March 16, 2007

Today in the history of psychology

The great Amos Tversky was born today in 1937.

Tversky was a Stanford cognitive psychologist who did fundamental work in the realm of judgment and decision making. He, along with collaborator Daniel Kahneman, have identified and explained 11 different "cognitive illusions" often found in the making of human judgments. He explained that people often use various heuristics (simple rules of thumb) when making decisions. But these simple rules can bias our decisions, especially decisions made under pressure, risk or uncertainty, which leads to errors in judgment.

One such heuristic was the availability heuristic. This is basically the notion that people base their prediction of an outcome on the emotional or cognitive closeness of prior experiences rather than the actual probability of it occurring. In other words, if a person can recall an instance of an event occurring, then he/she will give this event a higher probability of occurring in the future than other events for which they cannot recall instances. For example, a person may say that the chance of a plane crash is higher than a car crash, just because plane crashes are reported in the news more often.

Tversky's ideas have had a considerable impact in the field of economics for challenging the wide-held belief that people behave rationally to maximize their own welfare and minimize costs. He showed that, in fact, this is not always the case. People often act irrationally against their own welfare. His and Kahneman's overarching theory became known as Prospect Theory.

Prospect theory describes how people choose among alternatives when risk is involved. Basically, people assign probabilities of all possible outcomes of a decision based on a heuristic, then they set a reference point with values being assigned to gains and losses rather than final assets. They then choose between two alternatives, the one with the higher utility. There is a whole mathematical formula that describes these types of decisions. I'm not going to really get into that, but the function sort of looks like this:

Essentially, Tversky and Kahneman found that people favor gains that are certain over gains of the same value that are less certain. But even more so, people will avoid losses that are certain over losses that are less certain, even if this means taking more risks. You can look up "prospect theory" in any search engine for a deeper understanding, but I thought the example that I found here was nice:
"Tversky and Kahneman told people to assume there was disease affecting 600 people and they had two choices:
  • Program A, where 200 of the 600 people will be saved .
  • Program B, where there is 33% chance that all 600 people will be saved, and 66% chance that nobody will be saved.

The majority of people selected A, showing a preference for certainty. They then offered them another choice:

  • Program C, where 400 people will die.
  • Program D, where there is a 33% chance that nobody will die, and 66% chance that all 600 people will die.

Most people now selected D, seeking to avoid the loss of 400 people.
Notice how the framing makes the difference. A and C are the same, and B and D are the same."

This work in judgment making is what eventually led Kahneman to receiving the Nobel Prize in Economics in 2002. Tversky would have been there right beside him, and would have received the prize, but sadly he died in 1996 of skin cancer. But his influence lives on!

Happy Birthday Amos Tversky!

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