Thinking, Fast and Slow

by Daniel Kahneman

It is tempting to explain entrepreneurial optimism by wishful thinking, but emotion is only part of the story. Cognitive biases play an important role, notably the System 1 feature WYSIATI. We focus on our goal, anchor on our plan, and neglect relevant base rates, exposing ourselves to the planning fallacy. We focus on what we want to do and can do, neglecting the plans and skills of others. Both in explaining the past and in predicting the future, we focus on the causal role of skill and neglect the role of luck. We are therefore prone to an illusion of control. We focus on what we know and neglect what we do not know, which makes us overly confident in our beliefs.

I have yet to meet a successful scientist who lacks the ability to exaggerate the importance of what he or she is doing, and I believe that someone who lacks a delusional sense of significance will wilt in the face of repeated experiences of multiple small failures and rare successes, the fate of most researchers.

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.

people’s choices are based not on dollar values but on the psychological values of outcomes, their utilities.

Table 3

His utility function explained why poor people buy insurance and why richer people sell it to them. As you can see in the table, the loss of 1 million causes a loss of 4 points of utility (from 100 to 96) to someone who has 10 million and a much larger loss of 18 points (from 48 to 30) to someone who starts off with 3 million. The poorer man will happily pay a premium to transfer the risk to the richer one, which is what insurance is about.

The same sound will be experienced as very loud or quite faint, depending on whether it was preceded by a whisper or by a roar. To predict the subjective experience of loudness, it is not enough to know its absolute energy; you also need to know the reference sound to which it is automatically compared.

The mystery is how a conception of the utility of outcomes that is vulnerable to such obvious counterexamples survived for so long. I can explain it only by a weakness of the scholarly mind that I have often observed in myself. I call it theory-induced blindness: once you have accepted a theory and used it as a tool in your thinking, it is extraordinarily difficult to notice its flaws. If you come upon an observation that does not seem to fit the model, you assume that there must be a perfectly good explanation that you are somehow missing. You give the theory the benefit of the doubt, trusting the community of experts who have accepted it.

disbelieving is hard work, and System 2 is easily tired.

“Both candidates are willing to accept the salary we’re offering, but they won’t be equally satisfied because their reference points are different. She currently has a much higher salary.”

“She’s suing him for alimony. She would actually like to settle, but he prefers to go to court. That’s not surprising—she can only gain, so she’s risk averse. He, on the other hand, faces options that are all bad, so he’d rather take the risk.”

Evaluation is relative to a neutral reference point, which is sometimes referred to as an “adaptation level.”

Outcomes that are better than the reference points are gains. Below the reference point they are losses.

A principle of diminishing sensitivity applies to both sensory dimensions and the evaluation of changes of wealth.

The third principle is loss aversion.

Figure 10 Loss Aversion

Many of the options we face in life are “mixed”: there is a risk of loss and an opportunity for gain, and we must decide whether to accept the gamble or reject it.

“losses loom larger than gains” and that people are loss averse.

Richer and more realistic assumptions do not suffice to make a theory successful. Scientists use theories as a bag of working tools, and they will not take on the burden of a heavier bag unless the new tools are very useful. Prospect theory was accepted by many scholars not because it is “true” but because the concepts that it added to utility theory, notably the reference point and loss aversion, were worth the trouble; they yielded new predictions that turned out to be true. We were lucky.

The brains of humans and other animals contain a mechanism that is designed to give priority to bad news.

the long-term success of a relationship depends far more on avoiding the negative than on seeking the positive. Gottman estimated that a stable relationship requires that good interactions outnumber bad interactions by at least 5 to 1. Other asymmetries in the social domain are even more striking. We all know that a friendship that may take years to develop can be ruined by a single action.

“This reform will not pass. Those who stand to lose will fight harder than those who stand to gain.”

“Each of them thinks the other’s concessions are less painful. They are both wrong, of course. It’s just the asymmetry of losses.”

the decision weights that people assign to outcomes are not identical to the probabilities of these outcomes, contrary to the expectation principle. Improbable outcomes are overweighted—this is the possibility effect. Outcomes that are almost certain are underweighted relative to actual certainty. The expectation principle, by which values are weighted by their probability, is poor psychology.

When you pay attention to a threat, you worry—and the decision weights reflect how much you worry. Because of the possibility effect, the worry is not proportional to the probability of the threat. Reducing or mitigating the risk is not adequate; to eliminate the worry the probability must be brought down to zero.

people attach values to gains and losses rather than to wealth, and the decision weights that they assign to outcomes are different from probabilities.

My experience illustrates how terrorism works and why it is so effective: it induces an availability cascade. An extremely vivid image of death and damage, constantly reinforced by media attention and frequent conversations, becomes highly accessible, especially if it is associated with a specific situation such as the sight of a bus. The emotional arousal is associative, automatic, and uncontrolled, and it produces an impulse for protective action. System 2 may “know” that the probability is low, but this knowledge does not eliminate the self-generated discomfort and the wish to avoid it. System 1 cannot be turned off. The emotion is not only disproportionate to the probability, it is also insensitive to the exact level of probability.

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

The sunk-cost fallacy keeps people for too long in poor jobs, unhappy marriages, and unpromising research projects.

unusual events are easier than normal events to undo in imagination.

Daniel Gilbert and his colleagues provocatively claim that people generally anticipate more regret than they will actually experience, because they underestimate the efficacy of the psychological defenses they will deploy—which they label the “psychological immune system.” Their recommendation is that you should not put too much weight on regret; even if you have some, it will hurt less than you now think.

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.

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.

“They will feel better about what happened if they manage to frame the outcome in terms of how much money they kept rather than how much they lost.”

“Let’s reframe the problem by changing the reference point. Imagine we did not own it; how much would we think it is worth?”

“Charge the loss to your mental account of ‘general revenue’—you will feel better!”

“They ask you to check the box to opt out of their mailing list. Their list would shrink if they asked you to check a box to opt in!”

Confusing experience with the memory of it is a compelling cognitive illusion—and it is the substitution that makes us believe a past experience can be ruined. The experiencing self does not have a voice. The remembering self is sometimes wrong, but it is the one that keeps score and governs what we learn from living, and it is the one that makes decisions. What we learn from the past is to maximize the qualities of our future memories, not necessarily of our future experience. This is the tyranny of the remembering self.

The memory that the remembering self keeps, in contrast, is a representative moment, strongly influenced by the peak and the end.

Tastes and decisions are shaped by memories, and the memories can be wrong.

We have strong preferences about the duration of our experiences of pain and pleasure. We want pain to be brief and pleasure to last. But our memory, a function of System 1, has evolved to represent the most intense moment of an episode of pain or pleasure (the peak) and the feelings when the episode was at its end. A memory that neglects duration will not serve our preference for long pleasure and short pains.

Odd as it may seem, I am my remembering self, and the experiencing self, who does my living, is like a stranger to me.

Some aspects of life have more effect on the evaluation of one’s life than on the experience of living. Educational attainment is an example. More education is associated with higher evaluation of one’s life, but not with greater experienced well-being. Indeed, at least in the United States, the more educated tend to report higher stress. On the other hand, ill health has a much stronger adverse effect on experienced well-being than on life evaluation. Living with children also imposes a significant cost in the currency of daily feelings—reports of stress and anger are common among parents, but the adverse effects on life evaluation are smaller. Religious participation also has relatively greater favorable impact on both positive affect and stress reduction than on life evaluation. Surprisingly, however, religion provides no reduction of feelings of depression or worry.

Can money buy happiness? The conclusion is that being poor makes one miserable, and that being rich may enhance one’s life satisfaction, but does not (on average) improve experienced well-being.

A plausible interpretation is that higher income is associated with a reduced ability to enjoy the small pleasures of life. There is suggestive evidence in favor of this idea: priming students with the idea of wealth reduces the pleasure their face expresses as they eat a bar of chocolate!

people’s evaluations of their lives and their actual experience may be related, but they are also different.

“The easiest way to increase happiness is to control your use of time. Can you find more time to do the things you enjoy doing?”

“Beyond the satiation level of income, you can buy more pleasurable experiences, but you will lose some of your ability to enjoy the less expensive ones.”

the score that you quickly assign to your life is determined by a small sample of highly available ideas, not by a careful weighting of the domains of your life.

Experienced well-being is on average unaffected by marriage, not because marriage makes no difference to happiness but because it changes some aspects of life for the better and others for the worse.