Thinking, Fast and Slow

by Daniel Kahneman

The question that is answered is not the one that was intended,

This is why subjective confidence is not a good diagnostic of accuracy: judgments that answer the wrong question can also be made with high confidence.

It is difficult to reconstruct what it was that took us years, long hours of discussion, endless exchanges of drafts and hundreds of e-mails negotiating over words, and more than once almost giving up. But this is what always happens when a project ends reasonably well: once you understand the main conclusion, it seems it was always obvious.

Klein still winces when the word bias is mentioned, and he still enjoys stories in which algorithms or formal procedures lead to obviously absurd decisions. I tend to view the occasional failures of algorithms as opportunities to improve them.

asked everyone to write down an estimate of how long it would take us to submit a finished draft of the textbook to the Ministry of Education.

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.

The first was immediately apparent: I had stumbled onto a distinction between two profoundly different approaches to forecasting, which Amos and I later labeled the inside view and the outside view.

The second lesson was that our initial forecasts of about two years for the completion of the project exhibited a planning fallacy.

third lesson, which I call irrational perseverance: the folly we displayed that day in failing to abandon the project. Facing a choice, we gave up rationality rather than give up the enterprise.

The inside view is the one that all of us, including Seymour, spontaneously adopted to assess the future of our project.

Most of us view the world as more benign than it really is, our own attributes as more favorable than they truly are, and the goals we adopt as more achievable than they are likely to be.

In terms of its consequences for decisions, the optimistic bias may well be the most significant of the cognitive biases.

An optimistic attitude is largely inherited, and it is part of a general disposition for well-being, which may also include a preference for seeing the bright side of everything.

Optimists are normally cheerful and happy, and therefore popular; they are resilient

in adapting to failures and hardships, their chances of clinical depression are reduced, their immune system is stronger, they take better care of their health, they feel healthier ...

Optimistic individuals play a disproportionate role in shaping our lives. Their decisions make a difference; they are the inventors, the entrepreneurs, the political and military leaders—not average people.

They got to where they are by seeking challenges and taking risks. They are talented and they have been lucky, almost certainly luckier than they acknowledge.

Their self-confidence is reinforced by the admiration of others. This reasoning leads to a hypothesis: the people who have the greatest influence on the lives of others are likely to be optimistic and overconfident, and to take more risks than they realize.

When action is needed, optimism, even of the mildly delusional variety, may be a good thing.

But you must wonder:

Would she still have invested money and time if she had made a reasonable effort to learn the odds—or, if she did learn the odds (60% of new restaurants are out of business after three years), paid attention to them? The idea of adopting the outside view probably didn’t occur to her.

One of the benefits of an optimistic temperament is that it encourages persistence ...

But persistence can b...

Canadian organization—the Inventor’s Assistance Program—which collects a small fee to provide inventors with an objective assessment of the commercial prospects of their idea.

“We find that firms with award-winning CEOs subsequently underperform, in terms both of stock and of operating performance. At the same time, CEO compensation increases, CEOs spend more time on activities outside the company such as writing books and sitting on outside boards, and they are more likely to engage in earnings management.”

They also told us about plans to seek a loan to make the establishment more attractive by building a restaurant next to it. They felt no need to explain why they expected to succeed where six or seven others had failed.

The upshot is that people tend to be overly optimistic about their relative standing on any activity in which they do moderately well.

They are surely wrong: the outcome of a start-up depends as much on the achievements of its competitors and on changes in the market as on its own efforts.

They know less about their competitors and therefore find it natural to imagine a future in which the competition plays little part.

Hubris. Hubris. If you only think about your own business, you think, “I’ve got a good story department, I’ve got a good marketing department, we’re going to go out and do this.” And you don’t think that everybody else is thinking the same way. In a given weekend in a year you’ll have five movies open, and there’s certainly not enough people to go around.

The question that needs an answer is this: Considering what others will do, how many people will see our film? The question the studio executives considered is simpler and refers to knowledge that is most easily available to them: Do we have a good film and a good organization to market it? The familiar System 1 processes of WYSIATI and substitution produce both competition neglect and the above-average effect.

The consequence of competition neglect is excess entry: more competitors enter the market than the market can profitably sustain, so their average outcome is a loss.

Giovanni Dosi and Dan Lovallo call entrepreneurial firms that fail but signal new markets to more qualified competitors “optimistic martyrs”—good for the economy but bad for their investors.

This shows that CFOs were grossly overconfident about their ability to forecast the market. 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.

Even if they knew how little they know, the executives would be penalized for admitting it. President Truman famously asked for a “one-armed economist” who would take a clear stand; he was sick and tired of economists who kept saying, “On the other hand…”

Organizations that take the word of overconfident experts can expect costly consequences.

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.

Philip Tetlock observed that the most overconfident experts were the most likely to be invited to strut their stuff in news shows.

An unbiased appreciation of uncertainty is a cornerstone of rationality—but it is not what people and organizations want.

Extreme uncertainty is paralyzing under dangerous circumstances, and the admission that one is merely guessing is especially unacceptable when the stakes are high.

When they come together, the emotional, cognitive, and social factors that support exaggerated optimism are a heady brew, which sometimes leads people to take risks that they would avoid if they knew the odds.

The very definition of risk itself

Dan Lovallo and I coined the phrase “bold forecasts and timid decisions” to describe the background of risk taking.

The effects of high optimism on decision making are, at best, a mixed blessing, but the contribution of optimism to good implementation is certainly positive.

In essence, the optimistic style involves taking credit for successes but little blame for failures.

I have always believed that scientific research is another domain where a form of optimism is essential to success: I have yet to meet a successful scientist who lacks the ability to exaggerate the importance of what he or she is doing,

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.

He labels his proposal the premortem.

when the organization has almost come to an important decision but has not formally committed itself, Klein proposes gathering for a brief session a group of individuals who are knowledgeable about the decision.

“Imagine that we are a year into the future. We implemented the plan as it now exists. The outcome was a disaster. Please take 5 to 10 minutes to...