UTF-8 http://feraios.blogspot.com/feeds/posts/default

Tuesday, July 04, 2006

Defects, Irrationality & Cucumber Slices


There’s an interesting game we’re going to play that illustrates emotional deviations from rationality. But first, speaking of irrationality:

Materials are like people. It’s the defects that make them interesting. Seriously. It’s the impurities in silicon that let us compute, the impurities in glass that give them color and the imperfections in steel’s crystal structure that makes it strong. And in the markets, people are the one true systematic source of inefficiency. It’s almost the inverse of inventor Ray Kurzweil’s notable point that an invention doesn’t need to make sense in the world in which it starts—but rather in the world in which it is finished. Our intellectual and emotional systems were inventions that made more sense tens of thousands of years ago in the time of our evolutionary ancestors. But back to materials.

Ideas and hypothesis are also like materials. When you want to know how strong a material, is—you can't get its atomic composition and figure it out. Instead you have to stress it, pull it, freeze it, melt it, bend it, stretch it and break it. You have to see where it has strength and where it has weakness. The same goes for hypothesis in investing and running a business. If you have a hypothesis that can be tested, test it.

Sure, you might fail in the course of experimentation—but real failure is not learning from your mistakes. Besides, ask any entrepreneur and they’ll be existence proofs negating F. Scott Fitzgerald’s proclamation that there are no second acts in American lives.

Fitzgerald also said, “The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function.”

Consider the following two recent headlines from news outlets—each a polar opposite view of nanotech. One said, “Nanotech can solve all problems”. The other read: “Nanotech risks opening Pandora's box”. My take: both are over-enthusiasm and superstition for science.

Ironically enough, Adam Smith once prescribed: “Science is the great antidote to the poison of enthusiasm and superstition."

Back to irrationality and the interesting game we’re going to play. There’s a phenomenon called “inequity aversion”. In layman’s terms: we like to play nice. We prefer fairness and justice. And we like things split up between people fairly. And us being the irrational animals we are—we don’t like when co-workers get more than us if it doesn’t seem deserved. It’s a whole other column—but scientists have notably found that people are happier when they make $100,000 while their co-workers are making $80,000—than if they were to make $160,000 but their co-workers are making $200,000. Happiness, it seems, is relative.

So here’s the game: It’s called the Ultimatum Game and it involves you and me and 10 coins. You and I are sitting across from each other at a table. I start out with all 10 coins in front of me. Then, I place some in front of you. Then you are asked by a referee whether or not you’ll accept what I allocated to you. If you say “yes”—we both keep our respective number of coins. If you say “no”—neither of us gets anything.

If you believe people are self-maximizing—then in theory if I push 1 or 2 coins your way, you’re better off than having nothing—so you’ll say “yes”. But this doesn’t happen in the real world.

In the real world, you reject anything that doesn’t feel “fair”. Typically anytime I allocate less than 4 coins to you. Greed is punished. And people are even willing to endure pain or suffer to punish those they deem to be unfair—even if it’s irrational. It seems to be universal. Even with monkeys

A few years ago there was a famous experiment with monkeys. Researchers trained the primates to pay for cucumbers (which they like) with rock tokens. The researchers would put two monkeys next to each other. After the first monkey traded its rock for a cucumber slice, it would see the other monkey hand over its rock. But here’s the twist: the second monkey would get a tastier treat (like a sweet grape) for the same rock. The first monkeys that saw the second monkeys get the same thing, were happy with their cucumber slice—but the other ones felt unjust seeing the second monkey get a better deal (or exchange rate) and would either not eat, refused to play another round or sometimes took their cucumber and hurled it with great might! Hell hath no fury like a monkey scorned…

As British novelist JG Ballard said “The advanced societies of the future will not be governed by reason. They will be driven by irrationality, by competing systems of psychopathology.”

by Josh Wolfe



Post a Comment

<< Home