Behavioral Economics can be viewed through the lens of Optical Illusions.

1. Don’t Believe EverythingYou See
Or Think 02015.8.31
Nerd Nite East Bay - Paul Sas

2. Everything is less important
than it seems

3. Everything is less important
than it seems
“What you see is all there is” Danny Kahneman

5. Earn Ten Cents Extra!
How painful is
your choice to
FOREGO
gaining 10 cents?
How motivated can you be
by a dime?

6. Pay for a Dime Bag?
Doesn’t it FEEL different to pay 10 cents?
A loss hurts much more than not getting that
same dime

7. Reference Point
Changes a Gain to a Loss
It FEELS much different to avoid a loss than to
forego an additional gain

8. Reference Point
Changes a Gain to a Loss
It FEELS much different to avoid a loss than to
forego an additional gain
Losses approximately
2X as aversive as
comparable gain

9. What’s killing our farmers?
Out of the 3,141 counties in the US:
Highest kidney cancer rates found in the following counties:
Sparsely populated, primarily rural
Preponderantly Christian, more evangelical
Inland, remote from metropolitan coasts
Midwest, the South, and the West
Explanatory Hypotheses?

10. What’s saving our farmers?
Out of the 3,141 counties in the US:
Highest kidney cancer rates found in the following counties:
Sparsely populated, primarily rural
Preponderantly Christian, more evangelical
Inland, remote from metropolitan coasts
Midwest, the South, and the West
“The Law of Small Numbers”: often the best
explanation, but we’re fooled by randomness

11. Fools for a Good Story
Michotte The Perception of Causalityhttp://cogweb.ucla.edu/Discourse/Narrative/michotte-demo.swf

12. Why do extremely smart women often
choose less intelligent partners?

13. Why do extremely smart women often choose
less intelligent partners?
Can a great college athlete do anything to
deflect the Sports Illustrated curse?

14. Why do extremely smart women often choose less
intelligent partners?
Can a great college athlete do anything to deflect the
Sports Illustrated curse?
Why did the Gates Foundation invest ~$2 Billion to
support smaller class sizes?

15. Regression to the Mean
Why do extremely smart women often choose less
intelligent partners?
Can a great college athlete do anything to deflect the
Sports Illustrated curse?
Why did the Gates Foundation invest ~$2 Billion to
support smaller class sizes?

16. One Step at a Time
A
B

17. Side by Side
A
B

18. Side by Side Comparison

19. Separate Evaluation vs Joint
Music Dictionary A
10,000 entries
condition is like new
Music Dictionary B
20,000 entries
cover is torn
24 Piece China Set
condition is like new
28 Piece China Set
24 Pieces
4 extra saucers, 1 chipped

20. Separate Evaluation vs Joint
Music Dictionary A
10,000 entries
condition is like new
$24
Music Dictionary B
20,000 entries
cover is torn
$20
24 Piece China Set
condition is like new
28 Piece China Set
24 Pieces
4 extra saucers, 1 chipped
>

21. Presentation Paradox
People will pay more for a 5 ★ Hotel
than they will offer for
5 ★ Hotel that also mentions a 3 ★ Restaurant

22. How
does
the end
point
affect
a story?

23. Experiencing vs Remembering Self
Which person suffered more? A or B

24. Experiencing vs Remembering Self
Which person suffered more? A or B
Equal Area
in Box

25. Experiencing vs Remembering Self
Which person suffered more? A or B
Which person more willing to do it again? A or B
Equal Area
in Box

26. Peak-End Rule (Kahneman)
Duration Neglect: Difficulty estimating the total amount of suffering
Peak-End: Simple heuristic to recall the worst instant (peak) + the last instant (end)
Cognitive manipulation: Increase total quantity, but make last minutes less intense.
Longer period is recalled as less painful
Equal Area
in Box

27. Cognitive Illusions: General features & Patterns
We’re not performing mathematical/logical computations
Heuristics work as quick rules of thumb
Law of Small Numbers - patterns w/o sensitivity to sampling
Presentation Paradox - Single composite/gestalt stands for
the sequence
Peak-end rule - 2 points replace integrating under curve

28. Two System Theory
Fast Thinking: intuitive, immediate, unreflective
Perception of patterns comes for free
Slow Thinking: mathematical/logical computations
If a baseball and a bat cost $1.10 together, and the bat costs $1.00
more than the ball, how much does the ball cost?

29. vs
Fast
Imagine a Game Show where the fastest
response wins (almost always)

30. vs
SlowFast
Imagine a Game Show where the fastest
response wins (almost always)

31. Daniel Kahneman
&
SlowFast
Thinkers
Amos Tversky

32. General features of Prospect Theory (K&T ’79)
Status quo bias (connected to power of defaults)
Diminishing sensitivity
Losses weigh much heavier than foregone gains
Save More Tomorrow program – Allocate future raises
Risk averse for gains
Risk impulsive for losses

33. Reference point - SQ

34. Reference point - SQ
Future gains - relative
size makes it feel
much less attractive

35. Reference point - SQ
Future gains - relative
size makes it feel
much less attractive
Loss / Setback /
Backward move:
Same amount
looms larger

36. General features of Prospect Theory (K&T ’79)
Status quo bias (connected to power of defaults)
Diminishing sensitivity
Losses weigh much heavier than foregone gains
Save More Tomorrow program – Allocate future raises
Risk averse for gains
Risk impulsive for losses
Zoom into origin region
to explore sensitivity to
probabilities (0,1)

37. MAYBE
Our Sensitivity
to Chance
Depends
on Perspective

38. MAYBE
Our Sensitivity
to Chance
Depends
on Perspective

39. MAYBE
Our Sensitivity
to Chance
Depends
on Perspective

40. MAYBE
Our Sensitivity
to Chance
Depends
on Perspective

41. Probability
Weights +
Certainty
Effect
0 0
1 5.5
2 8.1
5 13.2
10 18.6
20 26.1
50 42.1
80 60.1
90 71.2
95 79.3
98 87.1
99 91.2
100 100
WeightProbability

42. Probability
Weights +
Certainty
Effect
0 0
1 5.5
2 8.1
5 13.2
10 18.6
20 26.1
50 42.1
80 60.1
90 71.2
95 79.3
98 87.1
99 91.2
100 100
WeightProbability
1- Over Sensitive to Low Probabilities

43. Probability
Weights +
Certainty
Effect
0 0
1 5.5
2 8.1
5 13.2
10 18.6
20 26.1
50 42.1
80 60.1
90 71.2
95 79.3
98 87.1
99 91.2
100 100
WeightProbability
1- Over Sensitive to Low Probabilities
2- Less sensitive to Shifts in the Middle
3- Increasing Sensitivity to Higher

44. Probability
Weights +
Certainty
Effect
0 0
1 5.5
2 8.1
5 13.2
10 18.6
20 26.1
50 42.1
80 60.1
90 71.2
95 79.3
98 87.1
99 91.2
100 100
WeightProbability
1- Over Sensitive to Low Probabilities
2- Less sensitive to Shifts in the Middle
3- Increasing Sensitivity to Higher
4- Extraordinary weight to certainty

45. Follow up References
The ultimate book of optical illusions / Al Seckel. [Any illusions book is worth *a look*]
Predictably irrational : the hidden forces that shape our decisions / Dan Ariely.
THE gateway drug to the field. Very witty pleasurable read by one of the leading researchers.
Also take 18 minutes to watch at lease one of his superstar TED talks.
The why axis: hidden motives & the undiscovered economics of everyday life / Uri Gneezy
Applications to public education, carpooling, sex differences, showing how experiments work to
help answer open questions of about the best approach to messy situations
Misbehaving : the making of behavioral economics / Richard H. Thaler
Humorous anecdotes trace the origins of the field to original insights into how humans
"misbehave."
Thinking, fast and slow / Daniel Kahneman.
Comprehensive - clear & concise; a stealth-text book of the entire field by one of its founders.

46. CHOICE ARCHITECTURE
Option A
Option B
Contextual cues, situational aspects, environmental associations
shape/structure perception