Why We’re Not Really AsRational As We’d Like to        Believe          Wali Memon         walimemon.com     1
Kahneman and Tversky: •The Value Function •The Risk Function •Reference Points                  Wali Memon                ...
The Value FunctionFor gains people are riskaverseFor losses people areRisk SeekingSteeper Curve for lossesthan for gains. ...
Imagine that the United States is preparing for theoutbreak of an unusual disease, which is expected tokill 600 people. Tw...
Imagine that the United States is preparing for theoutbreak of an unusual disease, which is expected tokill 600 people. Tw...
Two gainsA)A two hour lectureby DannyB) 2 one hourlectures by Danny                        Wali Memon                     ...
Two lossesA)A twenty minuteshockB) 2 ten minuteshocks                     Wali Memon                                    7 ...
The Risk FunctionOverweighting of smallpercentagesUnderweighting of largepercentagesCertainty is a special case           ...
LotteriesMedicalWarnings             Wali Memon                            0                 100            walimemon.com ...
Which do you prefer:Option A                           Option B5% of $12                          10% of $125% of $14     ...
10% of $12 and 90% of $965% of $12                             10% of $125% of $12                             5% of $9690...
Wali Memon                12walimemon.com
You are lying on the beach on a hot day. All youhave to drink is ice water. For the last hour youhave been thinking about ...
You are lying on the beach on a hot day. All youhave to drink is ice water. For the last hour youhave been thinking about ...
Summary: •The Value Function •The Risk Function •Reference Points                  Wali Memon                             ...
Why Self-Report Fails:          Split brain          Priming Studies          Other manipulations Wali Memon              ...
1) No Self-Reports2) Knowing when the system fails, helps us   understand how the system works3) The most persuasive evide...
Do more people die each year from shark attacksor being hit by falling coconuts?                    Vs.                   ...
On his way out, Sanders staggered against a servingtable, knocking a bowl to the floorOn his way out, Sanders staggered ag...
Jack is a 45 year old male. He is generally  conservative, but shows little interest in  political or social issues. He sp...
Jack is a 45 year old male. He is generally  conservative, but shows little interest in  political or social issues. He sp...
In a random group of five people, which set of birthdays is   more likely:March 5th , Jan 26th, July 17th, August 1st, Aug...
Assume the following:1 out of 1000 women who gets a mammogram has cancerMammograms detect 99% of breast cancer casesMammog...
Has             No Cancer             Cancer  Cancer       99               500  Detected No Cancer         1           99...
You have 10 seconds to estimate the answer tothe following problem:10 x 9 x 8 x 7 x 6 x 5 x 4 x 3 x 2 x 1 = _____         ...
You have 10 seconds to estimate the answer tothe following problem:1 x 2 x 3 x 4 x 5 x 6 x 7 x 8 x 9 x 10 = _____         ...
(Actual answer = 3628800)Estimations are biased even for absurd anchors!Is Danny older than 65?Is Danny younger than 10?Ho...
RULE: If a card has a vowel on one side,then it has an odd number on the other.Which cards do you have to turn over to kno...
RULE: If somebody is drinking, theymust be over 21 years of ageWhich cards do you have to turn over to knowif the rule is ...
People don’t want to have to change fromthe current situation, and require greatincentive to do so.                  Wali ...
The mean IQ of the population of 8th graders is known to be100. You have selected a random sample of 50 children fora stud...
What are the odds that in the next 10 years India andPakistan will get involved in a nuclear war, which willdraw in other ...
1) Prospect Theory’s Value Function, Risk   Function, and Reference Points make it the   premier Decision Making Theory2) ...
Wali MemonWalimemon.com     Wali Memon    walimemon.com   34
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Intricacies of Mind

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How Brain Works - Cannot be Defined? Hence We Use Computer Analogy

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Intricacies of Mind

  1. 1. Why We’re Not Really AsRational As We’d Like to Believe Wali Memon walimemon.com 1
  2. 2. Kahneman and Tversky: •The Value Function •The Risk Function •Reference Points Wali Memon 2 walimemon.com
  3. 3. The Value FunctionFor gains people are riskaverseFor losses people areRisk SeekingSteeper Curve for lossesthan for gains. Wali Memon 3 walimemon.com
  4. 4. Imagine that the United States is preparing for theoutbreak of an unusual disease, which is expected tokill 600 people. Two alternative programs to combatthe disease have been proposed. Assume that theexact scientific estimates of the consequences of theprogram are as follows:If program A is adopted 200 people will be savedIf program B is adopted, there is a 1/3 probabilitythat 600 people will be saved, and a 2/3 probability Wali Memonthat no people will be saved. walimemon.com 4
  5. 5. Imagine that the United States is preparing for theoutbreak of an unusual disease, which is expected tokill 600 people. Two alternative programs to combatthe disease have been proposed. Assume that theexact scientific estimates of the consequences of theprogram are as follows:If program A is adopted 400 people will die.If program B is adopted, there is a 1/3 probabilitythat no people will die, and a 2/3 probability that Wali Memon600 people will die. walimemon.com 5
  6. 6. Two gainsA)A two hour lectureby DannyB) 2 one hourlectures by Danny Wali Memon 6 walimemon.com
  7. 7. Two lossesA)A twenty minuteshockB) 2 ten minuteshocks Wali Memon 7 walimemon.com
  8. 8. The Risk FunctionOverweighting of smallpercentagesUnderweighting of largepercentagesCertainty is a special case 0 100 Wali Memon walimemon.com probability 8
  9. 9. LotteriesMedicalWarnings Wali Memon 0 100 walimemon.com probability 9
  10. 10. Which do you prefer:Option A Option B5% of $12 10% of $125% of $14 5% of $9090% of $96 85% of $96 Wali Memon 10 walimemon.com
  11. 11. 10% of $12 and 90% of $965% of $12 10% of $125% of $12 5% of $9690% of $96 85% of $965% of $12 10% of $125% of $14 5% of $90 Wali Memon90% of $96 walimemon.com 85% of $96 11
  12. 12. Wali Memon 12walimemon.com
  13. 13. You are lying on the beach on a hot day. All youhave to drink is ice water. For the last hour youhave been thinking about how much you wouldenjoy a nice cold bottle of your favorite beer. Acompanion gets up to make a phone call, andoffers to bring back a beer from the only nearbyplace where beer is sold, a fancy resort hotel. Heasks how much you are willing to pay for the beer.Assuming your friend would not inflate the Wali Memon 13price, what price do you tell him? walimemon.com
  14. 14. You are lying on the beach on a hot day. All youhave to drink is ice water. For the last hour youhave been thinking about how much you wouldenjoy a nice cold bottle of your favorite beer. Acompanion gets up to make a phone call, andoffers to bring back a beer from the only nearbyplace where beer is sold, a small, run-downgrocery store. He asks how much you are willingto pay for the beer. Assuming your friend would Wali Memon 14not inflate the price, what price do you tell him? walimemon.com
  15. 15. Summary: •The Value Function •The Risk Function •Reference Points Wali Memon 15 walimemon.com
  16. 16. Why Self-Report Fails: Split brain Priming Studies Other manipulations Wali Memon 16walimemon.com
  17. 17. 1) No Self-Reports2) Knowing when the system fails, helps us understand how the system works3) The most persuasive evidence is counter- intuitive4) Soooo much fun! Wali Memon 17 walimemon.com
  18. 18. Do more people die each year from shark attacksor being hit by falling coconuts? Vs. Wali Memon 18 walimemon.com
  19. 19. On his way out, Sanders staggered against a servingtable, knocking a bowl to the floorOn his way out, Sanders staggered against a servingtable, knocking a bowl of guacamole dip to the floor, andsplattering guacamole on the white shag carpet Wali Memon 19 walimemon.com
  20. 20. Jack is a 45 year old male. He is generally conservative, but shows little interest in political or social issues. He spends his free time on his hobbies which include HAM radio and mathematical puzzles. The probability that Jack is one of 30 engineers in a sample of 100 individuals is _____% Wali Memon 20 walimemon.com
  21. 21. Jack is a 45 year old male. He is generally conservative, but shows little interest in political or social issues. He spends his free time on his hobbies which include HAM radio and mathematical puzzles. The probability that Jack is one of 70 engineers in a sample of 100 individuals is _____% Wali Memon 21 walimemon.com
  22. 22. In a random group of five people, which set of birthdays is more likely:March 5th , Jan 26th, July 17th, August 1st, August 12thMay 1st, May 3rd, May 5th, May 7th, May 9th Wali Memon 22 walimemon.com
  23. 23. Assume the following:1 out of 1000 women who gets a mammogram has cancerMammograms detect 99% of breast cancer casesMammograms have a .5% false alarm rate What are the odds that a woman who tests positive actually has cancer? Wali Memon 23 walimemon.com
  24. 24. Has No Cancer Cancer Cancer 99 500 Detected No Cancer 1 99400 DetectedOnly 1 in 6 women who have cancerdetected actually have cancer!!! Wali Memon walimemon.com 24
  25. 25. You have 10 seconds to estimate the answer tothe following problem:10 x 9 x 8 x 7 x 6 x 5 x 4 x 3 x 2 x 1 = _____ Wali Memon 25 walimemon.com
  26. 26. You have 10 seconds to estimate the answer tothe following problem:1 x 2 x 3 x 4 x 5 x 6 x 7 x 8 x 9 x 10 = _____ Wali Memon 26 walimemon.com
  27. 27. (Actual answer = 3628800)Estimations are biased even for absurd anchors!Is Danny older than 65?Is Danny younger than 10?How old is Danny? Wali Memon 27 walimemon.com
  28. 28. RULE: If a card has a vowel on one side,then it has an odd number on the other.Which cards do you have to turn over to knowif the rule is true? A B 1 2 Wali Memon 28 walimemon.com
  29. 29. RULE: If somebody is drinking, theymust be over 21 years of ageWhich cards do you have to turn over to knowif the rule is true?Drink Not 21 18 Drink Wali Memon 29 walimemon.com
  30. 30. People don’t want to have to change fromthe current situation, and require greatincentive to do so. Wali Memon 30 walimemon.com
  31. 31. The mean IQ of the population of 8th graders is known to be100. You have selected a random sample of 50 children fora study on educational achievements. The first child youtest has an IQ of 150. What do you expect the mean IQ tobe for the whole sample? Wali Memon 31 walimemon.com
  32. 32. What are the odds that in the next 10 years India andPakistan will get involved in a nuclear war, which willdraw in other nuclear powers such as the United Statesand Russia leading to an all out Nuclear war. What are the odds that in the next 10 years United States and Russia will be involved in an all out Nuclear War? Wali Memon 32 walimemon.com
  33. 33. 1) Prospect Theory’s Value Function, Risk Function, and Reference Points make it the premier Decision Making Theory2) Errors are an excellent way of examining how we think3) We use heuristics to lighten the cognitive load of difficult tasks4) Making your friends look irrational advances the cause of science Wali Memon walimemon.com 33
  34. 34. Wali MemonWalimemon.com Wali Memon walimemon.com 34

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