Thinking, Fast and Slow

by Daniel Kahneman

An individual has been described by a neighbor as follows: “Steve is very shy and withdrawn, invariably helpful but with little interest in people or in the world of reality. A meek and tidy soul, he has a need for order and structure, and a passion for detail.” Is Steve more likely to be a librarian or a farmer? The resemblance of Steve’s personality to that of a stereotypical librarian strikes everyone immediately, but equally relevant statistical considerations are almost always ignored. Did it occur to you that there are more than 20 male farmers for each male librarian in the United States?

tired and hungry judges tend to fall back on the easier default position of denying requests for parole. Both fatigue and hunger probably play a role.

A reliable way to make people believe in falsehoods is frequent repetition, because familiarity is not easily distinguished from truth.

The world in our heads is not a precise replica of reality; our expectations about the frequency of events are distorted by the prevalence and emotional intensity of the messages to which we are exposed.

The most coherent stories are not necessarily the most probable, but they are plausible, and the notions of coherence, plausibility, and probability are easily confused by the unwary.

In the words of Nisbett and Borgida, students “quietly exempt themselves” (and their friends and acquaintances) from the conclusions of experiments that surprise them.

Because we tend to be nice to other people when they please us and nasty when they do not, we are statistically punished for being nice and rewarded for being nasty.

Highly intelligent women tend to marry men who are less intelligent than they are.

:(

A compelling narrative fosters an illusion of inevitability.

Our comforting conviction that the world makes sense rests on a secure foundation: our almost unlimited ability to ignore our ignorance.

On average, the gap in corporate profitability and stock returns between the outstanding firms and the less successful firms studied in Built to Last shrank to almost nothing in the period following the study. The average profitability of the companies identified in the famous In Search of Excellence dropped sharply as well within a short time. A study of Fortune’s “Most Admired Companies” finds that over a twenty-year period, the firms with the worst ratings went on to earn much higher stock returns than the most admired firms.

Since then, my questions about the stock market have hardened into a larger puzzle: a major industry appears to be built largely on an illusion of skill.

However, it is clear that for the large majority of individual investors, taking a shower and doing nothing would have been a better policy than implementing the ideas that came to their minds.

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.

Experienced radiologists who evaluate chest X-rays as “normal” or “abnormal” contradict themselves 20% of the time when they see the same picture on separate occasions.

In the market, of course, beliefs in one’s superiority have significant consequences. Leaders of large businesses sometimes make huge bets in expensive mergers and acquisitions, acting on the mistaken belief that they can manage the assets of another company better than its current owners do. The stock market commonly responds by downgrading the value of the acquiring firm, because experience has shown that efforts to integrate large firms fail more often than they succeed. The misguided acquisitions have been explained by a “hubris hypothesis”: the executives of the acquiring firm are simply less competent than they think they are.

The poorer man will happily pay a premium to transfer the risk to the richer one, which is what insurance is about.

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.

The best single predictor of whether or not people will donate their organs is the designation of the default option that will be adopted without having to check a box.