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Exactly. I've often felt that a lot of the "wow humans are so irrationally risk-averse when it comes to money" conclusions that some researchers make are suffer

Exactly. I've often felt that a lot of the "wow humans are so irrationally risk-averse when it comes to money" conclusions that some researchers make are suffering from limitations of extremely limited models. For example, imagine a stranger comes up to you on the street and offers you a coin game, where if you win you gain $1 billion, but if you lose you owe him $1 million. The simplified model would claim that you should play the game because the expected value is positive. A more nuanced model would understand that being that much in debt would be a lot more suffering for me than the offset from whatever I'd do with a billion dollars. Even if the coin was weighted more in my favor, and the penalty was less, an even more nuanced model would recognize that I'm probably doing OK enough in my life with the money I have and that anything to chip away at that is an unnecessary risk. And then a model that even more completely captures the interplay of reasoning that humans do would acknowledge "wait a second, who the hell is this random stranger offering me a devil's bargain?" The researcher with a simple model would say "oh, just ignore that, just take the situation at face value," but that's never how any decision is made. Our priors for "suspicious people offering bargains too good to be true are actually trying to cheat you somehow even if you don't know how" is very high. This is embedded in cultural/religious parables that teach "you do not make deals with clever demons," and because the culture that taught that has survived and persisted over time, it's probably a good prior to hold onto. All that complexity is lost if you only think in simple terms of expected value and single-iteration games.

OscarCunningham 9y ago
I think you're giving researchers too little credit in your first example. They do at least know that rational agents maximise expected utility, not just expected money. And then whenever they do a study they are very careful to fully convince subjects that there is no trickery going on. And then when interviewed the subjects don't say "I suspected trickery". So I think that such studies are justified in concluding that the subjects are acting irrationally. >Our priors for "suspicious people offering bargains too good to be true are actually trying to cheat you somehow even if you don't know how" is very high. This is embedded in cultural/religious parables that teach "you do not make deals with clever demons," and because the culture that taught that has survived and persisted over time, it's probably a good prior to hold onto. Right, right. But the question of "why do people make irrational decisions?" is exactly what the researchers are studying. They agree with you! The answer is that decisions which are irrational in one domain would be rational in the domain we were designed for.
bluecalm 9y ago
>>The simplified model would claim that you should play the game because the expected value is positive. No, it wouldn't. Humans are not maximizing EV of money won but utility of that money. This is fundamental to economic models which Taleb is criticizing. >>All that complexity is lost if you only think in simple terms of expected value and single-iteration games. It isn't lost unless you are for some strange reason maximizing expected amount of money which no one sane does (even people who don't understand what expected value is in the first place). If the game is single iteration or multi-iteration doesn't matter either, you just make the best play at every point and it doesn't change no matter if you will get a chanc to make another bet or not.

OscarCunningham 9y ago

I think you're giving researchers too little credit in your first example. They do at least know that rational agents maximise expected utility, not just expected money. And then whenever they do a study they are very careful to fully convince subjects that there is no trickery going on. And then when interviewed the subjects don't say "I suspected trickery". So I think that such studies are justified in concluding that the subjects are acting irrationally. >Our priors for "suspicious people offering bargains too good to be true are actually trying to cheat you somehow even if you don't know how" is very high. This is embedded in cultural/religious parables that teach "you do not make deals with clever demons," and because the culture that taught that has survived and persisted over time, it's probably a good prior to hold onto. Right, right. But the question of "why do people make irrational decisions?" is exactly what the researchers are studying. They agree with you! The answer is that decisions which are irrational in one domain would be rational in the domain we were designed for.

bluecalm 9y ago

>>The simplified model would claim that you should play the game because the expected value is positive. No, it wouldn't. Humans are not maximizing EV of money won but utility of that money. This is fundamental to economic models which Taleb is criticizing. >>All that complexity is lost if you only think in simple terms of expected value and single-iteration games. It isn't lost unless you are for some strange reason maximizing expected amount of money which no one sane does (even people who don't understand what expected value is in the first place). If the game is single iteration or multi-iteration doesn't matter either, you just make the best play at every point and it doesn't change no matter if you will get a chanc to make another bet or not.