Thinking, Fast and Slow

by Daniel Kahneman

Richard Thaler, who told us that when he was a graduate student he had pinned on his board a card that said costs are not losses.

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.

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.

The framing study yielded three main findings:

A region that is commonly associated with emotional arousal (the amygdala) was most likely to be active when subjects’ choices conformed to the frame. This is just as we would expect if the emotionally loaded words KEEP and LOSE produce an immediate tendency to approach the sure thing (when it is framed as a gain) or avoid it (when it is framed as a loss). The amygdala is accessed very rapidly by emotional stimuli—and it is a likely suspect for involvement in System 1. 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. 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.

By joining observations of actual choices with a mapping of neural activity, this study provides a good illustration of how the emotion evoked by...

But System 1, as we have gotten to know it, is rarely indifferent to emotional words: mortality is bad, survival is good, and 90% survival sounds encouraging whereas 10% mortality is frightening.

An important finding of the study is that physicians were just as susceptible to the framing effect as medically unsophisticated people

The different choices in the two frames fit prospect theory, in which choices between gambles and sure things are resolved differently, depending on whether the outcomes are good or bad.

Decision makers tend to prefer the sure thing over the gamble (they are risk averse) when the outcomes are good. They

tend to reject the sure thing and accept the gamble (they are risk seeking) when bo...

In this context, as well, the framing experiment reveals that risk-averse and risk-seeking preferences are not reality-bound.

but we must get used to the idea that even important decisions are influenced, if not governed, by System 1.

Not all frames are equal, and some frames are clearly better than alternative ways to describe (or to think about) the same thing. Consider the following pair of problems:

The explanation should already be familiar—this problem involves mental accounting and the sunk-cost fallacy. The different frames evoke different mental accounts, and the significance of the loss depends on the account to which it is posted.

tickets to a particular show are lost, it is natural to post them to the account associated with that play. The cost appears to have doubled and may now be more than the experience is worth.

a loss of cash is charged to a “general revenue” account—the theater patron is slightly poorer than she had thought she was, and the question she is likely to ask herself is whether the small reduction in her disposabl...

The version in which cash was lost leads to more reasonable decisions. It is a better frame because the loss, even if tickets were lost, is “...

If the person who lost tickets were to ask for my advice, this is what I would say: “Would you have bought tickets if you had lost the equivalent amount of cash? If yes, go ahead and buy new ones.”

In the next example, two alternative frames evoke different mathematical intuitions, and one is much superior to the other.

Consider two car owners who seek to reduce their costs:

With Richard Thaler, Sunstein coauthored Nudge, which is the basic manual for applying behavioral economics to policy.

An article published in 2003 noted that the rate of organ donation was close to 100% in Austria but only 12% in Germany, 86% in Sweden but only 4% in Denmark.

These enormous differences are a framing effect, which is caused by the format of the critical question. The high-donation countries have an opt out form, where individuals who wish not to donate must check an appropriate box.

Unless they take this simple action, they are consider...

Count that as a point against the rational-agent theory. A theory that is worthy of the name asserts that certain events are impossible—they will not happen if the theory is true. When an “impossible” event is observed, the theory is falsified.

experienced utility.

As economists and decision theorists apply the term, it means “wantability”

I have called it decision utility.

The decision utility of avoiding two injections is higher in the first case than in the second, and everyone will pay more for the first reduction than for the second.

It also suggested that, at least in some cases, experienced utility is the criterion by which a decision should be assessed.

Edgeworth

“hedonimeter,” an imaginary instrument analogous to the devices used in weather-recording stations, which would measure the level of pleasure or pain that an individual experiences at any moment.

findings, which illustrate a pattern we have observed in other experiments: Peak-end rule: The global retrospective rating was well predicted by the average of the level of pain reported at the worst moment of the experience and at its end. Duration neglect: The duration of the procedure had no effect whatsoever on the ratings of total pain.

If the objective is to reduce patients’ memory of pain, lowering the peak intensity of pain could be more important than minimizing the duration of the procedure. By the same reasoning, gradual relief may be preferable to abrupt relief if patients retain a better memory when the pain at the end of the procedure is relatively mild. If the objective is to reduce the amount of pain actually experienced, conducting the procedure swiftly may be appropriate even if doing so increases the peak pain intensity and leaves patients with an awful memory.

but my impression is that a strong majority will come down in favor of reducing the memory of pain.

dilemma as a conflict of interests between two selves

The experiencing self is the one that answers the question: “Does it hurt now?” The remembering self is the one that answers the ...

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 ...

He told of listening raptly to a long symphony on a disc that was scratched near the end, producing a shocking sound, and he reported that the bad ending “ruined the whole experience.”

My questioner had assigned the entire episode a failing grade because it had ended very badly, but that grade effectively ignored 40 minutes of musical bliss. Does the actual experience count for nothing?

Confusing experience with the memory of it is a compelling cognitive illusion

The experiencing self does not h...

What we learn from the past is to maximize the qualities of our future memories, not necessarily of our future experience.

the tyranny of the remembering self.

The experiment was designed to create a conflict between the interests of the experiencing and the remembering selves, and also between experienced utility and decision utility.

The peak-end rule predicts a worse memory for the short than for the long trial, and duration neglect predicts that the difference between 90 seconds and 60 seconds of pain will be ignored.

Fully 80% of the participants who reported that their pain diminished during the final phase of the longer episode opted to repeat it, thereby declaring themselves willing to suffer 30 seconds of needless pain in the anticipated third trial.

The subjects who preferred the long episode were not masochists and did not deliberately choose to expose themselves to the worse experience; they simply made a mistake.

We did not use these words, however, and the subjects did what came naturally: they chose to repeat the episode of which they had the less aversive memory.