Psychologists spend their time devising subtle experiments and analyzing the results their subjects produce, but maybe they should spend some time analyzing themselves, columnist John Kay suggested in the Financial Times of London on Tuesday.  --  "Very few people read 'a bird in the the hand' when you have written 'a bird in the hand,' but the converse misreading is very common.  --  But who is actually making the mistake?  Doesn’t the fault lie with the experimenter who asks his subjects to parrot a meaningless phrase, rather than the subject who valiantly finds sense in nonsense? . . . If you approached the staff and said:  'I see the sign for buses to Stanstead Airport, but where do I find the buses to Stansted Airport?' you would rightly be regarded as a pedantic fool rather than a careful observer." ...




By John Kay

Financial Times (London)
August 24, 2010
(see link for full article)

Read the following quickly A BIRD IN THE THE HAND.  Many people who are asked to do this say “a bird in the hand.”  Experimental psychologists use such exercises to demonstrate cognitive illusions.  The mistakes that are identified are not random, but systematic.  Very few people read “a bird in the the hand” when you have written “a bird in the hand,” but the converse misreading is very common.

. . .

Behavioral economics is often sourced to Danny Kahneman and Amos Tversky, but credit should go to the earlier work of a Frenchman, Maurice Allais.  Allais was less concerned to show that our behavior was irrational than to argue that the premises of rationality itself were irrational.  In fact, he suggested that they were part of an American conspiracy to deny the subtleties of how sophisticated people -- such as the graduates of élite French schools -- think.  He may have had a point.

Allais’ most famous experiment showed that we often treat very high probabilities very differently from certainties, although “rational” individuals would regard them as almost the same thing.  But very high probabilities often are different from certainties:  very high probabilities are usually derived from calculations whose relevance and validity are themselves uncertain.

When the credit crunch hit in 2007, a Goldman Sachs risk manager famously claimed that we were experiencing a 250-sigma event -- something unlikely to happen in the whole history of the universe.  But that was not the explanation of what had occurred.  The extreme events were not the result of an astounding freak of nature.  The very low probabilities he described were derived from the bank’s particular models of risk, which did not provide a good description of the world.

Irrationality lies not in failing to conform to some preconceived notion of how we should behave, but in persisting with a course of action that does not work.  Sometimes in modern economics and political life, there is a big difference.

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