Scan barcode
fbroom's review against another edition
4.0
This book is like a textbook. It is dense and filled with so much information and so many ideas. Without going slow and taking notes, I don’t know how much I would’ve retained. I already feel like it needs to be re-read to fill the gaps in my understanding. It was hard to go through and I feel like the chapters would’ve benefited from more editing
System 1 is your intuition (fast thinking) and System 2 is your slow thinker that requires a lot of effort and self-control. Your System 2 is lazy and gives in to conclusions drawn by System 1. System 1 is influenced by a lot of heuristics that may lead to believing false statements. Putting pressure on your System 2 is depleting and unpleasant and leads to giving in to eating sweets for example. The first part describes the two systems. The second and third parts are all about the different heuristics that our system 1 might fall into: The anchoring effect, availability heuristic, the halo effect and so on.
The forth part talks about choices, describes Bernoulli’s utility theory versus Daniel’s prospect theory which kind of confused me because I really thought that Bernoulli was talking about what we should do in a certain situation, not why we made a certain decision. Anyway, a really important concept here is that loss affect us way more than winning. We regret for example buying a stock that didn’t do well but we do care as much if we didn’t buy a stock that made tons of money. We also wouldn’t spend more than an x amount on a product but won’t sell it for 10*x because losing something impacts us more and finally losing 5 dollars in a gamble is worse than paying 5 dollars for a gamble. Losing is much worse than cost. More interesting effects described such as the endowment effect, the certainty effect, the framing effect and more.
The final part talks about the remembering self (keeping score & making choices) vs the experiencing self (actually living). I recommend reading Stumbling on Happiness by Daniel Gilbert as it describes these concepts much better in my opinion but basically when we are asked about how we much pain we felt in a procedure our answers are affected by the average of the pain during the last part (peak-end effect) plus the highest point of pain overall. We don’t take duration into account (duration neglect). One important concept here was how well-being differs from a person to another. When you set certain goals and reach them you’ll be happier than someone who achieved the same goal without really having that goal in mind.
Some other concepts are described like the focusing-illusion when we think that a certain thing would make us happy but it really wouldn’t in reality.
More Notes:
Introduction
- It was common to believe that people are rational and that emotions explain why people tend to make bad decisions but it’s not really the case. Daniel with his colleagues published papers that showed biases in intuitive thinking. One example was the availability heuristics which explains how some issues are on our mind more than others because we rely on our memories which are influenced by the media.
Part 1: Two Systems
1 The Characters of the Story
- System 1 is our intuition and runs automatically based on heuristics.
- System 2 is runs in a low-effort mode and is in charge of self-control and is responsible for overcoming the impulses of System 1.
2 Attention and Effort
- Study: The pupils of their subjects dilated when they were given problems that required mental effort. "We found that people, when engaged in a mental sprint, may become effectively blind.” If subjects were given even more difficult problem than what they can solve, the pupils actually shrank.
3 The Lazy Controller
It is easy to just rely on System 1. Taking the effort to use system 2 and think through a problem requires effort. Children who were able to exert more self control had higher scores on IO tests. Intelligence isn’t just the ability to reason, it is the ability to find relevant material in memory and to deploy attention when needed. In general activities that impose high demand on System 2 require self-control and that effort is depleting and unpleasant.
4 The Associate Machine
5 Cognitive Ease
- Cognitive ease vs Cognitive strain. Cognitive strain utilizes System 2 so when students had to answer logical puzzles in a hard to read font they did better than those who had to answer the puzzles in a very clear font.
- Familiarity can trick our brains into believing false facts. Repetition of false information leads to familiarity and eventually to tricks the brain to believe these false facts.
6 Norms, Surprises and Causes
- Norms: System 1 maintains a model of your personal world. So if you meet a person at different places by coincidence, next time you meet that person your System 1 would trick you into thinking that it’s normal to see this person "it happened before".
- Causes: We search for causes all the time even though the two events might not be linked. We immediately look for causes.
7 A Machine for Jumping to Conclusions
- System 1 is biased and can believe anything while System 2 is charge of doubting and unbelieving so if System 2 was busy you are at a higher chance of believing false statements.
- Exaggerated Emotional Coherence: when you like someone, you tend to like everything about this person. This shows when Daniel was grading students tests, if the first question was correct, you will give the benefit of the doubt to the student on later question and the opposite is true. The combination of having a coherence seeking System 1 and a lazy System 2 leads to believing my intuitive beliefs generated by impressions rather than facts.
8 How Judgments Happen
- System 1 is capable of basic assessments, like calculation the average but to sum all elements System 2 has to jump in.
9 Answering an Easier Question
- System 1 when faced with a complicated question, tries to find a related easier question that it can answer and uses that. (Substitution). For example how do you feel about your life will translate in your brain to how do I feel at this moment. Since System 2 is lazy it will follow System 1 and endorses its answer.
- Another heuristic is the Affect Heuristic where you will let your likes and dislikes affect your judgement
Part 2: Heuristics and Biases
10 The Law of Small Numbers
- Example of having high or low cancer rates in rural areas. Remember if you are drawing red and white balls from an urn, you are more likely to see extreme results (4 reds or 4 whites) if you draw 4 balls at a time vs 8 balls at a time. It is just statistics. You will see more extreme results in smaller populations than larger ones. It has nothing to do without the life style of rural areas as our System 1s like to think. Choosing the right sample size is critical.
- We always look for patterns and causes even though there might be none. Luck isn’t accepted as an answer although it might very well be.
- Same cancer story with the Gates foundation investing in small schools because 4 of the top 50 were small. The researcher didn’t report that also a large number of the worst are small. It is just that smaller samples will more likely show extremes!
11 Anchors
- The anchoring effect: if you were pre-exposed to a low number, your prediction to some unrelated event will be lower than if you were exposed to a high number. Example if you were asked the if age when Ghandi died was less than or greater than 114, your estimate would be higher than if the number given to you was 35.
- Anchoring can happen to both System 1 and System 2.
12 The Science of Availability
- We are also influenced by the availability heuristic. Example if were asked to list 6 instances where you were assertive and then were asked to evaluate how assertive you are you will be influenced to judge yourself as more assertive. If you were asked to list 12 though and struggled to come up with a huge list then you are more likely to list your self as less assertive. Another example is fearing airline safety when hearing of a recent airplane crash. Of course you are more likely to get affected by the availability heuristic when your System 2 is snoring :) (engaged in another task, feeling more happy/powerful)
13 Availability, Emotion and Risk
- affect heuristic
- availability cascade: an nonevent inflated by media
14 Tom W’s Specialty
- Representativeness: Even though students where offered based line statistics (x% of graduate students are enrolled in Humanities, … etc). Giving the students a narration of a stereotypical personality description for the lowest probability major, still influenced their decision to pick the low probability major.
15 Linda: Less is More
- When Linda was described as someone active in protests and then two options were presented about who Linda was possible (Ban Teller, Bank Teller who is an active Feminist) most students choose the second option although it is less probable than the first! logically adding another constraint would decrease the probability so again students here let their System 1 impressions win over.
16 Causes Trump Statistics
- Even though we were presented with actual statistics (85% of the cabs are green), when it was added that there is a witness who identified the cab as blue and his score of identifying a blue cab at night is 80%, people went with 80% as the probability that the cab is blue, ignoring the base case. The correct probability is 41%. When the story was altered to give the base rate a casual story (Green cabs are involved in 85% of accidents) here people do consider the base rate.
- Teaching statistical facts about human behavior doesn’t help students because we tend to exempt ourselves from these statistics (they don’t really apply to us) but when teaching the same lesson using individual cases things totally change. We can relate to the individuals and are able to learn from the individual cases.
17 Regression to the Mean
- If a player has a bad day today, it is likely that they will perform better the next. Everyone converges to the mean.
18 Taming Intuitive Predictions
Part 3: Overconfidence
19 The Illusion of Understanding
- We tend to think that we knew that certain events would happen and based on this we think we can predict the future. The truth is that we don’t really know the past. People tend to exaggerate these probabilities. When events that didn’t happen were given, people tended to lower their probability of them happening and increase the probability of their knowledge that an event would happen if it really happened.
- Lots of business books analyze successful companies to death and worship their brilliant CEOs and discard a important factor: Luck. Randomness is everywhere.
20 The Illusion of Validity
- The illusion of skill: stock market example: "the evidence from more than fifty years of research is conclusive: for a large majority of fund managers, the selection of stocks is more like rolling dice than like playing poker."
- "In another paper, titled “Boys Will Be Boys,” they showed that men acted on their useless ideas significantly more often than women, and that as a result women achieved better investment results than men."
- "In other words, people who spend their time, and earn their living, studying a particular topic produce poorer predictions than dart-throwing monkeys who would have distributed their choices evenly over the options"
21 Intuitions vs. Formulas
- Experts want to be clever, think outside the box and use complex formula while simple combinations of factors actually predict the future much better. Also humans are not consistent with judgement of complex information. Simple checklists are much better than your intuition.
22 Expert Intuition: When can we trust it?
- "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.”
- "We eventually concluded that our disagreement was due in part to the fact that we had different experts in mind. Klein had spent much time with fireground commanders, clinical nurses, and other professionals who have real expertise. I had spent more time thinking about clinicians, stock pickers, and political scientists trying to make unsupportable long-term forecasts.”
- Intuitions are likely to be skilled if - an environment that is sufficiently regular to be predictable and - an opportunity to learn these regularities through prolonged practice”
23 The Outside View
- Planning Fallacy: most of the time, projects don’t finish on it and cost way more than the initial budget. We don’t look at outside views, we think every case/project is unique. Better to use a reference class of projects similar to your own.
24 The Engine of Capitalism
- Most people genuinely believe that they are superior to most others on most desirable traits. Overconfidence mostly lead to disastrous decision making.
- One idea is doing a premortem, imagining the worst possible outcome happening and then writing a history of what happened. It usually lead to good ideas.
Part 4: Choices
25 Bernoulli’s Errors
- Talking about Bernoulli’s theory. Bernoulli explains the rational thing to do say if were presented with a chance to win 200 dollars or loss 100 on a coin flip. Bernoulli says that it depends on the utility. If you make an amount greater than x then the rational thing is to actually bet, if not then you shouldn’t.
- Kahneman seems to be interested in what people actually decide, NOT what should they do. He criticizes Bernoulli’s based on that. I was a little confused actually. People seem to rather make different types of decisions that don’t go along with Bernoulli’s. I also didn’t understand Anthony and Betty’s example so I need to reread this one.
26 Prospect Theory
- Again we are given examples (would you take 500 or take a 50% chance of winning 1000 given that you are given 1000 or 2000 in the second example). Daniel says that we don’t typically take the 1000 or 2000 into account when we make the decision. (even if this is true, doesn’t Bernoulli just tell us the optimal choice we should make, not what he thinks we’ll decide?) I’m not clear here on why we are again saying that Bernoulli is wrong.
- So utility theory only takes the current wealth into account while prospect theory also explains why people are risk averse with good options and risk seeking with bad options.
- NEED TO READ THIS AGAIN
27 The Endowment Effect
- The endowment effect, even though you wouldn’t spend more than x amount on a product you own and love, you still wouldn’t sell it for say 10*x. Prospect theory can explain this because the pain of leaving this product is more than the pleasure of getting it.
28 Bad Events
- Negativity Dominance: negative words, events, emotions have a much bigger impact on us than positive ones.
- Loss aversion again: We are more driven to avoid loss than to gain. Important concept in behavioral economics. (Reaching a high status is pleasurable but then losing your rank like in golf is so much more painful to us, much more than reaching the rank in the first place).
29 The Fourfold Pattern
- The increases in the chance of winning are equal (0 to 5, 10 to 15, 60 to 65, 95 to 100). 0 to 5 gives a new possibility while 95 to 100 makes the event certain (The Certainty Effect). Example (law suit where you are guaranteed to win by 95% but given a settlement of 90% you’d take it because you don’t want to ‘risk’ it. Better getting 90% than maybe a 5% of nothing. On the other hand, if you’re to pay a claim and the case is going wrong and there is 95% that you would lose and pay the full amount and there is a settlement where you’d pay 90%, people tend take the risk because maybe (5% chance) you will win.
30 Rare Events
- People overestimate the probability of unlikely events.
- People overweight unlikely events in their decision.
- "The denominator neglect”. Students choosing to choose form an urn with 8 winning marbles out of 100 over 1 winning marble out of 10. It is obvious that you should go with #2 but some people don’t. A disease that kills 1200 out of 10,000 is more dangerous than a disease that kills 24% of the population because the second example is more vivid, has an actual number.
31 Risk Policies
32 Keeping Score
- “Narrow Framing” when we consider our options in-terms of immediate wins or losses. Say you want to sell stocks to buy something you need. You tend to think of selling the stock that made the most money instead of the one that lost money because you want to keep winning although the rational trader will consider the stock that does the worst in the futures and sells it. Same when a company invests in a failed project and now it needs to invest more money into it or put that money in a new project and close the failed one. This is another case of a sure loss (lose the first project) vs an unfavorable gamble (continue with the first project). Often companies go with option 2 which is the unwise option.
- Regret (Person 1 was considering buying stock in company A but doesn’t, keeps his company B stock, company A does really great, Person 2 owns stock in company A, sells it to buy company B and now, he misses on the returns). Which person has the most regret? it is Person 2. We don’t deal well with loss/regret. although both 1 and 2 have the same exact outcome. Same goes with sticking to the same dish everything because we don’t like to deal with regret.
33 Reversals
- Presenting people with two different cases in different orders and then jointly produced different results. Reversing the order matters, changes the context of how we judge and also presenting jointly is another example of narrow framing.
34 Frames and Reality
- “The Framing Effect”: This is interesting “Would you enter game with 10% change to win 100 and 90% chance to lose 5 dollars”, “Would you pay 5 dollars to enter a lottery to win 100 dollars with a chance of 10%”. People would answer no to the first, yes to the second BUT they are identical. Paying 5 dollars is equal to losing 5 dollars but the way we “frame” is different.
- “Lose” is a much stronger/negative word than “cost”.
Part 5: Two Selves
35 Two Selves
- Experiencing self vs remembering self. Patients rate a painful procedure based on the average of the highest level of pain and the end of produce pain level, not duration.
36 Life as a Story
- Again duration neglect and peak-end effect. The remembering-self again wins. Offering a vacation where on the last all picture will be destroyed made some people actually suggest not wanting to go at all.
37 Experienced Well-Being
- Several ways to measure people’s happiness (their experienced well-being) U-Index: percentage of time spent in an unpleasant state. Gallup evaluation. Not so surprising results from these studies.
38 Thinking about Life
- Well-being also depends on the goals you set for yourself, people who set Monterey goals were happier when they achieved it than those who achieved it but didn’t want it.
- Also not surprising, climate doesn’t affect well-being. I think I read this in stumbling on happiness.
- "Focusing-Illusion” when you exaggerate the effect of say climate in your life like "I’m happy in California because the weather is always nice”.
- Yes it was! he mentioned Daniel Gilbert because Daniel talked about this a lot, wanting this that we think will make us happy although they won’t “miswanting”, “focusing-illusion”, exaggerating basically.
System 1 is your intuition (fast thinking) and System 2 is your slow thinker that requires a lot of effort and self-control. Your System 2 is lazy and gives in to conclusions drawn by System 1. System 1 is influenced by a lot of heuristics that may lead to believing false statements. Putting pressure on your System 2 is depleting and unpleasant and leads to giving in to eating sweets for example. The first part describes the two systems. The second and third parts are all about the different heuristics that our system 1 might fall into: The anchoring effect, availability heuristic, the halo effect and so on.
The forth part talks about choices, describes Bernoulli’s utility theory versus Daniel’s prospect theory which kind of confused me because I really thought that Bernoulli was talking about what we should do in a certain situation, not why we made a certain decision. Anyway, a really important concept here is that loss affect us way more than winning. We regret for example buying a stock that didn’t do well but we do care as much if we didn’t buy a stock that made tons of money. We also wouldn’t spend more than an x amount on a product but won’t sell it for 10*x because losing something impacts us more and finally losing 5 dollars in a gamble is worse than paying 5 dollars for a gamble. Losing is much worse than cost. More interesting effects described such as the endowment effect, the certainty effect, the framing effect and more.
The final part talks about the remembering self (keeping score & making choices) vs the experiencing self (actually living). I recommend reading Stumbling on Happiness by Daniel Gilbert as it describes these concepts much better in my opinion but basically when we are asked about how we much pain we felt in a procedure our answers are affected by the average of the pain during the last part (peak-end effect) plus the highest point of pain overall. We don’t take duration into account (duration neglect). One important concept here was how well-being differs from a person to another. When you set certain goals and reach them you’ll be happier than someone who achieved the same goal without really having that goal in mind.
Some other concepts are described like the focusing-illusion when we think that a certain thing would make us happy but it really wouldn’t in reality.
More Notes:
Introduction
- It was common to believe that people are rational and that emotions explain why people tend to make bad decisions but it’s not really the case. Daniel with his colleagues published papers that showed biases in intuitive thinking. One example was the availability heuristics which explains how some issues are on our mind more than others because we rely on our memories which are influenced by the media.
Part 1: Two Systems
1 The Characters of the Story
- System 1 is our intuition and runs automatically based on heuristics.
- System 2 is runs in a low-effort mode and is in charge of self-control and is responsible for overcoming the impulses of System 1.
2 Attention and Effort
- Study: The pupils of their subjects dilated when they were given problems that required mental effort. "We found that people, when engaged in a mental sprint, may become effectively blind.” If subjects were given even more difficult problem than what they can solve, the pupils actually shrank.
3 The Lazy Controller
It is easy to just rely on System 1. Taking the effort to use system 2 and think through a problem requires effort. Children who were able to exert more self control had higher scores on IO tests. Intelligence isn’t just the ability to reason, it is the ability to find relevant material in memory and to deploy attention when needed. In general activities that impose high demand on System 2 require self-control and that effort is depleting and unpleasant.
4 The Associate Machine
5 Cognitive Ease
- Cognitive ease vs Cognitive strain. Cognitive strain utilizes System 2 so when students had to answer logical puzzles in a hard to read font they did better than those who had to answer the puzzles in a very clear font.
- Familiarity can trick our brains into believing false facts. Repetition of false information leads to familiarity and eventually to tricks the brain to believe these false facts.
6 Norms, Surprises and Causes
- Norms: System 1 maintains a model of your personal world. So if you meet a person at different places by coincidence, next time you meet that person your System 1 would trick you into thinking that it’s normal to see this person "it happened before".
- Causes: We search for causes all the time even though the two events might not be linked. We immediately look for causes.
7 A Machine for Jumping to Conclusions
- System 1 is biased and can believe anything while System 2 is charge of doubting and unbelieving so if System 2 was busy you are at a higher chance of believing false statements.
- Exaggerated Emotional Coherence: when you like someone, you tend to like everything about this person. This shows when Daniel was grading students tests, if the first question was correct, you will give the benefit of the doubt to the student on later question and the opposite is true. The combination of having a coherence seeking System 1 and a lazy System 2 leads to believing my intuitive beliefs generated by impressions rather than facts.
8 How Judgments Happen
- System 1 is capable of basic assessments, like calculation the average but to sum all elements System 2 has to jump in.
9 Answering an Easier Question
- System 1 when faced with a complicated question, tries to find a related easier question that it can answer and uses that. (Substitution). For example how do you feel about your life will translate in your brain to how do I feel at this moment. Since System 2 is lazy it will follow System 1 and endorses its answer.
- Another heuristic is the Affect Heuristic where you will let your likes and dislikes affect your judgement
Part 2: Heuristics and Biases
10 The Law of Small Numbers
- Example of having high or low cancer rates in rural areas. Remember if you are drawing red and white balls from an urn, you are more likely to see extreme results (4 reds or 4 whites) if you draw 4 balls at a time vs 8 balls at a time. It is just statistics. You will see more extreme results in smaller populations than larger ones. It has nothing to do without the life style of rural areas as our System 1s like to think. Choosing the right sample size is critical.
- We always look for patterns and causes even though there might be none. Luck isn’t accepted as an answer although it might very well be.
- Same cancer story with the Gates foundation investing in small schools because 4 of the top 50 were small. The researcher didn’t report that also a large number of the worst are small. It is just that smaller samples will more likely show extremes!
11 Anchors
- The anchoring effect: if you were pre-exposed to a low number, your prediction to some unrelated event will be lower than if you were exposed to a high number. Example if you were asked the if age when Ghandi died was less than or greater than 114, your estimate would be higher than if the number given to you was 35.
- Anchoring can happen to both System 1 and System 2.
12 The Science of Availability
- We are also influenced by the availability heuristic. Example if were asked to list 6 instances where you were assertive and then were asked to evaluate how assertive you are you will be influenced to judge yourself as more assertive. If you were asked to list 12 though and struggled to come up with a huge list then you are more likely to list your self as less assertive. Another example is fearing airline safety when hearing of a recent airplane crash. Of course you are more likely to get affected by the availability heuristic when your System 2 is snoring :) (engaged in another task, feeling more happy/powerful)
13 Availability, Emotion and Risk
- affect heuristic
- availability cascade: an nonevent inflated by media
14 Tom W’s Specialty
- Representativeness: Even though students where offered based line statistics (x% of graduate students are enrolled in Humanities, … etc). Giving the students a narration of a stereotypical personality description for the lowest probability major, still influenced their decision to pick the low probability major.
15 Linda: Less is More
- When Linda was described as someone active in protests and then two options were presented about who Linda was possible (Ban Teller, Bank Teller who is an active Feminist) most students choose the second option although it is less probable than the first! logically adding another constraint would decrease the probability so again students here let their System 1 impressions win over.
16 Causes Trump Statistics
- Even though we were presented with actual statistics (85% of the cabs are green), when it was added that there is a witness who identified the cab as blue and his score of identifying a blue cab at night is 80%, people went with 80% as the probability that the cab is blue, ignoring the base case. The correct probability is 41%. When the story was altered to give the base rate a casual story (Green cabs are involved in 85% of accidents) here people do consider the base rate.
- Teaching statistical facts about human behavior doesn’t help students because we tend to exempt ourselves from these statistics (they don’t really apply to us) but when teaching the same lesson using individual cases things totally change. We can relate to the individuals and are able to learn from the individual cases.
17 Regression to the Mean
- If a player has a bad day today, it is likely that they will perform better the next. Everyone converges to the mean.
18 Taming Intuitive Predictions
Part 3: Overconfidence
19 The Illusion of Understanding
- We tend to think that we knew that certain events would happen and based on this we think we can predict the future. The truth is that we don’t really know the past. People tend to exaggerate these probabilities. When events that didn’t happen were given, people tended to lower their probability of them happening and increase the probability of their knowledge that an event would happen if it really happened.
- Lots of business books analyze successful companies to death and worship their brilliant CEOs and discard a important factor: Luck. Randomness is everywhere.
20 The Illusion of Validity
- The illusion of skill: stock market example: "the evidence from more than fifty years of research is conclusive: for a large majority of fund managers, the selection of stocks is more like rolling dice than like playing poker."
- "In another paper, titled “Boys Will Be Boys,” they showed that men acted on their useless ideas significantly more often than women, and that as a result women achieved better investment results than men."
- "In other words, people who spend their time, and earn their living, studying a particular topic produce poorer predictions than dart-throwing monkeys who would have distributed their choices evenly over the options"
21 Intuitions vs. Formulas
- Experts want to be clever, think outside the box and use complex formula while simple combinations of factors actually predict the future much better. Also humans are not consistent with judgement of complex information. Simple checklists are much better than your intuition.
22 Expert Intuition: When can we trust it?
- "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.”
- "We eventually concluded that our disagreement was due in part to the fact that we had different experts in mind. Klein had spent much time with fireground commanders, clinical nurses, and other professionals who have real expertise. I had spent more time thinking about clinicians, stock pickers, and political scientists trying to make unsupportable long-term forecasts.”
- Intuitions are likely to be skilled if - an environment that is sufficiently regular to be predictable and - an opportunity to learn these regularities through prolonged practice”
23 The Outside View
- Planning Fallacy: most of the time, projects don’t finish on it and cost way more than the initial budget. We don’t look at outside views, we think every case/project is unique. Better to use a reference class of projects similar to your own.
24 The Engine of Capitalism
- Most people genuinely believe that they are superior to most others on most desirable traits. Overconfidence mostly lead to disastrous decision making.
- One idea is doing a premortem, imagining the worst possible outcome happening and then writing a history of what happened. It usually lead to good ideas.
Part 4: Choices
25 Bernoulli’s Errors
- Talking about Bernoulli’s theory. Bernoulli explains the rational thing to do say if were presented with a chance to win 200 dollars or loss 100 on a coin flip. Bernoulli says that it depends on the utility. If you make an amount greater than x then the rational thing is to actually bet, if not then you shouldn’t.
- Kahneman seems to be interested in what people actually decide, NOT what should they do. He criticizes Bernoulli’s based on that. I was a little confused actually. People seem to rather make different types of decisions that don’t go along with Bernoulli’s. I also didn’t understand Anthony and Betty’s example so I need to reread this one.
26 Prospect Theory
- Again we are given examples (would you take 500 or take a 50% chance of winning 1000 given that you are given 1000 or 2000 in the second example). Daniel says that we don’t typically take the 1000 or 2000 into account when we make the decision. (even if this is true, doesn’t Bernoulli just tell us the optimal choice we should make, not what he thinks we’ll decide?) I’m not clear here on why we are again saying that Bernoulli is wrong.
- So utility theory only takes the current wealth into account while prospect theory also explains why people are risk averse with good options and risk seeking with bad options.
- NEED TO READ THIS AGAIN
27 The Endowment Effect
- The endowment effect, even though you wouldn’t spend more than x amount on a product you own and love, you still wouldn’t sell it for say 10*x. Prospect theory can explain this because the pain of leaving this product is more than the pleasure of getting it.
28 Bad Events
- Negativity Dominance: negative words, events, emotions have a much bigger impact on us than positive ones.
- Loss aversion again: We are more driven to avoid loss than to gain. Important concept in behavioral economics. (Reaching a high status is pleasurable but then losing your rank like in golf is so much more painful to us, much more than reaching the rank in the first place).
29 The Fourfold Pattern
- The increases in the chance of winning are equal (0 to 5, 10 to 15, 60 to 65, 95 to 100). 0 to 5 gives a new possibility while 95 to 100 makes the event certain (The Certainty Effect). Example (law suit where you are guaranteed to win by 95% but given a settlement of 90% you’d take it because you don’t want to ‘risk’ it. Better getting 90% than maybe a 5% of nothing. On the other hand, if you’re to pay a claim and the case is going wrong and there is 95% that you would lose and pay the full amount and there is a settlement where you’d pay 90%, people tend take the risk because maybe (5% chance) you will win.
30 Rare Events
- People overestimate the probability of unlikely events.
- People overweight unlikely events in their decision.
- "The denominator neglect”. Students choosing to choose form an urn with 8 winning marbles out of 100 over 1 winning marble out of 10. It is obvious that you should go with #2 but some people don’t. A disease that kills 1200 out of 10,000 is more dangerous than a disease that kills 24% of the population because the second example is more vivid, has an actual number.
31 Risk Policies
32 Keeping Score
- “Narrow Framing” when we consider our options in-terms of immediate wins or losses. Say you want to sell stocks to buy something you need. You tend to think of selling the stock that made the most money instead of the one that lost money because you want to keep winning although the rational trader will consider the stock that does the worst in the futures and sells it. Same when a company invests in a failed project and now it needs to invest more money into it or put that money in a new project and close the failed one. This is another case of a sure loss (lose the first project) vs an unfavorable gamble (continue with the first project). Often companies go with option 2 which is the unwise option.
- Regret (Person 1 was considering buying stock in company A but doesn’t, keeps his company B stock, company A does really great, Person 2 owns stock in company A, sells it to buy company B and now, he misses on the returns). Which person has the most regret? it is Person 2. We don’t deal well with loss/regret. although both 1 and 2 have the same exact outcome. Same goes with sticking to the same dish everything because we don’t like to deal with regret.
33 Reversals
- Presenting people with two different cases in different orders and then jointly produced different results. Reversing the order matters, changes the context of how we judge and also presenting jointly is another example of narrow framing.
34 Frames and Reality
- “The Framing Effect”: This is interesting “Would you enter game with 10% change to win 100 and 90% chance to lose 5 dollars”, “Would you pay 5 dollars to enter a lottery to win 100 dollars with a chance of 10%”. People would answer no to the first, yes to the second BUT they are identical. Paying 5 dollars is equal to losing 5 dollars but the way we “frame” is different.
- “Lose” is a much stronger/negative word than “cost”.
Part 5: Two Selves
35 Two Selves
- Experiencing self vs remembering self. Patients rate a painful procedure based on the average of the highest level of pain and the end of produce pain level, not duration.
36 Life as a Story
- Again duration neglect and peak-end effect. The remembering-self again wins. Offering a vacation where on the last all picture will be destroyed made some people actually suggest not wanting to go at all.
37 Experienced Well-Being
- Several ways to measure people’s happiness (their experienced well-being) U-Index: percentage of time spent in an unpleasant state. Gallup evaluation. Not so surprising results from these studies.
38 Thinking about Life
- Well-being also depends on the goals you set for yourself, people who set Monterey goals were happier when they achieved it than those who achieved it but didn’t want it.
- Also not surprising, climate doesn’t affect well-being. I think I read this in stumbling on happiness.
- "Focusing-Illusion” when you exaggerate the effect of say climate in your life like "I’m happy in California because the weather is always nice”.
- Yes it was! he mentioned Daniel Gilbert because Daniel talked about this a lot, wanting this that we think will make us happy although they won’t “miswanting”, “focusing-illusion”, exaggerating basically.
jadebrard's review against another edition
3.0
Apparently, listened to a summary but I feel like it was enough to know the book is pretty repetitive.
chantelle11's review against another edition
I read through some of it but abandoned it along the way. I think the audiobook reader was not for me. Some interesting concepts, somewhat awkwardly delivered by the author, and made worse by the reader.
thofsteenge's review against another edition
challenging
informative
inspiring
reflective
medium-paced
4.25
tjildau's review against another edition
4.0
It took me a while, mostly because I put it away for a few months, but I really enjoyed this book. The book is very informative but still easy to read and the examples make it more interesting/entertaining. Very fascinating and I think I will read it again in a couple of years.