a self-satisfied bachelor: to the contrary, he recently got married himself. He's simply accustomed to viewing the world as an extravaganza of sample spaces.
"People don't tend to pay attention to the background information, the sample space," he said. "They take the foreground information without context, and they accept it at face value."
And while full frontal credulity may be the lubricant of matrimony, he said, at other times it helps to look at the big-sky backdrop. More than once Koehler has calmed a jittery passenger seated next to him on an airplane by quoting probabilities. You would have to fly on a commercial airline every day for 18,000 years, he tells them, before your chances of being in a crash would exceed 50 percent. You want to know what 18,000 years looks like? Think "twice as far back as the dawn of agriculture."
Koehler has also examined the errors that people make in deciding how to invest their money. In one study, he and his colleague Molly Mercer showed subjects mockups of advertisements for mutual funds. To the first group they displayed an ad from a small company with a phenomenal track record. It operated only two funds, but each consistently outshone a benchmark market index like Standard & Poor's. Now it was starting up a third fund: Wanna invest? The next set of subjects was treated to an ad from a large mutual fund company, which mentioned that it ran thirty funds and then showed the results of the two funds that "killed" the market index; it, too, was seeking investors for a new fund. Yet another group saw a pitch from the same large company, again attempting to entice investors to a new fund by highlighting the lavish returns on its two star funds, but this time with no reference to the many other, and presumably far less impressive, money sinks in its corporate portfolio.
Koehler and Mercer found that subjects generally were impressed by the small company's results and voiced a willingness to buy into their latest start-up fund. They were equally unimpressed by the big company with thirty funds. "People recognized that, Oh, you're showing me only the best two out of thirty, and they said, Sorry, not interested," said Koehler. But when confronted with ad number three, from the big company that boasts of its two knockouts while omitting any reference to its baseline operations, subjects again fell prey to the lure of the fabulous foreground. They greeted it with the same enthusiasm accorded the small company.
"From a mathematical standpoint, the fund from the investment group that's two-for-two is a much better risk and is much likelier to outperform the market than is that of a group that's two-for-question-mark," said Koehler. "But people often forget to ask, What's the question mark here? They're not thinking about the sample space."
Unfortunately for us poor hayseeds seeking a place to plant our paychecks, real-life advertisements for mutual funds are not legally obliged to divulge their losers and thus they rarely do. Even the advice of "experts" may not enhance our prospects. "We got the same pattern of responses to our ads," Koehler said, "whether we asked undergraduates or professional investors."
Koehler conceded that it's not easy to think about a sample space, the background context, the teeming multitudes beyond the home team in front of you. "We're not hard-wired to think probabilistically," he said. "We're hard-wired to respond to life subjectively, empathetically, and on the fly, which may be a generous impulse in some cases, but at other times it clouds our judgment and is flat-out wrong." One approach he takes to encourage a quantitative mindset is applying it right where subjectivity has the greatest stranglehold on sense: our people skills. He uses exercises like the notorious Linda Problem. Students are given a paragraph describing a hypothetical character named Linda, who is said to be a thirty-year-old American woman who majored in philosophy, graduated with high
"People don't tend to pay attention to the background information, the sample space," he said. "They take the foreground information without context, and they accept it at face value."
And while full frontal credulity may be the lubricant of matrimony, he said, at other times it helps to look at the big-sky backdrop. More than once Koehler has calmed a jittery passenger seated next to him on an airplane by quoting probabilities. You would have to fly on a commercial airline every day for 18,000 years, he tells them, before your chances of being in a crash would exceed 50 percent. You want to know what 18,000 years looks like? Think "twice as far back as the dawn of agriculture."
Koehler has also examined the errors that people make in deciding how to invest their money. In one study, he and his colleague Molly Mercer showed subjects mockups of advertisements for mutual funds. To the first group they displayed an ad from a small company with a phenomenal track record. It operated only two funds, but each consistently outshone a benchmark market index like Standard & Poor's. Now it was starting up a third fund: Wanna invest? The next set of subjects was treated to an ad from a large mutual fund company, which mentioned that it ran thirty funds and then showed the results of the two funds that "killed" the market index; it, too, was seeking investors for a new fund. Yet another group saw a pitch from the same large company, again attempting to entice investors to a new fund by highlighting the lavish returns on its two star funds, but this time with no reference to the many other, and presumably far less impressive, money sinks in its corporate portfolio.
Koehler and Mercer found that subjects generally were impressed by the small company's results and voiced a willingness to buy into their latest start-up fund. They were equally unimpressed by the big company with thirty funds. "People recognized that, Oh, you're showing me only the best two out of thirty, and they said, Sorry, not interested," said Koehler. But when confronted with ad number three, from the big company that boasts of its two knockouts while omitting any reference to its baseline operations, subjects again fell prey to the lure of the fabulous foreground. They greeted it with the same enthusiasm accorded the small company.
"From a mathematical standpoint, the fund from the investment group that's two-for-two is a much better risk and is much likelier to outperform the market than is that of a group that's two-for-question-mark," said Koehler. "But people often forget to ask, What's the question mark here? They're not thinking about the sample space."
Unfortunately for us poor hayseeds seeking a place to plant our paychecks, real-life advertisements for mutual funds are not legally obliged to divulge their losers and thus they rarely do. Even the advice of "experts" may not enhance our prospects. "We got the same pattern of responses to our ads," Koehler said, "whether we asked undergraduates or professional investors."
Koehler conceded that it's not easy to think about a sample space, the background context, the teeming multitudes beyond the home team in front of you. "We're not hard-wired to think probabilistically," he said. "We're hard-wired to respond to life subjectively, empathetically, and on the fly, which may be a generous impulse in some cases, but at other times it clouds our judgment and is flat-out wrong." One approach he takes to encourage a quantitative mindset is applying it right where subjectivity has the greatest stranglehold on sense: our people skills. He uses exercises like the notorious Linda Problem. Students are given a paragraph describing a hypothetical character named Linda, who is said to be a thirty-year-old American woman who majored in philosophy, graduated with high
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