The Allais Paradox

The Allais Paradox | Wired Science | Wired.com:

There is some explanation of the Allais Paradox here in Wired.com.  The is a tendency to value certainty but once this is gone, there is a tendency to take risk. For speculation, this means that the positive skew to returns are very attractive but the negative skew does not have very much influence.

"But why was certainty so attractive? Kahneman and Tversky wanted to understand the psychology behind the paradox. Their breakthrough came by accident. Kahneman had been reading a textbook on economic utility functions, and was puzzled by the way economists explained a particular aspect of our behavior. When evaluating a gamble—like betting on a hand of poker, or investing in a specific stock—economists assumed that we made the decision by taking into account our wealth as a whole. (Being rational requires factoring in all the relevant information.) But Kahneman realized that this isn’t how we think. Gamblers in Las Vegas don’t sit around the card table contemplating their complete financial portfolio. Instead, they make quick decisions that depend entirely upon the immediate terms of the gamble. If there is a $100 wager, and you’re trying to decide whether or not to ante in with a pair of aces, you probably aren’t thinking about the recent performance of your mutual fund, or the value of your home."

This may mean that fat tails are attractive as the possibility of large gains draws attention while the possibility of large losses is given less weight than it should.  There is loss aversion.  If there are large potential losses, losses should be cut swiftly, but there is a tendency to hand on a hope - with potentially catastrophic results.

A guide to bootstrapping

Bootstrapping and Subsampling: Part I « Normal Deviate:

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Compartments and belief

The Mind’s Compartments Create Conflicting Beliefs: Scientific American: An overview of the idea that the mind contains compartments that may contain conflicting ideas.  The key thought that when there is conflict, there is more agitation and people are more likely to shout or try to assert their belief.

"Cognitive dissonance may also be at work in the compartmentalization of beliefs. In the 2010 article “When in Doubt, Shout!” in Psychological Science, Northwestern University researchers David Gal and Derek Rucker found that when subjects' closely held beliefs were shaken, they “engaged in more advocacy of their beliefs ... than did people whose confidence was not undermined.” Further, they concluded that enthusiastic evangelists of a belief may in fact be “boiling over with doubt,” and thus their persistent proselytizing may be a signal that the belief warrants skepticism."

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