1. Prospection

2. “Think” –Aretha Franklin
Prospection
“Think” –Aretha Franklin

3. “Forever Is Tomorrow Is Today” –David Gray
Prospection
“Forever Is Tomorrow Is Today” –David Gray

4. “things that have not yet come to pass”
PERCEPTION
PRESENT
LEARNING & MEMORY
“things that are”
“things that were”
“things that have not yet come to pass”
PAST
FUTURE ∞
TIME

5. Prospection is the human ability to think flexibly about possible, often “far-future” events

7. Expected Utility Theory
John von Neumann
Oskar Morgenstern

8. Expected Utility Theory
Expected Value =

9. Odds of Gain x Value of Gain
Expected Utility Theory
Expected Value =
Odds of Gain x Value of Gain

10. = $4 = $5 Expected Value = Odds of Gain x Value of Gain (1) x ($4)
Expected Utility Theory
If it comes up heads I’ll give you $10. Should you pay $4 to play?
Expected Value =
Odds of Gain x Value of Gain
(1) x ($4)
= $4
(1/2) x ($10)
= $5

11. = $4 = $1.67 Expected Value = Odds of Gain x Value of Gain (1) x ($4)
Expected Utility Theory
If it comes up 2 I’ll give you $10. Should you pay $4 to play?
Expected Value =
Odds of Gain x Value of Gain
(1) x ($4)
= $4
(1/6) x ($10)
= $1.67

12. Odds of Gain x Value of Gain
Expected Utility Theory
If you pick all 6 numbers, I’ll give you $50 million. Should you pay $1 to play?
Expected Value =
Odds of Gain x Value of Gain
Jackpot must be $175 million before the expected value = $1
(1/175,711,536) x ($50,000,000)
= $0.23

13. Expected Utility Theory

14. Odds of Gain x Value of Gain
Expected Utility Theory
Errors of odds
Errors of valuation
Expected Value =
Odds of Gain x Value of Gain

15. Errors of odds Errors of valuation Today’s gameplan
sample size neglect
gambler’s fallacy
availability bias
planning fallacy

16. Today’s gameplan

17. Errors of odds
TTHTHHHTHTHHHHHHHHTTTHHHHHHHHTHHHHTTHHHHHTTTTTTHTHTHHHHHTTTHHTHHHHTHTTTTTTTTHTTTHHHHTTTTTHHHTHHHTHHTT

18. Most people say “They are the same”
Errors of odds
45 babies are born each day in a large hospital and 15 in a small hospital. Each hospital records the days on which more than 60% of the babies born were boys. Which hospital recorded more such days in 2009?
Most people say “They are the same”

19. Sample Size Neglect Errors of odds Proportion of “heads” 40 flips 0.52
0.53
0.48
0.50
0.51
0.47
400 flips
0.50
0.49
0.51
4,000 flips
0.50
40,000 flips
0.53
0.40
0.50
0.33
0.62
0.45
0.42

20. Gambler’s fallacy Errors of odds
A fair coin is flipped 9 times. In which series is a HEAD more likely than a TAIL on the 10th flip?
T T T T T T T T T ____
H H H H H H H H ____

21. Gambler’s fallacy Errors of odds
The belief that the likelihood of a chance event is influenced by the nature of the events that preceded it.

22. Gambler’s fallacy Errors of odds
An .800 free-throw shooter shoots 9 free throws. In which series is a HIT more likely than a MISS on the 10th shot?
H H H H H H H H H ____
M M M M M M M M M ____

23. So How Do We Calculate Odds?
Errors of odds
So How Do We Calculate Odds?
Are you more likely to see a dog or a pig on a leash in Cambridge?

24. _ _ R _ R _ _ _ Availability bias So How Do We Calculate Odds?
Errors of odds
So How Do We Calculate Odds?
Are there more 4-letter English words with R in the 3rd or 1st place?
Availability bias
_ _ R _ R _ _ _
BARE, FORT, PARK RING, ROPE, ROOT...

25. Errors of odds
Availability bias

26. Errors of odds
Availability bias

27. The Planning Fallacy Errors of odds
Big Dig estimated to cost $2.8 billion in 1985, but has cost $14.6 billion as of 2006.

28. Errors of odds
The Planning Fallacy

29. Errors of odds Errors of odds Errors of valuation Errors of valuation
Today’s gameplan
Errors of odds
Errors of odds
Errors of valuation
Errors of valuation
sample size neglect
gambler’s fallacy
availability bias
planning fallacy

30. Categorical perception in phonology

31. Errors of odds Errors of odds Errors of valuation Errors of valuation
Today’s gameplan
Errors of odds
Errors of odds
presentism
relative valuation
gain/loss nonlinearity
temporal discounting
Errors of valuation
Errors of valuation
sample size neglect
gambler’s fallacy
availability bias
planning fallacy

32. Errors of valuation
Presentism

33. Errors of valuation
Presentism

34. Errors of valuation
Presentism

35. Relative valuation Errors of valuation $135K $150K Year 3 $55K $40K

36. Gain/Loss nonlinearity
Errors of valuation
Gain/Loss nonlinearity
Daniel Kahneman
Amos Tversky

37. Gain/Loss nonlinearity
Errors of valuation
Gain/Loss nonlinearity
OBJECTIVE
VALUE
+$10 +
-$10
SUBJECTIVE VALUE
The Domain
of Gain
of Loss

38. Gain/Loss nonlinearity
Errors of valuation
Gain/Loss nonlinearity
SUBJECTIVE VALUE +
+$10
-$10 +
OBJECTIVE
VALUE
+$10
-$10

39. Gain/Loss nonlinearity
Errors of valuation
Gain/Loss nonlinearity
SUBJECTIVE VALUE +
It curves!
-$10 +
OBJECTIVE
VALUE
+$10

40. The curves asymptote Errors of valuation
You want to buy a car stereo. The dealer near your house sells it for $248, but if you take the T to Wonderland, you can get it for $148. Would you spend two hours on the T to save $100?

41. The curves asymptote Errors of valuation
You want to buy a car with a stereo. The dealer near your house sells it for $38,948, but if you take the T to Wonderland, you can get it for $38,848. Would you spend two hours on the T to save $100?

42. The curves asymptote + + Errors of valuation SUBJECTIVE VALUE
OBJECTIVE
VALUE

43. The curves asymptote + + Errors of valuation -$38948 -$38848 -$248
SUBJECTIVE VALUE +
-$248
-$38948
-$38848
-$148 +
OBJECTIVE
VALUE

44. The curves asymptote + + Errors of valuation -$248 -$38948 -$38848
SUBJECTIVE VALUE +
-$248
-$38948
-$38848
-$148 +
OBJECTIVE
VALUE
-$148
-$248
-$38,848
-$38,948

45. It’s steeper for losses than gains
Errors of valuation
Losses loom larger than gains
SUBJECTIVE VALUE +
It’s steeper for losses than gains
-$10 +
+$10
OBJECTIVE
VALUE

46. Losses loom larger than gains
Errors of valuation
Losses loom larger than gains

47. Losses loom larger than gains
Errors of valuation
Losses loom larger than gains
The Endowment Effect
Objective Value = $5.00
Sellers Offer = $7.12
Buyers Bid = $2.57

48. Losses loom larger than gains
Errors of valuation
Losses loom larger than gains
The Endowment Effect
SUBJECTIVE VALUE +
Objective Value = $5.00
Sellers Offer = $7.12
Buyers Bid = $2.57
+$2.57
+$5.00 +
-$5.00
OBJECTIVE
VALUE
-$7.12

49. Errors of valuation
Temporal discounting

50. > > ? $12 $10 now in 1 week $10 now $12 in 1 week
Errors of valuation
>
$12
$10
more is better than less
>
now
in 1 week
sooner is better than later
$10 now
$12 in 1 week ?

51. $12 in 1 week $10 now $12 in 53 weeks $10 in 52 weeks
Errors of valuation
Temporal discounting
$12 in 1 week
$10 now
$12 in 53 weeks
$10 in 52 weeks
vs.

52. Errors of valuation
Temporal discounting

53. Odds of Gain x Value of Gain
Whence errors?
Errors of odds
Errors of valuation
Expected Value =
Odds of Gain x Value of Gain

54. Whence errors?

55. Whence errors?