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The Best of TED: Our mistaken expectations

By Brian | May 3, 2010 | Share on Facebook

Here’s another installment of my Best of TED series, in which I share talks from the Technology, Entertainment and Design conference that have struck me over the years as particularly insightful or fascinating.

This one comes from Harvard psychologist, Dan Gilbert, and deals with how we calculate expected value for a given activity or transaction. Stuff like, “Would you prefer 50 dollars now or 60 dollars in a month?” Like Dan Ariely’s talk that I linked to previously, this is peppered with lots of wonderful examples of decisions we make every day, and how the logical thing to decide would be exactly the opposite. Here’s an example:

Imagine that you’re going to the theater. You’re on your way to the theater. In your wallet you have a ticket, for which you paid 20 dollars. You also have a 20-dollar bill. When you arrive at the theater, you discover that somewhere along the way you’ve lost the ticket. Would you spend your remaining money on replacing it? Most people answer, no. Now, let’s just change one thing in this scenario. You’re on your way to the theater, and in your wallet you have two 20-dollar bills. When you arrive you discover you’ve lost one of them. Would you spend your remaining 20 dollars on a ticket? Well, of course: I went to the theater to see the play. What does the loss of 20 dollars along the way have to do?

Now, just in case you’re not getting it, here’s a schematic of what happened, OK? Along the way, you lost something. In both cases, it was a piece of paper. In one case, it had a U.S. president on it; in the other case it didn’t. What the hell difference should it make? The difference is that when you lost the ticket you say to yourself, I’m not paying twice for the same thing. You compare the cost of the play now — 40 dollars — to the cost that it used to have — 20 dollars — and you say it’s a bad deal.

There are other great vignettes in there as well, followed by a really great Q&A in which Gilbert talks about our reaction to terrorism vs. other things that kill Americans every year (like the flu or swimming pools…), and also a rebuttal of sorts from an audience member who thinks we should stop defining “value” for people and then calling them stupid for picking the option with the lower value. He discusses the inherent value in buying lottery tickets. Really great stuff, IMHO…

Topics: The Best of TED | 2 Comments »

2 Responses to “The Best of TED: Our mistaken expectations”

  1. Ilya says at May 4th, 2010 at 5:27 pm :
    Very engaging stuff, although I have a bit of beef with his emphasis on explaining how the choices people make are “wrong” while not spending any time on strategies to make right choices. Maybe those don’t exist…

    And I quite enjoyed the Q&A rebuttal on the value of buying lottery tickets. There is a 1 in 175 million chance of winning Mega Millions if you buy a ticket; if you don’t buy a ticket, your chance of winning is precisely 0. Some people might feel that $1 is too steep a price to pay for such minuscule “difference” in odds; others consider having a negligible chance better than having no chance at all. Bernulli’s formula will yield the result greater than $1 for any payout above $175 million – which means everyone SHOULD buy tickets when the payout is that large – but if there was a way of placing quantitative value on “having a chance” versus “not having a chance”, to say nothing of the whole serotonin argument, I’m sure buying tickets for even lower payout drawings could be considered “right thing to do”.

    The bottom line is, you cannot brand a decision right or wrong simply by examining one single factor about it. The entire Gilbert’s presentation was aimed at exposing the fallacy of such approach; yet, he does exactly that same thing himself when he uses lottery tickets as an example. I found that slightly diminishing the overall effect.

    Having written this, I now wonder why I don’t buy MegaMillions tickets more often… What’s the payout tonight? 266 million?

  2. Brian says at May 5th, 2010 at 12:07 am :
    Not to mention the statistically prudent decision to buy 133 million tickets (making your odds > 50/50). I’ve often wondered why a wealthy person (particulalry a past lottery winner) doesn’t pursue such a strategy across multiple lotteries. With deep enough pockets & fixed odds, you could easily make a living at such things…

    As re: Gilbert, I agree with you, Ilya, which is why I also enjoyed the Q&A. Gilbert seems to have a pretty good bead on irrational human behavior, but then betrays his own ego by committing the sins that he’s discovered in others. As Dan Arielly said in the previously featured video, we all believe we are immune to these broad trends – that we would not allow ourselves to make irrational decisions like those silly “other people” do.

    On the other hand, I give Gilbert props for copping to the criticism when the guy in the audience puts him in his place.

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