Tuesday, June 19, 2007

The Traveller's Dilemma

I took a second look into the old decision making theory because of an article I read recently in the June 2007 issue of Scientific American. It is a very interesting article on a game called the Traveller's Dilemma. The study on decision making has evolved from the classical study of rational analysis to the modern science of game theory. However, the Traveller's Dilemma game, which is under much academic research, revealed a much more complex layer of the human mind. I give a brief description of the game below. If you are interested, you may try your own answer to the game.

The Traveller's Dilemma
Lucy and Pete separately went on the a vacation trip to a remote Pacific island. They both bought an identical exotic piece of handicraft as souvenir. When they returned, they found that their souvenirs were damaged in transit. They both filed a claim with the airline. The airline manager accepted the responsibility and was willing to compensate. However, there was no way to assess the value of the strange souvenirs as both Lucy and Pete did not have any receipt.
The Airline manager came up with a proposal. He was willing to pay an assessed value between $2 and $100. Lucy and Pete were asked to put down the value of the souvenir without conferring to each other. If they both claimed the same amount between $2 and $100, the airline would pay them both the amount. If their claimed amounts were different, the airline would only pay the lower amount. Furthermore, to reward honesty and to penalize cheating, the one who claimed the lower amount would get $1 more while the other would get $1 less. If you were either Lucy or Pete, what amount would you claim?

The scientific approach to this question is the use of the game theory. Based on the logical regression that the person who claimed a smaller amount would get a better reward than the other, game theory insists that rationality should lead the players to select $2. In the end, the airline manager would only pay $2 to Lucy and Pete, which would be the best choice for both of them.

When studying the payoff matrix, a table showing the payoff of each possible choice, game theorists rely on the Nash Equilibrium, named after John Nash (His story was made into the movie A Beautiful Mind). A Nash Equilibrium is an outcome from which no player can do better by deviating unilaterally. Other equilibrium concepts adopted by game theorists also come up with the same result with both players claiming $2.

However, in reality when people play this game, many of them choose an amount near $100. Many universities conducted experiments and surveys on this game. A common result is that a relatively large proportion of players chose a higher amount instead of the $2 equilibrium state. Some academics called this Sensible Irrationality. A new kind of reasoning is needed to gain a rigorous understanding of this rational choice not to be rational. The results of Traveler's Dilemma contradict economists' assumption that standard game theory can predict how supposedly selfish rational people will behave. They also show how selfishness is not always good economics.

This story illustrates an important distinction between ordinary decision theory and game theory. In the latter, what is rational for one player may depend on what is rational for the other player. For Lucy to get her decision right, she must put herself in Pete's shoes and think about what he must be thinking. But he will be thinking about what she is thinking, leading to an infinite regression. Game theorists describe this situation by saying that "rationality is common knowledge among the players." In other words, Lucy and Pete are rational, they each know that the other is rational, they each know that the other knows, and so on. The assumption that rationality is common knowledge is the source of the conflict between logic and intuition and that, in the case of Traveler's Dilemma, the intuition is right and awaiting validation by a better logic.

Researchers made some attempts to explain why a lot of people do not choose the Nash equilibrium. Some argued that many people are unable to do the necessary deductive reasoning and therefore made irrational choices unwittingly. This is not entirely satisfactory as the result is still the same with some games played by theorists. Some proposed that perhaps altruism is hardwired into our psyches alongside with selfishness. Many of us may not feel like letting down the other party just by trying to earn an additional dollar. In any case, it seems likely that altruism, socialization and faulty reasoning all play a part in guiding individuals' choices. Some people playing the game may just ignore the game-theoretic logic and select a large amount, assuming their opponents will play something similar. The interesting point is that this rejection of formal rationality and logic has a kind of meta-rationality attached to it. The idea of behaviour generated by rationally rejecting rational behaviour is difficult to formalize. It will be a subject for further researches.

Wednesday, June 13, 2007

Humble decision making

The reason of my search for my old article on decision making is another paper by Amitai Etzioni I obtained from the Internet just recently. It is called Humble Decision Making and is an elaboration of the decision making theory. Although it is old, published in HBR in 1989, many of the observations are still quite valid today.

Etzioni predicted that many of the decision making theories will fail owing to the world getting more complex. He observed that the flow of information has swollen into such a flood and manages are in the danger of drowning. Extracting relevant data from the torrent is increasingly a daunting task. Little wonder that some beleaguered decision makers turn to astrologers and mediums.

First back on the rational model. This is the standard type of approach by rational persons through analyzing all the information concerning the decision required. It is the military type of approach and is well known for early academic researches into the mechanics of decision making. However, in the modern age, even with the assistance of powerful computers and databases for the processing of information, such semi-processing is still unable to analyze and thus obtain complete knowledge for decision making. Furthermore, since all decisions entail risks, decision making always evokes anxiety. Decision makers respond in predictable ways which render the decisions less reasonable. Some of the phenomenon mentioned may be quite familiar to us as they reflect the behaviour of some government officials:

Defensive avoidance - delaying making decision unduly as a defense for themselves.
Overreaction - making decision impulsively in order to escape the anxiety state.
Hypervigilance - obsessively collecting more and more information instead of making a decision.

Another observation is that executives see their decisions as professional and technocratic, but rarely as political. Rationalism disregards the emotion and politics of decision making. Implicit in the rationalistic decision making model is the assumption that decision makers have unqualified power and wisdom. It ignores the fact that other individuals also set goals for themselves and seek to push them through. Successful decision making strategies must include a place for co-operation, coalition building and the whole spectrum of differing personalities, perspectives, responsibilities and powers.

The difficulty in fully adopting the rational model has led executives seeking two alternatives. The first is the incremental model which is also known as the science of muddling through. It advocates not so much moving toward a goal as just away from trouble, by taking small maneuvers without any grand plan or sense of ultimate purpose. For the bureaucrats, it has two advantages. First, it eliminates the need for complete information by focusing on limited area close at hand. Second, it avoids the danger of making policy decision by not making any. This is of course highly conservative.

The second alternative to rationalism is openly opposed to reflection and analysis. Facing the fact that information is never complete, some bureaucrats may choose not to sit back and wait, but to pick the course favoured by their experience, inner voice, intuition, gut feeling and then to commit. By pumping enough resources, dedication and ingenuity into the course, they hope to make the under-processed decision right. However, this will more often result in shipwreck.

A variation to the above, which I think is very relevant to government officials, is rational ritualism, where the executives and their staff involve in an information dance whose prescribed moves include data pas de deux (two-person dance) and the interpretation waltz. The information used is generally poor, either arbitrarily selected or from undependable source, and vastly over interpreted. Usually most of those involved know that the data is unreliable and the analysis unreal but dare not say that the emperor is naked. They just make ritualistic projections and know well enough to ignore them.

A more practical approach to decision making, which is more suitable to the world of partial information, is what Etzioni called Humble Decision Making. It is a more generalized description of the adaptive decision making model or mixed scanning model. We have to acknowledge that we live in a world so complex that it is not possible to have very sound information for rational analysis, and also that good decisions cannot be made through conservative muddling through. Mixed scanning entails a mixture of shallow and deep examination of data, which is the generalized consideration of a broad range of facts and choices followed by detailed examination of a focused subset of facts and choices.

Adaptive decision making comes in many forms. Etzioni discussed several adaptive techniques in making use of partial information in decision making:

Focused trial and error - It assumes there is important information that the executive does not have and must proceed without. It is about feeling one's way towards an effective course of action despite the lack of essential chunks of data.

Tentativeness - A commitment to revise one's course as necessary is an essential adaptive rule.

Procrastination - Delay permits the collection of fresh evidence, processing of additional data, presentation of new options. If one can make a significantly stronger case at a later meeting, the result will justify the delay.

Decision staggering - It is another form of delay. An example is the decision to increase interest rate. By staggering the increase in small steps, the central bank can see the result of a partial intervention of the market.

Fractionalizing - It is a second corollary to procrastination. It treats important judgment as a series of sub-decisions and may or may not stagger them in time.

Hedging bets - An example is the buying of stocks of several companies instead of one owing to the lack of information of a company. It is much more likely to produce long term yield and security.

Maintaining strategic reserves - Maintaining large reserve is not always good for a company. But in a world where we learn to expect the unexpected, we need reserves to cover unanticipated costs and to respond to unforeseen opportunities.

Reversible decisions - They are a way of avoiding overcommitment when only partial information is available.

Such adaptive techniques illustrate several essential qualities for effective decision making that the textbook models lack, including flexibility, caution and the capability to proceed with partial information.

Friday, June 8, 2007

Decision making

Some time ago, I had a discussion with friends on the theory of decision making. Decision making theory is one of my favourite subjects in college. In fact it is an examination question I chose to answer which helped me get good marks. My early study was based on a paper by Amitai Etzioni. The paper introduced three models of decision making: the rational model, the incremental model and the mixed scanning model. The last one is also called the hybrid model where one scans the ground with loose criteria based on incremental consideration and then zooms in for a rational analysis. I wish to use a simple example to illustrate their decision making models.

Suppose we need to organize a get-together party. The decision required is a good restaurant in convenient location, with good food and service at a reasonable price. With the rational model, we need to collect detailed information and compared them to find the best. There is an element of choice and the tyranny of choice comes in. Are we sure that we have not missed a good restaurant? What if we pick a bad one? Should we first sample the food and service of each of them, or read all gourmet magazines for commentaries. What location is convenient to all? What price is reasonable to all. Even with such a simple decision, the resource required to make a sufficiently rational choice is huge. For an extreme maximizer, he will surely get clinical depression.

Clever persons normally use the incremental model. Just find out where did we eat last time. We could just book the same restaurant and same food. But to show that we have done our job, we could consider another restaurant nearby with a slightly better reputation. Waa Laa, a job is done.

A more conscientious person but equally lazy will use the hybrid model. We could first find out comments from the last get-together. Did anyone complaint about the place, food or price? Did anyone have suggestion on improvement? We then look for a few restaurants that could avoid the same pitfall, and then make a detailed rational comparison, perhaps with some site visits, before making the decision.

Our public policy decision making is rarely based on the rational model. Although some issues are researched by academics or by our Central Policy Unit, political decisions are seldom based on the rational approach. It is too difficult, too resource-demanding, and never complete. Charles Lindblom's book of the Science of Muddling Through paints a good picture of the psychological process of decision making of an average person. Civil servants are just average at best. Etzioni does have a point. You just cannot make decision so lazily. Thus upon pressure from the public, academic and politicians, the use of the hybrid model can show that at least some work is done. If you read some of the consultation papers, white papers or LegCo papers, they all offer a few (insufficient and incomplete) choices and then do a detailed analysis on them before recommending one for final decision. That's how we run our business.

Saturday, June 2, 2007

Global warming 2

There is no need to blame the G8 leaders. Politicians are a different breed of animals. Owing to the democracy platform, their paradigm is based on public opinion. Public opinion can be manipulated easily serving the interests of the dominant groups, but not necessarily the majority groups. In any case, politicians are balancing various interests on a daily basis and it is quite often a choice of the lesser evil. I would say most of us would do the same if we were in their shoes.

We may have to wait for the time when the public opinion all turn to demanding drastic actions to protect the environment, with much sacrifice. This may not take very long. We could all witness the horrific changes as they would very likely occur within our lifetime.

Last month, the IPCC (Intergovernmental Panel on Climate Change) issued its fourth assessment report which is on impacts, adaptation and vulnerability. If you do care, you may take a look at the 23-page report. This panel is very controversial and it is actually the battle ground of governments of the world on global warming. So please bear in mind that the observations are compromises: many horror predictions are left out. An intelligent guess is that the situation is at least 50% more severe.

The effects of climate changes included in the report are:
- Virtually certain that there will be warmer days and less cold days/nights
- Very likely more warm spells and heat waves
- Very likely more heavy rain events
- Likely more areas hit by drought
- Likely more intense tropical cyclones
- Likely more extreme sea levels

The key findings of the reports on the impacts are:
- 75-250 million people across Africa could face water shortages by 2020
- Crop yields could increase by 20% in East and Southeast Asia, but decrease by up to 30% in Central and South Asia
- Agriculture fed by rainfall could drop by 50% in some African countries by 2020
- 20-30% of all plant and animal species at increased risk of extinction if temperatures rise between 1.5-2.5C
- Glaciers and snow cover expected to decline, reducing water availability in countries supplied by melt water

We may look at these changes and impacts as a scientific experiment. But the horror will be seen as their effects on the human population emerge. When citizens of the world suffer as a result, there will be sufficient momentum for politicians to take action, although it could be too late by then. The impacts will affect residents of the areas suffering from the climate change. As a result, people will move as climate immigrants and climate refugees. USA and Europe have raised concern on the influx of migrants and refugees. But the situation will be much worse for internal movement within countries where there may not be sufficient protection and aid for the refugees.

We have already seen the situation in Darfur where drought triggered famine and then conflict. We have also seen Katrina causing the entire city of New Orleans to evacuate. Many island countries in the Pacific and Indian Ocean are already losing much land to the sea. Many areas relying on rivers fed by glacial water are having crop failure owing to irregular change of seasons. Many more countries such as Australia and those in the sub-Sahara region already have prolonged drought. The El Nino effect is predicted to be more severe, causing drought in Southern Asia and Polynesia but flooding in South America. We may be looking at a world where all the above are many folds worse in the next twenty to fifty years. Frankly I do not think there is anything we could do but to bite our teeth to adapt and survive.

Friday, June 1, 2007

Global warming

A friend asked me to sign a petition asking the G8 leaders to take action to abate carbon dioxide emission. I signed the petition. This is good consolation to quiet some of my guilts induced by environmentalists on my fault to warm the planet earth. I must confess that I live in a city for too long and I cannot survive without the polluting and global warming lifestyle. On a hot day, I cannot avoid a heatstroke without air-conditioning. I cannot go far on foot and have to take polluting transportation. I have to buy inexpensive food produced using ingredients which harm the planet as well as myself. I cannot communicate with so many people without my computer and the Internet which rely on the polluting power plants all over the world. So these G8 leaders must be worse persons than me and only if they could turn for the better and save the world for me. The gibberish stops here and here are my views on the future.

I do not have the least faith on the G8 leaders to guard the planet earth. We may call them world leaders, but they are actually only leaders of their countries, and they are elected. That means their skins hinge on the success of the next election. In the present world where there is no true democracy, their actions are dictated by the dominant opinion leaders who are not necessarily environmentalists. Any resolution reached in such forum is bound to be a watered down version, just like the Kyoto Protocol which could only slow down global warming by a few years, if ever implemented.

While the world presses the developed countries to emit less carbon dioxide, there are many folds of human beings in developing countries waiting in line to join the polluting train. Development cannot be stopped. As we speak, obsolete polluting machines are being shipped to developing countries to continue the polluting process, in the name of reduction of waste.

Man-made global warming cannot be disputed. I read from another journal that the earth has already accumulated too much carbon dioxide in the atmosphere. It is like too many blankets have been laid on top of us. The process has crossed the threshold and the warming engine has already started. The natural carbon dioxide absorbing ability by the ocean has slowed down. Even if the carbon dioxide emission by human is not increased at all as from today onwards, the global warming effect will still go on for a long time. All the predicted damages cannot be avoided.

I think sufficient evidence of man-made global warming have been laid before us, but they do not necessarily kick off corrective actions owing to the immediate pain of remedy. We have not yet reached the critical point. It will take some more catastrophes before governments of the world start taking concrete actions.

However, I do not think this will be the end of the world. Human being is the most adaptive species. We can evolve to cope with the effect of global warming, just like the poster I saw yesterday: a garment brand is already promoting its global warming series.

There are some scientists who are proposing that we should not waste time arguing the cause and effect of global warming. We should instead concentrate on the preparation to deal with the damages caused by severe climate changes. The damages will come in the form of climate immigrants and climate refugees. Without the success or otherwise on the debate on man-made global warming, disasters are now happening in many places where water shortages, sea level crises, deteriorating pasture land, conflicts and famine are forcing people to move. I think catastrophe is in the making and the human population will decrease. I hope an equilibrium with nature will eventually be found leading to a smaller human population co-existing with planet earth. This may be possible if we are given sufficient time to adapt.