Decision-making is a daily activity, spanning across various domains such as financial, gastronomic, professional, and romantic.
A Dutch polymath, Daniel Bernoulli, provided a formula in 1738 that helps in making the right decisions: the expected value of our actions is the product of the odds of gaining and the value of that gain.
Bernoulli’s Equation
Expected value = Odds of success x Value of success.
Simple for coin tosses but complex in everyday life due to human error in estimating odds and values.
Errors in Estimating Odds
Calculating odds is seemingly straightforward but challenging in real-life situations.
People often estimate odds based on memory recall, leading to biases (e.g., dogs vs. pigs on leashes in Oxford).
Example: Overestimation and underestimation of death causes based on media coverage (tornadoes vs. asthma).
Lottery example: Winners are highlighted, but the numerous losers aren’t, skewing perception.
Errors in Estimating Value
Estimating the value of gains is more challenging than estimating odds.
Value comparison: Big Mac is not worth $25 unless the context changes (e.g., on a long flight).
People compare to the past rather than other potential investments, leading to systematic errors (e.g., salary changes, vacation package pricing).
Shifting Comparisons
Comparisons influence perceived value, but consumption doesn’t consider initial comparisons.
Example: Wine pricing and theater ticket replacement scenario.
Time and Value
People struggle with decisions involving different time frames.
Tendencies: Prefer more over less and now over later.
Example: Choosing $50 now vs. $60 in a month.
Dynamic inconsistency due to shifting comparisons over time.
Persuasion through vivid future imagery can aid in better long-term decision-making.
Questions and Discussion
Terrorism and Fear: Terrorism induces fear disproportionate to its statistical threat due to media portrayal and human psychology.
Discussion on downplaying media portrayal and focusing on relative threat size.
Lottery Ticket Value: Serotonin release from anticipation provides value beyond the potential financial gain.
Aging and Future Planning: Difficulty in persuading people to plan for aging due to less vivid future thinking.
Psychologists suggest imagining the future in detail to balance decision-making between near and far future.
Conclusion
Despite human errors, it is crucial to improve decision-making based on Bernoulli’s formula as humanity holds its fate in its hands.
The lecture emphasizes the need to align our decision-making abilities with Bernoulli’s insights to ensure survival and well-being.