Friday, June 24, 2011

Prospect Theory

Okay, I spent the last two blogs talking about Enlightenment philosophers. Hopefully you noted I wrote about the variety of thoughts that were being thunk at that time and how they played against each other. I have also written in the past in a not-so favorable manner about the Enlightenment. So, was the Enlightenment a good thing or not? This entry will sort some of that out.

Enlightenment thinking was an improvement over the decision making process that had been used prior to that. Prior to that, the occasional genius thought stuff up and the rest of us could chose to believe him or not (it was almost always a him). So we had Confucius or Jesus, Aristotle or Moses. Frequently your choice would be determined by your parents or the law telling you to believe or die. The Enlightenment thinkers figured out how to avoid the punishments of the Inquistion but they were still just sitting down at a table with a pen and thinking about it.
The eighth painting in the series "The Rake's Progress" where the fashionable come to watch the whacky antics of the mentally ill.

When you stop and think about where ethics come from or how the world began, you are using a rational thought process, so it was natural for these philosophers to assume that humans are rational thinking beings. When we decide that we shalt not kill, it isn’t God telling us not to do that, we figured out that if we didn’t kill anybody we would be happier. We don’t covet our neighbor’s wife because we don’t want our neighbor coveting our wife. We’ll all be happier if we agree on that, right? This was eventually immortalized in the famous words that we are endowed “with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.” It is this idea of calculating our maximum happiness that forms much of the theory of capitalism and our modern way of looking at the world.

The problem is, we are not rational at all. It took a couple hundred years before anyone stopped and did any analysis of these ideas or any experiments on how people really think. Economists only experimented with ways to trick us into buying things. They came up with elaborate theories about how allowing people with money to do whatever they want will somehow benefit all of us. Never mind that they got that money by putting a value on our labor then skimming off some of that value into their pockets.

But before I get off on a liberal politics rant, let’s get back to how we think. The first time I heard of Prospect Theory was on TV and radio shows about money. Studies were done that showed that people don’t think straight when it comes to money. If you were given $30, then given a 50/50 chance to win or lose $9, 70% of you would take that bet. But, given the choice of getting $30 for certain or a coin flip to get either $21 or $39 dollars, only 43% take the coin flip. The two scenarios have exactly the same odds. The only difference is when you make the decision. We generally don’t calculate odds, we base our decisions on irrational things like is the $30 in our wallet or not.

What the TV and radio shows did not tell me is that this theory was not developed by economists, it was developed by psychologists. They had to convince the economists that everything they had been basing their theories on for 300 years was wrong. In 2002, these psychologists, Tversky and Kahneman won the Nobel Prize in Economics. Of course that doesn’t mean that economists really care. They still tell us that the trickledown theory really works.

What does this tell us about the science vs. religion debate? 300 years ago some well off people just decided that we were rational thinking creatures, that there was no mystery to where ideas come from. This flew in the face of thousands of years of tradition but also in the face of anyone who thought about it and wondered why they got mad at some stupid little thing or lusted after something they knew they could never have. This was thrown in the bucket of irrationality, something those Enlightenment philosophers were above of course. If you didn’t understand rationality, you were probably just born that way and incapable of understanding them. And they wondered why some people didn’t like them.

Ironically, it took the ultimate tool of rational thinking, the scientific method, to prove that we are not rational thinkers after all.

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