July 9, 2010
Fantastic article via Book of Odds (one of my daily reads)
H/T Ian Stanczyk
Introduction (via Zachary Turpin)
When statisticians calculate the likelihood of a random event, they sometimes use something called a “Poisson distribution.” Web-search this term. For the less-than-mathematical, the explanations that come up may read like migraine-inducing gibberish. Which is unfortunate, really, since the PD is so useful that it deserves a simple explanation.
A Poisson distribution is, at its root, a mathematical equation that uses a little data, supplied by you, to determine the odds a random event will occur X times in a given parameter (in an area, maybe, or a span of time). The event can be almost anything, as long as A) it is random, B) you know how often it occurs on average, and C) it occurs independently of the time since the last event. These event-strings, called “Poisson processes,” include things like:
- the number of raindrops to fall on a square of sidewalk
- the odds of getting a bulls-eye in darts
- the number of calls to pass through a 911 center in an hour
- the number of typos made per page
- the odds of winning at roulette
A characteristic of the Poisson process is the ease with which its mechanism may be understood, and the difficulty with which it is predicted. Traffic, for example: the distribution of cars on the road is easy to conceptualize. When a lot of cars hit the road at once, there’s traffic. It is not, however, easy to predict if the traffic on a Wednesday will become a traffic jam or how long a jam might last. With collectible numbers like average cars on a highway at 5:00 and average number of accidents per day—and a Poisson calculation—the likelihood of those events become clearer. Other Poisson processes are similarly simple and chaotic—how many people will be in a given grocery line when you arrive? How many phone calls will you receive in a day? Poisson distributions sidestep a bit of the chaos relying solely on average rate of occurrence.
Click Here To Read: Who’s Going Through a Toll Booth First? Ask Poisson
May 25, 2010
DANIEL SIMONS and CHRISTOPHER CHABRIS are quickly placing amongst my favorite researchers. There new book is fantastic (and you should expect an interview and review from yours truly).
Must read for anyone wishing to become excellent at anything!
Moving on….This article is about the Dunning Kruger effect which I linked to last week…
Introduction (Via NY Post)
Charles Darwin observed that “ignorance more frequently begets confidence than does knowledge.” That was certainly true on the day in 1995 when a man named McArthur Wheeler boldly robbed two banks in Pittsburgh without using a disguise. Security camera footage of him was broadcast on the evening news the same day as the robberies, and he was arrested an hour later. Mr. Wheeler was surprised when the police explained how they had used the surveillance tapes to catch him. “But I wore the juice,” he mumbled incredulously. He seemed to believe that rubbing his face with lemon juice would blur his image and make him impossible to catch.
Interesting Excerpt (via NY Post)
It turns out that the illusion of confidence can survive even the measurement of skill.
Chess, for instance, has a mathematical rating system that provides up-to-date, accurate and precise numerical information about a player’s “strength” (chess jargon for ability) relative to other players. Ratings are public knowledge and are printed next to each player’s name on tournament scoreboards. Ratings are valued so highly that chess players often remember their opponents better by their ratings than by their names or faces. “I beat a 1600” or “I lost to a 2100” are not uncommon things to hear in the hallway outside the playing room.
Armed with knowledge of their own ratings, players ought to be exquisitely aware of how competent they are. But what do they actually think about their own abilities? Some years ago, in a study we conducted with our colleague Daniel Benjamin, we asked a group of chess players at major tournaments two simple questions: “What is your most recent official chess rating?” and “What do you think your rating should be to reflect your true current strength?”
Click Here To Read: Why losers have delusions of grandeur
May 12, 2010
Welcome to part 3 of This bias will kill 99% of investors. Unlike prior posts where I focused on the Dunning Kruger effect this post is dedicated to the “Bias Blindspot”.
This bias was suggested to me via the MindHacks blog (in 2009).I have followed the psychologist Emily Pronin and I’m happy to say her work is fascinating.
Abstract: The Bias Blind Spot: Perceptions of Bias in Self Versus Others (via Pronin, Lin, & Ross)
Three studies suggest that individuals see the existence and operation of cognitive and motivational biases much more in others than in themselves. Study 1 provides evidence from three surveys that people rate themselves as less subject to various biases than the “average American,” classmates in a seminar, and fellow airport travelers. Data from the third survey further suggest that such claims arise from the interplay among availability biases and self-enhancement motives. Participants in one follow-up study who showed the better-than-average bias insisted that their self-assessments were accurate and objective even after reading a description of how they could have been affected by the relevant bias. Participants in a final study reported their peer’s self-serving attributions regarding test performance to be biased but their own similarly self-serving attributions to be free of bias. The relevance of these phenomena to naïve realism and to conflict, misunderstanding, and dispute resolution is discussed.
Fascinating Excerpts (via Pronin, Lin, & Ross)
This proposal of an asymmetry in perceptions of bias arises from recent accounts of “naive realism” (Griffin & Ross, 1991; Pronin, Puccio, & Ross, 2001; Ross & Ward, 1996; also see Ichheiser, 1970), which hold that people think, or simply assume without giving the matter any thought at all, that their own take on the world enjoys particular authenticity and will be shared by other openminded perceivers and seekers of truth. As a consequence, evidence that others do not share their views, affective reactions, priorities regarding social ills, and so forth prompts them to search for some explanation, and the explanation most often arrived at, we argue, is that the other parties’ views have been subject to some bias that keeps them from reacting as the situation demands. As a result of explaining such situations in terms of others’ biases, while failing to recognize the role of similar biases in shaping their own perceptions and reactions, individuals are likely to conclude that they are somehow less subject to biases than the people whom they observe and interact with in their everyday lives.
Excerpted Conclusion (via Pronin, Lin, & Ross)
The results of our three studies suggest that knowledge of particular biases in human judgment and inference,and the ability to recognize the impact of those biases on others, neither prevents one from succumbing nor makes one aware of having done so. Indeed, our research participants denied that their assessments of their personal qualities (Study 2) and their attributions for a particular success or failure (Study 3) had been biased even after having displayed the relevant biases and reading descriptions of them
Click Here To Read: The Bias Blindspot- This Bias Will Also Kill 99% of Investors
May 12, 2010
Welcome back to our second post on the Dunning Kruger effect or as I have renamed it the Circle of Competence Bias.
Below is the abstract and excerpts via Dunning & Kruger’s original work. I highly recommend this to all readers.
If you could read 3 papers this year this would be one of them!
Miguel’s Solution: Develop a thick skin (not by pleasing others or listening to their praises). Seek confidants that will shoot down your ideas and will tell you the truth. Develop a close group of mentors and friends that provide you with perspective. Always seek immediate feedback from more talented people and ask them to tell you what sucks first. Lastly, surround yourself with people much better than you —never satisfice on this last principle.
For investors: always assume a guy like Warren Buffett is opposite your trade! I know very sharp investors whom I’d prefer not to trade with (meaning on the opposite side of the fence). I always assume there’s at least 5 of these people for every company I research.
Paper:
Unskilled and Unaware of It: How Difficulties in Recognizing One’s Own Incompetence Lead to Inflated Self-Assessments
Abstract (Via Dunning & Kruger)
People tend to hold overly favorable views of their abilities in many social and intellectual domains. The au-thors suggest that this overestimation occurs, in part, because people who are unskilled in these domains suffer a dual burden: Not only do these people reach erroneous conclusions and make unfortunate choices, but their incompetence robs them of the metacognitive ability to realize it. Across 4 studies, the authors found that participants scoring in the bottom quartile on tests of humor, grammar, and logic grossly overes-timated their test performance and ability. Although their test scores put them in the 12th percentile, they estimated themselves to be in the 62nd. Several analyses linked this miscalibration to deficits in metacogni-tive skill, or the capacity to distinguish accuracy from error. Paradoxically, improving the skills of partici-pants, and thus increasing their metacognitive competence, helped them recognize the limitations of their abilities.
Fascinating Introduction (via Dunning & Kruger)
Perhaps more controversial is the third point, the one that is the focus of this article. We argue that when peo-ple are incompetent in the strategies they adopt to achieve success and satisfaction, they suffer a dual bur-den: Not only do they reach erroneous conclusions and make unfortunate choices, but their incompetence robs them of the ability to realize it. Instead, like Mr. Wheeler, they are left with the mistaken impression that they are doing just fine. As Miller (1993) perceptively observed in the quote that opens this article, and as Charles Dar-win (1871) sagely noted over a century ago, “ignorance more frequently begets confidence than does knowledge” (p. 3).
In essence, we argue that the skills that engender com-petence in a particular domain are often the very same skills necessary to evaluate competence in that do-main-one’s own or anyone else’s. Because of this, in-competent individuals lack what cognitive psychologists variously term metacognition (Everson & Tobias, 1998),
Puzzling results (via Dunning & Kruger)
One puzzling aspect of our results is how the incompe-tent fail, through life experience, to learn that they are unskilled. This is not a new puzzle. Sullivan, in 1953, marveled at “the failure of learning which has left their capacity for fantastic, self-centered delusions so utterly unaffected by a life-long history of educative events” (p. 80). With that observation in mind, it is striking that our student participants overestimated their standing on aca-demically oriented tests as familiar to them as grammar and logical reasoning. Although our analysis suggests that incompetent individuals are unable to spot their poor performances themselves, one would have thought nega-tive feedback would have been inevitable at some point in their academic career. So why had they not learned?
One reason is that people seldom receive negative feedback about their skills and abilities from others in everyday life (Blumberg, 1972; Darley & Fazio, 1980; Goffman, 1955; Matlin & Stang, 1978; Tesser & Rosen, 1975). Even young children are familiar with the notion that “if you do not have something nice to say, don’t say anything at all.”
Conclusion (via Dunning & Kruger)
We propose that those with limited knowledge in a domain suffer a dual burden: Not only do they reach mistaken conclusions and make re-grettable errors, but their incompetence robs them of the ability to realize it. Although we feel we have done a competent job in making a strong case for this analysis, studying it empirically, and drawing out relevant impli-cations, our thesis leaves us with one haunting worry that we cannot vanquish. That worry is that this article may contain faulty logic, methodological errors, or poor communication. Let us assure our readers that to the ex-tent this article is imperfect, it is not a sin we have com-mitted knowingly.
Click Here To Read: Unskilled and Unaware of It: How Difficulties in Recognizing One’s Own Incompetence Lead to Inflated Self-Assessments
May 12, 2010
This will be a three part post. Something I rarely do and which signifies the importance of the decision making trap.
I have to send a big thanks to Vaughan @ Mindhacks for finding this!
So what is the Dunning Kruger Effect?
Definition via Wikipedia :
The Dunning Kruger Effect – is a cognitive bias in which “people reach erroneous conclusions and make unfortunate choices but their incompetence robs them of the metacognitive ability to realize it.”[1] The unskilled therefore suffer from illusory superiority, rating their own ability as above average, much higher than in actuality; by contrast, the highly skilled underrate their abilities, suffering from illusory inferiority. This leads to a perverse result where less competent people will rate their own ability higher than more competent people. It also explains why actual competence may weaken self-confidence because competent individuals falsely assume that others have an equivalent understanding. “Thus, the miscalibration of the incompetent stems from an error about the self, whereas the miscalibration of the highly competent stems from an error about others
The Hypothesis:
Kruger and Dunning noted a number of previous studies which tend to suggest that in skills as diverse as reading comprehension, operating a motor vehicle, and playing chess or tennis, “ignorance more frequently begets confidence than does knowledge” (as Charles Darwin put it). They hypothesized that with a typical skill which humans may possess in greater or lesser degree:
- Incompetent individuals tend to overestimate their own level of skill.
- Incompetent individuals fail to recognize genuine skill in others.
- Incompetent individuals fail to recognize the extremity of their inadequacy.
- If they can be trained to substantially improve their own skill level, these individuals can recognize and acknowledge their own previous lack of skill.
Listen to a radio show on the Dunning Kruger Effect (Via mindhacks)
ABC Radio National’s Science Show has a fantastic short segment on the ‘unskilled and unaware of it’ effect, also known as the Dunning-Kruger effect, where people with low levels of ability in a certain field vastly over-rate their talents because they lack the skills to judge their own competence.
Miguel’s definition for value investors and decision makers.
Essentially the Dunning Kruger Effect plays on your perceived circle of competence. Instead of having a tight boundary around concepts, ideas, and skills which you know you have mastered; the effect reveals holes in your circle of competence. In other words, you think you know more than you actually know. This is very very dangerous! Ask any equity investor trying convertible bond arb with 40xleverage!
I highly recommend listening to this Radio Program on the Dunning Kruger Effect or via Mindhacks (be sure to thank Vaughan)
March 4, 2010
I’ve listed and often linked to many cognitive biases, here is a quaint definition via Oxford.
Click Here To Read: Defining & Identifying A Cognitive Bias
Definition (via Oxford)
A cognitive bias is any systematic deviation from a normative criterion that affects thinking, often leading to errors in judgment. Affect, in particular, may bias cognition, both by altering depth of cognitive processing and by impacting the content of cognitions. A useful example of emotion altering depth of processing appears in studies by Bodenhausen et al (1994). Happy individuals demonstrated less depth of processing than individuals in a neutral affective state, evidenced by their reliance on simple mental categories rather than on complex stimuli. A useful example of emotion altering the content of thought appears in studies on the affect-as-information model (see affect-as-information). Individuals in a positive mood judged their overall life satisfaction more positively than did individuals in a negative mood. That is, their temporary positive mood altered the content of their thoughts about satisfaction as a whole.
4 Demonstrations of Emotional Biases (via Oxford)
1. Judgment lacks correspondence with a criterion. The most direct way to measure a bias is to compare human judgment to a known normative criterion. For example, Bechara et al. (1997) examined the decision making of patients with lesions in their pre-frontal cortex – an area that integrates emotion with cognition. They
2. Judgment lacks correspondence with judgments of others. Another way to measure a bias is to compare the judgment of different groups on a task. If the groups’ judgments fail to cohere, then one can infer that at least one of the groups must be biased. When using this approach, it is especially useful to identify one group as expert, so it can serve as the standard for comparison.
3. Judgment relies on bad information. The existence of cognitive bias can also be inferred from individuals’ reliance on a bad judgmental cue.
4. Judgment fails to use good information. Finally, one can infer a bias if individuals fail to utilize a good judgmental cue. In Lerner et al’s (1998) study of legal decision making, participants were randomly assigned to an anger condition or a neutral condition.
Click Here To Read: Defining & Identifying A Cognitive Bias
February 14, 2010
Looks like a bias, sounds like a bias, guess what…it’s a bias!
Click Here To Read: Judging A Book By Its Cover – He just looks Republican:Surprising insights from the social sciences
Introduction (via Boston.com)
You shouldn’t judge a book by its cover, but you can probably judge political partisans by theirs. Psychologists at Tufts University showed people photos of white Democratic and Republican politicians and college students. People were able to guess the political affiliation of the person in the photo at a rate significantly better than chance. There was no significant difference in how accurately people perceived the political affiliation of men vs. women. When asked to assess the traits of people in the photos, people perceived powerful-looking individuals to be Republicans and warm-looking individuals to be Democrats, though only perceptions of having a powerful appearance actually correlated with political affiliation.
Additional Excerpts (Via Boston.com)
Rule, N. & Ambady, N., “Democrats and Republicans Can Be Differentiated from Their Faces,” PLoS ONE (January 2010).
In prices, precise is nice
Note to real estate agents: You’re leaving money on the table! Researchers at Cornell University conducted multiple experiments and analyses to demonstrate what they call the “price precision effect.” When people are presented with comparable prices, the one that is rounded (i.e., has more zeros) is perceived to be bigger, even if it’s slightly smaller. People seem to be thrown for a loop by a large, yet precise, number, causing them to misinterpret it as a smaller number and, thus, be willing to pay more. The same pattern was found in a survey of prospective home buyers and in transaction data from the Multiple Listing Service. According to the authors, if there are two comparable homes listed for $485,000 and $484,880, the latter can be expected to sell for about $1,200-$1,450 more.
Thomas, M. et al., “The Price Precision Effect: Evidence from Laboratory and Market Data,” Marketing Science (January-February 2010).
Power corrupts, starting with you
Hardly a day goes by without us hearing about the hypocrisy of some powerful person. But are these just a few bad apples? To find out, researchers primed people to think about power and then asked them to report how acceptable it would be for others or themselves to entertain unethical behavior, such as over-reporting travel expenses, breaking traffic laws, under-reporting income, or stealing a bike. Those who were put in a powerful frame of mind were significantly more hypocritical – in other words, they demanded better behavior from others than from themselves. In contrast, those who were put in a low-power or illegitimate-power frame of mind exhibited what the authors call “hypercrisy” – demanding more from themselves than from others.
Lammers, J. et al., “Power Increases Hypocrisy: Moralizing in Reasoning, Immorality in Behavior,” Psychological Science (forthcoming).
Click Here To Read: Judging A Book By Its Cover – He just looks Republican:Surprising insights from the social sciences
February 9, 2010
Synopssis (Via PsyBlog)
Research shows both pro-Arabs and pro-Israelis watching the same news reports think it is biased against their own side.
Introduction (Via PsyBlog)
The media may well be biased, in fact it would be a miracle if it were permanently and perfectly balanced, that isn’t what this post is about.
Instead this is about how you and I perceive the presence or absence of bias in the media.
This study, conducted in the 1980s, helps to explain a lot of the heat and light that gets produced by those commenting on media bias across the political spectrum, including the remarkably vitriolic outpourings often seen in the comment sections of newspaper websites and across the internet.
Key Lessons (Via PsyBlog)
The study demonstrates what the authors call the ‘hostile media phenomenon’: people’s tendency to view news coverage about which they hold strong beliefs as biased against their own position.
There were two mechanisms at work here:
- The truth is black and white: partisans generally thought that the truth about the Arab-Israeli debate was black and white. Any hint of shades of grey in the news reports was interpreted by partisans as bias towards the other side. In other words: any balanced report will seem biased to partisan viewers.
- The news report was too grey: as well as thinking the Arab-Israeli issue was either black or white, partisans also perceived that the specific news report they watched was too grey.
Put simply: when we care about an issue, we tend not to notice all the points we agree with, and focus on the ones we don’t.
Admitting bias
Whether the news actually is biased in one particular outlet about an issue that you care about can be very hard to quantify.
What we can say from this study is that people who care about a particular issue will tend to find media bias everywhere, whether or not it really exists. Not only that but they are unlikely to admit this fact to themselves since this study, amongst others, also shows how remarkably resistant we are to admitting to our own biases, even when they are categorically demonstrated to us.
Click Here To Read: Why The Media Seems Biased When You Care About The Issue
February 8, 2010
One of my favorite papers of the year….
“Thus, the media bias can also be explained by newspapers choosing the companies’ exposures according to their editorial policy. “
Click Here To Read: Media Bias in Financial Newspapers: Evidence from Early-Twentieth-Century France !!!
Abstract (Via SSRN)
The financial market was well developed in France in the years before World War I, and there were many newspapers that provided information to investors. Yet commentators at the time faulted the financial press for inaccuracy and biases, which they linked to the existence of payments made by companies for coverage in the editorial section. This paper tests whether the payment scheme induced a systematic bias in the coverage of companies listed on the Paris stock exchanges by newspapers. The results show that, although firms’ media coverage was affected, the performance of firms actually touted by the press was good. Thus, the media bias can also be explained by newspapers choosing the companies’ exposures according to their editorial policy.
Excerpts (Via SSRN)
This paper provided quantitative evidence on how four financial newspapers chose the information they published on listed firms in early-twentieth-century France. It shows that editors used varying financial criteria when choosing companies, thereby competing on various dimensions to attract readers. The results also show that the media were biased toward some subsets of companies but that this did not have a negative effect on their readers. Moreover, we have shown that independent newspapers were not the Holy Grail of unbiased information, because bank-owned newspapers did not underperform when compared to their independent counterparts. This stands in sharp contrast with the judgments of many observers writing at the time. The results also suggest that the newspaper market was segmented between risk-averse and risk-seeking investors and that the selection of the firms covered in the media varied according to the targeted readership. Notice that the increasing digitalisation of newspapers’ content will allow future research to broaden the sample of newspapers tested and consequently to assess the generic character of our results.
Although each conclusion is not surprising in itself, the broader picture that they suggest is that the importance of media bias was clearly overemphasized in the historical literature and that the dissemination of information on listed companies must have undoubtedly contributed to the development of the financial markets. The payments to newspapers could, however, have a negative impact, notably because of the transaction cost they imposed on listed firms. In particular, following the literature on corruption, small firms, those that were not able to afford paying the numerous intermediaries involved in the information market, certainly suffered from the peculiarities of the process through which information made its way into the newspapers. We let to future research the estimation of this possible impact of media bias on the overall stock market performance.
Click Here To Read: Media Bias in Financial Newspapers: Evidence from Early-Twentieth-Century France !!!
January 26, 2010
H/T To the Nudge Blog for telling me about this article.
Click Here To Read: ‘Parking Availability Bias’
Introduction (Via How We Drive)
Driving home from the Yale event last night (which was packed, and filled with all kinds of interesting traffic types, ranging from Norman Garrick to Anne Lutz Fernandez), as I was listening to various renditions of La Boheme on Doug Fox’s wonderful program (Mr. Fox, I didn’t catch the details on that second act), which I discovered for the first time, a warm presence amidst the eerie fog-tinged, arc-lighted Stygian gloom of I-95, I was thinking back to Donald Shoup’s reply to a question I had posed to him, which itself was related to Brian Pijanowski’s study of parking-lot sprawl in Indiana. Despite a huge and quantifiable overabundance of parking in the county he studied, he was interested to note that people still complained “there wasn’t enough parking.”
I asked Shoup, who of course from the groves of academe has helped ignite a quiet but fomenting revolution in parking policy, to what extent this question of perception in the parking equation had been studied or quantified — keeping in mind that perception is a crucial, if often under-appreciated part of the traffic/planning nexus (e.g., commute times, etc.). One part of Shoup’s answer stuck with me: He talked of studying a parking garage in West Hollywood. On the bottom floors, there were cars, and in the empty spaces, plenty of oil stains to indicate past users. On the upper floors, he noted, it looked as if the spaces had never been graced by a single car. And yet the word from drivers was that there was ‘nowhere to park.’ But the problem, Shoup noted, is that drivers’ perception parking supply is informed by the parking spaces they can actually see. Call it “parking availability bias” (ode to Tversky and Kahneman). And the spaces that are most easily seen, of course, are curb spaces, hence the importance of rational market pricing policies to ensure turnover and vacancy. A few empty spaces (15%) can go a long way.
Click Here To Read: ‘Parking Availability Bias’
