Why the Most Important Idea in Behavioral Decision Making Is a Fallacy
blogs.scientificamerican.com
Why the Most Important Idea in Behavioral Decision Making Is a Fallacy
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Re: Why the Most Important Idea in Behavioral Decision Making Is a Fallacy
#2Loss aversion may not be a psychological phenomenon, but it is definitely a real thing in most financial markets.
The entire insurance and reinsurance industry are based on loss aversion.
Re: Why the Most Important Idea in Behavioral Decision Making Is a Fallacy
#3With anything to do with the brain (from sociology to physiatry and right through behavioral economics), we're really still deep in the dark ages. We know basically nothing and the fields themselves seem to be more about styles than objective truth or repeatability. Generously I assume that's because making measurements and doing experiments is as hard today as it was for scientists in the 10th century...
Re: Why the Most Important Idea in Behavioral Decision Making Is a Fallacy
#4Loss aversion may not be a psychological phenomenon, but it is definitely a real thing in most financial markets. The entire insurance and reinsurance industry are based on loss aversion.
But is it just protecting the organization, as one is typically paid to do, or is it an "irrational" decision? Science and math cannot tell you what the "correct" decision is without some reference goals, and the reference goals are probably subjective.
The most objective such can be that I can see is giving estimated probabilities to the owners of a company or org. Example: "Insurance policy X will reduce our estimated profits by 20%, but will also reduce our chance of going bankrupt in the next five years by 15%". Whether the owners/stakeholders want that trade-off is up to them. The universe otherwise doesn't "care" what your trade-off preferences are.
Re: Why the Most Important Idea in Behavioral Decision Making Is a Fallacy
#5Loss aversion may not be a psychological phenomenon, but it is definitely a real thing in most financial markets. The entire insurance and reinsurance industry are based on loss aversion.
Per the article, that can't be true because you need to compare a loss with a gain. When you insure yourself you are merely sharing the inevitable loss with other people so that you don't get it in one big lump.
Re: Why the Most Important Idea in Behavioral Decision Making Is a Fallacy
#6Sadly, as Kahneman now admits, many of the studies behind behavioral economics just haven't replicated.
Along with Loss Aversion, the whole idea of Priming also seems null.
Re: Why the Most Important Idea in Behavioral Decision Making Is a Fallacy
#7Loss aversion may not be a psychological phenomenon, but it is definitely a real thing in most financial markets. The entire insurance and reinsurance industry are based on loss aversion.
Insurance is about risk aversion (which is reasonable in some cases), not loss aversion (which is completely irrational)
Re: Why the Most Important Idea in Behavioral Decision Making Is a Fallacy
#8There are a number of related psychological and behavioural concepts which strike me as modestly-useful but wide-of-the-mark.
The Marshmallow Test -- an assessment of short-term vs. long-term trade-offs -- is one such case. It seems that the outcomes are far more reasonably explained by whether an individual has been exposed to a high-trust or low-trust environment, one in which promises are kept or broken. That is, even under controlled conditions, the cognitive priors the subjects bring to the experiment differ widely, and interpretations of claims differ.
Sunk cost strikes me as similar.
In the case of loss-aversion, there's the issue that under different circumstances, a given loss may represent a minor setback, an entirely inconsequential event, or a major, life-changing precipice. The distinctions are highly contextual, and depend on both personal background and circumstances.
This applies, incidentally, to organisations and firms as well as people. If you're flying along with ample cashflow, a $5 billion penalty (a magnitude recently experienced by a large tech firm) could be tolerable. If you're scating on a wing and a prayer, tight margins, and market perceptions subject to wild swings (say, as a short-term office-space "tech" startup headed by a dynamic leader with flexible moral and epistemic standards), a few well-timed blog posts might prove disruptive if not fatal.
Context matters. Discontinuities exist. Priors differ.
Re: Why the Most Important Idea in Behavioral Decision Making Is a Fallacy
#9There are a number of related psychological and behavioural concepts which strike me as modestly-useful but wide-of-the-mark. The Marshmallow Test -- an assessment of short-term vs. long-term trade-offs -- is one such case. It seems that the outcomes are far more reasonably explained by whether an individual has been exposed to a high-trust or low-trust environment, one in which promises are kept or broken. That is,…
"The Marshmallow Test -- an assessment of short-term vs. long-term trade-offs -- is one such case."
The problem with psychological research is that researchers assume they have thought of everything that could possibly occur to a subject, and that subjects take everything they are told at face value whenever necessary for the validity of an experiment.
Re: Why the Most Important Idea in Behavioral Decision Making Is a Fallacy
#10Loss aversion may not be a psychological phenomenon, but it is definitely a real thing in most financial markets. The entire insurance and reinsurance industry are based on loss aversion.
Insurance is about risk aversion (which is reasonable in some cases), not loss aversion (which is completely irrational)
I'm not sure of the difference, but before I go look for educational material on how these phrases are used, obviously(?) risk is an abstract idea that we can never actually measure or demonstrate even in retrospect, whereas losses are a fact of life that everyone experiences. So it sounds very odd on the face of it to say loss aversion is irrational and risk aversion is not.
Would you say that evolution is fundamentally irrational? It's certainly unavoidable.