Irrational Economist_ Making Decisions in a Dangerous World - Erwann Michel-Kerjan [30]
Beliefs refer to the external world and include misconceptions and predictions, such as believing that Zurich is the capital of Switzerland (which is not true, it happens to be Bern) or that it will rain tomorrow (which will be proved right or wrong tomorrow). Values refer to inherently subjective statements about personal likes and dislikes, such as saying that one likes beer over wine, or that when buying a car, safety is more important than style. The normative theory holds that values and beliefs must be independent of each other. For example, my subjective estimate as to the probability that it will rain tomorrow should not be influenced by whether I wish for rain or not. But behaviorally it very much does (just ask football fans what the odds are that their team will win). Most people suffer at times from wishful thinking or perhaps undue concern or worry (see Tom Schelling’s chapter in this book), and admonishing them not to do so is a weak remedy.
Deep down, human beings exhibit a wide array of foibles, twitches, and quirks that interfere with the rational model. Consider extreme cases, such as trying to get a person suffering from attention deficit disorder to engage in a utility elicitation exercise, or to get an autistic child to express subjective beliefs, or to get a drunken person to choose rationally by ordering a taxi—good luck. Although well intentioned, classic rationality is a very demanding discipline, even for healthy, sober people, and therefore may run into the very human obstacles it seeks to overcome, namely those associated with bounded rationality and the underlying sea of emotions. In some sense, we all suffer a bit from attention deficit disorder, autism, and inebriation, and therefore decision analysis needs to adapt more to us rather than vice versa. Much research is being conducted on the role of affect and mood, which can influence our perceptions and values far more than heretofore acknowledged. But there is little guidance in classical decision analysis on how to deal with this. We need prescriptive approaches that better balance the rational ideals we strive for with our cognitive and emotional limitations.
But suppose we actually manage to separate beliefs from values; the next step, then, is to measure each component further, via subjective probability and utility assessment. This seems rationally straightforward (a simple matter of asking people some questions and clearing up the inconsistencies), but is behaviorally far more complex. Decades ago, researchers enumerated important biases that complicate probability encoding in real-world settings, from anchoring effects (whereby you focus too much on a specific number or threshold) and availability biases to wishful thinking and overconfidence. Researchers did the same for utility encoding, which likewise suffers from distinct traps and biases (see Kleindorfer et al., 1993). Decision analysts would not have known about such biases without the benefit of behavioral decision research. Decision analysts then proposed various antidotes to such biases, such as asking questions in a variety of ways, in an effort to make their analysis more robust and valid. However, the effectiveness of such procedures remains in doubt since subsequent research has shown that such de-biasing seldom works well.
A PRACTICAL CASE FOR TEENAGERS: DECISION EDUCATION FOUNDATION
The Decision Education Foundation (DEF) based in Palo Alto, California, is a philanthropic organization that aims to improve decision making among adolescents and adults (see www.decisioneducation.org). DEF was founded in 1996 by Professor Ron Howard from Stanford University with two of his former doctoral students, Eric Horvitz and David Heckerman from the Decision Theory Group at Microsoft Research, and several other decision experts from the Strategic Decisions Group, including Tom Keelin, Jim Matheson, and Carl