process, and might just help you make better decisions in future. Leaders take note!

The title comes from the way psychologists separate brain functions: two systems are in operation, one is incredibly fast but prone to making errors, while the other is more accurate but slower and lazier. Kahneman reveals how the interaction of these systems results in systematic errors in our thinking and quirks in our decision-making.

For example, we have a fantastic tendency to fail to look beyond the obvious. Kahneman uses the phrase 'What you see is all there is' to describe our thinking so often he actually shortens it to WYSIATI. His expertise combined with a wonderful turn of phrase results in highly enjoyable quotes, such as:

"Our comforting conviction that the world makes sense rests on a secure foundation: our almost unlimited ability to ignore our ignorance."

However, just because Daniel Kahneman has written something doesn't make it true. There are alternative theories (certainly within behavioural economics) worthy of equal attention that don't make the book. Those interested in behavioural economics should not rely on Thinking, Fast and Slow alone. Although, a really nice touch is that the two main papers for which Kahneman received his Nobel Prize are reproduced at the back for those who are really interested.

Given the sheer quantity of material packed into the 400+ pages it may take a while to digest, but don't let that put you off - it's well-worth a read. I thoroughly recommend Thinking, Fast and Slow.



Genre: Psychology
Accessibility: 7/10
Accuracy: 8/10
Readability: 8/10
Usefulness: 10/10
Verdict: Required Reading

Risk Intelligence - Don't Know Why

Earlier today I took a fascinating online test designed to measure risk-intelligence:

www.projectionpoint.com

It measures how well you judge your ability to estimate probabilities correctly (and only takes 5 minutes).

Guruhogg scored 76.74 - see if you can beat that!

My result


Recommended listening:
Don't Know Why by Norah Jones

Thursday 16 August 2012

Salt And Oats - Fire Coming Out Of The Monkey's Head






Sailing on the Norfolk Broads is both a wonderful and totally unique experience. We cruise around beautiful rivers and lakes in 1930s yachts, enjoying getting away from the world. Every now and then, however, we have to stop at outposts of civilisation for supplies. Ludham Bridge Stores is one such outpost. It is almost the dictionary definition of a monopoly; the nearest competitor is at least half a day by sail. So improving their shop using behavioural economics probably isn't a high priority for the owners, but I humbly suggest that they might be able to increase their profitability somewhat...

The first thing you see as you enter the front door is salt and oats. Right in your face. At eye-level. About 50cm from your face.

Now, I'm fairly confident when I say that salt and oats are the exact opposite of 'impulse buys'. No-one ever in the history of humanity has ever walked into a shop, seen some salt, and thought to themselves:

"Oooh... That might nice..."

Why? Because people know whether they need salt or not. They have either run out of salt, in which case they will buy it wherever you put in the shop, or they have not run out of salt, in which case they will not buy it.

It's a fairly similar story with oats.

And, worse than wasting the prime spot in the shop to get people to buy something on an impulse (like, say, an ice-cream) you have, in one fell swoop, changed the consumer journey. They will now be thinking:

"Oh, I don't need salt... What do I need?"

By getting people to think about what they need rather than what they would like, Ludham Bridge Stores probably sells fewer ice-creams and other such-like impulse items.

After saying all this as I stood with friends at the entrance to the shop a few weeks ago, I was told to shut-up, hurry-up and just buy something by my mates. Such is the life of a behavioural economist.

Ludham Bridge

Recommended listening:
Fire Coming Out Of The Monkey's Head by Gorillaz

Wednesday 15 August 2012

You've Been Framed! - American Idiot


  • You are ill in hospital. The surgeon informs you that he could operate. If successful the operation will cure you completely. He tells you that 95% of patients survive the operation.

What do you decide?



  • You are ill in hospital. The surgeon informs you that he could operate. If successful the operation will cure you completely. He tells you that 5% of patients do not survive the operation.

How about now?

Standard economics has always assumed that people's preferences are stable. Thus the way in which questions are worded should not have an impact on what we prefer. Psychologists beg to differ.

Now, you're probably telling yourself that you're unaffected by the way the question is 'framed'. However, evidence shows that people are highly susceptible to framing effects.

More worryingly, evidence shows that doctors are equally susceptible to framing when faced with similar problems to the one above!

We are all to some extent irrational when it comes to framing effects. But never fear, there is an easy way to improve your rationality - simply reframe the problem and see if it changes your preference...

If told:

  • 30 people die out of every 10,000 that undergo an operation

remind yourself that

  • 99.7% survive

Remembering this should help you improve your decision making... Simples!

Recommended listening:
American Idiot by Green Day


Tuesday 14 August 2012

Late To The Football - Three Lions '98


As I sat waiting for my friends in a Guildford pub, I recalled many a similar experience of my youth. For years we played football every Saturday afternoon, but we had a serious problem with punctuality.

Every week we would agree to meet at 2pm on the park, but every week people would turn up slightly later than the week before. With hindsight I can see that this was a classic case of coordination failure, with a hint of the free-rider problem. Let me explain...

Us in our heyday

There was no intrinsic problem with 2pm (it wasn't as if it was too early for us to get up). The problem was that there was a disincentive to being the first one to arrive. Waiting on your own for everyone else to turn up is not especially fun. There was an incentive to turn up just after everyone else. Turning up at the same time would have been fine, but you'd have to wait for them to put their boots on (but you didn't want to come too late or you'd miss valuable footy time).

Thus if you suspected other people would show up at 2:00pm, your optimal strategy would be to turn up at 2:01pm. Because you turned up at 2:01pm this week, the others might arrive at 2:02pm next week. Thus you can see how things quickly got out of hand. Compounding this was the teenage tendency to be late anyway, and every time you were accidentally late you would give an incentive for your mates to be later the following Saturday.

Even though it was explicitly stated each week that we would start at 2pm, by the time we were in 6th Form kick-off was usually 2:45pm or later. Occasionally there would be a punctuality push and it would be announced that we'd all turn up and start at exactly 2pm - but this only brought things back to about 2:15pm!

Stoke Park (empty)

Economists call this coordination failure. The optimal solution for society would have been all of us turning up at 2:00pm, but individual incentives meant that we failed to coordinate effectively. The only way to mitigate this would have been to create a disincentive to turning up late, but creating and implementing this would have been hard given we were just a group of football-loving mates. The free-riding was insurmountable. Coordination failure is one reason why economists sometimes advocate government intervention - if there had been a higher power somehow encouraging us to turn up on time then we could have solved the problem.


Recommended listening:
Three Lions '98 by Baddiel, Skinner, Lightning Seeds

Wednesday 8 August 2012

Sailing Times - I'm A Harrier And I'm Okay


At the start of a week's sailing on the beautiful Norfolk Broads, a question occurred to me... are we rational with regards to time?

I was a leader on Harriers B - a fantastic camp for 15-18s. On the first evening on the cruise, when commanded by the Commodore, we all changed our watches to something called cruise time. Cruise time is an hour later, so at 21:45 all our time-keeping devices were changed to 22:45. The rationale behind it is that as a small fleet of yachts we need to get into moorings early each day while there is still space. So cruise time helps us be earlier. For example, we get up at 7am cruise time and are usually moored up by 5pm cruise time. This sounds a lot better than getting up at 6am every day to be in by 4pm. And because it sounds better it feels better. And because it feels better we do more at that ungodly hour of the morning. Thus cruise time works. It genuinely makes us earlier.


Admittedly there was some protest this year from one of the leaders...

Commy: I'll wake you all up at 7am tomorrow...
Matt: It's 6am!
Commy: No it's not!
Matt: You can't fool my body!

(And in fairness Matt did his very best to prove this was the case throughout the week, never knowingly getting up).

However, most of us swiftly adjusted to cruise time. We were probably better at getting up in the  morning in the mindset of it being 7am than 6am, even though it was all a trick.

According to traditional economics we, as homo economicus, should be unaffected by cruise time. We should behave just the same. It is just a simple trick - the real world time is unaffected. We are not deceived into changing our watches, we all know what we're doing and why we're doing it.


But given that we do change our behaviour when we're told that it's 7am not 6am, even when we know that is not the case, I suggest that this presents a challenge to the belief that we're all the perfectly rational homo economicus.

Recommended listening:
I'm A Harrier And I'm Okay (see verse 5)

Tuesday 7 August 2012

Psychology Deception - Acceptable In The 80s



Apparently some 30-50% of psychology experiments published in top journals use deception (Hertwig and Ortmann, 2001). Why?

One reason for deceiving subjects is that it enables experimenters to create interesting situations. For example, we might want to see how people react in an emergency. Another reason is that it allows experimenters to hide the real purpose of the experiment from subjects. For example, we might want to stop people just giving the politically correct answers instead of what they really think (Nick Wilkinson, 2008).

However, the use of deception is frowned upon by economists.

The main problem is that people aren't stupid. Word gets round. Only the naive would enter a psychology experiment without the expectation of deception on the part of the experimenter. This has knock-on effects on behaviour. If you suspect you're being deceived you may just behave differently thus defeating the whole point of the experiment in the first place.

Thus there are few examples of deception in the world of experimental economics. This should mean that our results stay reliable, even if in the short term we are more limited in what we can do. In an ideal world deception would never ever be used in any experiment, but sadly there is little incentive for everyone to act for the greater good (cf. the free-rider problem).

Fully aware of the irony, I am going to end this post by saying that guruhogg has never knowingly used deception.

Recommended listening:
Acceptable In The 80s by Calvin Harris