## Friday, January 27, 2006

### A Quick Quiz: Comprehension and Risk Preferences

I'm a sucker for these things, so, riddle me this:
1) A bat and a ball cost \$1.10 in total. The bat costs \$1 more than the ball. How much does the ball cost?

2) If it takes five machines five minutes to make five widgets, how long would it take 100 machines to make 100 widgets?

3) In a lake, there is a patch of lily pads. Every day, the patch doubles in size. If it takes 48 days for the patch to cover the entire lake, how long would it take for the patch to cover half the lake?
For answers, and to find out what it means about your valuation of risk, see this Virginia Postrel article.

Of particular interest to me is the fact that the better one scores on an extended version of the above quiz, the more likely one is to take a certain form of bad bet, in this example taking a 1% shot of \$5000 over a guaranteed \$60. I wonder about the theory as to why people who do 'know better' would take that bet. I think I would, even though I'm well aware that it's "-EV". Though of course the result likely gets turned on its head and you invert the problem and offer someone a 1/100 lotto ticket which pays \$5000 for a price of \$60. I wouldn't do that, (my one night of drunken pull-tab excess aside)

Discuss.

5 cents, 5 minutes, 47 days.

Now I'll go read the article.

Pooh, if that was a spoiler, delete away.

Interesting.

One of my first reaction was to ponder the idea that if you got them right (well, it depends on the question--I've seen variations on the last so many times that I think, "increment!" and the answer comes to me), it probably means that you're someone who thinks twice when analyzing what's truly key. (Or you could be a true, at-a-glance whiz, but that's certainly not me.) Yet, the article suggests that this correlates with "riskier" decisions, etc.

Hmm. As I said, thinking.

demimondian said...

There's a vast literature on human decision making under risk -- if you're interested, I can point you at some of the work, although it's pretty technical. The bottom line is that humans are dreadful poker players.

Pooh said...

Please, if you have some of the less mathy titles.

And yes, I know that humans are dreadful poker players. Quite well.

demimondian said...

Not mathy...hmm...that's pretty hard. The godfather of the field is R. Duncan Luce. Let me grovel around and see if I can find a good review article in _Sci Am_ or the like

XWL said...

This book on decision making is a good start.

It's clear that it wasn't written originally in English, and some of the chapters are tough slogging, but it's a rewarding book to finish.