WCC Would You Take the Bird in The Hand or A 75% Chance at The Two in The Bush Article Analysis Please read and answer FIVE questions below the article (at

WCC Would You Take the Bird in The Hand or A 75% Chance at The Two in The Bush Article Analysis Please read and answer FIVE questions below the article (attached file). Thank you! Would You Take the Bird in the Hand, or a 75% Chance at
the Two in the Bush?
By VIRGINIA POSTREL
WOULD you rather have $1,000 for sure or a 90 percent chance
of $5,000? A guaranteed $1,000 or a 75 percent chance of
$4,000?
In economic theory, questions like these have no right or wrong
answers. Even if a gamble is mathematically more valuable a 75
percent chance of $4,000 has an expected value of $3,000, for
instance someone may still prefer a sure thing.
People have different tastes for risk, just as they have different
tastes for ice cream or paint colors. The same is true for waiting:
Would you rather have $400 now or $100 every year for 10
years? How about $3,400 this month or $3,800 next month?
Different people will answer differently.
Economists generally accept those differences without further
explanation, while decision researchers tend to focus on average
behavior.
In decision research, individual differences “are regarded as a
nuisance as just another source of ‘unexplained’ variance,” Shane
Frederick, a management science professor at the Sloan School of
Management at the Massachusetts Institute of Technology, wrote
in “Cognitive Reflection and Decision Making.” The article is
published in the Fall 2005 issue of The Journal of Economic
Perspectives, which includes a special section of articles devoted
to “cognition, brain science and economics.” (The article is
available at mit.edu/people/shanefre/ publications.htm.)
Professor Frederick discovered striking systematic patterns in how
people answer questions about risk and patience, including those
above. This short problem-solving test, he found, predicts a lot:
1) A bat and a ball cost $1.10 in total. The bat costs $1 more
than the ball. How much does the ball cost?
2) If it takes five machines five minutes to make five widgets,
how long would it take 100 machines to make 100 widgets?
3) In a lake, there is a patch of lily pads. Every day, the patch
doubles in size. If it takes 48 days for the patch to cover the
entire lake, how long would it take for the patch to cover half the
lake?
The test measures not just the ability to solve math problems but
the willingness to reflect on and check your answers. (Scores
have a 0.44 correlation with math SAT scores, where 1.00 would
be exact.) The questions all have intuitive answers wrong ones.
Professor Frederick gave his “cognitive reflection test” to nearly
3,500 respondents, mostly students at universities including
M.I.T., the University of Michigan and Bowling Green University.
Participants also answered a survey about how they would choose
between various financial payoffs, as well as time-oriented
questions like how much they would pay to get a book delivered
overnight.
Getting the math problems right predicts nothing about most
tastes, including whether someone prefers apples or oranges,
Coke or Pepsi, rap music or ballet. But high scorers those who get
all the questions right do prefer taking risks.
“Even when it actually hurts you on average to take the gamble,
the smart people, the high-scoring people, actually like it more,”
Professor Frederick said in an interview. Almost a third of high
scorers preferred a 1 percent chance of $5,000 to a sure $60.
They are also more patient, particularly when the difference, and
the implied interest rate, is large. Choosing $3,400 this month
over $3,800 next month implies an annual discount rate of 280
percent. Yet only 35 percent of low scorers those who missed
every question said they would wait, while 60 percent of high
scorers preferred the later, bigger payoff.
Men and women also show different results. “Expressed loosely,”
he writes, “being smart makes women patient and makes men
take more risks.”
High-scoring women show slightly more willingness to wait than
high-scoring men, while the differences in risk-taking are much
larger. High-scoring women are about as willing to gamble as
low-scoring men, while low-scoring women are even more riskaverse
For instance, 80 percent of high-scoring men would pick a 15
percent chance of $1 million over a sure $500, compared with
only 38 percent of high-scoring women, 40 percent of low-scoring
men and 25 percent of low-scoring women.
The connection between cognition and risk preferences challenges
some of the “prospect theory” developed from the pioneering
work of Daniel Kahneman and Amos Tversky. They observed that
people would accept larger risks to avoid losses than to achieve
gains, even when the two choices were mathematically
equivalent. The same person might take a sure $100 instead of a
50 percent chance of $300, yet prefer a 50 percent chance of
losing $300 rather than a sure $100 loss.
This result, which has implications for investment and insurance,
is one of the major findings of behavioral economics. Although
prospect theory “is spectacularly true” for the low-scoring group,
Professor Frederick writes, high scorers treat potential gains and
potential losses about the same.
Psychology studies often find that small differences in wording
seem to produce large differences in survey answers. But since
these experiments are usually done on college campuses using
students, the real difference may lie elsewhere.
Maybe, suggested Professor Frederick in the interview, “it’s
because one study was done at University of Toledo” where the
mean score on his test was 0.57 out of a possible 3 “and one
study was done at Princeton,” where the mean was 1.63. The test
groups may not really be the same.
“Most researchers are finding that subtle differences in framing
cause different preferences,” he said, “but it might just be that
these people are a whole lot smarter on average than these other
people, and that’s why you’re getting these results.”
The correct answers, by the way, are 5 cents, 5 minutes, and 47
days.
Virginia Postrel (dynamist.com) is the author of “The Substance
of Style: How the Rise of Aesthetic Value Is Remaking Commerce,
Culture and Consciousness.”
1.Explain Professor Frederick’s “cognitive reflection” test.
2.What lessons have you learn about human behavior, risk
taking and payoff from this article?
3.How would you go about accessing your risk profile?
That is, are you a high risk taker, medium risk taker or low
risk taker? Why is it important to know this?
4.Explain prospect theory.
5.Explain the difference between men and women with
respect to risk taking and intelligence.
Would You Take the Bird in the Hand, or a 75% Chance at
the Two in the Bush?
By VIRGINIA POSTREL
WOULD you rather have $1,000 for sure or a 90 percent chance
of $5,000? A guaranteed $1,000 or a 75 percent chance of
$4,000?
In economic theory, questions like these have no right or wrong
answers. Even if a gamble is mathematically more valuable a 75
percent chance of $4,000 has an expected value of $3,000, for
instance someone may still prefer a sure thing.
People have different tastes for risk, just as they have different
tastes for ice cream or paint colors. The same is true for waiting:
Would you rather have $400 now or $100 every year for 10
years? How about $3,400 this month or $3,800 next month?
Different people will answer differently.
Economists generally accept those differences without further
explanation, while decision researchers tend to focus on average
behavior.
In decision research, individual differences “are regarded as a
nuisance as just another source of ‘unexplained’ variance,” Shane
Frederick, a management science professor at the Sloan School of
Management at the Massachusetts Institute of Technology, wrote
in “Cognitive Reflection and Decision Making.” The article is
published in the Fall 2005 issue of The Journal of Economic
Perspectives, which includes a special section of articles devoted
to “cognition, brain science and economics.” (The article is
available at mit.edu/people/shanefre/ publications.htm.)
Professor Frederick discovered striking systematic patterns in how
people answer questions about risk and patience, including those
above. This short problem-solving test, he found, predicts a lot:
1) A bat and a ball cost $1.10 in total. The bat costs $1 more
than the ball. How much does the ball cost?
2) If it takes five machines five minutes to make five widgets,
how long would it take 100 machines to make 100 widgets?
3) In a lake, there is a patch of lily pads. Every day, the patch
doubles in size. If it takes 48 days for the patch to cover the
entire lake, how long would it take for the patch to cover half the
lake?
The test measures not just the ability to solve math problems but
the willingness to reflect on and check your answers. (Scores
have a 0.44 correlation with math SAT scores, where 1.00 would
be exact.) The questions all have intuitive answers wrong ones.
Professor Frederick gave his “cognitive reflection test” to nearly
3,500 respondents, mostly students at universities including
M.I.T., the University of Michigan and Bowling Green University.
Participants also answered a survey about how they would choose
between various financial payoffs, as well as time-oriented
questions like how much they would pay to get a book delivered
overnight.
Getting the math problems right predicts nothing about most
tastes, including whether someone prefers apples or oranges,
Coke or Pepsi, rap music or ballet. But high scorers those who get
all the questions right do prefer taking risks.
“Even when it actually hurts you on average to take the gamble,
the smart people, the high-scoring people, actually like it more,”
Professor Frederick said in an interview. Almost a third of high
scorers preferred a 1 percent chance of $5,000 to a sure $60.
They are also more patient, particularly when the difference, and
the implied interest rate, is large. Choosing $3,400 this month
over $3,800 next month implies an annual discount rate of 280
percent. Yet only 35 percent of low scorers those who missed
every question said they would wait, while 60 percent of high
scorers preferred the later, bigger payoff.
Men and women also show different results. “Expressed loosely,”
he writes, “being smart makes women patient and makes men
take more risks.”
High-scoring women show slightly more willingness to wait than
high-scoring men, while the differences in risk-taking are much
larger. High-scoring women are about as willing to gamble as
low-scoring men, while low-scoring women are even more riskaverse
For instance, 80 percent of high-scoring men would pick a 15
percent chance of $1 million over a sure $500, compared with
only 38 percent of high-scoring women, 40 percent of low-scoring
men and 25 percent of low-scoring women.
The connection between cognition and risk preferences challenges
some of the “prospect theory” developed from the pioneering
work of Daniel Kahneman and Amos Tversky. They observed that
people would accept larger risks to avoid losses than to achieve
gains, even when the two choices were mathematically
equivalent. The same person might take a sure $100 instead of a
50 percent chance of $300, yet prefer a 50 percent chance of
losing $300 rather than a sure $100 loss.
This result, which has implications for investment and insurance,
is one of the major findings of behavioral economics. Although
prospect theory “is spectacularly true” for the low-scoring group,
Professor Frederick writes, high scorers treat potential gains and
potential losses about the same.
Psychology studies often find that small differences in wording
seem to produce large differences in survey answers. But since
these experiments are usually done on college campuses using
students, the real difference may lie elsewhere.
Maybe, suggested Professor Frederick in the interview, “it’s
because one study was done at University of Toledo” where the
mean score on his test was 0.57 out of a possible 3 “and one
study was done at Princeton,” where the mean was 1.63. The test
groups may not really be the same.
“Most researchers are finding that subtle differences in framing
cause different preferences,” he said, “but it might just be that
these people are a whole lot smarter on average than these other
people, and that’s why you’re getting these results.”
The correct answers, by the way, are 5 cents, 5 minutes, and 47
days.
Virginia Postrel (dynamist.com) is the author of “The Substance
of Style: How the Rise of Aesthetic Value Is Remaking Commerce,
Culture and Consciousness.”
1.Explain Professor Frederick’s “cognitive reflection” test.
2.What lessons have you learn about human behavior, risk
taking and payoff from this article?
3.How would you go about accessing your risk profile?
That is, are you a high risk taker, medium risk taker or low
risk taker? Why is it important to know this?
4.Explain prospect theory.
5.Explain the difference between men and women with
respect to risk taking and intelligence.

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