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- Understanding Why We Make Bad Decisions: Insights from Dan Gilbert
Understanding Why We Make Bad Decisions: Insights from Dan Gilbert
Explore how decisions impact our lives daily and the gift of making the right choices from Dutch polymath Daniel Bernoulli. Learn why despite the knowledge, we still make poor decisions as revealed by Dan Gilbert in this intriguing transcript.
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Video Transcript
We all make decisions every day; we want to know
what the right thing is to do -- in domains from the financial
to the gastronomic to the professional to the romantic.
And surely, if somebody could really tell us how to do
exactly the right thing at all possible times,
that would be a tremendous gift.
It turns out that, in fact, the world was given this gift in 1738
by a Dutch polymath named Daniel Bernoulli.
And what I want to talk to you about today is what that gift is,
and I also want to explain to you why it is
that it hasn't made a damn bit of difference.
Now, this is Bernoulli's gift. This is a direct quote.
And if it looks like Greek to you, it's because, well, it's Greek.
But the simple English translation -- much less precise,
but it captures the gist of what Bernoulli had to say -- was this:
The expected value of any of our actions --
that is, the goodness that we can count on getting --
is the product of two simple things:
the odds that this action will allow us to gain something,
and the value of that gain to us.
In a sense, what Bernoulli was saying is,
if we can estimate and multiply these two things,
we will always know precisely how we should behave.
Now, this simple equation, even for those of you
who don't like equations, is something that you're quite used to.
Here's an example: if I were to tell you, let's play
a little coin toss game, and I'm going to flip a coin,
and if it comes up heads, I'm going to pay you 10 dollars,
but you have to pay four dollars for the privilege of playing with me,
most of you would say, sure, I'll take that bet. Because you know
that the odds of you winning are one half, the gain if you do is 10 dollars,
that multiplies to five, and that's more
than I'm charging you to play. So, the answer is, yes.
This is what statisticians technically call a damn fine bet.
Now, the idea is simple when we're applying it to coin tosses,
but in fact, it's not very simple in everyday life.
People are horrible at estimating both of these things,
and that's what I want to talk to you about today.
There are two kinds of errors people make when trying to decide
what the right thing is to do, and those are
errors in estimating the odds that they're going to succeed,
and errors in estimating the value of their own success.
Now, let me talk about the first one first.
Calculating odds would seem to be something rather easy:
there are six sides to a die, two sides to a coin, 52 cards in a deck.
You all know what the likelihood is of pulling the ace of spades
or of flipping a heads.
But as it turns out, this is not a very easy idea to apply
in everyday life. That's why Americans spend more --
I should say, lose more -- gambling
