## Thursday, November 4, 2010

### Are we math-rational?

It seems like Math should be able to help when you have to make a go/no-go decision.

Here are some examples:

• Your car needs repairs. The garage's estimate approaches the value of the car. The car is 10 years old, runs ok, but needs \$3500 worth of work on a variety of systems - do you give the car away, sell it as is, drive it until it breaks down, or fix it? How do you decide?

• You install some new software. It doesn't work like you thought it would. Do you uninstall it, lose the value of the cash you spent (not returnable) and your time for installation - then go back to the old way? How do you determine the best option?

• You buy a ticket to a concert. You then remember an important family event on the same date. Do you throw away the concert ticket, try to resell it, give it to a friend, or ignore the family event and go to the concert anyway, knowing you will "pay the price" for it later?

• You buy a house in a nice area and you it. But the market is down, you owe far more than it's worth, you're struggling to make the payments and you discover you can rent a similar house down the street for much less. Do you hand the house back to the bank, do you take in a renter, or just gradually go broke?

• You own stock in a company that is struggling. It's done well in the past but you are beginning to doubt that it will appreciate in value or pay its dividends. Do you sell? Hold? Ignore?

• Does math help us in these situations?  In general, based on 50 years of experience, I'd say It's seldom any help.

Why? Too many considerations in each of these decisions are not mathematical.

I'll explain - many decisions are made in a logical manner, based on rational evaluation of the evidence. But in many other cases we are intuitive, or emotional; the options are not easily compared, and we don't have numerical criteria that can be mathematically evaluated.

I know about car-buying decisions because I worked in automotive publishing for 25 years. No matter how much comparison information you give people in advance, they often as not will choose whatever they want on the day they go shopping. Not what they said they would buy.

I had the chance to drive a Tesla, the electric sportscar. It was red; it was fast; it didn't handle as well as my current car. I didn't like it; I certainly didn't need it. After my drive the Tesla salesman asked me what car I thought I would buy next. Based on my whims, my shopping habits, and my needs, I said "A Ford Transit Connect."

He was stunned - "That's \$20,000! It's a mini-truck! A commercial vehicle!" That's right. Nothing at all like his product, but certainly a usable option for me and one I liked better than his fast little electric sportscar.

But not rational. Not mathematical.

I'm not suggesting math can't be involved in some decisions - it's just not useful in 37.78% of decisions (yes, I made that up).