Why we are wrong — Chris Dillow

Cognitive-affective bias. Short post but really a long one considering the links, which are useful in gaining understanding as well as justifying claims.

Stumbling and Mumbling
Why we are wrong
Chris Dillow | Investors Chronicle

Lars P. Syll — Dutch books and money pumps

According to Keynes we live in a world permeated by unmeasurable uncertainty – not quantifiable stochastic risk – which often forces us to make decisions based on anything but rational expectations. Sometimes we ‘simply do not know.’ Keynes would not have accepted the view of Bayesian economists, according to whom expectations “tend to be distributed, for the same information set, about the prediction of the theory.” Keynes, rather, thinks that we base our expectations on the confidence or ‘weight’ we put on different events and alternatives. To Keynes, expectations are a question of weighing probabilities by ‘degrees of belief,’ beliefs that have precious little to do with the kind of stochastic probabilistic calculations made by the rational agents modelled by Bayesian economists.

Lars P. Syll’s Blog
Dutch books and money pumps
Lars P. Syll | Professor, Malmo University

HBR — You Can’t Make Good Predictions Without Embracing Uncertainty

But the uncertainty of the future is no excuse for less rigor or clarity. A consistent, quantitative perspective on uncertainty not only builds the best foundation for making good management decisions but also provides a platform for developing a shared understanding of trade-offs, bridging disagreement and establishing accountability.…

Uncertainty cannot be pretended away.

Harvard Business Review
You Can’t Make Good Predictions Without Embracing Uncertainty
Peter Hopper, partner and managing director of the Hong Kong office of the Strategic Decisions Group, and Carl Spetzler, chairman and CEO of SDG and coauthor

Ohio State University — You're not irrational, you're just quantum probabilistic

Researchers explain human decision-making with physics theory…

"Whenever something comes up that isn't consistent with classical theories, we often label it as 'irrational.' But from the perspective of quantum cognition, some findings aren't irrational anymore. They're consistent with quantum theory--and with how people really behave."

In two new review papers in academic journals, Wang and her colleagues spell out their new theoretical approach to psychology. One paper appears in Current Directions in Psychological Science, and the other in Trends in Cognitive Sciences.

Their work suggests that thinking in a quantum-like way¬--essentially not following a conventional approach based on classical probability theory--enables humans to make important decisions in the face of uncertainty, and lets us confront complex questions despite our limited mental resources.

What was that about rational choice again?

Eureka Alert
You're not irrational, you're just quantum probabilistic
Ohio State University

ht Mark Thoma at Economist's View

Justin Fox — From “Economic Man” to Behavioral Economics

Everything you always wanted to know about the development of decision theory.

Harvard Business Review

From “Economic Man” to Behavioral Economics

Justin Fox | former editorial director of Harvard Business Review and now a columnist for Bloomberg View

ht Mark Thoma at Economist's View

Brad DeLong — Is Choosing to Believe in Economic Models a Rational Expected-Utility Decision Theory Thing?

This is a good one. I won't spoil it.

OK, I can't resist.

The fact that so few economists are in the third camp–and that any economists are in the second camp–makes me agree 100% with Andrew Gelman’s strictures on economics as akin to Ptolemaic astronomy, in which the fundamentals of the model are “not [first-order] approximations to something real, they’re just fictions…”

WCEG — The Equitablog
Is Choosing to Believe in Economic Models a Rational Expected-Utility Decision Theory Thing?
Brad DeLong

Justin Fox — Instinct Can Beat Analytical Thinking

Absolute must-read. 

I had realized this forty years ago when invited to teach decision theory in a military setting characterized by complexity and radical uncertainty in contexts where speed of response is crucial.

Harvard Business Review — HBR Blog Network
Instinct Can Beat Analytical Thinking

Justin Fox