Kaspar Etter and Jonas Vollmer StartupCamp Switzerland Basel, 8

Rationality
Kaspar Etter and Jonas Vollmer
StartupCamp Switzerland
Basel, 8 February 2014
Optical Illusion
Awareness may help but
does not solve the problem!
Cognitive Illusion
– We perceive the
world differently
than it actually is
– We live in a quite
distorted reality
TED Talk by Dan Ariely
☞ giordano-bruno-stiftung.ch/blog/warum-kluge-menschen-dumme-dinge-tun/
Loss Aversion
TED Talk by
Laurie Santos
You have been given $1000. Choose:
– Win $1000 with 50% (risky)
– Win $500 with certainty (safe)
You have been given $2000. Choose:
– Lose $1000 with 50% (risky)
– Lose $500 with certainty (safe)
Prospect Theory
Framing Effect
Tversky/Kahneman:
A: 72%, B: 28%
C: 22%, D: 78%
Outbreak of disease, choose between:
– A: 200 out of 600 people will be saved
– B: ⅓ pr. of saving everyone, ⅔ no one
– C: 400 out of 600 people will die
– D: ⅓ prob. nobody will die, ⅔ 600 die
Don’t trust your (moral) intuitions!
Framing Effect (continued)
Confirmation Bias
The tendency to seek evidence
consistent with a prior belief.
Overconfidence
Being overly optimistic, overestimating one's
own abilities, believing information is more
precise than it actually is.
Winner’s Curse
Especially when bidding, overconfidence
can lead to very bad outcomes (overpay).
Dunning-Kruger Effect
When you are dead, you don’t
know that you are dead. It is
difficult only for the others.
It is the same when you are stupid.
(Inability of the unskilled to
recognize their ineptitude.)
Survivorship
Bias
Availability Heuristic
If a random word is taken from an English
text, is it more likely that the word starts
with a K or that K is the third letter?
– Typical text: twice as many words that
have "K" as third letter than as the first.
– There are three times more words with
"K" in the third position than at the start.
Omission Bias
Spending
>
hurts more than
Though we know:
– Status Quo Bias
– Not-Invented-Here
– Endowment Effect
Scope Insensitivity
We spend more time
on food discounts than
on health insurance!
Prioritize!
TED Talk by Bjorn Lomborg
☞ giordano-bruno-stiftung.ch/blog/triage-entscheidungsokonomie-im-alltag/
Sunk Cost Fallacy
– A sunk cost is a retrospective cost
that has already been incurred and
cannot be recovered. (Write it off!)
– Investment decisions should only
be based on prospective costs.
– «Throwing good money after bad.»
Cognitive Biases
– Are cognitive illusions bad?
– We need a normative model:
Rational Choice Theory
– Bias is a systematic deviation,
i.e. you lose (in expectation)
☞ en.wikipedia.org/wiki/List_of_cognitive_biases: Planning Fallacy, Self-Serving Bias, …
Rationality
Achieving
your goals!
By using science and decision theory:
– Epistemic rationality: accurate beliefs
– Instrumental rationality: good strategy
Epistemic Rationality:
Bayesian Reasoning
How to update your beliefs:
TED Talk by
Tali Sharot
Pold (e|h)
Pnew (h) = Pold (h) ·
Pold (e)
Only gradual confidence possible!
Excellent article: econ.st/19QXzFe
☞ giordano-bruno-stiftung.ch/blog/das-bayestheorem-und-der-base-rate-fehlschluss/
Instrumental Rationality:
Expected Utility Maximization
E[u(x)]
u(x)
x
You
choose
between
future worlds
E[u(y)]
u(y)
y
p1
p2
E[u(z)]
u(z)
z
p3
Now
You have a utility function,
whether you like it or not!
☞ giordano-bruno-stiftung.ch/blog/was-ist-dererwartungswert-und-warum-soll-ich-ihn-maximieren/
Applied Rationality
– System 1 vs. System 2 (Daniel Kahneman)
– Automatic vs. Manual Mode (Joshua Greene)
– Train the operator! Know
when automatic modes
are adequate and when
you better switch to
manual modes.
General Techniques
–
–
–
–
–
–
Always imagine the opposite!
Vary the situation in relevant ways!
Look at a problem like an outsider!
Be honest with yourself; improve!
Get feedback; update your beliefs!
Most importantly: Try new things!
e
Lean Startup
Cycle
f
i
L
Recommendations
More Information
www.rationality.ch
kaspar.etter@gbs-schweiz.org
jonas.vollmer@gbs-schweiz.org
Who is Giordano Bruno?
– Dominican friar in Naples, 1548 – 1600
– Cosmological theory: sun is just a star
– Found guilty of heresy by the
Roman Inquisition and burned
– Martyr for free thought and
modern scientific ideas though
he had a pantheistic world view