Read an interesting piece in the WSJ today about how <a href="http://online.wsj.com/article/SB119188420773652765.html?mod=yahoo_itp&ru=yahoo">waiting affects decision making</a>:
From the article:<p class="times"></p><p class="times"></p><blockquote><p class="times">Waiting drives some of us to make dumb decisions. In a study conducted by Gregory Berns, an associate professor of psychiatry and behavioral sciences at Emory University, respondents were given an option of receiving an electric shock now or a lesser shock after waiting. Roughly a third opted for more voltage sooner.</p> <p class="times">"The brain runs simulation of the future using the same process that simulates the experience itself," says Dr. Berns. This extreme response is what often governs bad decisions, he says. That may explain why some people, at the slightest whiff of layoffs, fire themselves.</p> Lee Miller, a former head of HR, has witnessed that "huge mistake" with a colleague who left his job rather than wait for an inevitable promotion.
</blockquote>It is interesting to see how people prefer to solidify their uncertainty, even when the outcome is unfavorable. This would seem to go against the findings of of psychologists Kahneman and Tversky, who explored <a href="http://en.wikipedia.org/wiki/Prospect_theory">Prospect Theory</a> and loss aversion. This theory would indicate that people would rather wait and take the chance that they don't get laid off vs. quitting immediately. An added dimension of asymmetrical time for decision outcome is present here though.
A simple thought experiment would suffice to demonstrate proof of concept:
Given a decision of a certain loss of $1000, or a 40% chance of losing $2500 and 60% chance of losing nothing, Prospect theory states that most of us would choose the latter, reflecting loss-adverse (risk seeking) behavior, though the expected outcomes are the same. (Often the experiment is demonstrated with expected loss greater than the certain loss, yet people still choose the risky option).
Let's rephrase the above though:
How about if we change the outcome to be a certain loss of $1000 <span style="font-weight: bold;">today</span> or a 40% chance of losing $2500 and a 70% chance of losing nothing, <span style="font-weight: bold;">3 months</span> from now. Would you choose to take the loss today or wait three months for the outcome?
The article would imply that many people would prefer the certain loss today. This behavior might be explained by our preference to minimize variance. If we were to optimize for Net Present Expected Value, we would choose the latter. Since both outcomes have the same expected value, but the latter has the extra element of being discounted back through time, waiting seems to be the optimal choice.
Another <a href="http://davidmaister.com/articles/5/52/%20">article</a> talks about this and models it in a simple formula:
Satisfaction = Experience - Expectation
When we have low expectations of something but our experience is positive, such as an unexpectedly good movie, we are satisfied. However, when we have high expectations that are not met (low experience) then we are unsatisfied.
The author of the article uses 'Perception' in place of 'Experience' but I'd like to distinguish the point because using Perception in this context is unclear. Expectations and experiences are in fact both 'perceived' subjectively. But I digress.
This simple model might be modified to fit a negatively exponential utility curve instead:
<center><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://bp3.blogger.com/_lPCxpA1k1LY/RwyIltQHf1I/AAAAAAAAAAU/XYpWhZg2Z4E/s1600-h/utility.PNG"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="http://bp3.blogger.com/_lPCxpA1k1LY/RwyIltQHf1I/AAAAAAAAAAU/XYpWhZg2Z4E/s320/utility.PNG" alt="" id="BLOGGER_PHOTO_ID_5119617057797144402" border="0" /></a></center>
We find that this is consistent with the rate at which we discount money back to present value as well (PV = FV*e^-rt).
From the article:<p class="times"></p><p class="times"></p><blockquote><p class="times">Waiting drives some of us to make dumb decisions. In a study conducted by Gregory Berns, an associate professor of psychiatry and behavioral sciences at Emory University, respondents were given an option of receiving an electric shock now or a lesser shock after waiting. Roughly a third opted for more voltage sooner.</p> <p class="times">"The brain runs simulation of the future using the same process that simulates the experience itself," says Dr. Berns. This extreme response is what often governs bad decisions, he says. That may explain why some people, at the slightest whiff of layoffs, fire themselves.</p> Lee Miller, a former head of HR, has witnessed that "huge mistake" with a colleague who left his job rather than wait for an inevitable promotion.
</blockquote>It is interesting to see how people prefer to solidify their uncertainty, even when the outcome is unfavorable. This would seem to go against the findings of of psychologists Kahneman and Tversky, who explored <a href="http://en.wikipedia.org/wiki/Prospect_theory">Prospect Theory</a> and loss aversion. This theory would indicate that people would rather wait and take the chance that they don't get laid off vs. quitting immediately. An added dimension of asymmetrical time for decision outcome is present here though.
A simple thought experiment would suffice to demonstrate proof of concept:
Given a decision of a certain loss of $1000, or a 40% chance of losing $2500 and 60% chance of losing nothing, Prospect theory states that most of us would choose the latter, reflecting loss-adverse (risk seeking) behavior, though the expected outcomes are the same. (Often the experiment is demonstrated with expected loss greater than the certain loss, yet people still choose the risky option).
Let's rephrase the above though:
How about if we change the outcome to be a certain loss of $1000 <span style="font-weight: bold;">today</span> or a 40% chance of losing $2500 and a 70% chance of losing nothing, <span style="font-weight: bold;">3 months</span> from now. Would you choose to take the loss today or wait three months for the outcome?
The article would imply that many people would prefer the certain loss today. This behavior might be explained by our preference to minimize variance. If we were to optimize for Net Present Expected Value, we would choose the latter. Since both outcomes have the same expected value, but the latter has the extra element of being discounted back through time, waiting seems to be the optimal choice.
Another <a href="http://davidmaister.com/articles/5/52/%20">article</a> talks about this and models it in a simple formula:
Satisfaction = Experience - Expectation
When we have low expectations of something but our experience is positive, such as an unexpectedly good movie, we are satisfied. However, when we have high expectations that are not met (low experience) then we are unsatisfied.
The author of the article uses 'Perception' in place of 'Experience' but I'd like to distinguish the point because using Perception in this context is unclear. Expectations and experiences are in fact both 'perceived' subjectively. But I digress.
This simple model might be modified to fit a negatively exponential utility curve instead:
<center><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://bp3.blogger.com/_lPCxpA1k1LY/RwyIltQHf1I/AAAAAAAAAAU/XYpWhZg2Z4E/s1600-h/utility.PNG"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="http://bp3.blogger.com/_lPCxpA1k1LY/RwyIltQHf1I/AAAAAAAAAAU/XYpWhZg2Z4E/s320/utility.PNG" alt="" id="BLOGGER_PHOTO_ID_5119617057797144402" border="0" /></a></center>
We find that this is consistent with the rate at which we discount money back to present value as well (PV = FV*e^-rt).