International Law

Threats in an Abundant World

Our national gloom is real enough, but it isn't a matter of insufficient funds. It's a matter of insufficient certainty. Americans have been perfectly happy with far less wealth than most of us have now, and we could quickly become those Americans again -- if only we knew we had to.

Dan Gilbert is championing standard decision theory, arguing that the inherent failure to update our value functions according to standard decision theory is a serious error.

Gilbert has a nice a push back against current behavioral economics - which celebrates all deviations from reasonable behavior. Gilbert makes some important observations about Bernoulli's decision theory: the last 200 years have given us a number of compelling stories about why we deviate from the simple ranking formula, rank of decision = chance * value of outcome. But, in the end these stories are not ones we wish to hold on to. The deviations are part of an anthropological past that did not require us to do much more than tell stories. No records of value and chances need to enter into our vocabulary on a daily basis.

Gilbert cogently makes the point that we are bad at evaluating both chance, substituting ease of recollection for calculation, and valuing outcomes, by using comparative frames which won't exist after we make our choice.

For example, we may pick the larger stereo system because as compared to the smaller sound system, it simply doesn't compete.

But, at home, there is not smaller sound system to highlight the larger system's comparative advantage. This is an important observation: we choose between comparable objects, a decision complete with framing effects: but reasonable choice requires that what we end up is an outcome that sells itself because that outcome must stand alone once we pick it from the others.

Full post as published by Misleading Advertising Law on May 21, 2009 (boomark / email).