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Take the Good With the Bad · Why We Do What We Do

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You're listening to Why we do what we do? Welcome to Why we do
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what we do. I am your Optimistically Choosing host Abraham Ah and I am
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your Multiple Pathways host Shane Where a psychology podcast. We talk about the things
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that people do sometimes, the choices that they make or don't make, and
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with the things that influence those choices and economics in a way, maybe a
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little bit of math sprinkled in there, but you know, just generally human
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psychology. That's where you find yourselves. If you're joining us for the first
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time, Welcome, Happy to have you here. And this episode comes out
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on June twenty eighth, and we've got some holidays to recognize that this comes
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out, so just take a minute to celebrate the fact that it is.
0:54
We're wrapping up Pride month here, but it's Pride month, So happy about
0:56
that. Happy Pride. Yeah, still a big deal, big big supporters.
0:59
That's all like that. It's also national Paul Bunyan Day. It's very
1:03
American, very specific. Yes, blue oocks jumping down trees. Did he
1:07
give us the Appelachians or did he give us the Rockies which mountain as he's
1:11
supposed to give us Mountain Range. I would guess the Appellachians. I don't
1:14
remember now. I feel like Paul Bunyan feels like an Appolachi or Appalachian.
1:18
I know that's a whole thing, so maybe one day I want to dive
1:21
into that. But okay, also gave us those things in the bottom of
1:23
your feet called Bunyan's. Ah, thanks, thanks guy. It's National Insurance
1:30
Awareness Day, which actually kind of loosely ties into our topic for today in
1:34
the sense that it is a risk thing that you pay money toward and then
1:38
you are basically buying nothing interesting. Yeah, that's fair. It's also International
1:44
Body Piercing Day, so that's fun. Yeah. I've got lots of body
1:48
piercings myself. I used to have more, taking a bunch of amount.
1:51
As I've gotten old, I took mine out too. I had my nose
1:53
pierced several times. Okay, a nose, lip, tongue, all those
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are gone. A couple of your piercing, so all that. So we're
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all we're getting old. Yeah, yeah, it just happens. Get funcals
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and yourself when you're young. I guess let's that's what we did. It
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is National cevich A Day. Which calling it national in the United States sounds
2:13
weird, but that's what it said. So ye day, I guess that's
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yeah, that's a whole thing. It's also happy hearts hugs day. How
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to look this one up? This one is kind of interesting, sounds nice.
2:23
It's meant to, as far as I can tell from the description of
2:27
this, communicate a high level of like love and compassion respect for someone at
2:31
a distance, Like someone you can't just say this deal like side of a
2:35
text or a message on social media or something like that and write the soppy,
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like heartwarming thing you've been thinking of, Like Shane, I so appreciate
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you being here with me. I'm really lucky to have you as my co
2:45
host. What you're really swell fella, and it just it's about time.
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It's about time. So that was a happy heart hug. I think that
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was so sweet. I love that. Yeah, that's that sounds very wholesome.
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It's like it's like the whole idea of like give people their flowers before
3:02
they pass, you know, yeah, exactly, that's sort of I like
3:06
that. A lot couple of quick housekeeping things. The podcast Awards are coming
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out. You can follow them a go into Facebook dot com Slash Group Slash
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Podcast Awards or Twitter dot com slash Podcast Awards, or you can just drop
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twenty three. PCA standing for Podcast Awards and twenty three being the year twenty
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twenty three. Starting July first, you can go to podcast Awards dot com
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to nominate why we do what we do for best Podcast in whatever category.
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So you should do that thing if you're interested in doing that. If you're
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also interested in supporting us, you can do so in other ways. You
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can pick up some merch at our store. You can follow us, you
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can like us, you can leave us a rating and review. You can
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also join us on Patreon, where you can access to all kinds of behind
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the scenes goodies. And of course, you can create a theory of decision
3:52
making called why we do what we do, which would be a really good
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name for a theory if you think of that, right. I like that,
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actually like very spot on. That's why that's why we need the podcast
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what we need it exactly. Yes, we are a theory in a manner
4:04
of speaking, I guess, and I'll talk more about the ways that you
4:06
can support us at the end of this discussion today and before we move on,
4:11
as I mentioned, we're trying to We have these people on Patreon.
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We appreciate them, they're the best. You can join the list of people
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that we appreciate and call the best by going over there. And if we
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can reach a goal of fifteen patren members by June. By the end of
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June, we're gonna do a virtual hangout with y'all. And if we don't,
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then maybe we'll just extend that off rout a little bit further. But
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we want to hang out with you, so come join us on over on
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Patreon. We got leo tiers as low as a dollar. If you can
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swing a dollar a month, helps us out, helps you out because then
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you get behind the scenes extra stuff. So yeah, that's that's what we
4:42
have going on in the background. Tier. Are we ready to talk about
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our topic today? Yeah, let's dive in. I think this is an
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interesting one. Yeah, and actually I think it'll be a shorter ish one.
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This is a psych one O one one day of class replacement episode,
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maybe like get the day on behavior economics and this will cover a chunk of
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that, or maybe as a supplement. That's your thing. I don't know
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if psychology professors would agree with that assessment of this, But we're gonna talk
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about behavior economics thing, and before we start, I'm gonna ask you,
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Shane, would you rather take a drug that has a ninety percent success rate
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or drug that has a ten percent failure rate? So do I get to
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ask any questions about this? No? Then yes? Great? What was
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your question? I was gonna say, what drug? Let's say, like
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my grain drug. I would go with the ninety percent success rate. That
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sounds nice, naturally, I think that's a good choice. That's a good
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choice. We're gonna talk more about how I just set up that question as
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we get into our topic today. But actually, let's let's get some more
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background. I mean, you probably saw it in the title of this episode,
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maybe you read the description of this, but let's get into a little
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background because we're gonna get to what it's called and why that matters. But
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let's let's just unpack a little bit of where we're coming from here. Yes,
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so alert for all of life and the secrets of psychology. Everything we
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do we do in the context of what we've learned. How we are raised
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our current circumstances and the combination of our biology. And of course we believe
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this because so far it is true for everything we have ever done, and
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it is never not true for something anyone has ever done. Basically, what
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we're talking about today is this idea of prospect theory. Yes, we're going
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to be talking about this idea of choices. That's something that's actually going to
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come up in subsequent episodes as well, and we've talked about a little bit
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in the past. But there's this idea of choices. This is something that
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has deeply intrigued a lot of people for a long time. Choices are treated
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as some sort of magical other behavior that is unique among behaviors and worthy of
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discussion as its own sort of entity. So that's why we feel like we
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need to unpack this a little bit. But because so much attention has been
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given to the idea of choices, there's a lot of theories and hypotheses,
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laws named sure or specifically to address the choices that people make. And so
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that's one of the things we're talking about today. Yeah, I mean,
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I think choices are really fascinating, but also I don't think they're quite as
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complex as people make it out to be. Yeah, well, I also
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don't think that they represent a unique segment of human behavior, Like I don't
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think it stands out as being fundamentally different in process, form or any other
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feature of things that humans do personally. And it'll be worth getting into what
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choosing means and what choices are at some point, but for now, let's
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get into another landmark theory about how people make choices. And this has largely
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been studying in a fields called behavioral economics. Yes you know, I'd love
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me some economics now. A nineteen ninety five study by Maddie and Gilovich reported
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that Olympic bronze medal winners appeared to be happier than silver medal winners. The
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narratives hypothesize that the silver medal winners see their outcome as missing their chance at
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gold as the only other possible outcome, whereas the bronze medalists see their outcome
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as I want to medal as compared to winning none at all, Meaning the
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silver medalists saw their medal as a loss compared by comparing upward, and the
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bronze medalists saw their award as gain by comparing it downward to lower rankings.
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So basically silver medalists were bummed they didn't get the gold. Bronze medalists were
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just happy to be there, exactly right. Yeah, there's this whole sort
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of perspective here and how you frame it, how you think of it,
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what you sort of mean. Yeah, So this is all situated and side
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of this idea of choice and how people value a particular outcome. And this
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is the idea of risk versus reward and gain versus loss, and so those
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are the sort of balancing quadrants of values we're going to bring to talking about
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this theory and understanding choice making. And one of the most common theories to
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summarize data on this choice research is called prospect theory by Kanneman and Verski in
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nineteen seventy nine, also called the loss of version theory. So you might
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have heard it either the prospect theory or the loss of version theory. Either
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one is what we're talking about here. Yeah, And I was sort of
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trying to dig through the history and the first citations we found suggested that this
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was developed in nineteen seventy three, but virtually everyone cited the publication as being
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nineteen seventy nine for prospect theory. So I'm thinking maybe it was sort of
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proposed and then experimentally walked out over the next few years and then published in
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nineteen seventy nine. But this was this theory was created in part to help
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understand why people make what you might call suboptimal choices, and how they use
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heuristics or shortcuts to evaluate the relative worth of an outcome when they're making choices.
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Yeah, so I think it's probably worth taking some time to let's break
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this down. Let's kind of like unpack this, let's look get every component,
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and we're going to start with understanding what the problem is that prospect theory
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is trying to solve. One way of understanding people's choices is that they will
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make the best possible choice, the best choice for their circumstance. So let's
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say we're going to the DMV short aside. DMV in the US is rough,
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horrible. I think one time I had to wait like three hours just
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to get my daughter the paperwork to be able to get her permit, her
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driving permit. It's a mess, and that was a short wait. That
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was a short wait. Yeah, So yeah, DMV is I mean,
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we use it almost anonymously to describe drowning in a ceo of bureaucracy where nothing
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gets done and the simplest task is like the most labor intensive thing you can
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imagine. Yeah, that to me is how I talk about the DMV.
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And I'm like, pretty much, if you want to compare anything that is
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like a boring, unnecessarily complicated task, you compare it to the DMV.
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At least that's how I use it. Yeah, And I mean, and
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just to kind of give you, like a little bit of insight on the
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hellscape that is Florida. The DMV that was in our town had its own
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standalone building, and the government cut their funding in Florida and was like,
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you don't need a building, so they moved them to a pretty much an
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abandoned mall in South Datona, Florida, to the point where like the person
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that owns the mall does not run the AC inside the mall, so it's
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like a ballmy like ninety five degrees inside the mall. And then every unit
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has its own like they run their own AC and stuff like that. It's
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it's a miserable experience because you have to wait in line. It's for the
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entire county that the wait in line outside in the mall because there's no room
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inside the d MB. It is absurd. Wow, that's horrible. Yeah,
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it's horrible. So basically what we're saying is, you don't know if
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you're gonna be there for five minutes or five hours, so you think perhaps
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you should bring your computer so you can do some work while you wait.
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And this means you probably need a charger and you'll have to find a seat
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by an outlet, plus you're holding onto it while you're waiting in line.
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So you decide do you bring the laptop or do you not bring the laptop.
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That is a choice in a kind of terrible circumstance. And there's sort
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of three dimensions to your problem of deciding you bring a laptop. You have
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one the outcomes, you're either encumbered or unencumbered, meaning you have your laptop
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or you're carrying around or you don't. And then you're either board or you're
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productive. So you either have something to do or you don't have something to
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do. So that's dimension one. Dimension two is the states, and the
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state is just the thing that's outside of your control, like, are there
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long lines or short lines? Quick side note, almost never short lines.
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That would be a rare day. Yes, so assume that there are long
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lines, but maybe you'll get lucky made with the short lines. And then
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so that's that's the states and the third dimension here is the choices that you
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make. You either bring the laptop or you don't bring the laptop. And
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so that's sort of a way to frame how decision making might occur on this
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scenario, right, And so in this scenario, you essentially have four basic
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possible outcomes. One, you bring the laptop and don't need it because you
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efficiently complete your visit in only a few minutes and unnecessarily carried your stuff with
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you. Two you bring the laptop and need it because the lines are long
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and your visit takes hour. Three you don't bring the laptop and wait for
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hours without getting anything done. Or four you don't bring the laptop and the
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lines are quick and you are in and out one in minutes, encumbered by
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laptop. As you can see the combination of the things that come up,
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I mean, there's all sorts of other variables that might come into play,
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but those are generally your four basic outcomes. The end, This is really
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just situated to help enumerate a way that you might understand decision making. And
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so the idea that you're essentially trying to maximize your possible outcome here is kind
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of wrapped up in something that's very old called expected utility hypothesis, and expected
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utility posits that rational decision makers will always make the choice that has the most
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utility or the best outcome for them. The implication of this is that if
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there are two choices that have identical outcomes, that they'll be selected evenly and
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treated as if they are even outcomes. For instance, if you were to
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find a five dollar bill or find two five dollar bills and then lose one,
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you would have a net gain of five dollars either way, so you
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wouldn't have a preference over which scenario you were in. You'd end up with
14:05
five dollars. That's sort of how that theory works out. But in reality,
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most people prefer the situation where you gain five dollars as opposed to the
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one and where you gain ten dollars but lose five of those dollars, and
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so this is kind of thought of as being this irrational thinking because the outcomes
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are the same, but people would nevertheless choose the situation where they only gained
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and had no losses at all. So this was the big idea of prospect
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theory that people weigh losses and gains differently and risks and rewards differently when making
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choices. And with that being said, we're going to go ahead and give
14:39
you some ads so that you can make some choices. So we've been talking
14:50
about this idea of choices and now getting into what prospect theory tries to do
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in relation to what was this expected utility hypothe I actually saw referred to as
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expected utility theory as well, but I think theory is maybe not Zach,
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you're given the amount of data that there are about this. But anyway,
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the idea from prospect theory is that humans are a loss of verse, meaning
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that they are more likely to avoid losses than they are to seek gains.
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Now, apparently this is a groundbreaking discovery at the time, particularly because the
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prevailing wisdom was that people didn't matter, that they would be based on utility
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alone and not the circumstances around it. And specifically, what they sort of
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found and their study was that losses are around one point five to two times
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more impactful than gains, meaning that if, for example, would just link
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that to money, you'd have to gain fifteen to twenty dollars for every ten
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dollars loss to feel like there was an even experience in terms of whether you
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are okay with the loss or prefer the gain. Right. So another example
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of this might be investing in a stock that gained one hundred dollars verse one
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that gained two hundred dollars then lost one hundred dollars. So people are more
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likely to choose the stock that only gained one hundred as opposed to the stock
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that gained two hundred and lost one hundred, because people don't like losing.
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Now, I should have started this episode with a trigger warning that we are
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going to be talking about math, and we've already thrown a lot of numbers
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at you, but there's more math that comes, so prepare yourself. Yeah,
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prepare yourself. I mean it's really not complicated. We're not really talking
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through formulas or anything. It's just that it wouldn't be talking about things relevant
16:23
to math. Yeah. Anyway, related to that, there are a couple
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of fun things in math to understand a prospect theory. And so this is
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kind of where we get to the meat of it, if you will,
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if you can imagine a matrix, and for those of you who are not
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really conjuring what I mean by this, this is just a grid with an
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X and y axis running through the middle, where the top and right represent
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positive values and the left and bottom quarters represent negative values. That's do you
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have sort of four grids arranged around these axes, if you will, that
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run through the middle. In this case, the X axis or the horizontal
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one often represents values or money, but it could be any choice really,
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and and the vertical access represents utility or the outcome there. And if you
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were to plot the expectations for human choice according to the expected utility hypothesis,
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it basically be a straight line that went from a diagonal line, but straight
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it wouldn't be curved. It would start at the bottom left quadrant and it
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would slope straight up to the top right quadrant, essentially meaning that sure,
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the more it was worth, the more had utility and a linear even projection
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from across. That's according to that theory, But prospect theory instead suggests an
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asymmetrical relation to choice. Graphically, there's a steep convex curve and the bottom
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left quadrant, and this means that as the value of choice increases, the
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utility of that choice barely changes until the value reaches nearly zero or positive,
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and then once the line crosses the zero it forms a convex curve. And
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this means that immediately after the positive benefit is achieved, the relative value has
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a quick increase, but not by a lot, and then it kind of
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flattens out. Even as the value continues to increase, the utility does not,
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so you get sort of a what looks kind of like an S on
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the graph, or the middle of the s intersex zero. It sort of
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is like the relative like utility of it doesn't change very much until you get
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to zero. Then it slopes up quickly and hit zero, passes through zero
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and continues us to accelerate and then starts to flatten out and just sort of
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forms a relatively straight line at a relatively low value too. It doesn't even
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get up to like the top part of it. The asymtote there is kind
18:25
of low, and so basically saying that the negative choices are felt more impactfully
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than the positive choices. You don't start to see a switch in that choice
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until it reaches at least net zero, Right, I was just thinking about
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this, and we're kind of talking about this math. It's been I don't
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know, it's been probably twenty years, maybe even twenty five years since I've
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been in like any sort of algebra class that would mention some of these terms.
18:49
Wow, Abraham, can you tell me what an asomtote is? Yeah,
18:56
an asomtote is in a curved line where the line approaches it's usually as
19:03
you stretch out in time, the value of the line approaches so close to
19:06
zero that it basically stays relatively parallel zero. But yeah, very technically and
19:11
specifically, it's a line that continually approaches a given curve but does not actually
19:15
meet that curve at any finite distance. And so it's sort of like you
19:19
see this in a hyperball. It curves a lot. As the curve sort
19:22
of slows down toward the X axis, it'll get really close to it,
19:26
and it'll run what looks fairly parallel to it, and it's possible that they'd
19:30
meet at some point, like it would actually reach zero. But it also
19:33
might just never reach zero and just continue on that way and definitely, Yeah,
19:37
it's kind of like that sibling that's always like I'm not touching you,
19:40
but they're like really really really really really close. Yes, exactly, all
19:45
right, thank you for that lesson. All right. So at this point,
19:48
however, you have to consider what zero is on a number line,
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meaning what is your starting position when we talk about this, and the starting
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place by which you determine whether an outcome tends toward the positive or negative is
20:00
called the reference point in prospect theory. Now, starting with a lot means
20:03
that you have a lot more to lose and are more avoiding the risk.
20:07
Starting with very little means you have little to lose and a lot more to
20:10
gain and are more risky and making choices. So you have a lot,
20:14
you don't want to take any risks. You have a little bit, you're
20:15
more likely to take risks, right because your potential for gain seems greater,
20:21
because even if you were to gamble on some activity or outcome, what you
20:25
can lose is not that much relative to where you're at right. So,
20:27
in keeping with a scientific behavioral point of view, Konomen and Taversky astute Lea
20:33
noted that each person's reference point is influenced by their past and present circumstances,
20:38
culture, and preferences, and that it can change over time as people learn
20:42
and change, which I think was extremely forward thinking for people at that time,
20:48
and particularly for behavioral economists. Yeah, this was what year, This
20:52
was nineteen ninety five. No, this one's more than nineteen seventy nine,
20:56
although they can this one's oh yeah yeah. Yeah. They continue to like
21:02
refine and develop prospect theory. And there was like another seminal paper of theirs
21:04
and I want to say nineteen ninety two, but they published on this a
21:07
lot and it really did shape behavioral economics. Yeah, good for them.
21:11
I mean, I'm glad. I'm glad they were ahead of the curve on
21:14
that. Yeah, you know, pun intended. Now, this might be
21:17
thought of as the pleasure from a gained reward is less intense than the pain
21:22
of a loss reward, even if the outcomes are tangibly quantitatively the same.
21:26
Yeah, so you might be going, well, like, it feels better
21:29
to gain than it would be to lose, even though I end up at
21:33
the same space. Yeah, and I think that they would probably frame it
21:36
as like gaining ten dollars does not feel as good as losing ten dollars feels
21:41
bad. If that makes sense. Yes, so the penny saved is a
21:45
penny earned sort of mentality I think sort of applies here. Sure, I
21:48
was opposed to spending it. Now, this also does apply to the probability
21:52
of an award some outcome. People tend to perform more probable outcomes to less
21:57
probable ones when they're talking about gains, and this is called risk aversion,
22:02
which is again they tend to prefer smaller outcomes that are more guaranteed to risk
22:06
your outcomes that might be larger. Now, alternatively, and reciprocally, people
22:11
prefer a less certain, unfavorable outcome to a more certain unfavorable outcome. So
22:15
essentially, loss of a reward is worse if the loss is guaranteed as opposed
22:21
to the unknown. If you do something illegal, it is more probable that
22:25
you will get fined, but if you gamble your money, it is less
22:29
certain that you will lose the money, even when it is the same amount
22:32
of money that you might lose. So I'm okay with gambling. I'm definitely
22:36
not gonna do something illegal. The outcomes, even though they're kind of the
22:38
same, they're a little bit different, right, because I know if I
22:41
do something, I'm gonna be in trouble. Yeah. Yeah, So if
22:44
it was like a two hundred dollars fine for littering or two hundred dollars lost
22:48
while gambling, people are more likely to do the gambling thing than the littering
22:52
thing. Littering is more certain. Gambling is you don't know, You don't
22:55
know what the outcome is gonna be. I could lose two hundred dollars,
22:57
but you don't know. That's maybe not the best example, because there's like
23:00
other social stigma that comes with littering, and there's like the confrontation of being
23:04
confronted by the police, and in the actual relative certainty of being caught for
23:07
littering seems pretty low, right, unless you happen to have dark skin,
23:11
in which case the consequences are probably more certain, particularly in certain parts of
23:15
this country and in the United States at least. So anyway, those are
23:18
some considerations, But that's just it's meant to be a hypothetical to illustrate the
23:22
point, not be an exact example of how that would play out, right,
23:26
So Anyway, the key idea from all of this, then, is
23:30
that because people are more concerned with avoiding loss than they are with necessarily acquiring
23:34
gains. There's sort of some four major implications of this. A. I'm
23:40
gonna start with, I'm gonna do letters. A. People will take actions
23:42
that reduce the chance of losses. Be people will avoid taking actions that could
23:48
lead to losses. So those are similar but slightly different. See, people
23:52
take more risks when they're experiencing losses than when they're experiencing gains. And D
23:59
people quote tend to overestimate the likelihood of low probability events and overestimate the likelihood
24:04
of high probability events, essentially downplaying things that are more likely to happen and
24:10
not really estimating things that are less likely to happen. If that makes sense,
24:14
Yeah, that makes perfect sense. So Kenneman and Teversky understood that how
24:18
these scenarios are framed is important in understanding the choice that people will make.
24:22
That is, is it framed as a loss or as a gain. So
24:25
take the example at the beginning of the episode, would you rather take a
24:27
drug with ninety percent success rate or a ten percent fail rate? Well,
24:30
those are the exact same outcome. When you do some basic maths for folks
24:36
in Florida, it's the same outcome. It's the same number. It ends
24:38
up being the same number. You just have to trust us. You have
24:41
to trust us on that. Okay, I mean we are we are a
24:44
form of media. So you know, I guess take that with what you
24:48
will. But a drug that is ninety percent successful has by definition a ten
24:51
percent failure rate, But framing it as a loss makes it seem worse than
24:53
framing it as a gain, so people are more likely to choose the former,
24:59
right, Yeah, ninety percent success rate. This brings us to the
25:03
stages of decision making in prospect theory, and there's basically two stages, although
25:07
they have substages. The first stage is editing and the second stage is evaluating.
25:14
Right, So, in the editing stage, complex choices are mentally whittled
25:17
down to use mental shortcuts to include or exclude certain information that will be used
25:21
in the evaluating stage. There are also substages to editing that probably aren't worth
25:26
going into great detail, but they are briefly coding, combination, segregation,
25:30
cancelation, simplification, and detection. Specifically detection of dominance. Now, during
25:36
the editing, people may be starting with inadequate information or reject important pieces of
25:41
information due to poor mental shortcuts they may be using, which could account for
25:45
some of the suboptimal choices that they may make. Yeah, and I think
25:48
the names of those sort of substages kind of help, but essentially it just
25:52
has to do with what information is included and excluded sort of what those are.
25:57
Sure. So that's the editor stage, as you mentioned, and so
26:00
editing is where a lot of the heavy lifting is done because that's where you're
26:03
sort of deciding what information is relevant here. And the evaluating stage people use
26:08
the information retained in the editing stage whatever doesn't get removed to then weigh the
26:14
potential outcomes in terms of those positive or negative results and make a decision that
26:18
will maximize gains and avoid losses, although the losses are weighed more heavily than
26:23
the gains. Yes, so how the choice is presented would be predicted by
26:27
prospect theory to influence what decision is made. You can see this at work
26:32
in marketing, where companies tend to promote the gains made or the losses avoided.
26:36
Same thing or similar at least now, although it would be funny to
26:40
see an AD that was brutally honest about the losses one might experience by purchasing
26:44
their product. That would be I would love to see that. Yeah that
26:48
are like, this isn't that good? You probably won't like it all that
26:52
much, So I really canna help you with the problem you're trying to solve.
26:56
Yeah, buyer product, why bother? So that kind of actually,
26:59
as the bulk of prospect theory essentially is stating that people tend to weigh losses
27:03
more heavily or more impactfully than they do weigh their gains. That they tend
27:07
to then make choices based off their starting point, which has to do with
27:11
whether they're already experiencing losses and gains, and then also has to deal with
27:15
the relative probability of those losses are gains if they're riskier and low probability,
27:19
or if they're more high probability and more likely outcomes, And then the preference
27:23
is reversed from positive negative, meaning preferring more certain gains to riskier ones and
27:30
preferring less certain losses to more certain ones. And that pretty much sums up
27:36
how it works. And now one thing that hopefully astute, sort of skeptical
27:41
listeners might be asking, is but what do the critics say about this?
27:45
Where does this start to break down? And unfortunately, when I have to
27:49
lean on those marketing you'll listen to this marketing thing, Let's see if they're
27:52
brually honest about the losses you might experience by purchasing their products. Fingers cross
27:57
as all you adds? All right, let's unpack some criticisms of prospect theory.
28:10
I love criticisms. They're so fun, right, it's kind of worth
28:12
asking is it all peaches and rainbows? Of course not. There's no perfect
28:15
theory out there. There never has been. Anything that tries to account for
28:19
a broad category of behaviors with a specific guideline about those behaviors is going to
28:22
miss the mark with some cases, at the very least some cases, not
28:26
all cases, but at least some cases. Yeah. And so one criticism
28:30
of prospect theory has to do with that reference point that we mentioned, that
28:33
sort of like where's your zero? From what standpoint are you evaluating what's good
28:38
what's negative? That sort of thing, And because it's so difficult to pin
28:44
down, because it is in reference to all those things we mentioned, like
28:45
your culture, your preferences, your learning history. It has limited application to
28:51
quantitatively understanding or predicting behavior because economists can't look at someone's starting place and quantitatively
28:56
assign where they're at if it's something like you're learning history. And so that's
29:00
been one criticism. It's been hard to pack into a model because it depends
29:06
on something that they can't really define all that easily because it's a somewhat nebulous
29:11
concept, right and now others point out that prospect theory does not adequately reflect
29:15
other psychological features of decision making, such as the emotional state someone is in
29:19
at the moment they have to make a choice, things like that. I
29:22
mean, when we talk about this type of thing being contextual, we are
29:26
talking that is extremely contextual. And there are hundreds of variables that apply to
29:32
making a single choice. Yeah, I mean, if you can imagine someone
29:34
who's really upset or is just absolutely elated at the moment that they might choose
29:38
something, that's probably going to have an impact on how that choice skews,
29:42
and particularly whether they sort of self frame it as being positive or negative.
29:47
You know how many books I bought when I was mad none, how many
29:49
I was happy all of them. Then you've been happy a lot based on
29:53
your life. I try, I try. Let's see here. So talking
29:59
about these critic the framing of questions can be arranged pretty neatly. In these
30:03
experiments, they ask them just that straightforward. Would you prefer a drug this
30:07
ninety percent successful or ten percent failure rate? That sort of thing. But
30:10
in every day circumstances, that's not necessarily how these setups are going to be
30:15
arranged. And there's often going to be multiple competing, contradictory or complementary frames
30:21
that will occur in every decision making steps. So as you go along,
30:23
it's not going to be so black and white as is this a loss or
30:26
is this again? It's probably going to have a lot of different references to
30:30
a lot of different things competing with other things as well, and so framing
30:34
is unlikely to be present to consumers and the way that it is used in
30:37
the experiments that have sort of showed how in an analog prospect theory might work
30:44
absolutely now. Psychologists have also suggested this model does not accurately represent the process
30:49
of decision making, even if it tends to get the outcome fairly correct.
30:52
Specifically that people do not naturally go through all of the steps and processes outlined
30:56
in prospect theory, and if they do, it's probably not explicit or it's
31:00
probably not very quantifiable. Trying to think for yourself, like if you're making
31:04
a choice, did you sit down and go like, now I am an
31:07
editing phase, what information should I include or exclude? Like? I think
31:11
the assumption is that that aspect of decision making is implicit and automatic, and
31:18
probably I think they would say relatively unconscious. I think we're not actually trying
31:22
to make those decisions. That's just sort of a way of describing in a
31:26
kind of heuristic way, how we are making those decisions, And so it
31:30
maybe isn't capturing like what decision making actually looks like, because nobody's really going
31:37
through those steps. And that actually is kind of relative to the last one
31:41
here, which is that it may rely too heavily on these idea of cognitive
31:45
processes without really considering sort of the more concrete, observable behaviors and circumstances,
31:52
contextual stimuli and variables that we can definitely measure and get a handle on.
31:56
That are going to be relevant to understanding how this works, which kind of
32:00
us to a scientific behavior based perspective on what is happening in these choice models
32:05
in relation to prospect theory. Absolutely, you know, the behaviorists in us
32:09
we have to we have to tackle this stuff, have to. The thing
32:12
is is we're not going to get into the choice right now, but we
32:14
are going to talk about this at least elements of this from a behavioral perspective.
32:17
In viewing behavior through a circumstantial point of view, we see decisions around
32:22
things such as finance as being influenced by our experience and context. Right,
32:25
experience, contexts, those things together make for certain decisions, and we're going
32:30
to make decisions based on what we know every time. One way this might
32:34
be easily manifested is by looking at the relative ubiquitousness said it. There you
32:38
go about something like prospect theory and other cultures where the learning history about gains
32:43
and losses might be different. Yeah, I mean, if you just think
32:45
about, like, one of the best ways to break a psychological theory is
32:50
to ask like, do they do that in other countries? Right? Yes?
32:54
Because one of the jokes about psychology is it's like the science of undergrad
32:59
students in the United States. Yeah, and these sort of white educated,
33:04
industrialized places. Is why they call it weird, following the acronym of those
33:08
features of the subjects who tend to make up these types of studies. And
33:13
in fact this was the case, and this was a twenty eleven analysis by
33:16
Marshall and colleagues that found that in different countries or risk your financial decisions are
33:22
considered more acceptable. People are less loss averse and less risk averse than they
33:28
are as described by the study. So even if you see sort of a
33:31
general tendency that looks kind of like what you see in prospect theory, the
33:36
fact is that you can sort of start to pull it apart by looking at
33:37
countries where they have different values, different histories, different economic circumstances, and
33:44
therefore they make different choices based on a totally different situation that they're in.
33:47
And then you sort of think, like, so, prospect theory, what
33:51
it's capturing is what people tend to do in Western cultures. But that kind
33:55
of means that it's almost by definition or not by definition, but most has
34:00
to be or like I guess, in a different way, it can't be
34:05
endemic to humans generally, because we've already seen that just a simple shift in
34:08
culture without trying to change anything else, has people respond differently to choice making
34:14
situations. Absolutely, and that again that's how that's how you break a theory.
34:19
Just apply it somewhere else and see if it's still still works. And
34:22
if it doesn't, yeah, well you know, maybe it's contextual. So
34:25
further, whenever someone makes a decision, they learn from that decision, So
34:30
people's relative evaluation of the experience of loss or risk is likely to change throughout
34:35
their life as they gain experiences with losses or gained. So essentially it's not
34:38
static, and it can't be static. Your starting point is always going to
34:40
move and shift a let alone, your reference point is always going to move
34:44
and shift, let alone, all the other variables to influence those decisions.
34:47
And to their credit, you know, condiment into Verseki did point out that
34:51
this was something that would change over time, but I think that that sort
34:53
of almost cuts out the knees from under this and by saying like, well,
34:59
essentially what people do is going to change, and I think that we
35:01
would actually suggest it probably changes even more than they might predict that it would
35:06
change, because I think the relative exposure to risks, losses, probability,
35:10
and gains is going to shift pretty dramatically how they start making choices later in
35:15
life, as they get more and more experience with having to make those choices
35:17
and experiencing the outcomes of those choices, and maybe they start to even out
35:22
a little bit. You know, someone who loses a lot might start to
35:23
think, like they might start to have the experience like losses aren't so bad,
35:27
Like I'm able to balance back from those pretty quickly. So like,
35:30
particularly because I'm only losing such and such amount and I can gains that same
35:34
amount by doing this other thing. So it's like, man, it's worth
35:36
the gamble, right, And I mean, I could see that being the
35:37
case. So we just know that that learning history is such an important part
35:42
of it. And another thing to consider here is like I always like to
35:45
wrap things in the context of sort of evolution and natural selection in that sort
35:49
of thing. And I think that this is not a criticism of prospect theory.
35:53
If anything, I think that there's some evolutionary a reason to believe that
35:57
there's some truth to this idea, which is that it makes some amount of
36:00
sense that losing resources should be more impactful than gaining resources in the sense that
36:06
some resources are extremely important in the immediate here and now. Right. So,
36:12
if you look at something like resources such as food, they're ephemeral and
36:15
while gaining food and a food scarce environment, so you're already sort of in
36:20
a food scarce environment. When you gain that food that provides momentary security for
36:22
the near future, you've got something that's like, Okay, this will last
36:25
me today, maybe tomorrow. I've got some time here. Versus if you
36:30
lose food, that is an immediate guarantee of insecurity in the near and possible
36:35
long term future. Right, So those threats to your security have an immediate,
36:40
real lasting impact, and that might then have there being a very natural
36:45
tendency to like, without having to do any mental calculations, gaining things is
36:50
more important because that provides immediate security for now and possibly into the future.
36:55
Yeah, I think that makes perfect sense from that perspective. Now of the
37:00
future is a concept only afforded the creatures that can organize their sense of time
37:04
into a framed reference to quote things that happened before now and quote things that
37:08
well that might happen after now you know, which, as far as we
37:13
can tell, is a pretty uniquely human thing, right, It's not really
37:16
something that happens like I don't see dolphins wearing wristwatches. Yeah, And it's
37:21
not that like like we see examples of non human animals doing things that look
37:24
like sort of planning if you will, like like burying foods. They can
37:28
come back to it later. Is like something that seems like a plan for
37:30
the future, but we don't. First of all, that's the circumstances of
37:36
which that happened or are few enough that it does seem like that's it's it's
37:39
it's unique that we tend to even notice that it happens because you're like,
37:43
wow, look at that. They're like thinking about the future. And second
37:45
of all, is like whether they're actually thinking about in terms of the future
37:49
or instead in terms of biological imperative that is a response to simple stimulus cues
37:52
in the environment. We don't know. We don't know what their response is.
37:54
Maybe they are planning for the future, but we know that humans do
37:58
this a lot, very easily and constantly, and so even if this does
38:02
appear in non human animals, they're doing it to a different degree and not
38:07
to the extent or consistency that humans do it. So that's why we think
38:10
it's sort of human. But last sort of point on here is in sort
38:15
of unpacking again this behavioral aspect of it, is there is a lot of
38:21
empirical data at this point that shows that people's choices are largely, if not
38:24
completely, influenced by the outcome of their previous choices, which kind of goes
38:29
back to what we've already been talking about, right, So it could be
38:32
correct that loss has felt more severely than gains when the outcomes of the same
38:37
But whatever someone will do the next time they're making a choice will be very
38:42
powerfully influenced by the outcome of the last time they made that particular choice.
38:46
And we've got data for miles to back that one up, Like we just
38:50
know that that's the case at this point, and that makes perfect sense.
38:53
I feel like that goes back to Thorntondyke's intelligent cats, right, Like we
38:58
learn from our experiences. There is literally us going through the maze and then
39:01
figuring out how to go through the maze faster, And we have an episode
39:05
on Thorndyke and his cats, those fancy cats. We also have an episode
39:09
on behavioral economics in which we interview doctor Lynn Green. This is episode forty
39:14
two, which was published February twenty eight, twenty eighteen. If you want
39:16
to go back and check that one out, maybe worth a rerun at some
39:19
point in the future. Yeah, that was a long time ago. Yeah
39:21
it was. Yeah, but we have more on that topic there, and
39:23
then we've also got more about I mean, we've lots lots of topics sort
39:28
of veguely related to choice making in that sort of thing, and more planned,
39:30
so stay tuned for those. But yeah, let's let's hit some take
39:35
on points here. Yeah, I mean, I think the big takeome point
39:37
is like it's always nice when when psychologists and researchers want to put together a
39:43
theory that tries to explain something. But the problem is that when you try
39:45
to overgeneralize that theory, it's you start very easily punching holes in it.
39:50
Like if you try to take that and apply it to every member of the
39:52
species, every member of the group, any culture, especially when it comes
39:57
to human behavior, like if it starts fall apart, then it's not a
40:00
thing that holds or maybe it doesn't like entirely capture the experience. And I
40:07
think, you know, they started to account for that when they started talking
40:09
about how this will ebb and flow and change, But I don't think that
40:12
they really saw the entire picture of like this is probably better explained by some
40:15
other theory or process. Yeah, I think one take on point for me,
40:20
which we didn't explicitly state, but is something that I think you can
40:23
sort of connect the dots with things that we described. And I don't know
40:27
if we said this clearly, but this has been one of the most enduring
40:30
theories in all of behavioral economics. It has proved pretty useful. They've applied
40:34
it countless times and repeated it in many studies, and even though there are
40:37
criticisms, it has like really shaped the field of behavioral economics, and people
40:42
continue to use the general idea of this and refined it. They found a
40:45
lot of ways to sort of build on it and expand it and find its
40:47
parameters of limitation as well as sure how it could be applied to things like
40:52
world wars, like international conflict, like a whole thing that I've seen be
40:55
wrapped in now with this idea of loss of version and that sort of thing.
41:00
And so what's interesting about is, as you said, is this is
41:02
one of the also the few theories that is what I would describe as a
41:07
pretty behavior analytics skewing in terms of thinking about this in terms of the contextual
41:13
features of someone's situation and how that's important in understanding the choices that they'll make.
41:17
And I think that's that's something that is pretty on board with things that
41:21
I think we would see, and it has also then proved to be one
41:23
of the most enduring of those theories. So I think that there's there's a
41:28
lot of potential here to use sort of unintentionally use behavioral principles to help explain
41:35
some human behaviors. And there's you know, we can poke some holes in
41:38
that too, like we simply just you know, we look at and find
41:42
ways where we might say that this breaks down, and those are legitimate,
41:45
like those are things for us to examine critically and understand what we're missing in
41:49
terms of understanding the choices that people make. But that to me is sort
41:52
of the big standout is that as this is something that has continued to prove
41:55
useful as a landmark and behavioral economic understanding, it is also one of the
42:00
most behavioral that has come out of behavioral economics. Yeah. Absolutely, And
42:06
I think that's kind of what it comes down to for me, is like
42:07
when it comes to choice and it comes to the choice making behavior, I
42:12
think it's just far too complex to put into a box. I think there
42:15
are too many things, there are too many things that come into play to
42:17
immediately go this is the thing, this is the theory, this is the
42:21
one thing that tells me that this is everything. And as we'll get to
42:24
a subsequent episode down the road, this also is probably better at explaining choice
42:29
than some of the explicitly behavioral theory. Yes, in my opinion, Yes,
42:36
agreed. Yeah, so we'll talk about that another day. Any other
42:39
take on points for you before we wrap up, No, I think that
42:42
covers it for me. Well, if you're joining us for the first time,
42:44
there's something we like to do at the end of every episode, which
42:46
is gives some recommendation, something that we think that you listeners could or should
42:50
go out and experience for yourself and maybe fine join it the way that we
42:53
did. But before we do that, we need to give thanks where thanks
42:57
are due. And one is that I'd like to credit my team here.
43:00
We have editing and production by Justin Greenhouse, writing in fact checking by Shane
43:05
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43:19
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43:22
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43:27
level and that just helps support us and join for a little bit and then
43:30
maybe stop, you know, if you want to do that sort of thing.
43:32
And if you do, then I'm going to say thank you every single
43:35
episode. I'm going to thank the current list of people right now who deserve
43:37
my Thinks because they're wonderful, they're here and we appreciate them. That wonderful
43:42
group of people includes Mike m Megan Layla, Mike t, Justin, Kim,
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Joshua, The Daily BA, Brad, Stephanie, Olivia, and Brian.
43:51
Thank you all so much for your continued support of everything that we do.
43:53
Yes, you are the best. Of course, thank you everyone for
43:57
listening to us today, and of course thank you Shane for taking time to
44:00
record with me on this where a Monday morning episode. Hey, thank you
44:04
for having me. It's always fun. We made it work. Anything that
44:07
I left out or anything we need to include before we get to our recommendations,
44:10
No, I think that about covers that Oh yeah, go support us
44:14
on podcast awards. All right, let's do some recommendations. Recommendations. All
44:25
right, I am recommending the latest season of Black Mirror. I think it
44:30
was season six. It just came out actually at the time of this recording,
44:34
like two days ago, you know. There recently we're three days ago.
44:37
Now. This is kind of one of the weirder seasons. I would
44:39
say that very little of this season actually has to do with specific technology or
44:45
technological advancements. Is actually the first time I've seen this level of supernatural brought
44:52
to the Black Mirror season. But it has got some really really good episodes
44:57
in it. Particularly the first couple really sit out to me as being fantastic.
45:00
I mean, the rest of they're all they're all good. But yeah,
45:02
if you're into Black Mirror, I recommend checking it out. New season
45:06
out now on Netflix. I heard that this season was pretty good, and
45:08
I heard there were a couple very Stephen King esque episodes, like there was
45:15
some there was some episode that takes like plot points from Dead Zone I think,
45:17
or something like that, which is cool. Okay, so I'm not
45:21
familiar with Dead Zone, but I would definitely say there's at least two episodes
45:24
that come to mind that seem very Stephen King as. Okay, very cool,
45:29
very cool. I like it. I like it. Well, if
45:30
you're recommending media, I would also like to recommend media, and that would
45:34
be the book and the movie that I think people know about this and I'm
45:37
linked to the game on this so whatever. But it's The Martian by Andy
45:40
Weir. So I just finished this book. It's not often that I like
45:45
will clear out everything in my world and just read a book and like finish
45:50
it. Like I tend to read in big chunks, so like I'll read
45:52
a couple of hours here, a couple and kind of do that. But
45:54
this time I was like, you know what I'm gonna spend all of I
45:58
think it was like Saturday, like just reading and reading and reading, and
46:01
I think I finished the entire book that day because it was so it was
46:06
so good. I never thought I'd be super interested in reading about potato farming
46:08
on Mars, but right they made it work. Like it's done really well.
46:13
I mean, if you're not familiar with The Martian, it's the story
46:15
of a NASA astronaut during a Mars mission who gets stranded on Mars by himself,
46:21
and the whole book is I mean it happens right away, like the
46:24
first entry is like I'm stuck here, and the entire book is trying to
46:29
get him off of Mars and him problem solving how to survive on Mars with
46:31
limited resources. And it's incredible. I mean, it is done so well.
46:36
And the movie also great. Matt Damon perfect for that role. I
46:39
mean, they could not have cast a better person for that role. Yeah.
46:43
I've actually gone on to say that I think this is now up there
46:46
with my favorite movie of all time. Really, yeah, I really really
46:52
love The Martian. It's like that and Shashank Redemption are both competing for number
46:55
one in my heart for my favorite movie. I don't blame you. It's
46:58
incredible. I mean they do it. It's done so well. I mean
47:00
I was totally sucked in. Yeah, and I mean the book is absolutely
47:06
amazing. So, like I said, as the movie is already one of
47:08
my favorites, the book is I think even better if as possible, and
47:13
so high high recommend. Yeah, I completely second that. I actually wonder
47:15
if i'd recommended it one of those on here before, probably the movie.
47:19
I think he did the movie. But either way, now you've got the
47:22
WWD stamp of approval. Yeah, double stamp. We need a rubber stamp
47:29
for that, we do. That's right. And I don't know if if
47:30
you have seen this, but like the extended version of The Martian is so
47:35
worth it. That's in a few things from the book that we're missed in
47:37
sort of the standard theatrical release, So I recommend there too. Okay,
47:40
Yeah, I don't know if I've seen that one, but I will definitely
47:43
check that out. Cool. All right, I think that was all that
47:45
we have to say about The Martian and Black Mirror, and probably all we
47:49
have to say about Prospect theory. If you'd like to correct us or give
47:51
us feedback or tell us how everything that we got right, and send us
47:53
wonderful compliments. You can email us directly info at WWDWWD podcast dot com.
48:00
Please reach out to us on social media. We've got lots of cool stuff
48:01
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48:05
places is WWDWWD podcast and we'll look forward to hearing from everybody. There.
48:09
Is there anything that mister or anything you look to add before we take it
48:12
by Shane? Nope, I think that covers it all right. Appreciate you
48:15
all. This is Abraham and this is Shane. We are out see up.
48:19
You've been listening to Why we do what we do. You can learn
48:22
more about this and other episodes by going to WWDWWD podcast dot com. Thanks
48:29
for listening and we hope you have an awesome day