The Bayes’ Theorem is Only the Beginning.

I found his really interesting article on the evolution of decision analysis and how the Bayes’ Theorem played a major role in this. The article From “Economic Man” to Behavioral Economics explains how the experiment of pulling red or blue marbles from a bag and determining which color is more dominant in the bag actually proves that humans are conservative in their calculations. By this I mean that the Bayes’ Theorem says that given what was pulled from the bag humans say the probability of dominance is about 20% less than what the Bayes’ Theorem would suggest. Now given this, a lot of research has gone into why humans make such calculations and apply these calculations to decisions. A new field of Economics developed from these studies and this field is now called Behavioral Economics. This field takes into account the differences between pure statistics , the Bayes’ Theorem, and a human’s typical behavior. This typical behavior was deemed to be “irrational behavior” because it went against what statistics would typically recommend, and economists wanted to know why this occurred. The article explained that this “irrational behavior” occurred because humans either use a “rule of thumb” or a method that they previously learned that worked well. The article then went on to explain that true experience can cause humans to make decisions in ways that are more representative of the statistical evidence. But the caveat is that this experience comes from thousands of hours of repetition. This entire article is interesting in that it shows how the Bayes’ Theorem has a flaw when predicting the outcome of a normal humans decisions. But the Bayes’ Theorem does well with predicting the decision of an expert. The article had a lot more interesting information on how the field of Behavioral Economics was created, but how relevant the Bayes’ Theorem is is what was most interesting to me. Especially considering all we have learned about it and its application recently.

Source: https://hbr.org/2015/05/from-economic-man-to-behavioral-economics

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