Wednesday, April 29, 2015

Harvard Business Review: From "Economic Man" to Behavioral Economics

It should be well-known around these parts by now that I am interested in decision-making, behavioural economics, and their various offshoots. I also happen to read the Harvard Business Review from time to time, being my good Ivy League alumnus self. So when I saw HBR's Executive Editor of its New York group, Justin Fox, had just written a piece on the history of behavioural economics for the May 2015 issue, I couldn't help but give it a read.

WARNING: The above link might use up one of your five free HBR articles per month. I assure you, it's worth it. Besides, an advantage of posting this entry near the end of the month is you can reset that clock on May 1.

"From 'Economic Man' to Behavioral Economics" gives a great overview of the directly Jon von Neumann-Oskar Morgenstern-influenced decision analysis camp, and the more recently developed Kahneman-Tversky prospect theory camp (dubbed "heuristics and biases" in the article). It tracks early names like Ward Edwards I had only seen in passing. It also includes names, like Richard Zeckhauser, of people whose works I haven't yet read. It is accessible for the business-minded among us and I presume at least readable to everyone else.

I tend more toward the belief that people are rational, and that utility manifests itself in more mysterious ways than an arithmetic calculation all the time. For example, rather than call someone's preference to take a guaranteed $46 rather than have a 1/2 chance of winning $100 (expected value $50) irrational, I would simply say the person is willing to pay at least $4 to not have to take the chance. There is thus a utility of security that goes beyond an insurance company-style expected value number crunching in human decision making - but that does not render us irrational. I always liked economics better than psychology anyway.

Tuesday, April 28, 2015

April's Book: How to Not Be Wrong

How to Not Be Wrong by Jordan Ellenberg
Math (2014 - 322 pp.)

How to Not Be Wrong is a bluntly titled book that, to borrow a phrase from Cleveland-based paint giant Sherwin-Williams, does exactly what it says on the tin. It is a book on how math can be applied in everyday life, divided into five easy parts: Linearity, Inference, Expectation, Regression, and Existence. The opening section, "When Am I Going to Use This?", shows the kind of jocular spirit Jordan Ellenberg has in writing the book. It is very clear he does not intend a dry academic textbook. He has succeeded in making math accessible to anyone willing to read what he has to say.

Some of the book's most entertaining moments are when seemingly bizarre occurrences have logical, sensible mathematical explanations upon a little thought. Three of these occur in the Inference chapter, which focuses on probability and Bayes' theorem. The Baltimore stockbroker story illustrates the problem of information asymmetry applied to a surprisingly high number of observed events. "Dead Fish Don't Read Minds" shows the hilarious consequences of failing to account for a control group. "The International Journal of Haruspicy" is perhaps the starkest example of confirmation bias I have ever seen; a scientist hoping to find predictions of world events in sheep entrails can, well, find those predictions if he or she looks hard enough. Bonus points if you knew the word "haruspicy" in advance, which I did not.

Ellenberg's frequent use of charts and graphs makes the book more fun. He scrawls them just as professionally as is necessary to explain his point, with axes often pointing off in not-so-perfect-right-angle directions. In "Galton's Ellipse", in the Regression section, Ellenberg explains the trigonometric foundation of correlation in such clear words and pictures I felt sheepish* having either not known it before or having forgotten it. "Does Lung Cancer Make You Smoke Cigarettes?", unsurprisingly in the Regression section, speaks to the fallacy of confirming the antecedent (i.e. X --> Y, therefore Y --> X), and then shifts gears to show in very simple visual terms why unattractive ugly men go unnoticed. Perhaps best is when the charts and graphs combine with pop culture. Ellenberg's opening chapter, "Less Like Sweden", explains the Laffer curve in a simple graph with support from the classic movie Ferris Bueller's Day Off.

I would love to read an advanced version of How to Not Be Wrong, incorporating concepts my exposure to statistics and economics has given me a lifelong interest in. Unfortunately, I doubt this is forthcoming. The whole thing makes me want to get my PhD and write the How to Not Be Wrong/Freakonomics of game theory.

Even if you know all the math in here, How to Not Be Wrong is a fun read. I finished it two weeks ago, making this the longest between finishing and posting about a book for this blog. For any given person, there will probably be something new to discover. For me, it was the life of Francis Galton, who was simultaneously ahead of everyone else in statistical research yet stuck in his time regarding eugenics. For the record, yes, you will use all the math in this book, and no, that will not only be the case if you become an engineer, actuary, or whatever other career that chart in my old high school mentioned.

Ease of Reading: 6
Educational Content: 9

*Is this a haruspicy joke? I think we should say it is.

Sunday, April 19, 2015

The Twilight Zone, 55 Years Later: A Nice Place to Visit

***SPOILER ALERT in this entire post but this show is so old that shouldn't matter a ton***

The classic Twilight Zone episode "A Nice Place to Visit" aired on April 15, 1960, almost 55 years ago to this day. The episode contemplates the unhappy fate of a thief who is shot by police and then wakes up to find he gets whatever he wants. Money, gambling winnings, a new house, new clothes, everything. None of it earned, it isn't what he'd hoped. After all, what's the fun in winning a rigged game?

This led me, in true thought experiment fashion, to think of what I'd do if I suddenly awoke in such a world. I certainly wouldn't do what protagonist Rocky Valentine did to find himself so bored all the time.

For starters, I wouldn't do anything competitive or driven by chance. Competitive games are hopelessly boring when you know the outcome in advance, whatever it may be, as anyone who's seen scores before tape-delayed sporting events knows. Uncertainty is the whole point of chance, to be tautological. There's no fun in rolling a die or drawing a card when you know what the outcome is.

What are things, then, that are enjoyable even when you know the outcome? The answer to that question could turn Rocky's Hell into Heaven.

If I lived in a world where I always got my way, I'd read and write even more than I do now. I presumably wouldn't feel like I'd read any book before. I certainly wouldn't be able to feel like I'd written anything before writing it. I'd listen to and make even more music than I do now. This uses exactly the same logic, with the added bonus that I can enjoy listening to or playing the same songs again and again. Really, anything creative would be the ticket.

The added quirk - that Rocky can't see his old friends because they're no longer real - I can't solve. I'd still seek whatever companionship the world could give me.

Saturday, April 18, 2015

Resolution Successful of this past Tuesday. Resolving to buy at least six pairs of socks in 2015 was that unimportant. I've actually bought nine pairs!

On a related/unrelated note, I feel the same (already target) weight I was on New Year's and I haven't run any marathons. See the magic of trivial resolutions?

Sunday, April 5, 2015

Celebrate with the Easter Dogs!

Everyone loves the Easter Bunny. (Well, maybe not quite everyone.) Spring is a great time to fawn over all kinds of adorable animals, though - like dogs - and Easter is far from an exception. Here's a brief sampling of North American temperate-zone canines all decked out for the day of Christ's rising, in photos and drawings:

The Easter Fox
(The Rustic Fox)

Foxes do love eggs, as likes to point out.

The Easter Wolf
(Adela Bishop and Carole Czapla)

Maria Ferguson of Everything Wolf confirms that wolves are quite fond of Easter eggs themselves.

Not only wildlife get into the spirit, though...

German shepherds appear better suited for Easter bunny bodyguard (bunnyguard?) duty, whether the bunny is real*...

...or just made of chocolate.**

Happy Easter!

*For the love of all that is good in this world, don't create this situation unless the animals know each other.^
**As above but make sure the dog doesn't perceive the chocolate as food.^
^Neither of the above are actually meant to be dog ownership advice, more so a "don't try this at home"-style disclaimer.