Thinking, Fast and Slow

by Daniel Kahneman

The more vivid description produces a higher decision weight for the same probability.

The power of format creates opportunities for manipulation, which people with an axe to grind know how to exploit.

focal attention and salience contribute to both the overestimation of unlikely events and the overweighting of unlikely outcomes.

Salience is enhanced by mere mention of an event, by its vividness, and by the format in which probability is described.

but underweighting also occurs when people have actually experienced the rare event.

This advice is not impossible to follow. Experienced traders in financial markets live by it every day, shielding themselves from the pain of losses by broad framing.

As expected, broad framing blunted the emotional reaction to losses and increased the willingness to take risks.

The combination of loss aversion and narrow framing is a costly curse.

They would do better by having a risk policy that they routinely apply whenever a relevant problem arises.

A risk policy is a broad frame.

The outside view and the risk policy are remedies against two distinct biases that affect many decisions: the exaggerated optimism of the planning fallacy and the exaggerated caution induced by loss aversion.

There is no guarantee, of course, that the biases cancel out in every situation. An organization that could eliminate both excessive optimism and excessive loss aversion should do so. The combination of the outside view with a risk policy should be the goal.

money is a proxy for points on a scale of self-regard and achievement.

For Humans, mental accounts are a form of narrow framing; they keep things under control and manageable by a finite mind.

As might be expected, finance research has documented a massive preference for selling winners rather than losers—a bias that has been given an opaque label: the disposition effect. The disposition effect is an instance of narrow framing.

The decision to invest additional resources in a losing account, when better investments are available, is known as the sunk-cost fallacy, a costly mistake that is observed in decisions large and small.

In the presence of sunk costs, the manager’s incentives are misaligned with the objectives of the firm and its shareholders, a familiar type of what is known as the agency problem.

Regret is one of the counterfactual emotions that are triggered by the availability of alternatives to reality.

This short example illustrates a broad story: people expect to have stronger emotional reactions (including regret) to an outcome that is produced by action than to the same outcome when it is produced by inaction.

The asymmetry is at least as strong for losses, and it applies to blame as well as to regret.

Losses are weighted about twice as much as gains in several contexts: choice between gambles, the endowment effect, and reactions to price changes.

The taboo tradeoff against accepting any increase in risk is not an efficient way to use the safety budget.

The intense aversion to trading increased risk for some other advantage plays out on a grand scale in the laws and regulations governing risk. This trend is especially strong in Europe, where the precautionary principle, which prohibits any action that might cause harm, is a widely accepted doctrine.

As the jurist Cass Sunstein points out, the precautionary principle is costly, and when interpreted strictly it can be paralyzing.

But enhanced loss aversion is embedded in a strong and widely shared moral intuition; it originates in System 1. The dilemma between intensely loss-averse moral attitudes and efficient risk management does not have a simple and compelling solution.

You can also take precautions that will inoculate you against regret. Perhaps the most useful is to be explicit about the anticipation of regret. If you can remember when things go badly that you considered the possibility of regret carefully before deciding, you are likely to experience less of it.

You should also know that regret and hindsight bias will come together, so anything you can do to preclude hindsight is likely to be helpful.

Poignancy (a close cousin of regret) is a counterfactual feeling, which is evoked because the thought “if only he had shopped at his regular store…” comes readily to mind.

The emotional reactions of System 1 are much more likely to determine single evaluation; the comparison that occurs in joint evaluation always involves a more careful and effortful assessment, which calls for System 2.

You should not form the impression that single and joint evaluations are always inconsistent, or that judgments are completely chaotic. Our world is broken into categories for which we have norms, such as six-year-old boys or tables.

The result illustrates Hsee’s evaluability hypothesis: The number of entries is given no weight in single evaluation, because the numbers are not “evaluable” on their own. In joint evaluation, in contrast, it is immediately obvious that dictionary B is superior on this attribute, and it is also apparent that the number of entries is far more important than the condition of the cover.

There is good reason to believe that the administration of justice is infected by predictable incoherence in several domains.

As we have seen, rationality is generally served by broader and more comprehensive frames, and joint evaluation is obviously broader than single evaluation.

For the purpose of logical reasoning, the two descriptions of the outcome of the match are interchangeable because they designate the same state of the world. As philosophers say, their truth conditions are identical: if one of these sentences is true, then the other is true as well.

The two sentences evoke markedly different associations. “Italy won” evokes thoughts of the Italian team and what it did to win. “France lost” evokes thoughts of the French team and what it did that caused it to lose,

Someone whose preferences are reality-bound would give the same answer to both questions, but such individuals are rare. In fact, one version attracts many more positive answers: the second.

We should not be surprised: losses evokes stronger negative feelings than costs. Choices are not reality-bound because System 1 is not reality-bound.

The two may be economically equivalent, but they are not emotionally equivalent.

The authors ranked the 20 subjects accordingly and gave the ranking a striking label: the rationality index.

The amygdala is accessed very rapidly by emotional stimuli—and it is a likely suspect for involvement in System 1.

region known to be associated with conflict and self-control (the anterior cingulate) was more active when subjects did not do what comes naturally—

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.

It appears that these elite participants were (often, not always) reality-bound with little conflict.

An important finding of the study is that physicians were just as susceptible to the framing effect as medically unsophisticated people (hospital patients and graduate students in a business school). Medical training is, evidently, no defense against the power of framing.

Reframing is effortful and System 2 is normally lazy. Unless there is an obvious reason to do otherwise, most of us passively accept decision problems as they are framed and therefore rarely have an opportunity to discover the extent to which our preferences are frame-bound rather than reality-bound.

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

Most people find that their System 2 has no moral intuitions of its own to answer the question.

The surprising aspect of Schelling’s problem is that this apparently simple moral rule does not work reliably. It generates contradictory answers to the same problem, depending on how that problem is framed.

Our preferences are about framed problems, and our moral intuitions are about descriptions, not about substance.

As we have seen again and again, an important choice is controlled by an utterly inconsequential feature of the situation. This is embarrassing—it is not how we would wish to make important decisions. Furthermore, it is not how we experience the workings of our mind, but the evidence for these cognitive illusions is undeniable.