How do people make decisions? Neoclassical economics assumes that they do it rationally. However, making a rational decision puts a strain on one's mind, like mental multiplication. For the most part, people rely on intuitive heuristics. These heuristics have a number of characteristic biases, which this book describes in great detail. People tend to overreact to small risks, especially those emanating from unpopular entities such as chemical corporations or nuclear power plants. People tend to overestimate their expertise. Duke University has been polling the CFOs of large corporations about the direction of the American stock market for some years; their predictions are worse than random, and their confidence intervals are 4 times too short. People also tend to overestimate their chances of success; the author calls it the engine of capitalism. The chances that a small business in the United States will fail within 5 years are 65%, but the entrepreneurs who start them think that this statistic does not apply to them. People tend to categorize others as either good or bad, and not realize that a person or an institution may be good at something and bad at something else, and vice versa. An investment manager might buy Ford stock not because he thinks this stock is undervalued, but because he likes Ford cars. People have a bad intuitive understanding of Bayes' Theorem. If a stranger fits a visible stereotype for some group, people assume him to belong to this group, even if this group is very small and alternative explanations are more plausible. Lacking information, people tend to construct narratives. As a young man in the Israeli Air Force, the author was told by flight instructors that when they praised cadets for flying well, the cadets tended to do worse during the next flight, and when they scolded them, the cadets tended to do better; the instructors concluded that punishment works better than reward. A simpler explanation was regression toward the mean: an average cadet would fly really well rarely, and really badly also rarely; after a very good or a very bad flight the cadet would go back to his average performance without any praise or scolding.

Investigations such as these brought the author the 2002 Nobel Prize in Economics. I don't understand how anyone can still argue that economics makes unrealistic assumptions about human nature, if the greatest prize in the discipline went to a scholar whose research uncovered just where these assumptions break down.