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Home / Tag Archives: 17. Making decisions with uncertainty

Tag Archives: 17. Making decisions with uncertainty

Ironically, advances in AI increase the value of human judgement

 Written by three economists, Prediction Machines analyzes the potential of AI and as a fall in the cost of prediction.  The top review on Amazon reduced the book to three propositions:AI is mostly about predictionThe cost and price of prediction is falling,This will increase demand for complementary skills, like judgement and decision making.While accurate, the review does not do the book justice.  Most interesting is the taxonomy of the different kinds of uncertainty:  (known, knowns),...

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Bargaining with Macaques: the alternatives to agreement determine the terms of agreement

 At the Uluwatu temple in Bali, monkeys steal high value items from tourists, and then ransom the items back for food.  Higher valued items are returned only after higher payouts.  From MarginalRevolution.com:After spending more than 273 days filming interactions between the animals and temple visitors, researchers found that the macaques would demand better rewards – such as more food – for higher-valued items [like mobile phones, wallets and prescription glasses].Bargaining between a...

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Removing a noisy signal improves decision making: Army removes photos from promotion sheets

 From The Army Times: The Army will no longer include official photos for officer selection boards, beginning in August, to help eliminate unconscious biases in the promotion process...To their credit, the Army first ran an experiment to determine the consequence of the change and found that when the photo was removed:...there was less variance between voters’ scoring, meaning voters ranked candidates more similarly across the board. After removing the photo, voters also took less time to...

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Reducing leverage hurts options buyers

Financial options on funds are bets that, e.g., a fund's price will increase up to a specified strike price.  Leverage tends to make a fund more risky, and more likely that the fund price will hit the strike price at which the option pays off.  So far so good.  But for every person who buys an option (long) hoping that the price will increase to the strike price, there is a seller on the other side (short), who hopes that it doesn't.  Colleague Bob Whaley has pointed out that changes in...

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Arbitrage opportunity in betting markets?

 The Iowa Electronics Markets sell contracts that payoff $1 if a particular candidate is selected.  The prices can be interpreted as probabilities if Price=Expected Payoff=Prob[win]*$1.  Below, the implied probabilities seem to track the polls, which suggests that Biden has a big lead.  However, this educational betting market is thin (mostly students, only $40,000 or so).  The much bigger betting markets in London has the election as much closer: Trump is trading at -120 (Prob[win]=54%) and...

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One in eight women will get breast cancer, but who gets screened?

Answer: those less likely to get the disease, and when they do, it is caught at an earlier stage.  [embedded content]  The video suggests that if you are doing benefit-cost analysis of screening (Chapter 3), you will understate the benefits of screening because of selection bias (Chapter 17). To see this clearly, imagine that only people who don't have the disease get tested. In this extreme case, there is no information revealed by the test, i.e., the test has zero benefit and some...

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Deterring partying

 Syracuse University suspended students who attended a party where social distancing was not practiced. ...Vice Chancellor for Strategic Initiatives and Innovation J. Michael Haynie said the gathering of first-year students "may have done damage enough to shut down campus, including residence halls and in-person learning, before the academic semester even begins."Because the individual expected costs of partying (the probability of suffering harm from infection times the cost of harm) are...

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Why are Gold, Stocks, and Bonds appreciating?

DISCLAIMER:  If I really knew, I wouldn't be teaching school!   The Bloomberg Dollar(BBDXY) tracks the performance of a basket of 10 leading global currencies versus the U.S. dollar.  The above represents a decline in the price of a dollar (as it cannot buy fewer foreign currencies)  ZeroHedge says that it is because the dollar is depreciating. As the dollar loses value (relative to other currencies), people shift money out of dollars into assets that (hopefully) won't lose value as...

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High-Powered Incentives Kill

In the just published article, "The Perils of  High-Powered Incentives: Evidence from Colombia’s False Positives,"Acemoglu, Fergusson, Robinson, Romero, and Vargas investigate incentivizing the military. We investigate the use of  high-powered incentives for the Colombian military and show that this practice produced perverse side effects. Innocent civilians were killed and misrepresented as guerillas  (a phenomenon known in Colombia as “false positives”). Policymakers (and managers)...

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