Lecture 02

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  • + narasinga narasinga 1 week ago
    Professor Sanjay it would be great to have your lectures recorded on posted on youtube.
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Lecture 02 - Presentation Transcript

  1. The Psychology of Human Misjudgment Friday 4 September 2009 1
  2. Key Word: Vivid Friday 4 September 2009 2
  3. Approximately 3,000 people died in september 11 attacks Friday 4 September 2009 3
  4. An additional 1,500 died due to increased ROAD Travel because of dread risk Friday 4 September 2009 4
  5. What caused the dread risk? Key Word: Vivid Friday 4 September 2009 5
  6. This Data is so boring! Friday 4 September 2009 6
  7. Boring Boring Boring!!! Can someone make it more VIVID? Enter Chief Constable of Gwent, Wales Friday 4 September 2009 7
  8. Key Word: Vivid Friday 4 September 2009 8
  9. VIVIDNESS can KILL as well as SAVE Friday 4 September 2009 9
  10. Vividness leaves an impression Friday 4 September 2009 10
  11. Indian Thali: Rs 500 Key Word: Vivid Friday 4 September 2009 11
  12. Sesame Noodles with Smoked Salmon: Rs 750 Friday 4 September 2009 12
  13. Roast Chicken with Chives: Rs 450 Friday 4 September 2009 13
  14. A RADICAL IDEA IN MENU DESIGN EXPLOITING VIVIDNESS Friday 4 September 2009 14
  15. Linguini Shrimp and Broccoli: Rs 1,250 Friday 4 September 2009 15
  16. Grilled Steak: Rs 1,450 Friday 4 September 2009 16
  17. And restaurants stopped serving tandoori items and sale of tandoors plunged... Friday 4 September 2009 17
  18. What does vividness do to People’s Perception of Risk? Friday 4 September 2009 18
  19. Which is more likely? A massive flood somewhere in America ... ... in which more than a thousand people die. Friday 4 September 2009 19
  20. An earthquake in California, causing massive flooding, in which more than a thousand people die. Friday 4 September 2009 20
  21. We overweigh direct experience and under-weigh vicarious experience Friday 4 September 2009 21
  22. What we see for ourselves with our own eyes, hear from our own ears, has a greater impact than what we see or hear through others I saw it with my OWN Eyes! Friday 4 September 2009 22
  23. “We have never seen anything like this,” said analyst Glenn Schorr, who covers the investment banks for UBS AG. “There have been tough situations like Long-Term Capital Management and the crash of 1987, but the problem here is there is leverage in the securities under the microscope and in the banks that own them. And to try and unwind it all at once creates a one-way market where there are only sellers, and no buyers.” - WSJ, September 14, 2008 Friday 4 September 2009 23
  24. Ha! It’s all in there - in this little book! “You don't have to pee on an electric fence to learn not to do it.” Friday 4 September 2009 24
  25. “Man who” syndrome “But I know a man who smoked three packs of cigarettes a day and lived to be 99!” Friday 4 September 2009 25
  26. We under-weigh rich and concrete data because it does not evoke vivid images. Friday 4 September 2009 26
  27. Physicians response to Surgeon General’s report linking cancer to smoking Friday 4 September 2009 27
  28. The probability that a physician will continue to smoke is directly related to the distance of the physician’s specialty from the lungs! Friday 4 September 2009 28
  29. People are more likely to pay for terrorism insurance than for plain insurance, which covers, among other things, terrorism Friday 4 September 2009 29
  30. Before boarding a flight, people are willing to pay more a flight insurance policy to cover against terrorism insurance than for a policy which offers protection from all causes. Friday 4 September 2009 30
  31. Friday 4 September 2009 31
  32. Day trading: A disease based on vividness Friday 4 September 2009 32
  33. General Model at work: Availability Bias Friday 4 September 2009 33
  34. “When I’m not near the girl I love, I love the girl I’m near.” Friday 4 September 2009 34
  35. Human brains tends to drift into working with what’s easily available to it. Friday 4 September 2009 35
  36. The brain can’t use what it can’t remember... Friday 4 September 2009 36
  37. ...or what it is blocked from recognizing under the influence of certain psychological tendencies Friday 4 September 2009 37
  38. The result? Mind tends to over- weigh what’s easily available to it Friday 4 September 2009 38
  39. Who is this guy? Daniel Kahneman Nobel Laureate Friday 4 September 2009 39
  40. “People assess the frequency, probability, or likely cause of an event by the degree to which instances or occurrences of that event are readily “available” in memory” Friday 4 September 2009 40
  41. “An event that evokes emotions and is vivid, easily imagined, and specific will be more available than an event that is unemotional in nature, bland, difficult to imagine, or vague.” Friday 4 September 2009 41
  42. Friday 4 September 2009 42
  43. Combining Availability Bias with Data Analytics Friday 4 September 2009 43
  44. Wal-Mart Uses “Visual Priority” to change behavior Friday 4 September 2009 44
  45. First-conclusion bias Friday 4 September 2009 45
  46. Friday 4 September 2009 46
  47. So does the order of items on a menu Friday 4 September 2009 47
  48. “Nothing is more dangerous than an idea, when it's the only one you have.” Émile Auguste Chartier Friday 4 September 2009 48
  49. The human mind seeks easy answers to the questions which start with the word “why” Friday 4 September 2009 49
  50. We answer questions which start with the word “why” by grabbing the first answer that comes to mind. Friday 4 September 2009 50
  51. The human mind is like the human egg. Out of a billion sperms racing towards the egg, only one succeeds in entering and fertilizing it. Friday 4 September 2009 51
  52. As soon as the fastest swimming sperm enters the egg, the egg immediately shuts down to stop any other sperm from entering Friday 4 September 2009 52
  53. When our minds jump to conclusions, we push aside other reasons and latch on to the first explanation which comes to mind Friday 4 September 2009 53
  54. Why should I buy this stock? Because its cheap! Well, so what? Under what circumstances would this be a mistake? Can you think of three? Friday 4 September 2009 54
  55. on “Darwin is a great model in terms of objectivity. And the reason why I especially like Darwin is that his example provides reasonable hope of mental improvement to a great many people... Friday 4 September 2009 55
  56. on “If Darwin could take modest intellectual endowments and end up next to Newton in Westminster Abbey, we can all learn something from him... Friday 4 September 2009 56
  57. on “And one of the great things to learn from Darwin is the value of extreme objectivity. He tried to disconfirm his ideas as soon as he got ‘em... Friday 4 September 2009 57
  58. on “He quickly put down in his notebook anything that disconfirmed a much-loved idea. He especially sought out such things. Friday 4 September 2009 58
  59. on “Well, if you keep doing that over time, you get to be a perfectly marvelous thinker instead of one more klutz repeatedly demonstrating first-conclusion bias. Friday 4 September 2009 59
  60. “I followed a golden rule, namely that whenever a new observation or thought came across me, which was opposed to my general results, to make a memorandum of it without fail and at once... Friday 4 September 2009 60
  61. “for I had found by experience that such facts and thoughts were far more apt to escape from the memory than favorable ones.” Friday 4 September 2009 61
  62. Friday 4 September 2009 62
  63. What is the second right answer? “Part of the reason…” What three things could prove me wrong? Friday 4 September 2009 63
  64. Noise Overreaction to what you see Quantity not as important as quality I saw it with my OWN Eyes! Friday 4 September 2009 64
  65. Too much data Importance of DCF frame of mind Stock market pages cause denominator blindness Friday 4 September 2009 65
  66. Denominator 5 Amount of gain or loss/ 160 total amount of your wealth Leaps in numerator are vivid and exciting but have little influence in what really matters - Friday 4 September 2009 66
  67. Media likes to report what’s sensational because people like to read what’s sensational. Although you’re what you read, you’re also what you DON’T read. Friday 4 September 2009 67
  68. Visual Identification Experiment Jerome S. Bruner and Mary C. Potter, “Interference in Visual Recognition,” Science, Vol. Friday 4 September 2009 144 (1964), pp. 424-25. 68
  69. “Pictures of common objects, coming slowly into focus, were viewed by adult observers. Friday 4 September 2009 69
  70. “Recognition was delayed when subjects first viewed the pictures out of focus. Friday 4 September 2009 70
  71. “The greater or more prolonged the initial blur, the slower the eventual recognition. Friday 4 September 2009 71
  72. “Interference may be accounted for partly by the difficulty of rejecting incorrect hypotheses based on substandard cues.” Friday 4 September 2009 72
  73. Information Overload = Noise Friday 4 September 2009 73
  74. My experience with Goldman Sachs Friday 4 September 2009 74
  75. Noise How Inside traders go wrong http://fundooprofessor.blogspot.com/ 2005/10/lollapalooza-from-insider- trading.html Friday 4 September 2009 75
  76. Over-emphasis of the importance of private information (availability, scarcity) leads to over- confidence-driven concentrated long positions, often financed with leverage. Friday 4 September 2009 76
  77. Problem of Silent Evidence The Halo Effect Friday 4 September 2009 77
  78. Anchoring Friday 4 September 2009 78
  79. Friday 4 September 2009 79
  80. Money lost in wallet Friday 4 September 2009 80
  81. Lamp vs. Car Friday 4 September 2009 81
  82. Anchors Par value 52 week low All time high Low absolute price Sunk-cost fallacy Stock price itself Friday 4 September 2009 82
  83. Overweighing what can be counted “You’ve got a complex system and it spews out a lot of wonderful numbers that enable you to measure some factors. Friday 4 September 2009 83
  84. “But there are other factors that are terribly important, [yet] there’s no precise numbering you can put to these factors... Friday 4 September 2009 84
  85. “You know they’re important, but you don’t have the numbers.Well practically everybody (1) overweighs the stuff that can be numbered, because it yields to the statistical techniques they’re taught in academia... Friday 4 September 2009 85
  86. “and (2) doesn’t mix in the hard-to- measure stuff that may be more important. That is a mistake I’ve tried all my life to avoid, and I have no regrets for having done that.” Friday 4 September 2009 86
  87. “Not everything that counts can be counted, and not everything that can be counted, counts.” Albert Einstein Friday 4 September 2009 87
  88. “The first step is to measure what can be easily measured. This is okay as far as it goes. John Bogle Friday 4 September 2009 88
  89. “The second step is to disregard that which cannot be measured, or give it an arbitrary quantitative value. This is artificial and misleading. Friday 4 September 2009 89
  90. “The third step is to presume that what cannot be measured really is not very important. This is blindness. Friday 4 September 2009 90
  91. “The fourth step is to say that what cannot be measured does not really exist. This is suicide” Friday 4 September 2009 91
  92. “People calculate too much and think too little.” The Dangers of Microsoft Excel e.g. in Shutdown of Textile Operations case Friday 4 September 2009 92
  93. We over-react to recent events Recency + vividness = lethal combination Friday 4 September 2009 93
  94. Recency Our most recent experience tends to carry more weight in our heads than old experiences. Friday 4 September 2009 94
  95. Friday 4 September 2009 95
  96. “Nothing Matters” - Gauri Bakshi Friday 4 September 2009 96
  97. Price is readily available and precise and is also recent and vividly shown on TV etc. Friday 4 September 2009 97
  98. Value is not readily available and is necessarily an estimate Is it any wonder people overweigh price? Friday 4 September 2009 98
  99. “It’s stupid the way people extrapolate the past- and not slightly stupid, but massively stupid.” Friday 4 September 2009 99
  100. Hot Hands in Sports In any random sequence of data there will be clusters which will look non random and they will stand out and grab your attention. Friday 4 September 2009 100
  101. Antidotes Use checklists Friday 4 September 2009 101
  102. Antidotes Look for disconfirming evidence – killing your own ideas Friday 4 September 2009 102
  103. Emphasize factors that don’t produce lots of easily available numbers. Friday 4 September 2009 103
  104. Hire skeptical, articulate people who can provide you with perspectives or notions that are different from your own perspectives and notions Friday 4 September 2009 104
  105. Under-weigh extra- vivid experience and overweigh less vivid experience. Same with recent events; i.e. cool off. Friday 4 September 2009 105
  106. “Remember the lesson: “An idea or a fact is not worth more merely because it is easily available to you.”” Friday 4 September 2009 106
  107. Reflexive vs. Reflective Brain Friday 4 September 2009 107
  108. Reflexive Brain System 1: effortless, automatic, fast, opaque (goes unnoticed), parallel- processed, can lend itself to errors. Intuition, “blink”, highly emotional Friday 4 September 2009 108
  109. Reflective Brain System 2: effortful, reasoned, slow, logical, serial, progressive, and self- aware (step-by-step reasoning as in Friday 4 September 2009 109
  110. Reflexive system is very sophisticated and has served us well for millions of years Shortcuts good, generally speaking Friday 4 September 2009 110
  111. We don’t effectively use the reflective parts of our brains We think we do but we don’t Friday 4 September 2009 111
  112. Friday 4 September 2009 112
  113. Friday 4 September 2009 113
  114. Friday 4 September 2009 114
  115. Thank you Friday 4 September 2009 115

+ Sanjay BakshiSanjay Bakshi, 2 months ago

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BFBV Lecture on Psychology of Human Misjudgment

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