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How To Do Exactly the Right Thing at All Possible Times or. Nothing. ____. ^. The Idea That Changed the World. E(u | p, X) = x X p(x)u(x). E(u | p, X) = x X p(x)u(x). Expected Value = (Odds of Gain) X (Value of Gain). - PowerPoint PPT Presentation
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How To Do Exactly the Right Thing at All Possible Times
or
The Idea That Changed the WorldNothing
^____
E(u | p, X) = x X p(x)u(x)
Expected Value =
(Odds of Gain) X (Value of Gain)
E(u | p, X) = x X p(x)u(x)
1/2 X $10
If it comes up heads I’ll give you $10. Should you pay $4 to play?
= $5
Expected Value =
(Odds of Gain) X (Value of Gain)
Yes!
Errors in Odds Errors in Value
Expected Value =
(Odds of Gain) X (Value of Gain)
Expected Value =
(Odds of Gain) X (Value of Gain)
Errors in ValueErrors in Odds
Errors in Odds
Are there more dogs or pigs on leashes in Oxford?
Errors in Odds
_ _ R _ R _ _ _
BARE, FORT, PARK...
Are there more 4-letter English words with R in the 3rd or 1st place?
Errors in OddsErrors in Odds
RING, RANG, RUNG...
Cause Estimate Actual
Tornado 564 90
Fireworks 160 6
Asthma 506 1886
Drowning 1684 7380
Per 200 million US residents per year
Errors in OddsErrors in Odds
Cause Estimate Actual
Tornado 564 90
Fireworks 160 6
Asthma 506 1886
Drowning 1684 7380
Per 200 million US residents per year
Errors in OddsErrors in Odds
>>>
>
Errors in OddsErrors in Odds
Errors in OddsErrors in Odds
Errors in OddsErrors in Odds
Errors in OddsErrors in Odds
Errors in Odds
?Errors in Odds
• 10 tickets
• $1 to play
• $20 if you win
Errors in OddsErrors in Odds
1/10 X $20 = $2
Errors in OddsErrors in Odds
1/10 X $20 = $2
Expected Value =
(Odds of Gain) X (Value of Gain)
Errors in Odds Errors in Value
Errors in Value
Is this Big Mac worth $25?
Errors in Value: Comparing with the Past
COMPARING WITH
the Past instead of the Possible
$60K in Year 1
$50K in Year 2
$40Kin Year 3
$35Kin Year 1
$45Kin Year 2
$55Kin Year 3
$15
0K
$13
5K
Errors in Value: Comparing with the Past
A $2000 Hawaiian vacation package is on sale for $1600. Would you buy it?
Errors in Value: Comparing with the Past
A $2000 Hawaiian vacation package is on sale for $700. You think it over for a week, and by the time you get to the ticket agency, the best fares are gone and the package will now cost you $1500. Would you buy it?
Errors in Value: Comparing with the Past
$2000 $1600
Errors in Value: Comparing with the Past
$2000 $700 $1500
Yes
No
You are on your way to the theatre. In your wallet you have a ticket for which you paid $20, and a $20 bill. When you arrive at the theatre you discover that you’ve somehow lost the ticket.
Would you spend your remaining $20 on a ticket?
Errors in Value: Comparing with the Past
No
You are on your way to the theatre. In your wallet you have two $20 bills. When you arrive at the theatre you discover that you’ve somehow lost one of the bills.
Would you spend your remaining $20 on a ticket?
Errors in Value: Comparing with the Past
Yes
The Lost MoneyThe Lost Ticket
X X
Errors in Value: Comparing with the Past
Errors in Value
COMPARING WITH
the Possible instead of the Past
COMPARING WITH
the Past instead of the Possible
Errors in Value: Comparing with the Possible
$8.00 $27.00 $33.00
Errors in Value: Comparing with the Possible
$8.00 $27.00 $33.00 $51.00
Errors in Value: Comparing with the Possible
Errors in Value: Comparing with the Possible
1
2
3
4
5
6
7
P r e d i c t i o n E x p e r i e n c e
C h o c o la t eS p a m
L i k i n g o f C h ip s
You want to buy a car stereo. The dealer near your house sells it for $200, but if you drive across town, you can get it for $100. Would you drive to get 50% off (saving $100)?
Errors in Value: Comparing with the Possible
Yes
You want to buy a car with a stereo. The dealer near your house sells it for $31,000, but if you drive across town, you can get it for $30,900. Would you drive to get .003% off (saving $100)?
Errors in Value: Comparing with the Possible
No
Errors in Value: Comparing with the Possible
A B C D
Errors in Value: Comparing with the Possible
TODAY TOMORROW NEXT WEEK NEXT YEAR
Errors in Value: Comparing with the Possible
$60 NOW
$50 NOW
Errors in Value: Comparing with the Possible
OR
Problem #1
• More is better than less
Errors in Value: Comparing with the Possible
$60 NOW
$50 NOW
Problem #1
$60NOW
Errors in Value: Comparing with the Possible
OR
Problem #2
$60 In 1
month
$60NOW
Errors in Value: Comparing with the Possible
• Now is better than later
Problem #2
$60 In 1
month
$50NOW
Errors in Value: Comparing with the Possible
Now is better than later
More is better than less
OR
BUT
Problem #3
$60 In 1
month
$50NOW Impatience
Errors in Value: Comparing with the Possible
Now is better than later
More is better than less
Problem #3
$60 In 1
month
$50NOW Impatience
Errors in Value: Comparing with the Possible
Now is better than later
More is better than less
OR
$50 In 12
months
$60 In 13
months
$60 In 1
month
$50NOW
$50 In 12
months
$60 In 13
months
Impatience
Patience
Errors in Value: Comparing with the Possible
Now is better than later
More is better than less
$60 In 1
month
$60
$60
$60
$60
$60
$50
$50
$50
$50 $50
NOW 1 MONTH 12 MONTHS 13 MONTHS
SU
BJE
CTI
VE
VA
LUE
30 Days 30 Days
Errors in Value: Comparing with the Possible
Impatience
Patience
Errors in Value: Comparing with the Possible
Illusions of Spatial Perspective
Errors in Value: Comparing with the Possible
1 ft 21 ft 2000 ft 2021 ftAs seen from
Illusions of Spatial Perspective
Errors in Value: Comparing with the Possible
1 ft 21 ft 2000 ft 2021 ft
20 Feet 20 Feet
As seen from
$60
$60
$60 $60
$60
$50
$50 $50
$50
$50
NOW 1 MONTH 12 MONTHS 13 MONTHS 2O YEARS
SU
BJE
CTI
VE
VA
LUE
Illusions of Temporal Perspective
Errors in Value: Comparing with the Possible
As seen from
$60
$60
$60
$60
$60
$50
$50
$50
$50 $50
NOW 1 MONTH 12 MONTHS 13 MONTHS
SU
BJE
CTI
VE
VA
LUE
Illusions of Temporal Perspective
30 Days 30 Days
Errors in Value: Comparing with the Possible
As seen from
If we’re so stupid, then how did we get to the moon?
Conclusion