Thinking, Fast and Slow
Thinking, Fast and Slow

Thinking, Fast and Slow

“She is a hedgehog. She has a theory that explains everything, and it gives her the illusion that she understands the world.” (Location 3903)

Why are experts inferior to algorithms? One reason, which Meehl suspected, is that experts try to be clever, think outside the box, and consider complex combinations of features in making their predictions. Complexity may work in the odd case, but more often than not it reduces validity. (Location 3949)

Another reason for the inferiority of expert judgment is that humans are incorrigibly inconsistent in making summary judgments of complex information. When asked to evaluate the same information twice, they frequently give different answers. (Location 3957)

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learned from this finding a lesson that I have never forgotten: intuition adds value even in the justly derided selection interview, but only after a disciplined collection of objective information and disciplined scoring of separate traits. I set a formula that gave the “close your eyes” evaluation the same weight as the sum of the six trait ratings. A more general lesson that I learned from this episode was do not simply trust intuitive judgment—your own or that of others—but do not dismiss it, either. (Location 4096)

An intuitive prediction of how Harding would perform as president arose from substituting one question for another. A reader of this book should expect such an intuition to be held with confidence. (Location 4163)

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Note: How would a good pesident look rather than what qualifications they would have.

“The situation has provided a cue; this cue has given the expert access to information stored in memory, and the information provides the answer. Intuition is nothing more and nothing less than recognition (Location 4183)

In the absence of valid cues, intuitive “hits” are due either to luck or to lies. If you find this conclusion surprising, you still have a lingering belief that intuition is magic. Remember this rule: intuition cannot be trusted in the absence of stable regularities in the environment. (Location 4262)

“Did he really have an opportunity to learn? How quick and how clear was the feedback he received on his judgments?” (Location 4327)

I was following a procedure that we already planned to incorporate into our curriculum: the proper way to elicit information from a group is not by starting with a public discussion but by confidentially collecting each person’s judgment. (Location 4338)

The forecasting method that Flyvbjerg applies is similar to the practices recommended for overcoming base-rate neglect: Identify an appropriate reference class (kitchen renovations, large railway projects, etc.). Obtain the statistics of the reference class (in terms of cost per mile of railway, or of the percentage by which expenditures exceeded budget). Use the statistics to generate a baseline prediction. Use specific information about the case to adjust the baseline prediction, if there are particular reasons to expect the optimistic bias to be more or less pronounced in this project than in others of the same type. (Location 4456)

In this view, people often (but not always) take on risky projects because they are overly optimistic about the odds they face. I will return to this idea several times in this book—it probably contributes to an explanation of why people litigate, why they start wars, and why they open small businesses. (Location 4477)

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“He’s taking an inside view. He should forget about his own case and look for what happened in other cases.” (Location 4497)

Discouraging news led about half of the inventors to quit after receiving a grade that unequivocally predicted failure. However, 47% of them continued development efforts even after being told that their project was hopeless, and on average these persistent (or obstinate) individuals doubled their initial losses before giving up. Significantly, persistence after discouraging advice was relatively common among inventors who had a high score on a personality measure of optimism—on which inventors generally scored higher than the general population. (Location 4551)

More generally, the financial benefits of self-employment are mediocre: given the same qualifications, people achieve higher average returns by selling their skills to employers than by setting out on their own. The evidence suggests that optimism is widespread, stubborn, and costly (Location 4556)

The optimistic risk taking of entrepreneurs surely contributes to the economic dynamism of a capitalistic society, even if most risk takers end up disappointed. (Location 4583)

It is tempting to explain entrepreneurial optimism by wishful thinking, but emotion is only part of the story. Cognitive biases play an important role, notably the System 1 feature WYSIATI. We focus on our goal, anchor on our plan, and neglect relevant base rates, exposing ourselves to the planning fallacy. We focus on what we want to do and can do, neglecting the plans and skills of others. Both in explaining the past and in predicting the future, we focus on the causal role of skill and neglect the role of luck. We are therefore prone to an illusion of control. We focus on what we know and neglect what we do not know, which makes us overly confident in our beliefs. (Location 4589)

The evidence for the cognitive interpretation of the above-average effect is that when people are asked about a task they find difficult (for many of us this could be “Are you better than average in starting conversations with strangers?”), they readily rate themselves as below average. The upshot is that people tend to be overly optimistic about their relative standing on any activity in which they do moderately well. (Location 4603)

However, WY SIATI plays its part, and entrepreneurs naturally focus on what they know best—their plans and actions and the most immediate threats and opportunities, such as the availability of funding. They know less about their competitors and therefore find it natural to imagine a future in which the competition plays little part. (Location 4610)

Overconfidence is another manifestation of WYSIATI: when we estimate a quantity, we rely on information that comes to mind and construct a coherent story in which the estimate makes sense. Allowing for the information that does not come to mind—perhaps because one never knew it—is impossible. (Location 4638)

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As Nassim Taleb has argued, inadequate appreciation of the uncertainty of the environment inevitably leads economic agents to take risks they should avoid. However, optimism is highly valued, socially and in the market; people and firms reward the providers of dangerously misleading information more than they reward truth tellers. One of the lessons of the financial crisis that led to the Great Recession is that there are periods in which competition, among experts and among organizations, creates powerful forces that favor a collective blindness to risk and uncertainty. (Location 4650)

However, overconfidence is a direct consequence of features of System 1 that can be tamed—but not vanquished. The main obstacle is that subjective confidence is determined by the coherence of the story one has constructed, not by the quality and amount of the information that supports it. (Location 4685)

Bernoulli invented psychophysics to explain this aversion to risk. His idea was straightforward: people’s choices are based not on dollar values but on the psychological values of outcomes, their utilities. The psychological value of a gamble is therefore not the weighted average of its possible dollar outcomes; it is the average of the utilities of these outcomes, each weighted by its probability. (Location 4796)

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Betty is much more likely to take her chances, as others do when faced with very bad options. (Location 4856)

Note: People given a bad option and a worse option are more likely to take thier chances.

Because Bernoulli’s model lacks the idea of a reference point, expected utility theory does not represent the obvious fact that the outcome that is good for Anthony is bad for Betty. His model could explain Anthony’s risk aversion, but it cannot explain Betty’s risk-seeking preference for the gamble, a behavior that is often observed in entrepreneurs and in generals when all their options are bad. (Location 4859)

“He was very happy with a $20,000 bonus three years ago, but his salary has gone up by 20% since, so he will need a higher bonus to get the same utility.” (Location 4874)

“She’s suing him for alimony. She would actually like to settle, but he prefers to go to court. That’s not surprising—she can only gain, so she’s risk averse. He, on the other hand, faces options that are all bad, so he’d rather take the risk.” (Location 4878)

For financial outcomes, the usual reference point is the status quo, but it can also be the outcome that you expect, or perhaps the outcome to which you feel entitled, for example, the raise or bonus that your colleagues receive. (Location 4957)

When directly compared or weighted against each other, losses loom larger than gains. This asymmetry between the power of positive and negative expectations or experiences has an evolutionary history. Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce. (Location 4963)

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For most people, the fear of losing $100 is more intense than the hope of gaining $150. We concluded from many such observations that “losses loom larger than gains” and that people are loss averse. (Location 4984)

Relative to your expectations, winning nothing will be experienced as a large loss. Prospect theory cannot cope with this fact, because it does not allow the value of an outcome (in this case, winning nothing) to change when it is highly unlikely, or when the alternative is very valuable. In simple words, prospect theory cannot deal with disappointment. Disappointment and the anticipation of disappointment are real, however, and the failure to acknowledge them is as obvious a flaw as the counterexamples that I invoked to criticize Bernoulli’s theory. (Location 5052)

“He weighs losses about twice as much as gains, which is normal.” (Location 5077)

Selling goods that one would normally use activates regions of the brain that are associated with disgust and pain. Buying also activates these areas, but only when the prices are perceived as too high—when you feel that a seller is taking money that exceeds the exchange value. Brain recordings also indicate that buying at especially low prices is a pleasurable event. (Location 5215)

Veteran traders have apparently learned to ask the correct question, which is “How much do I want to have that mug, compared with other things I could have instead?” This is the question that Econs ask, and with this question there is no endowment effect, because the asymmetry between the pleasure of getting and the pain of giving up is irrelevant. (Location 5256)

“She didn’t care which of the two offices she would get, but a day after the announcement was made, she was no longer willing to trade. Endowment effect!” (Location 5272)

“He just hates the idea of selling his house for less money than he paid for it. Loss aversion is at work.” (Location 5275)

The brains of humans and other animals contain a mechanism that is designed to give priority to bad news. By shaving a few hundredths of a second from the time needed to detect a predator, this circuit improves the animal’s odds of living long enough to reproduce. (Location 5302)

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The psychologist Paul Rozin, an expert on disgust, observed that a single cockroach will completely wreck the appeal of a bowl of cherries, but a cherry will do nothing at all for a bowl of cockroaches. (Location 5313)

They cite John Gottman, the well-known expert in marital relations, who observed that the long-term success of a relationship depends far more on avoiding the negative than on seeking the positive. Gottman estimated that a stable relationship requires that good interactions outnumber bad interactions by at least 5 to 1. Other asymmetries in the social domain are even more striking. We all know that a friendship that may take years to develop can be ruined by a single action. (Location 5320)

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As initially conceived, plans for reform almost always produce many winners and some losers while achieving an overall improvement. If the affected parties have any political influence, however, potential losers will be more active and determined than potential winners; the outcome will be biased in their favor and inevitably more expensive and less effective than initially planned. (Location 5377)

Unfairly imposing losses on people can be risky if the victims are in a position to retaliate. Furthermore, experiments have shown that strangers who observe unfair behavior often join in the punishment. Neuroeconomists (scientists who combine economics with brain research) have used MRI machines to examine the brains of people who are engaged in punishing one stranger for behaving unfairly to another stranger. Remarkably, altruistic punishment is accompanied by increased activity in the “pleasure centers” of the brain. (Location 5438)

The conclusion is straightforward: the decision weights that people assign to outcomes are not identical to the probabilities of these outcomes, contrary to the expectation principle. Improbable outcomes are overweighted—this is the possibility effect. Outcomes that are almost certain are underweighted relative to actual certainty. The expectation principle, by which values are weighted by their probability, is poor psychology. (Location 5501)

the certainty effect is at work. The 2% difference between a 100% and a 98% chance to win in problem B is vastly more impressive than the same difference between 63% and 61% in problem A. (Location 5533)

We retained utility theory as a logic of rational choice but abandoned the idea that people are perfectly rational choosers. We took on the task of developing a psychological theory that would describe the choices people make, regardless of whether they are rational. In prospect theory, decision weights would not be identical to probabilities. (Location 5547)

However, decision weights depart sharply from probabilities near these points. At the low end, we find the possibility effect: unlikely events are considerably overweighted. For example, the decision weight that corresponds to a 2% chance is 8.1. If people conformed to the axioms of rational choice, the decision weight would be 2—so the rare event is overweighted by a factor of 4. The certainty effect at the other end of the probability scale is even more striking. A 2% risk of not winning the prize reduces the utility of the gamble by 13%, from 100 to 87.1. (Location 5556)

The possibility effect in the bottom left cell explains why lotteries are popular. When the top prize is very large, ticket buyers appear indifferent to the fact that their chance of winning is minuscule. A lottery ticket is the ultimate example of the possibility effect. Without a ticket you cannot win, with a ticket you have a chance, and whether the chance is tiny or merely small matters little. (Location 5602)

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people buy more than protection against an unlikely disaster; they eliminate a worry and purchase peace of mind. (Location 5607)

The thought of accepting the large sure loss is too painful, and the hope of complete relief too enticing, to make the sensible decision that it is time to cut one’s losses. This is where businesses that are losing ground to a superior technology waste their remaining assets in futile attempts to catch up. Because defeat is so difficult to accept, the losing side in wars often fights long past the point at which the victory of the other side is certain, and only a matter of time. (Location 5624)

Consistent overweighting of improbable outcomes—a feature of intuitive decision making—eventually leads to inferior outcomes. (Location 5665)

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My experience illustrates how terrorism works and why it is so effective: it induces an availability cascade. (Location 5686)

Note: People give over weighted decision weights to disaster

Many stores in New York City sell lottery tickets, and business is good. The psychology of high-prize lotteries is similar to the psychology of terrorism. The thrilling possibility of winning the big prize is shared by the community and reinforced by conversations at work and at home. Buying a ticket is immediately rewarded by pleasant fantasies, just as avoiding a bus was immediately rewarded by relief from fear. In both cases, the actual probability is inconsequential; only possibility matters. (Location 5694)

Note: Possibility Effect

These findings shed new light on the planning fallacy and other manifestations of optimism. The successful execution of a plan is specific and placing easy to imagine when one tries to forecast the outcome of a project. In contrast, the alternative of failure is diffuse, because there are innumerable ways for things to go wrong. Entrepreneurs and the investors who evaluate their prospects are prone both to overestimate their chances and to overweight their estimates. (Location 5744)

As predicted by denominator neglect, low-probability events are much more heavily weighted when described in terms of relative frequencies (how many) than when stated in more abstract terms of “chances,” “risk,” or “probability” (how likely). As we have seen, System 1 is much better at dealing with individuals than categories. (Location 5817)

The main purpose of the mantra is to control your emotional response when you do lose. If you can trust it to be effective, you should remind yourself of it when deciding whether or not to accept a small risk with positive expected value. Remember these qualifications when using the mantra: • It works when the gambles are genuinely independent of each other; it does not apply to multiple investments in the same industry, which would all go bad together. • It works only when the possible loss does not cause you to worry about your total wealth. If you would take the loss as significant bad news about your economic future, watch it! • It should not be applied to long shots, where the probability of winning is very small for each bet. If you have the emotional discipline that this rule requires, you will never consider a small gamble in isolation or be loss averse for a small gamble until you are actually on your deathbed—and not even then. (Location 5991)

In addition to improving the emotional quality of life, the deliberate avoidance of exposure to short-term outcomes improves the quality of both decisions and outcomes. (Location 6013)

“Tell her to think like a trader! You win a few, you lose a few.” (Location 6040)

The disposition effect is an instance of narrow framing. The investor has set up an account for each share that she bought, and she wants to close every account as a gain. A rational agent would have a comprehensive view of the portfolio and sell the stock that is least likely to do well in the future, without considering whether it is a winner or a loser. (Location 6091)

people expect to have stronger emotional reactions (including regret) to an outcome that is produced by action than to the same outcome when it is produced by inaction. This has been verified in the context of gambling: people expect to be happier if they gamble and win than if they refrain from gambling and get the same amount. (Location 6166)

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If you can remember when things go badly that you considered the possibility of regret carefully before deciding, you are likely to experience less of it. You should also know that regret and hindsight bias will come together, so anything you can do to preclude hindsight is likely to be helpful. (Location 6243)

My personal hindsight-avoiding policy is to be either very thorough or completely casual when making a decision with long-term consequences. Hindsight is worse when you think a little, just enough to tell yourself later, “I almost made a better choice.” (Location 6245)

“He has separate mental accounts for cash and credit purchases. I constantly remind him that money is money.” (Location 6252)

The jurors who saw the case of the burned child on its own made an offer that matched the intensity of their feelings. They could not anticipate that the award to the child would appear inadequate in the context of a large award to a financial institution. In joint evaluation, the punitive award to the bank remained anchored on the loss it had sustained, but the award to the burned child increased, reflecting the outrage evoked by negligence that causes injury to a child. (Location 6414)

A bad outcome is much more acceptable if it is framed as the cost of a lottery ticket that did not win than if it is simply described as losing a gamble. We should not be surprised: losses evokes stronger negative feelings than costs. Choices are not reality-bound because System 1 is not reality-bound. (Location 6464)

Thaler described the debate about whether gas stations would be allowed to charge different prices for purchases paid with cash or on credit. The credit-card lobby pushed hard to make differential pricing illegal, but it had a fallback position: the difference, if allowed, would be labeled a cash discount, not a credit surcharge. Their psychology was sound: people will more readily forgo a discount than pay a surcharge. The two may be economically equivalent, but they are not emotionally equivalent. (Location 6468)

Tendencies to approach or avoid are evoked by the words, and we expect System 1 to be biased in favor of the sure option when it is designated as KEEP and against that same option when it is designated as LOSE. (Location 6482)

Note: This maybe why positive psychology toots the horn of glass half full.

A brain region known to be associated with conflict and self-control (the anterior cingulate) was more active when subjects did not do what comes naturally—when they chose the sure thing in spite of its being labeled LOSE. Resisting the inclination of System 1 apparently involves conflict. (Location 6501)

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The most “rational” subjects—those who were the least susceptible to framing effects—showed enhanced activity in a frontal area of the brain that is implicated in combining emotion and reasoning to guide decisions. Remarkably, the “rational” individuals were not those who showed the strongest neural evidence of conflict. It appears that these elite participants were (often, not always) reality-bound with little conflict. (Location 6503)

“They will feel better about what happened if they manage to frame the outcome in terms of how much money they kept rather than how much they lost.” (Location 6656)

“Charge the loss to your mental account of ‘general revenue’—you will feel better!” (Location 6659)

two minutes of pain at level 9 is twice as bad as one minute at the same level of pain. However, the findings of this experiment and others show that the retrospective assessments are insensitive to duration and weight two singular moments, the peak and the end, much more than others. So which should matter? What should the physician do? The choice has implications for medical practice. (Location 6724)

The experiencing self is the one that answers the question: “Does it hurt now?” The remembering self is the one that answers the question: “How was it, on the whole?” Memories are all we get to keep from our experience of living, and the only perspective that we can adopt as we think about our lives is therefore that of the remembering self. (Location 6734)

The remembering self is sometimes wrong, but it is the one that keeps score and governs what we learn from living, and it is the one that makes decisions. What we learn from the past is to maximize the qualities of our future memories, not necessarily of our future experience. This is the tyranny of the remembering self. (Location 6743)

The preferences we observed in this experiment are another example of the less-is-more effect that we have encountered on previous occasions. One was Christopher Hsee’s study in which adding dishes to a set of 24 dishes lowered the total value because some of the added dishes were broken. Another was Linda, the activist woman who is judged more likely to be a feminist bank teller than a bank teller. The similarity is not accidental. The same operating feature of System 1 accounts for all three situations: System 1 represents sets by averages, norms, and prototypes, not by sums. (Location 6777)

Each cold-hand episode is a set of moments, which the remembering self stores as a prototypical moment. This leads to a conflict. For an objective observer evaluating the episode from the reports of the experiencing self, what counts is the “area under the curve” that integrates pain over time; it has the nature of a sum. The memory that the remembering self keeps, in contrast, is a representative moment, strongly influenced by the peak and the end. (Location 6781)

Pleasurable electric stimulation can be delivered in bursts that vary in intensity and duration. Here again, only intensity matters. Up to a point, increasing the duration of a burst of stimulation does not appear to increase the eagerness of the animal to obtain it. The rules that govern the remembering self of humans have a long evolutionary history. (Location 6793)

“You are thinking of your failed marriage entirely from the perspective of the remembering self. A divorce is like a symphony with a screeching sound at the end—the fact that it ended badly does not mean it was all bad.” (Location 6814)

“This is a bad case of duration neglect. You are giving the good and the bad part of your experience equal weight, although the good part lasted ten times as long as the other.” (Location 6816)

“You seem to be devoting your entire vacation to the construction of memories. Perhaps you should put away the camera and enjoy the moment, even if it is not very memorable?” (Location 6904)

The feelings associated with different activities suggest that another way to improve experience is to switch time from passive leisure, such as TV watching, to more active forms of leisure, including socializing and exercise. (Location 6988)

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Not surprisingly, a headache will make a person miserable, and the second best predictor of the feelings of a day is whether a person did or did not have contacts with friends or relatives. It is only a slight exaggeration to say that happiness is the experience of spending time with people you love and who love you. (Location 6998)

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A plausible interpretation is that higher income is associated with a reduced ability to enjoy the small pleasures of life. There is suggestive evidence in favor of this idea: priming students with the idea of wealth reduces the pleasure their face expresses as they eat a bar of chocolate! (Location 7027)

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“The easiest way to increase happiness is to control your use of time. Can you find more time to do the things you enjoy doing?” (Location 7036)

massive error of affective forecasting. On their wedding day, the bride and the groom know that the rate of divorce is high and that the incidence of marital disappointment is even higher, but they do not believe that these statistics apply to them. (Location 7050)

Experienced well-being is on average unaffected by marriage, not because marriage makes no difference to happiness but because it changes some aspects of life for the better and others for the worse. (Location 7089)

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Note: Maybe the key to maximize marriage happiness is to forego the things that make married life unhappy.

We can infer from the speed with which people respond to questions about their life, and from the effects of current mood on their responses, that they do not engage in a careful examination when they evaluate their life. They must be using heuristics, which are examples of both substitution and WYSIATI. (Location 7120)

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Note: Maybe we should take steps to remember the happy moments and bring them to mind more readily. Like framed photos. Expenditure to maximize happiness is an investment on future pecieved well being.

Any aspect of life to which attention is directed will loom large in a global evaluation. This is the essence of the focusing illusion, which can be described in a single sentence: Nothing in life is as important as you think it is when you are thinking about it. (Location 7125)

“She thought that buying a fancy car would make her happier, but it turned out to be an error of affective forecasting.” (Location 7225)

“Buying a larger house may not make us happier in the long term. We could be suffering from a focusing illusion.” (Location 7229)

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