My Review of "The Drunkard's Walk"

The book, "The Drunkard's Walk: How randomness rules our lives," looks at randomness and really randomness plays a greater role in what happens with humans than people, in general, think. I found the book to be exceptional. Although I have always suspected what the book claims, the book backs up its conclusions with mathematics. Plus, it does it in a fun way, making for a very enjoyable book, also. Although not specifically a financial or investing book, the book really is helpful in understanding such stuff. Some points which I noted are....

1. Human intuition is ill suited to uncertainty since in the 1930's researchers noted that people couldn't make sequences of random numbers nor recognize a random sequence.

2. Sometimes in life things happen which can't be foreseen.

3. The amygdala in the brain is active when making a decision, hence decisions are emotional.

4. Rewards work, but punishment doesn't. The opposite is just regression to the mean.

5. Examples which are more likely due to randomness - Roger Maris/1961, success of certain movies and studio heads.

6. Research has shown that people will assign greater probabilities to outcomes which are described in greater detail, the "availability bias."

7. Arithmetic didn't really exist until the 16th century, hence probability not understood before then.

8. DNA in courts - lab error = 1/11, DNA = 1/1B, so chance of error more like 1/10.

9. The Law of Sample Space - Gerolano Cardano - the Book of Games of Chance - 16th century.

10. The Probability of Points - 2 entities competing.

11. Pascal's Triangle - if need to know # of ways in which you can choose some # of objects from a collection that has a > or = #. Pascal's wager -odds about consequences of a pious life, 1/2 if G-d exists, ie. if pious. Confusing, but discussed.

12. Sweepstakes - cost of mail cheaper than chance of winning. Lottery, odds of winning same as one person dying driving to place which sells lottery tickets, but not advertised that way. Dice and roulette wheel are not perfectly balanced, so some uncertainty, not predictable.

13. The book mentions calculus and how it is composed of 1) a sequence, a succession of elements,b) a series which is the sum of the sequence of elements, and 3) a limit where the sequence is heading. But, in Zeno's paradox, the paradox is resolved because of constant motion, no stops. That's how Bernouli attacked the the relationship between probability and observation - toss a coin 10x maybe 7 heads, toss a zillion times expect 50% heads. Bernouli's Golden Theorem - large enough sample to ensure confidence within a certainty. Too small of a sample = the law of small numbers. For instance 1/3 chance that 5 of a CEO's performance will reflect his ability, so better to analyze his abilities rather than just look at results.

14. Bayes's Theorem is discussed where conditional probabilities. Prosecutor's fallacy/ mistake of inversion - just because A happens then B doesn't mean if B happens A will happen. Examples are SIDS deaths and OJ trial.

15. Understanding and quantifying random error led to a new field - mathematical statistics.

16. Wine tasting influenced by all kinds of things, price, context. Statistical measurements include standard deviation, standard deviation squared = variance. Also the Error Law known as a normal distribution or bell curve - in certain cases can expect certain proportionality of results. But, social physics not all normal, like Pareto principle - 80/20 rule or regression to the mean concept. Brownian motion shows Drunkard's Walk, randomness.

17. Book mentions V2 rocket attacks in WWII and cancer clusters, more due to randomness than predictable patterns. The human need to feel in some control interferes with the accuracy in perceiving natural events.

18. Lorenz's Butterfly effect - just small changes can lead to massive differences in results. Plus, unlike laws of physics, human affairs are too complex to predict. Asymmetry makes things impossible to predict, yet look predictable on retrospect, like the stock market. Also, people failing or in poverty may be more random than predictable.

In summary, a terrific book - will likely change the way a reader looks at things, or if a reader does think that way the book will show the mathematics behind it, in a very readable form. 5 out of 5 stars.

My review of "Drive"

"Drive" is an excellent take on what motivates people in modern society compared with times past. Things it covers are:

1. A couple of decades ago rhesus monkeys solved a puzzle without a reward of food, water or sex. They began playing with it and solved it, implying a thrid drive - some intrinsic reward. They even made more errors when an external reward was used - raisens. Then, more recently similar results were found in an experiment (a Soma puzzle) with humans, implying humans also have this third, intrinsic, drive - for novelty, challenge, with scientific proof counter to what business usally does to motivate workers.

2. Like computers, societies have operating systems - a) Motivation 1.0 - in older times just for survival, b) Motivation 2.0 - the industrial revolution led to rewards and punishments, carrots and sticks to motivate workers, c) Motivation 2.1 - some refinements like flex hours and casual dress, d) Motivation 3.0 - purpose driven rather than monetary compensation - think Wikipedia versus Microsoft's Encarta encyclopedia, Firefox, Apache web server, Linix. Strongest motivation - enjoyment. Vermont - first state to implement a new business organization, "low profit limited liability corporation" with purpose maximized rather than profit.

4. Behavioral economics shows people motivated also by irrational motives. US census showed many non-employer businesses. Financial rewards can turn play into work - reducing performance, loss of creativity. - the Sawyer Effect.

5. Extrinsic rewards can work for left-brain algorithmic tasks, but not for right-brain flexible problem-solving, creative solutions - can lead to bad, even unethical behavior and sort-term thinking like what led to the recent Great Recession - too much pay caused epic problems. Goals which lead to mastery are good - rewarding the activity better than rewarding the result.

6. Rewards best if unexpected, not if-then but now-that.

7. Self Determination Theory (SDT) - Type I person - 3 needs of a Type I person: a) autonomy - over 4 T's - task, time, technoque, and team, b) mastery - a flow - 3 laws to get in the flow - mindset, pain, asymptote - getting closer and closer to perfection but never reaching it, c) purpose - words are important like having an oath, when an employee says "we" rather than "they" for the company.

8. Toolkit for a Type I person - a) flow test - one sentence for a person like freed the slaves for Lincoln, b) small question - like was today better than yesterday, c) take a "sagmeiter" - a sabbatical like every 7 years - do something different like travel, d) do annual personal performance reviews, e) get unstuck by going oblique - by pushing out of a mental rut, f) move 5 steps closer to mastery - deliberate practice, g) 3x5 cards with question/answer to give meaning to each day, h) create your own motivational poster.

9. Nine ways to get your organization to be Type I - have 20% free time, encourage peer-peer now-that rewards, conduct an autonomy audit, take 3 steps to giving up control, play "whose purpose is it?", Reich's pronoun test - we or they, design for intrinsic motivation, Goldilocks for groups - not too easy, not too hard tasks, turn offsite into "FedEx day."

10. Type I compensation - get it right then get out of sight. Ensure internal, external fairness - harder job gets paid more, etc. Pay more than average.

11. Tips for parents on how to motivate kids: homework - autonomy, mastery, purpose, have a FedEx day, Do It Yourself (DIY) report cards, don't combine allowances and chores, praise strategy and effort not IQ, let kids see the big picture of things.

Overall, this book is very insightful and an easy read - recommended - 5 out of 5 stars.

My Review of "SuperFreakonomics"

As a sequel to "Freakonomics" this one is fine, with some insightful behavioral economic thoughts like:

1. A drunk walker is eight times more likely to die than a drunk driver, on a per mile basis.

2. Lower birthrate in India when cable TV introduced because of more autonomy of women.

3. Negative externalities using horses for transportation, too much manure and accidents, led to more modern form of transportation. Title 9 for women's athletics led to more male coaches of women's teams.

4. Averages can be misleading because the "average" person has one breast and one testicle, but a good place to start. People are more scared of sharks than elephants yet elephants kill many more people per year than sharks.

5. Expert performers are almost always made, not born, so best to work at what you love since likely you'll worker harder at that.

6. Terrorists are less likely to come from poor families.

7. "Cognitive drift" can lead to many errors, because people can become distracted easily in just a few seconds.

8. Women ER doctors generally are better than men.

9. Nobel Prize winners live longer, so do baseball Hall of Fame members. Also, do annuity buyers because of incentive to collect more.

10. Chemo for cancer is questionably effective.

11. TV watching increases crime - any kind of TV programs.

12. Humans are naturally altruistic, but affected by context, like when being under scrutiny.

13. Law of unintended consequences is very powerful, Seemingly good laws many times lead to the opposite happening more.

14. Simple and cheap fixes are more frequent than one might think. Ammonium nitrate most responsible for feeding the world. Polio vaccine to conquer polio. Car seat belts to save lives. Book offers some possible simple ways to stop bad hurricanes (send some surface warm water down deep) and solve global warming (send sulfur dioxide high in the sky). Don't have doctors wear ties - ties hardly ever cleaned, have doctors follow good hand hygiene in hospitals.

15. Capuchin monkeys can be taught to use money, hence basic economic laws hold for them, also like humans show irrational economic behavior like favoring loss aversion even if it isn't the wisest choice.

If the book is not as rigorous in its proof of assertions, that is OK with me, as it is an easy read and made me think a little deeper about some subjects worthy of deeper thought.

4 out of 5 stars.

My review of "Predictably Irrational"

This is a behaviorial economics book by Dan Ariely, I listened to the audiobook, which looks at how we are predisposed in certain situations to make irrational choices like:

1. When people are given a third choice, a different version of one of two similar choices, the person will likely chose the choice with two options, like a trip to Paris with or without a free breakfast or Rome with a free breakfast, the person would likely chose Paris simply because the two choices of Paris predisposes the person to thinking of Paris. So, sometimes just adding a more expensive version of the same product will cause more of the product to be sold.

2. Creating a new "anchor" can change the attractiveness of something, like Starbucks creating an attractive ambiance of its shops can make people want to pay more for coffee than at Dunkin' Donuts. Or, when a person moves from a city with inexpensive homes to a city with more expensive ones, the person is conditioned to buy a smaller home because he/she is 'anchored' to a certain price range. The same thing can work in reverse, affected by the particular 'anchor.'

3. Social versus market norms can affect choices. People sometimes are likely to do more work for free if for a social cause, rather than being paid. Sometimes small gifts work better than more expensive ones, because they keep the relationaship more social and less market-driven. The implication is important as companies have become less generous with creating a family atmosphere with free healthcare and other things like free lunches, company picnics, etc workers likely will feel more dedicated and work harder.

4. Ariely shows how sexual arousal alters a person's think so he/she will act less rational.

5. The book also looks at procrastination and how just having a person set his/her own deadlines works better than having no deadlines.

6. Ownership cause people to value something more than not owning it. That's why trial offers and money return guarantees work well.

7. The book covers the placebo effect and why a 50 cent pill might be more effective than the same one costing $2.50.

8. Thje book covers cheating and why simply having people contemplate the morality of doing something predisposes the person to be more honest - like saying, you know we use the honor system here or asking them if they can list the Ten Commandments even if they make mistakes in doing so. Also, context can affect cheating. People are less likely to steal cash than when someting which is removed from actual cash, like pencils at work, getting stock options at work when acting unethically, etc.

Overall, the book amplifies how human psychology must be considered in economics and how we are conditioned to make economic choices sometimes irrationally and in doing so is worthwhile in making a person think a little deeper about some things which have economic consequences.

My review of "Nudge"

"Nudge", a behavioral economics book, is very good at giving a reader perhaps a peak into President Obama's mind as he attempts to tackle some pretty big issues like healthcare, the environment, education and the financial urgencies of Medicare and Social Security. In his first few months in office, he does seem to be trying to win the support of political moderates just as this book presents such a case with its concept of "libertarian paternalism". The concept presents a case for giving people many choices while at the same time trying to have them lean toward directions which would likely be in their best interests. Some points from the book which caught my attention are:

1. Small details can have major impacts on people's behavior.

2. A "nudge" is an aspect of choice architecture which alters human behavior in a predictable way without forbidding any options or changing their economic incentives.

3. Never underestimate the power of inertia. The power can be harnessed by default options, for example. 'Econs' are people who respond to economic incentives. 'Humans' are people who respond to incentives AND nudges. Therefore, incentives and nudges help everyone.

4. It is false to assume almost everyone all the time makes choices in their best interest.

5. There are two kinds of thinking: intuitive/automatic (the oldest, like with voters and teenage drivers) and reflective/rational.

6. The book goes into rules of thumb like 'anchoring', 'availabilty' and 'representativeness' which affect how people make decisions.

7. Optimism/overconfidence and loss aversion affect decisions.

8. Temptation/dynamic-inconsistency can be handled.

9. 'Following the herd' must be managed.

10. 'The spotlight effect' - people unnecessarily tend to think others are watching them. So, investment clubs with conformists tend to do poorly, for instance.

11. The golden rule of 'nudges' is when they are most likely to help and least likely to cause harm.

12. Expect errors - humans are prone to making errors.

13. If Social Security is changed to allow investment choices, well thought-out defaults would be good. Medicare Part D is too cumbersome the way it is now, with about 2/3 making the wrong choices.

14. Asymmetric paternalism - help the least sophisicated while imposing the least on the most sophisticated.

The book also goes into over thirty nudges on various issues. Overall, the book is timely in giving a reader a clue into how some major issues facing the government might be handled, in order to have the best chance of progressing and working. 4 out of 5 stars.