Here’s a premise I’ve heard a million times. Sounds logical yet, I have heard this pushed down so many throats with no push back, I just want to scream. Derivatives based on the 2002 Nobel Prize® work “Prospect Theory.” One over used part of the research was to show how lousy people are at working out what is statistically best for them. The “coin flip” is the bemoaned example.
It goes like this: Would you rather have $100.00 now, in your hand. Or, flip a coin where you have the chance of winning $250.00? Of course the alternative is if you don’t win – you get Zip, Zero, Nada.
People that choose the $100 are usually cast in some pool of inferior risk takers or, economic morons because, statistically the expected value is $125.00 and is therefore greater than the sure thing. So to choose the sure thing proves humans can’t or don’t make good economical decisions. That is a load of bunk.
This type of thinking only holds up if humans are pulled from the equation, not the reason for it. Life is not that static. Most economic theories are exactly that – theories. And, I would like to throw cold water all over this hypothesis by asking one question: “If the test subjects were starving, (real starvation) where death was near certain within 1 or 2 days if no food was to be had. Offered the same choice where $100.00 would buy an immediate supply of food for 7 days or, flip a coin for a months worth. What is the correct choice?
If you chose the coin flip and lost well…you would just become a statistic. Does that mean you’re now statistically smart? Or just dead? Doesn’t seem like such a noble choice to me. Yet, because this example was part of the research for the Nobel Prize winners, it’s used as a bludgeon against anyone who questions anything “statistical” from academia.
Many entrepreneurs face real issues that must be made sometimes under extraordinary conditions. Whether to hire, fire, expand, contract, invest, divest, take on debt, reduce debt, sell at a discount, pass on the sale, and more.
These are real issues that “statistics” just don’t give clear answers. However, when real world thinking and analysis is needed many make the wrong decisions or assumptions because they are intimidated by the person supplying the “statistical choices” for the only reason there is some collage of letters after their name. Nothing more.
What trumps everything is your demonstrated value. What you can offer potential or current clients. How you can improve their condition whether financially or something other. And getting that argument in front of actual potential clients that can buy your products or services with actual legal tender that clears the bank.
Offering value in your entrepreneurial pursuits is truly the most noble of prizes and assures you the best of probabilities to eat. Leave the theories to the academics. They have their own prizes. However, I don’t think they’re edible.
© 2013 Mark St.Cyr
Addendum: Although I take issue with the above example. It’s not based primarily in the model or theory itself. It’s the way it’s used as a basis or instrument for warding off questioning or reasoning from anyone outside academia. For in actuality, the very people or person that put forth the above example wrote the book, Thinking Fast And Slow – Daniel Kahneman (Penguin Books Limited, Nov. 2011) A book I highly recommend reading. It’s also there, expressed within that very book, their research called “priming” in which I give my reasoning to challenge the above argument. Go figure. Or better yet – “Who’da thunk it?”