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Irrationality 16,17: Inconsistent Decisions and Bad Bets, Overconfidence

01/22/2013

Chapter 16: Inconsistent Decisions and Bad Bets Kinde Notes:

In a classic experiment Elizabeth Loftus showed subjects a videotape of a car accident. Some subjects were then asked, ‘How fast were the cars going when they smashed into each other?’, others were asked, ‘How fast were the cars going when they hit one another?’ The average speed given by the first group was 41 miles per hour and by the second 34 miles per hour. A week later subjects were asked whether they had noticed any broken glass resulting from the accident. The presence of broken glass was incorrectly reported by twice as many of the first group as of the second: the suggestion that the cars had been travelling fast had made subjects confabulate the occurrence of broken glass (3264).

moral

1. Always work out the expected value of a gamble before accepting it.
2. Before accepting any form of gamble decide what you want from it – high expected value, the remote possibility of winning a large sum with a small outlay, a probable but small gain, or just the excitement of gambling usually earned at a cost.
3. Remember that whether you save £5 on the cost of a house or on the cost of a radio, the saving is equally valuable to you.
4. If you are making a numerical estimate and have a given starting value, remember that the correct estimate is likely to be further away from the starting value than you may at first think.
5. Remember that many small independent probabilities may add up to quite a large probability.
6. Equally, if an event is determined by the occurrence of all of several other events, the probability of the event occurring will be very much lower than that of any one of the other (3340).

Chapter 17: Overconfidence Kindle Notes:

One aspect of overconfidence is hindsight: it takes two forms. One is believing that an event that has already happened was inevitable and could have been predicted, given the initial circumstances; the other is the belief that if you had taken a decision that was in fact made by someone else, you would have taken a better one (3352).

One can conclude that a lot of knowledge is a dangerous thing – it may not increase accuracy, but it does lead to false confidence (a theme to which I will return) (3429).

moral 1. Distrust anyone who claims to be able to predict the present from the past. 2. Be wary of stockbrokers (or anyone else) who claim to predict the future. 3. To avoid disappointment, try to control your own overconfidence: think of evidence or arguments that are contrary to your beliefs (3477).

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