Fooled by a Feeling

Before I get into how interesting this chapter was, there were two things that bothered me.

In Fooled by a Feeling, Lehrer says the stock market is completely random and impossible to predict. Uhh... no it isn't? The stock market is prone to sudden rises and dips, yes, but it definitely is not impossible to predict. For example, say Ford announces a new car utilizing the world's newest clean energy source. This new form of energy is groundbreaking, and is obviously more efficient and cleaner than gas. Needless to say, Ford's stock value will shoot through the roof. I do not agree with Lehrer's claim that the stock market is impossible to anticipate. Through careful research, stock brokers are able to predict the rises and falls of certain stocks. Tada. Proof that predicting stocks is possible.

Secondly, Lehrer mentions an experiment involving humans with intact emotional brains and humans without them. The two groups are given a certain amount of money and tasked to either play it safe by investing nothing, or make a bet and bet $1 in hopes of getting $2.50 in return. If a subject chooses to take the bet, a coin is flipped. If the coin lands on heads, the subject loses the dollar. But if the coin lands on tails, the subject gains $2.50. The experiment was supposed to show that people with emotions make irrational decisions - statistically, the subject would have a mere 13% chance that he or she would have less than $20, which is what the subject would have had if he or she didn't bet. But wait... Doesn't this experiment require the subject to make a decision? Didn't Lehrer just spend the whole first chapter convincing us that people without emotions couldn't make decisions?

That doesn't make sense...

But anyway, the rest of the chapter was an intriguing read as usual. In the chapter, Lehrer talks about loss aversion. He proposes two scenarios. Both scenarios involve the outbreak of a lethal virus in the United States (swine flu!?!) and include two possible programs to be put into effect. The disease has the potential of killing 600 people. The first scenario has Program A saving 200 people. Program B has a 33.3% chance of saving 600 people, and a 66.6% chance of saving nobody. I instinctively went with Program A, and so did 72% of people asked. In the second scenario, Program A will kill 400 people, while program B will have a 33.3% chance that no one will die and a 66.6% chance that 600 people will die. I went with Program B this time (like 78% of other people) before I realized that both scenarios were exactly the same thing. Our brains are automatically inclined to avoid losses - hence the name of loss aversion. The clear-cut example that Lehrer used struck me as extremely revealing of the human brain's workings - I am learning so much about how the brain ticks. Interested, I looked up more about loss aversion.

Another aspect of the brain that Lehrer mentioned was the human tendency to favor immediate reward, even though a gain at a later time would yield more. This explains why credit card debt is so common, as well as explains the economic deficit we are currently in (Lehrer did not specifically mention the current economic slump, but he did mention subprime mortages, which was the cause). The brain sees immediate gain, such as a pair of shoes on sale or a mortgage with a low initial rent, and ignores the later costs, like the high interest rates on credit cards and the ridiculous price hikes after two years on subprime mortgages. All in all, the chapter taught me to carefully consider my financial decisions and not to jump to conclusions based on my brain's tendency to want immediate reward. Life lesson #2 from How We Decide. Nice.

While some parts of this chapter did bother me slightly, it was still as interesting and as enlightening as ever.

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