212 - Choices

You have two decisions to make, A or B and C or D

Choose between

A, a sure gain of $250,  and

B, a 25% chance to gain $1000 and a 75% chance to gain $0.


Separately, choose between

C, a sure loss of $750,  and

D, a 75% chance to lose $1000 and a 25% chance to lose $0.

From here Tversky & Kahneman 1981 p454:


Of 150 respondents, responses were, in percentage terms  A:B  84:16, risk averse and C:D 13:87, risk seeking.  Choices made were A&D 73%, B&C 3%. Given only the choices A&D and B&C, 100% go for the first.


Several experiments have been done that show that we are risk averse when it comes to gain and risk seeking over loss. At least two thirds of us will take the smaller certain gain. And the same proportion will opt for the chance to lose nothing, even when the alternative is twice as expensive. Further questioning shows that the responses are insensitive to the changes in wealth, while being very sensitive to gains or losses.


This might then translate to the Brexit referendum: Remain offers a small chance of improvement and no new losses. Leave offers a chance for improvement in some areas of concern – and for those who included it in their thinking, likely losses of wealth. Since the swing was away from Remain, the referendum expressed significant opinion that the perceived wrongs of EU behaviour and patterns of movement were worth some costs to the nation. What was wrong about the campaign was that the money arguments focused on not-paying money to Europe, not on the costs of leaving Europe. The dearth of trustworthy data moved the population at large towards Leave. The choice at the time was largely seen as worth the risk because whatever the likely losses were, they had been argued into irrelevance.


The matter that is confusing is that, from a non-emotional perspective the two situations might be seen as identical. In Tversky and Kahneman’s work they moved to looking at life rather than money in problems 5&6:


The framing is that the nation is faced with the prospect of a disease, expected to kill 600 people. Problem 5 presents as lives saved:

A saves 200,

B saves 600 at 1/3 probability or none at 2/3 probability.



Problem 6 gives the same choices but expressed as deaths;

C will kill 400 and

D gives 1/3 chance no-one dies and 2/3 that 600 die.


Unsurprisingly the choice is A over B at 72:28%. But the second set of responses

say take D over C, 78:22%.  Do you see this as consistent or not? Surely these are identical problems with almost equally opposite decisions made. There is a 6% difference leaning towards D (and hence B), to take the risk of there being 600 deaths or none, the all or nothing choice. It would appear that the difference is a reflection of the people who do see the problems as equivalent.


There are immediate consequences for selling. If there is a difference between use of cash or a credit card, then the lobby for credit cards will argue that there is a cash discount, not a credit surcharge. This is why we respond to declared discounts, even if the base price has been moved so that there is only a tiny difference between the discounted offer and the expected price a few weeks earlier. The research for this was done in the 1950s, as described in the Hidden Persuaders by Jack Vance.


So, this is all about how the problem is framed. This is a basis of spin.


An example is easily found in pay rates. In a deflationary environment, no-one is going to be happy at any reduction in pay, not even in anticipated increases being reduced; similarly in an inflationary environment, any pay increase will be welcomed even if in real terms the gain is small. This is called money illusion.

A study by Kahneman, Knetsch and Thaler posed a company making small profit, in a community with substantial unemployment. Case 1: there is no inflation, pay will fall by 7%; Case 2 inflation is 12%, pay will go up by 5%.  While the loss of real income is virtually identical, responses can be described as unfair or very unfair, 62% for case 1 and 22% for case 2. What’s mine is mine: what I don’t have I won’t worry about. What we learn is that we will seek risk when contemplating loss, which in turn means that in disputes about loss, the negative consequences of deadlock are willingly contemplated. Thus there is an obstacle to bargaining when my concessions are perceived by me as losses and your concessions are perceived by me as gains; the inequality of perception negatively affects the negotiation. Imagine that we both rate concessions lost as twice the value of concessions won; then the difference between positions is at four to one and very difficult to resolve. One can avoid this perception by characterising things as bargaining chips whose ownership is irrelevant.


In general one concludes that rational choice is made when the situation is sufficiently transparent, but is increasingly unlikely as transparency vanishes. Which perhaps means that politically there is advantage to be had in muddying the water, in distracting the argument from any and every area of weakness, for the more ‘complicated’ the situation is presented, the more likely that you are to win the argument with force of personality. Arguments will be won by framing the result in ways that support whichever is more in your interests, the risk-averse or risk-seeking.


Choice Theory says:

  1. 1All that humans do is behave.
  2. 2The behaviour exhibited by humans is chosen.
  3. 3All humans are genetically driven to satisfy their five basic needs – survival, love and belonging, power, fun, and freedom.


It also gives us ten axioms:

  1. We can only control our own behaviour – no one else’s.
  2. We can only give information to another person.
  3. All long-lasting psychological problems are linked to relationship problems.
  4. Our relationship problems are part of our present lives.
  5. The past shapes us into the individuals we are today. However, we can only satisfy our needs and keep satisfying them in the future.
  6. We satisfy our needs by keeping in mind the pictures of our Quality World.
  7. Humans can only behave.
  8. Acting, thinking, feeling and physiology make up total behaviour.
  9. The entire behaviour is chosen by the individual, but only acting and thinking can be controlled, while feeling and physiology can be altered indirectly by controlling the acting and thinking components.
  10. Total behaviour is explained by verbs and named by the part that is most easily recognisable.


Talking to my brother (yes, an unusual event) about the 2008 crisis, his take was largely different from mine. As he said at a later point in the conversation, If people are asked a question in an open oral/aural environment, then the first answer strongly affects all answers. He referred to Kahneman, who I subsequently have looked up properly. I’d heard of him and his work, but not studied it in any sense properly. I do so(me of that) here.







DJS 20161125




Quotes from abstracts:

Improving assessment tasks through addressing our unconscious limits to change

"Where a course and its assessment have been 'inherited' from another teacher, it might be presumed that the existing assessment was well thought through previously and that further work on it is not warranted. Finally, there may be too much uncertainty about whether the benefits of alternative assessment tasks will accrue in practice; improving assessment often involves adopting methods that a teacher has not tried before, which therefore entail some risk, and which may lead to regret if the new tasks are not sufficiently effective (Kahneman and Tversky 1982a; Kahneman 2011, 346–349). The combination of factors supporting the status quo leads to a rather discouraging conclusion: the range of explanations for the existence of status quo bias … suggests that this phenomenon will be far more pervasive in actual decision making than the experimental results alone would suggest. "

At Least I Tried: The Relationship between Regulatory Focus and Regret Following Action vs. Inaction

"Finally, the interaction effect that was found between the trigger for change and regulatory focus calls for future research to explore whether (and in what conditions) a trigger for change, which signals deviation from the norm, increases the impact of individual differences on regret feeling. APPENDIX: THE SCENARIOS USED IN THE EXPERIMENT Scenario 1: Stock Investment (Kahneman and Tversky, 1982) Scenario 2: Soccer Teams (Zeelenberg et al., 2002) Jacob and Noah are both coaches of a soccer team. Jacob is the coach of team A, and Noah is the coach of team B. Both coaches lost the prior game with a score of 4?0. "

Norm theory and the action-effect: The role of social norms in regret following action and inaction

"The widely replicated classic action-effect posits that negative outcomes resulting from action are regretted more than when resulting from inaction (Kahneman & Tversky, 1982). But, social norms matter. "




https://www.researchgate.net/publication/232562854_The_Psychology_of_Preferences

http://link.springer.com/chapter/10.1007/978-3-642-70634-9_6#page-1

https://www.cleverism.com/psychology-of-choice/


TED talks : Professor Sheena Iyengar on her book The Art of Choosing.

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© David Scoins 2017