Expected Odds x Expected Value

May 23, 2006

This is the formula that Daniel Gilbert (Harvard professor and author of Stumbling on Happiness) told us was the centuries old formula for doing precisely the right thing at precisely the right time. I guess people had more noble ambitions back then.  Every gamble, risk, action, goal, or even thought has an expected chance of happening and an expected value if that thing actually happens. The premise of his talk yesterday was that though the formula seems simple, the brain is unfortunately pretty awful at doing these calculations in real life.

Errors of Odds

We don't store odds in our brain very easily. Instead of storing something like "there's a .001% chance of being struck by lightning" the brain stores "I can remember 2 stories of people being struck by lightning within the last 2 years". Events or information that is easy to recall will have inflated odds (disasters, news stories, and other information that is easy to recall, like words rhyming with "at") while events and information that is difficult to recall will have deflated odds (death by boring events like asthma, drowning in a pool, etc, stories that aren't good news, and other information that is difficult to recall like words that have an "r" as the third letter).

Your ability to predict the possibility of something happening is going to be wrong almost all of the time due to the way our brain stores odds. We are designed to overaggressively seek or avoid memorable events and information while being blind-sided by unmemorable events and information.

Errors of Value

As bad as we are about storing odds, we are even less skillful at predicting how much something is worth. We think we will be happier when our goals are realized than we actually are, and we think we'll be sadder when fortune fails us than we actually are. This is because we make decisions of value through comparison rather than by trying to determine objective value. We go to the coffee shop that serves the cheapest or the best coffee and never consider if it is actually worth its price. What does "worth its price" even really mean? Much more powerful than the idea of how much $1.89 is worth is the idea that $1.89 is less than the $2.25 that coffee costs across the street, and much less than the $3.50 that it would cost to get a mocha. We are therefore getting a deal. This is easily manipulated by well known tricks of retailers who put "aspirational brands" near commodity brands in order to make people more comfortable with purchasing the high-end commodity brand.

Implications

I came away from this talk (actually, it was the second time I saw the talk… I also saw him speak in Austin at SXSW this year) with a couple questions, the most articulate of which is "So what?"  An error is an error only if it causes us some strife.  One obvious form of strife is that if we aren't consistent in our ability to make decisions, then people will exploit the inconsistencies of our decision making.  Which we know is pretty much the case with the current state of the media and advertising.  But, an error is also only useful to point out if there is some way to correct our behavior by rooting out the error and making better decisions.  Daniel Gilbert side steps this question and offers no simple keys to happiness and good decision making.  One leaves with a sense of urgency… we need to figure this out, and soon!  Before we reach the inevitable end of our collective poor judgement calls… a world of misleading advertisements, lotteries, casinos, disasters, and debt.  He warns us that we're the only ones with the ability to control our fate, by predicting the future and altering the present… and if we as a species fail to do so, it will be a result of this poor decision making.  He sure has a funny way of stumbling on happiness.

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One Response to “Expected Odds x Expected Value”


  1. […] Daniel Gilbert, who I just saw speak last night, also published a new article yesterday: The Science of Happiness. […]


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