How To Do Exactly the Right Thing at All Possible Times

or

The Idea That Changed the WorldNothing

^____

E(u | p, X) = x X p(x)u(x)

Expected Value =

(Odds of Gain) X (Value of Gain)

E(u | p, X) = x X p(x)u(x)

1/2 X $10

If it comes up heads I’ll give you $10. Should you pay $4 to play?

= $5

Expected Value =

(Odds of Gain) X (Value of Gain)

Yes!

Errors in Odds Errors in Value

Expected Value =

(Odds of Gain) X (Value of Gain)

Expected Value =

(Odds of Gain) X (Value of Gain)

Errors in ValueErrors in Odds

Errors in Odds

Are there more dogs or pigs on leashes in Oxford?

Errors in Odds

_ _ R _ R _ _ _

BARE, FORT, PARK...

Are there more 4-letter English words with R in the 3rd or 1st place?

Errors in OddsErrors in Odds

RING, RANG, RUNG...

Cause       Estimate   Actual

Tornado   564    90

Fireworks  160    6

Asthma   506    1886

Drowning   1684    7380

Per 200 million US residents per year

Errors in OddsErrors in Odds

Cause       Estimate   Actual

Tornado   564    90

Fireworks  160    6

Asthma   506    1886

Drowning   1684    7380

Per 200 million US residents per year

Errors in OddsErrors in Odds

>>>

>

Errors in OddsErrors in Odds

Errors in OddsErrors in Odds

Errors in OddsErrors in Odds

Errors in OddsErrors in Odds

Errors in Odds

?Errors in Odds

• 10 tickets

• $1 to play

• $20 if you win

Errors in OddsErrors in Odds

1/10 X $20 = $2

Errors in OddsErrors in Odds

1/10 X $20 = $2

Expected Value =

(Odds of Gain) X (Value of Gain)

Errors in Odds Errors in Value

Errors in Value

Is this Big Mac worth $25?

Errors in Value: Comparing with the Past

COMPARING WITH

the Past instead of the Possible

$60K in Year 1

$50K in Year 2

$40Kin Year 3

$35Kin Year 1

$45Kin Year 2

$55Kin Year 3

$15

0K

$13

5K

Errors in Value: Comparing with the Past

A $2000 Hawaiian vacation package is on sale for $1600. Would you buy it?

Errors in Value: Comparing with the Past

A $2000 Hawaiian vacation package is on sale for $700. You think it over for a week, and by the time you get to the ticket agency, the best fares are gone and the package will now cost you $1500. Would you buy it?

Errors in Value: Comparing with the Past

$2000 $1600

Errors in Value: Comparing with the Past

$2000 $700 $1500

Yes

No

You are on your way to the theatre. In your wallet you have a ticket for which you paid $20, and a $20 bill. When you arrive at the theatre you discover that you’ve somehow lost the ticket.

Would you spend your remaining $20 on a ticket?

Errors in Value: Comparing with the Past

No

You are on your way to the theatre. In your wallet you have two $20 bills. When you arrive at the theatre you discover that you’ve somehow lost one of the bills.

Would you spend your remaining $20 on a ticket?

Errors in Value: Comparing with the Past

Yes

The Lost MoneyThe Lost Ticket

X X

Errors in Value: Comparing with the Past

Errors in Value

COMPARING WITH

the Possible instead of the Past

COMPARING WITH

the Past instead of the Possible

Errors in Value: Comparing with the Possible

$8.00 $27.00 $33.00

Errors in Value: Comparing with the Possible

$8.00 $27.00 $33.00 $51.00

Errors in Value: Comparing with the Possible

Errors in Value: Comparing with the Possible

1

2

3

4

5

6

7

P r e d i c t i o n E x p e r i e n c e

C h o c o la t eS p a m

L i k i n g o f C h ip s

You want to buy a car stereo. The dealer near your house sells it for $200, but if you drive across town, you can get it for $100. Would you drive to get 50% off (saving $100)?

Errors in Value: Comparing with the Possible

Yes

You want to buy a car with a stereo. The dealer near your house sells it for $31,000, but if you drive across town, you can get it for $30,900. Would you drive to get .003% off (saving $100)?

Errors in Value: Comparing with the Possible

No

Errors in Value: Comparing with the Possible

A B C D

Errors in Value: Comparing with the Possible

TODAY TOMORROW NEXT WEEK NEXT YEAR

Errors in Value: Comparing with the Possible

$60 NOW

$50 NOW

Errors in Value: Comparing with the Possible

OR

Problem #1

• More is better than less

Errors in Value: Comparing with the Possible

$60 NOW

$50 NOW

Problem #1

$60NOW

Errors in Value: Comparing with the Possible

OR

Problem #2

$60 In 1

month

$60NOW

Errors in Value: Comparing with the Possible

• Now is better than later

Problem #2

$60 In 1

month

$50NOW

Errors in Value: Comparing with the Possible

Now is better than later

More is better than less

OR

BUT

Problem #3

$60 In 1

month

$50NOW Impatience

Errors in Value: Comparing with the Possible

Now is better than later

More is better than less

Problem #3

$60 In 1

month

$50NOW Impatience

Errors in Value: Comparing with the Possible

Now is better than later

More is better than less

OR

$50 In 12

months

$60 In 13

months

$60 In 1

month

$50NOW

$50 In 12

months

$60 In 13

months

Impatience

Patience

Errors in Value: Comparing with the Possible

Now is better than later

More is better than less

$60 In 1

month

$60

$60

$60

$60

$60

$50

$50

$50

$50 $50

NOW 1 MONTH 12 MONTHS 13 MONTHS

SU

BJE

CTI

VE

VA

LUE

30 Days 30 Days

Errors in Value: Comparing with the Possible

Impatience

Patience

Errors in Value: Comparing with the Possible

Illusions of Spatial Perspective

Errors in Value: Comparing with the Possible

1 ft 21 ft 2000 ft 2021 ftAs seen from

Illusions of Spatial Perspective

Errors in Value: Comparing with the Possible

1 ft 21 ft 2000 ft 2021 ft

20 Feet 20 Feet

As seen from

$60

$60

$60 $60

$60

$50

$50 $50

$50

$50

NOW 1 MONTH 12 MONTHS 13 MONTHS 2O YEARS

SU

BJE

CTI

VE

VA

LUE

Illusions of Temporal Perspective

Errors in Value: Comparing with the Possible

As seen from

$60

$60

$60

$60

$60

$50

$50

$50

$50 $50

NOW 1 MONTH 12 MONTHS 13 MONTHS

SU

BJE

CTI

VE

VA

LUE

Illusions of Temporal Perspective

30 Days 30 Days

Errors in Value: Comparing with the Possible

As seen from

If we’re so stupid, then how did we get to the moon?

Conclusion