Transcript of “Why we make bad decisions” by Dan Gilbert, the author of Stumbling on Happiness at TED conference…

**Dan Gilbert – Author, Stumbling on Happiness**

We all make decisions every day; we want to know what the right thing is to do — in domains from the financial to the gastronomic to the professional to the romantic. And surely, if somebody could really tell us how to do exactly the right thing at all possible times, that would be a tremendous gift.

It turns out that, in fact, the world was given this gift in 1738 by a Dutch polymath named Daniel Bernoulli. And what I want to talk to you about today is what that gift is, and I also want to explain to you why it is that it hasn’t made a damn bit of difference.

**Bernoulli’s gift**

Now, this is Bernoulli’s gift. This is a direct quote. And if it looks like Greek to you, it’s because, well, it’s Greek. But the simple English translation — much less precise, but it captures the gist of what Bernoulli had to say — was this: The expected value of any of our actions — that is, the goodness that we can count on getting — is the product of two simple things: the odds that this action will allow us to gain something, and the value of that gain to us.

In a sense, what Bernoulli was saying is, if we can estimate and multiply these two things, we will always know precisely how we should behave.

Now, this simple equation, even for those of you who don’t like equations, is something that you’re quite used to. Here’s an example: if I were to tell you, let’s play a little coin toss game, and I’m going to flip a coin, and if it comes up heads, I’m going to pay you 10 dollars, but you have to pay four dollars for the privilege of playing with me, most of you would say, sure, I’ll take that bet. Because you know that the odds of you winning are one half, the gain if you do is 10 dollars, that multiplies to five, and that’s more than I’m charging you to play. So, the answer is, yes. This is what statisticians technically call a damn fine bet.

Now, the idea is simple when we’re applying it to coin tosses, but in fact, it’s not very simple in everyday life. People are horrible at estimating both of these things, and that’s what I want to talk to you about today.

There are two kinds of errors people make when trying to decide what the right thing is to do, and those are errors in estimating the odds that they’re going to succeed, and errors in estimating the value of their own success. Now, let me talk about the first one first. Calculating odds would seem to be something rather easy: there are six sides to a die, two sides to a coin, 52 cards in a deck. You all know what the likelihood is of pulling the ace of spades or of flipping a heads. But as it turns out, this is not a very easy idea to apply in everyday life. That’s why Americans spend more — I should say, lose more — gambling than on all other forms of entertainment combined. The reason is, this isn’t how people do odds.

The way people figure odds requires that we first talk a bit about pigs. Now, the question I’m going to put to you is whether you think there are more dogs or pigs on leashes observed in any particular day in Oxford. And of course, you all know that the answer is dogs. And the way that you know that the answer is dogs is you quickly reviewed in memory the times you’ve seen dogs and pigs on leashes. It was very easy to remember seeing dogs, not so easy to remember pigs. And each one of you assumed that if dogs on leashes came more quickly to your mind, then dogs on leashes are more probable. That’s not a bad rule of thumb, except when it is.

So, for example, here’s a word puzzle. Are there more four-letter English words with R in the third place or R in the first place? Well, you check memory very briefly, make a quick scan, and it’s awfully easy to say to yourself, Ring, Rang, Rung, and very hard to say to yourself, Pare, Park: they come more slowly. But in fact, there are many more words in the English language with R in the third than the first place. The reason words with R in the third place come slowly to your mind isn’t because they’re improbable, unlikely or infrequent. It’s because the mind recalls words by their first letter. You kind of shout out the sound, S — and the word comes. It’s like the dictionary; it’s hard to look things up by the third letter. So, this is an example of how this idea that the quickness with which things come to mind can give you a sense of their probability — how this idea could lead you astray. It’s not just puzzles, though. For example, when Americans are asked to estimate the odds that they will die in a variety of interesting ways — these are estimates of number of deaths per year per 200 million U.S. citizens. And these are just ordinary people like yourselves who are asked to guess how many people die from tornado, fireworks, asthma, drowning, etc. Compare these to the actual numbers.

Pages: First |1 | ... | → | Last | View Full Transcript