Lasse Ringstad The Costs of Irrationality

The cost of irrationality Cognitive biases – the difference between good and great

decision-makers How poker players perform better by avoiding the availability and representativeness bias

For those who prefer the full academic article: http://www.slideshare.net/lassebringstad/the-costs-of-irrationality-v17-article

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Self-assessed poker ability on a scale from 1-10 (10 being best)

Propensity to cognitive biases (negative more biased)

N=338 R=0.18

Individual propensity to cognitive biases is inversely correlated with poker ability...

0.0

-0.5

-1.5

-2.0

-1.0

Combination of both biases

-0.92

-1.94

Representativeness bias

-0.37

-1.17

Availability bias

-0.55

-0.77

Professionals

Amateurs

Differences in propensity to cognitive biases between professional and amateur poker players (Negative numbers indicate a more biased individual)

And professional poker players are significantly less cognitively biased than amateur poker players!

Interested? Keen to improve your decision-making?

If so – I believe the next 20 slides can help you

N=338

Since you are still here – I assume I have your attention! Let's kick it off with a small task to keep you focused...

At some point in the presentation you will be asked some questions about the following participants at a recent London fundraiser. Please pay attention to the attached list of celebrity attendees:

• Angelina Jolie

• Brad Pitt

• Brian Cox

• Cameron Diaz

• Emma Watson

• Jeremy Hunt

• Jim Broadbent

• Kate Middleton

• Kiera Knightley

• Karl Simmons

• Kim Kardashian

• Meryl Streep

• Noel Clark

• Prince William

• Rihanna

• Rufus Sewell

• Stephen Fry

All finished? Good – let's move on!

If you don't feel like thinking – you can skip directly to slide 8. (Although I do believe the presentation is more powerful if you take the time to perform the tasks properly...)

Let's talk about Linda

Linda is thirty-one years old, single, outspoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in antinuclear demonstrations. Please rank the following statements by their probability, using 1 for the most probable and 5 for the least probable. A) Linda is a teacher in elementary school B) Linda is a bank teller C) Linda works in a bookstore and takes yoga classes D) Linda is an insurance salesperson E) Linda is a bank teller and is active in the feminist movement

Linda Come on – give the question a good go before moving on!

Let's talk about Linda

Linda is thirty-one years old, single, outspoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in antinuclear demonstrations. Please rank the following statements by their probability, using 1 for the most probable and 5 for the least probable. A) Linda is a teacher in elementary school B) Linda is a bank teller C) Linda works in a bookstore and takes yoga classes D) Linda is an insurance salesperson E) Linda is a bank teller and is active in the feminist movement

64% of the respondents in my survey think that E is more probable than B. Did you agree?

If so – there is something inherently wrong about that answer. E is a conjunction of B (B and something more) – so B is true whenever E is true. And hence B is more probable than E.

Probability that Linda is

active in the feminist

movement

E) Probability that Linda is a

bank teller and active in the

feminist movement.... As

you can see the probability

of E must be smaller than

the probability of B...

B) Probability that Linda is a

bank teller

Linda "sounds more like" a feminist bank teller than simply a bank teller. So we mistakenly mix representativeness with probability. It is an example of suffering from the representativeness bias.

E)

Linda

Representati-

veness

bias

Why we

are fooled

All right, but with Linda I just misunderstood the question! Cool – let's try two more questions

Without looking back at the celebrities that attended the fundraiser in London. Please give your best indication of the number of male and female celebrity participants at the event: _____________________ Which cause of death is most common in the United States? a) Lightning b) Tornado

Linda

All right, but with Linda I just misunderstood the question! Cool – let's try two more questions

Without looking back at the celebrities that attended the fundraiser in London. Please give your best indication of the number of male and female celebrity participants at the event: _____________________ Which cause of death is most common in the United States? a) Lightning b) Tornado

9 men and 8 women

Did you find yourself thinking that more women than men attended the event? So did 55% of the individuals in my survey... And did you think Tornado's were the most common cause of death? So did 84% of the respondents in my survey... We are fooled by a heuristic we call the availability heuristic. - It is easier to recall the female participants since the made-up fundraiser had several famous women, and several not-so-famous men. - Similarly it is easier to imagine and remember Tornados killing people than Lightning. So we think they are a more common cause of death.... It is an example of suffering from the availability heuristic.

• Angelina Jolie

• Brad Pitt

• Brian Cox

• Cameron Diaz

• Emma Watson

• Jeremy Hunt

• Jim Broadbent

• Kate Middleton

• Kiera Knightley

• Karl Simmons

• Kim Kardashian

• Meryl Streep

• Noel Clark

• Prince William

• Rihanna

• Rufus Sewell

• Stephen Fry

Celebrity attendees

Linda

Availability

bias

How we

are fooled

So what are these heuristics? They are the mental shortcuts we apply in our daily lives

...so we simplify our choices by applying mental "rules of thumb"

In our daily lives we face an incredible amount of choices....

"I always start my night-out with a beer"

"I never play for an inside straight"

"I don't drink coffee after 6 pm"

And these mental "rules of thumb" usually work very well

"I always start my night-out with a beer"

Usually a good choice since you have experienced that wine makes you tired and spirits makes you drunk too early

"I never play for an inside straight" Usually a good choice since chasing that inside straight will normally not pay off

"I don't drink coffee after 6 pm" Usually a good choice since that coffee will make sure you don't sleep well

But sometimes heuristics lead to systematic biases in our decisions...

"Individuals tend to pick the default option"

Tom does not save enough for retirement since the default savings rate is too low to cover his future needs

"Individuals tend to love whatever is for free – even if it is not rational"

So we get tricked into buying two bananas when the grocery store states "Buy 2, get 1 for free!", even though we never eat more than 1 banana...

"Individuals think that events that can be easily remembered are more likely than less vivid events"

Mom is mistakenly more worried when I go out for a flight then when I go out for a drive

So why does all this matter in real life? Awareness of our cognitive biases can improve our decision-making!

My thesis: Individuals suffering from cognitive biases make poorer choices in strategic situations than individuals not suffering from these biases. And these

biased individual are consequently perform worse in strategic-decision making situations, such as negotiations, business or poker.

We should not always question our intuitive judgment. Because as we can see heuristics can be very useful!

But I believe we should be aware that our heuristics and judgment sometimes fail us. If we become more aware of how heuristics fail us – we will become better decision-makers. Which in turn means we can become better businessmen, negotiators or poker-players!

Heuristics

can be

useful...

...but I think

awareness

will make us

better

decision-

makers...

...thus I

formulated

my thesis

Method: To test the thesis I mapped individual propensity to cognitive biases & correlated the results with poker ability

...and compared each individual's propensity to cognitive biases with his/her online poker

performance

I administered a psychological survey to online poker players...

• 338 poker players provided complete responses! • 11 questions on Linda, Tornados and celebrity

fundraisers created a mapping of the degree to which individuals suffered from cognitive biases

• Specifically 5 questions on the representativeness bias – or the Linda bias

• And 6 questions on the availability bias – or the fundraiser bias

• Poker has been compared to the strategic dilemmas individuals face elsewhere in life and business

• Player´s success depends upon chance, his risk-return strategy and his social judgment

• So poker is very similar to all other forms of strategic decision-making – be it in business or life in general

• Tracking of online poker performance available from sites like sharkscope.com!

Definitions: The representativeness & availability bias

1. In essence I can actually measure the poker ability of each individual in my sample based on online-ranking sites such as sharkscope.com. For further information on my methodology please refer to the methods section in my final paper (link can be found at the end of this presentation).

Note: this is not an exhaustive list of biases, and I do believe that testing for more biases would have led to even stronger results

The representativeness bias – or the "similarity heuristic"

The availability bias – or the "ease of recollection or imagination bias"

The availability heuristic, or the celebrity bias, is our tendency to assess the probability of an event by how easily it can be remembered or imagined Example – tornados & celebrities • Most people incorrectly believe tornados to be a

more common cause of death than lightning, since tornados are easier to imagine and remember

• Individuals consistently believe that more women attended a male-dominated fundraiser after being showed a list of participants; including very famous women and not-so-famous men

The representativeness heuristic, or the Linda bias, can be thought of as a similarity heuristic, and is our tendency to assess the probability of an event by how similar it is to its parent population. Example – Linda the feminist • Individuals consistently rate the statement “Linda

is a bank teller, and active in the feminist movement” as more probable than the statement “Linda is a bank teller” after reading a fictional personality sketch of Linda, depicting her as someone representative of a feminist

Result I: Individual propensity to cognitive biases is inversely correlated with poker ability!

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Self-assessed poker ability on a scale from 1-10 (10 being best)

Propensity to cognitive biases (negative more biased)

The results unequivocally confirm that suffering from

cognitive biases makes you a poorer decision-maker!

Due to data limitation on online poker tracking1 , self-assessed poker ability is used as a proxy for actual poker

ability for most of the graphs (the correlation between self-assessed poker ability and actual online ability is ~0.4) N=338

R=0.18

1. Pokerstars decided to ban online tracking tools on their site – thus effectively eliminating 2/3 of my sample. For further information on my methodology please refer to the methods section in my final paper (link can be found at the end of this presentation).

Result I – backup: The results are supported by smaller subset where actual online ability could be measured

Backup

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Sharkscope assessed poker ability on a scale from 0-100 (100 being best)

Propensity to cognitive biases (negative more biased)

N=89 R=0.17

The correlation is roughly the same as for self-assessed poker ability at 0.17 vs. 0.18

Result II: Suffering from either of the cognitive biases negatively affects your poker performance

The inverse correlation between the availability bias and poker ability is 0.11...

...but the representativeness bias is more detrimental to ability with a correlation of 0.16

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Self-assessed poker ability on a scale from 1-10 (10 being best)

Propensity to the availability bias (negative more biased)

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Propensity to the representativeness biases (negative more biased)

Self-assessed poker ability on a scale from 1-10 (10 being best)

N=338 R=0.11

N=338 R=0.16

Note: The correlation between poker ability and the availability bias is statistically significant at a 5% level, and the correlation between poker ability and the representativeness bias is statistically significant at a 1% level

Result III: Individual propensity to both biases is more strongly correlated with poker ability than any single bias

0.15

0.20

0.10

0.05

0.00

Representativeness bias

0.16

Availability bias

0.11

Correlation between individual propensity to biases, and poker ability1

Combination of both biases

0.18

1. The difference in correlation between the combination of both biases and the availability bias is statistically significant at a 10% level, whilst the difference between the representativeness bias and the combination of both biases is not statistically significant

For those interested; the correlation is significant at a 1% level (5% for availability) – which means that I am 99% certain that my results are correct.

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Result IV: Professional poker players are less prone to cognitive biases than amateurs

...and the professionals are undoubtedly less prone to cognitive biases than amateurs!

I segmented my sample based on their "main source of income"...

• 73 individuals stated poker as their main source of income, and I count them as professionals – The median poker professional had made

$18k from online poker (usually the pros have accounts on several online sites – so the real number is probably much higher)

• Whilst 265 stated other professions as their main source of income – such as engineering, teaching, IT or logistics – The median poker amateur in my sample had

lost 16 dollars playing online poker2

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Representativeness bias

-0.92

Combination of both biases1

-0.37

-1.17

Availability bias

-0.55

-0.77

Amateurs

Professionals

Differences in propensity to biases between professionals and amateurs (Negative numbers indicate a more biased individual)

-11 11 "Cognitive Bias Scale"

The "non-biased" individual –

always getting the correct answer

would score 11 (1 point per

exercise)

The "biased" individual – always

getting the biased answer would

score -11 (-1 point per exercise)

1. And the combined difference in biases between pros and amateurs is significant at a 1% level. (The results are correct with 99% likelihood) 2. Skewed towards good players

N=338

Result V: For elite-decision makers, such as professional poker players, it is even more important not to be biased!

...so cognitively biased professionals are seriously harmed by their errors!

Cognitive biases are more correlated to the performance of professionals than amateurs...

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0.1

0.0

Combination of both biases

0.26

0.13

Representativeness bias

0.22

0.09

Availability bias

0.19

0.09

Professionals

Amateurs

Correlation between poker ability and propensity to biases for professionals and amateurs

• Statistically this means that amongst this group – my test can reveal ~6% of the performance differential between individuals!1

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5 6 7 8 9 10

Propensity to cognitive biases (negative more biased)

Poker ability on a scale from 1-10 (10 being best)

1. By running an adjusted R squared analysis for those interested... And yes – the p-level of the test is very good at 0,025

Details matter more for pros (they all know the basics). Just as Northug is more dependent

on good skies to win Olympic races than your kid is dependent on good skies to win his

local race, being unbiased is more important for top-decision makers than for amateurs

Actions I: Individuals should develop strategies to overcome cognitive biases to become better decision-makers!

"Firms with dispersed power will commit fewer strategic errors than firms with an "all-might CEO" – since

individuals are more prone to cognitive biases than groups

A CEO contemplating launching a new product might make a better decision, if she realizes that her

assessment of the likelihood of success is probably coloured by her recollection of the success or failures of

similar products in the past (awareness is key)

"Billy Beane improved the Oakland Athletics by overriding the ingrained heuristics scouts used when looking for

baseball talent, and replaced it by statistical analysis" (Watch Moneyball people...!). The biases stemming from heuristic reasoning might not be crucial if you are picking

out the firm softball team, but amongst professionals details are key. And eventually other baseball teams had

to replicate Bean´s analytical approach to remain competitive...

"The next time you see that young Swede bets me, I will counter attack!" Don't jump to the conclusion that he is aggressive and bluffing a lot (he is representative of a bluffer)... Make sure that you understand the base-rate – how

often is any poker player bluffing in that particular situation? And adjust your estimate according to this.

"This guy has only played 2 hands for the last hour – he must be super tight!" Don't jump to this conclusion (availability bias)... How often is it that a normal (non-tight) player ends up only playing 2 hands for an hour? Adjust your estimate

accordingly...

Actions II: Some pointers to overcome these biases and become better decision-makers

"Awareness is key"

"Expose yourself to statistical thinking!"

Consultation or debate with others – as groups are less prone to cognitive biases than individuals

"Poker players should engage in game analysis with other professionals!"

Avoid engaging in several mental activities at the same time!

"Cognitive biases are more likely to occur under time-pressure"

Did you like this? Here are some killer books to learn more!

A Beginner's Guide to Irrational Behavior A great online course on the topic from Dan Ariely Check it out at www.Coursera.org

For now – thanks for paying attention! (And a big thanks to those who participated in the survey!!)

"I'm so excited to learn about biases and making better decisions!"

http://www.slideshare.net/lassebringstad/the-costs-of-irrationality-v17-article

Here is a link to the actual article I wrote if you would like to investigate it in further detail! (The full survey is also in the appendix of the article for those keen

to check it out)

PS. I will be in Dublin for the Norwegian championship main event – so please reach out if you would like to chat about the results (naturally – I think this is a super interesting topic for discussion).

Bonus: The LSE professors / markers also found my findings interesting and plausible

" Lovely clear finding that professional gamblers suffer less from CBs than amateurs. "

"An excellent small quantitative study, with valid and reliable results."

The study is described very clearly, with a good sized n and good justification of what was done. The statistical analysis looks very thorough and is reasonably

sophisticated. The discussion, conclusions and limitations sections all flow logically from the findings.

"...you have found something very interesting indeed!"

"While I retain some doubts about the generalisability of games phenomena to

decision-making generally, the author clearly understands these general reservations and goes out of his way to justify his approach"

"My only query would be about generalisability, from poker to strategic decision-making

generally - but this is a well-trodden path and the writer puts forward a reasonable case. He

expands upon the justification later (section 2:3) and argues his position well"