We've all made rational decisions and forecasts based on individually analyzing the best available data. But there are many other aspects of decision making. This session will examine some of those. When can groups of non-expert individuals beat some of the best experts? What are some of the common biases that cause ordinary people to make decisions differently from those that they "should" make. Can you take advantage of the ways other makes decisions or is this unwarranted manipulation?

1. 1
Smart crowds,
Irrational individuals?
Gordon Haff
Cloud Product Strategy
Red Hat
3 May 2014

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About Me
• Red Hat Cloud Product Strategy
• Twitter: @ghaff
• Google+: Gordon Haff
• Email: ghaff@redhat.com
• Blog: http://bitmason.blogspot.com
• Flickr: http://www.flickr.com/photos/bitmason/
• Formerly: Illuminata (industry analyst), Data
General (minicomputers/Unix/NUMA/etc.),
shareware developer

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Some Decision-Making Tools and Approaches
• Data vs. models
• Complex models vs. heuristics
• Data-driven vs. hunches
• Individual vs. group
• “Crowd wisdom” ç
• Behavioral decision theory ç

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The Wisdom of Crowds

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“The average competitor was probably as well
fitted for a just estimate of the dressed weight
of an ox, as an average voter is of judging the
merits of most political issues on which he
votes.”
Francis Galton

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The Crowd’s Result?
Within
one
pound

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An Oscar Contest Example: Consensus* vs. Experts
*read “consensus” as modal group choice for each decision
Best picture
Best actress
Phil Eve
Sue
Tom
Harry
✔
Eve
Tom
Harry
Phil
Sue
✔

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Oscar contest: Consensus vs. Winners by Year

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Is Averaging Experts Better?
Best > 20 year contestant: 28.5 (vs. 30.5)
Best 5 year contestant: (31 (vs. 33 during same period)

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When do wise crowds work?
• Diversity of opinion
• Information
• Independence
• Decentralization
• Aggregation

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Decreasing Advantage = Decreasing Independence?

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Nate Silver: Aggregating Models

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Prediction Markets are an Implementation
• Regulatory hurdles when real money involved
• Have been experimented with for internal use by
companies such as Google
• Ultimately, observing that aggregating many models/
decisions may trump individual “expertise” may be most
important lesson

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Why are Individual Decisions Flawed?
• You’re stupid
• You lack data
• You lack domain expertise
• You lack time
• You’re being influenced by persistent and common
biases and therefore making non-optimal decisions

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Behavioral Decision Theory
• Humans vs. homo economicus
• 1979: Kahneman and Tversky:
Prospect theory: An Analysis of
Decision Under Risk
• Choice architectures
• Anchors
• Frames
• Sunk costs
• Probabilities
• Availability bias

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Organ Donation Rates in Europe
What’s different between the gold and blue countries?

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Choice Architectures are Unavoidable
• At best, people depend on
simplifying rules
• Can nudge in positive directions
while maintaining freedom to
decide differently
• But is a very powerful tool
o Default savings
o Automatic renewals
o Default options in software,
etc.

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The Offered Choices Matter
• Caveat: Choice need not create
complexity

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Source: Wikimedia

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Anchoring: We Don’t Adjust Enough
• Bias can appear even when you know the anchor is random
• Leads to incrementalist approach (e.g. in policy-making)
• Common in negotiations
• Also related to setting confidence limits on forecasts and
other predictions too narrowly

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• Choose between:
o A sure gain of $240
o 25% chance to win $1,000 and a 75% chance to gain
nothing

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• Choose between:
o A sure loss of $750
o 75% chance to lose $1000 and a 25% chance to lose
nothing

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Framing
• Risk aversion
• Risk seeking in losses
• Discounts vs. surcharges
• More broadly:
o 25% meat vs. 25% fat
o “Pro-choice”
o Survey language

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Sunk costs
The basketball game is still on
in spite of the blizzard. Do you
still go?
• You won the ticket from the
local radio station
• You bought the ticket for
$10
• You bought the ticket for
$100

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Sunk Costs
• Sunk cost avoidance is pervasively seen in experiments
• Possibility that spending more money may make the whole
thing worthwhile consistent with prospect theory
• Also cognitive dissonance
• With respect to using sunk costs, foot-in-the-door, bait-
and-switch, low-ball, skin-in-the-game are related
• Can make it sensible to focus on variable costs
(temporarily)
• Always a fallacy?

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People Suck at Statistics (aka Gambler’s Fallcy)
We haven’t had much snow
for the past three years.
The big one is due!
Buy any model of Acme
snowblower by September
30 and take 20 percent off.
Be ready for the coming
blizzard!

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Availability Bias
• Which is more common cause of death (US)?
o Fires?
o Parkinson’s Disease?
• Which is more common cause of death (US)?
o Road accidents?
o Flu and pneumonia?
• Overreact to new or familiar information

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Summary
• Groups can be powerful but composition and organization
matter
o Wisdom of crowds vs. group-think
o Governance and culture also matter for joint and
community undertakings (e.g. open source)
• Individual decision making subject to many biases
o Be aware!

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QUESTIONS & LEARN MORE
MY INFO
Twitter: @ghaff
Google+: Gordon Haff
Email: ghaff@redhat.com
Blog: http://bitmason.blogspot.com