EST 581 Decision Making

1. EST 581 Decision Making Final Class Session: Remaining Topics

2. Agenda • "Science & Technology Parks: Past and Future - Experience of Korea” - Dr. Deok Soon Yim • Administrivia • Preview final exam • Exam time and place • Summer projects and fall courses • More on decision psychology and utility • Swarm decisions* • Multi-criterion decision making* * Time permitting

3. Exam • June 15, 7:10 p.m., here in room 154 • 2 hours • Answer 11 of 13 questions. • Multiple choice, math solutions, and short answer. • The exam is difficult; I anticipate using relative grading.

4. Summer projects • I have proposals from: • Youseong Hwang • Youngjun Park • Expecting more proposals. • Project students should: • Register for EST 591 for fall semester, with me as instructor. • Get a permission letter from me for this “independent study” course. • Give me drafts, progress reports during summer.

5. TSM offerings for fall 2012 • EST 582 Systems Approach to Human-Machine Systems (Phillips) • EMP 525 Technology Assessment for Emerging Technologies (Yim) • EMP 507 Management of Innovation & Creativity (Yoon) • A fourth course TBD • Maybe Tech Marketing • EST 591 Independent Projects (Phillips)

6. More on decision psychology and utility: Hormones and decisions • John Coates, neuroscientist at Cambridge U., tested hormone levels of London financial traders. • Financial traders’ decisions are influenced by their bodies as well as the markets. • Two steroid hormones—testosterone and cortisol—come out in force during the excesses of bull and bear markets. The Economist 5/26/2012, p.86

7. Hormones and decisions • Testosterone is released into the body at moments of competition, risk-taking and triumph. • In animals this leads to the “winner effect”. • A male that wins one battle goes into the next one • primed with higher levels of testosterone, helping him to win again. • Eventually, though, the animal starts more fights and experiences higher rates of mortality. The Economist 5/26/2012, p.86

8. Hormones and decisions • Higher trader testosterone levels in the morning correlated with higher profits in the afternoon. • Such profits came from taking higher risks, not from greater skill. • In prolonged periods of stress the body secretes cortisol, a hormone that marshals resources to cope with crises. • Cortisol levels in traders’ bodies fluctuate in line with market volatility, • even displaying a striking correlation with the prices of derivatives. • But when cortisol remains in the body for extended periods, • Rational analysis becomes harder, allowing emotional responses to dominate; • Risk aversion grows as testosterone production is suppressed. The Economist 5/26/2012, p.86

9. Hormones and decisions • One answer, Coates thinks, is to hire more older men and, especially, women. • Their bodies release far less testosterone. • Women have the same levels of cortisol as men, but their stress response is triggered • less by competitive failures and • more by problems in their personal lives. • That may make them more resilient when the markets turn against them. • CAUTION: That last point about gender comparison is unproven; only preliminary evidence exists. The Economist 5/26/2012, p.86 http://www.economist.com/node/21555882

10. 3 more reasons people may not make rational decisions • Disempowerment • “Lumpy” utility functions • Loss-aversion The Economist 5/12/2012, p.71

11. Development economists say some very poor people remain in poverty because • even the largest investments they are able to make, • whether eating a few more calories or • working a bit harder on their minuscule businesses, • are too small to make a big difference. • So getting out of poverty seems to require a quantum leap— • vastly more food, • a modern machine, or • an employee to mind the shop. • As a result, they often forgo even the small incremental investments of which they are capable: • a bit more fertilizer, • some more schooling or • a small amount of saving. The Economist 5/12/2012, p.71

12. This is hopelessness – “disempowerment” and lumpy utility • Hopelessness can result in “pathological conservatism.” • Really, extreme loss-aversion. • For example, poor people stay in drought-hit villages when the city is just a bus ride away. • An experiment in rural Bangladesh provided men with the bus fare to Dhaka at the beginning of the lean season, the period between planting and the next harvest when there is little to do except sit around. • The offer of the bus fare, an amount which most of the men could have saved up to pay for themselves, led to a 22-percentage-point increase in the probability of migration. • The money migrants sent back led their families’ consumption to soar. • Having experienced the $100 increase in seasonal consumption per head that the $8 bus fare made possible, half of those offered the bus fare migrated again the next year • People may think they are in a poverty trap when they are not. • Surveys show many poor parents believe that a few years of school have almost no benefit; education is valuable only if you finish secondary school. • So if they cannot ensure that their children can complete school, they tend to keep them out of the classroom altogether. • Yet economists have found that each year of schooling adds a roughly similar amount to a person’s earning power: the more education, the better.

13. Lumpy utility • MIT economist Esther Duflo has run experiments in Bangladesh similar to the bus experiment described on last slide. • Results are either same or more dramatic. • Conclusion: International aid should be directed at getting recipients past the “lump” in the utility function. • With instruction about how to use the received asset. • Gives empowerment and new sense of what’s possible. http://www.economist.com/node/21554506

14. Swarm Intelligence • A single ant or bee isn't smart, but their colonies are. • The study of swarm intelligence can help humans manage complex systems, from truck routing to military robots.

15. "If you watch an ant try to accomplish something, you'll be impressed by how inept it is." Deborah Gordon, Stanford U. biologist • But a colony can solve problems such as • finding the shortest path to the best food source, • allocating workers to different tasks, or • defending a territory from neighbors. • Even with half a million ants, a colony functions just fine with no management at all. • It relies instead upon countless interactions between individual ants, each of which is following simple rules of thumb. • Scientists call this behavior self-organizing.

16. How do the simple actions of individuals add up to the complex behavior of a group? • When one ant bumps into another, it sniffs with its antennae to find out if the other belongs to the same nest and where it has been working. • Ants that work outside the nest smell different from those that stay inside. • Before they leave the nest each day, foragers normally wait for early morning patrollers to return. • But the forager needs several contacts no more than ten seconds apart before it will go out.

17. A forager won't come back until it finds something. • The less food there is, the longer it takes the forager to find it and get back. The more food there is, the faster it comes back. • Nobody's deciding whether it's a good day to hunt. • The collective is, but no particular ant is. • No ant sees the big picture. • No ant tells any other ant what to do. • That's how swarm intelligence works: • simple creatures following simple rules, each one acting only on local information.

18. Bees choose a new nest location. • Scout bees find candidate locations. • When they return to the swarm, each performs a waggle dance urging other scouts to go have a look. • These dances include a code giving directions to the location. • The strength of each dance reflects the scout's enthusiasm level. • After a while, dozens of scouts are dancing, some for one site, some for another, and a small cloud of bees was buzzing around each box. • Out at the locations, scouts start grouping. • When the number of scouts visible at any place reaches about 15, the bees sense that a decision has been made.

19. Ants, bees, locusts, fish, wildebeests,… • The bees' rules for decision-making work for humans too: • seek a diversity of options, • encourage a free competition among ideas, and • use an effective mechanism to narrow choices. • voting, • auctioning, • averaging • Or other multi-criterion decision making rule. • But it does not mean crowd-sourced decisions are always best. See http://consciousmanager.blogspot.com/2008/10/crowds-wisdom-or-madness.html http://ngm.nationalgeographic.com/2007/07/swarms/miller-text/5

20. Swarm self-organization can be modeled algorithmically. • And for well-defined optimization problems, work quite well. • Applications include: • Routing delivery trucks (Italy, Switzerland) • Routing phone calls through network (UK, France) • Southwest Airlines, matching flights to gates at Phoenix airport (US) • Programming worker robots, military drones.

21. Multi-criterion decision making • In an interdependent system, it is impossible to maximize more than one function at a time. • “It is better to be rich and healthy than to be poor and sick.” – Professor Irwin Corey • It’s not always that easy. • Is it better to be rich and sick, or poor and healthy? • As we cannot simultaneously maximize health and wealth, we must think about • Correlations, and • “Trade-offs.”

22. Multi-criterion decision making • You have studied “rating schemes” in EMP506. • Another popular method, more precise and more complex, is AHP, the Analytic Hierarchy Process. • http://www.youtube.com/watch?v=18GWVtVAAzs&feature=related • We will also look at Goal Programming. • There are many other methods. We do not have time to present them in this course.

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