Thinking, Fast and Slow

by Daniel Kahneman

Our difficulties with the concept of regression originate with both System 1 and System 2. Without special instruction, and in quite a few cases even after some statistical instruction, the relationship between correlation and regression remains obscure. System 2 finds it difficult to understand and learn. This is due in part to the insistent demand for causal interpretations, which is a feature of System 1.

We are capable of rejecting information as irrelevant or false, but adjusting for smaller weaknesses in the evidence is not something that System 1 can do. As a result, intuitive predictions are almost completely insensitive to the actual predictive quality of the evidence.

Intuitive predictions need to be corrected because they are not regressive and therefore are biased.

intuitive predictions tend to be overconfident and overly extreme.

A characteristic of unbiased predictions is that they permit the prediction of rare or extreme events only when the information is very good. If you expect your predictions to be of modest validity, you will never guess an outcome that is either rare or far from the mean. If your predictions are unbiased, you will never have the satisfying experience of correctly calling an extreme case.

A preference for unbiased predictions is justified if all errors of prediction are treated alike, regardless of their direction. But there are situations in which one type of error is much worse than another.

If you choose to delude yourself by accepting extreme predictions, however, you will do well to remain aware of your self-indulgence.

Following our intuitions is more natural, and somehow more pleasant, than acting against them.

Extreme predictions and a willingness to predict rare events from weak evidence are both manifestations of System 1. It is natural for the associative machinery to match the extremeness of predictions to the perceived extremeness of evidence on which it is based—this is how substitution works. And it is natural for System 1 to generate overconfident judgments, because confidence, as we have seen, is determined by the coherence of the best story you can tell from the evidence at hand.

Matching predictions to the evidence is not only something we do intuitively; it also seems a reasonable thing to do.

Taleb introduced the notion of a narrative fallacy to describe how flawed stories of the past shape our views of the world and our expectations for the future. Narrative fallacies arise inevitably from our continuous attempt to make sense of the world.

we humans constantly fool ourselves by constructing flimsy accounts of the past and believing they are true.

You are always ready to interpret behavior as a manifestation of general propensities and personality traits—causes that you can readily match to effects.

Inconsistencies reduce the ease of our thoughts and the clarity of our feelings.

The human mind does not deal well with nonevents. The fact that many of the important events that did occur involve choices further tempts you to exaggerate the role of skill and underestimate the part that luck played in the outcome.

You cannot help dealing with the limited information you have as if it were all there is to know. You build the best possible story from the information available to you, and if it is a good story, you believe it. Paradoxically, it is easier to construct a coherent story when you know little, when there are fewer pieces to fit into the puzzle.

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

we believe we understand the past, which implies that the future also should be knowable, but in fact we understand the past less than we believe we do.

When an unpredicted event occurs, we immediately adjust our view of the world to accommodate the surprise.

A general limitation of the human mind is its imperfect ability to reconstruct past states of knowledge, or beliefs that have changed. Once you adopt a new view of the world (or of any part of it), you immediately lose much of your ability to recall what you used to believe before your mind changed.

Your inability to reconstruct past beliefs will inevitably cause you to underestimate the extent to which you were surprised by past events.

The tendency to revise the history of one’s beliefs in light of what actually happened produces a robust cognitive illusion.

Hindsight bias has pernicious effects on the evaluations of decision makers. It leads observers to assess the quality of a decision not by whether the process was sound but by whether its outcome was good or bad.

We are prone to blame decision makers for good decisions that worked out badly and to give them too little credit for successful moves that appear obvious only after the fact.

Actions that seemed prudent in foresight can look irresponsibly negligent in hindsight.

The sense-making machinery of System 1 makes us see the world as more tidy, simple, predictable, and coherent than it really is. The illusion that one has understood the past feeds the further illusion that one can predict and control the future.

you are prone to overestimate the predictability of the world you live in.

Consumers have a hunger for a clear message about the determinants of success and failure in business, and they need stories that offer a sense of understanding, however illusory.

the halo effect is so powerful that you probably find yourself resisting the idea that the same person and the same behaviors appear methodical when things are going well and rigid when things are going poorly.

Stories of how businesses rise and fall strike a chord with readers by offering what the human mind needs: a simple message of triumph and failure that identifies clear causes and ignores the determinative power of luck and the inevitability of regression.

Because of confidence by coherence, the subjective confidence we have in our opinions reflects the coherence of the story that System 1 and System 2 have constructed.

people are often reluctant to infer the particular from the general.

It is wise to take admissions of uncertainty seriously, but declarations of high confidence mainly tell you that an individual has constructed a coherent story in his mind, not necessarily that the story is true.

The illusion of skill is not only an individual aberration; it is deeply ingrained in the culture of the industry. Facts that challenge such basic assumptions—and thereby threaten people’s livelihood and self-esteem—are simply not absorbed.

skill in evaluating the business prospects of a firm is not sufficient for successful stock trading, where the key question is whether the information about the firm is already incorporated in the price of its stock. Traders apparently lack the skill to answer this crucial question, but they appear to be ignorant of their ignorance.

The idea that the future is unpredictable is undermined every day by the ease with which the past is explained.

our tendency to construct and believe coherent narratives of the past makes it difficult for us to accept the limits of our forecasting ability.

The illusion that we understand the past fosters overconfidence in our ability to predict the future.

Those who know more forecast very slightly better than those who know less. But those with the most knowledge are often less reliable.

The first lesson is that errors of prediction are inevitable because the world is unpredictable. The second is that high subjective confidence is not to be trusted as an indicator of accuracy (low confidence could be more informative).

experts try to be clever, think outside the box, and consider complex combinations of features in making their predictions. Complexity may work in the odd case, but more often than not it reduces validity. Simple combinations of features are better.

humans are incorrigibly inconsistent in making summary judgments of complex information. When asked to evaluate the same information twice, they frequently give different answers.

to maximize predictive accuracy, final decisions should be left to formulas, especially in low-validity environments.

Dawes showed that marital stability is well predicted by a formula: frequency of lovemaking minus frequency of quarrels

the line between what clinicians can do well and what they cannot do at all well is not obvious, and certainly not obvious to them. They know they are skilled, but they don’t necessarily know the boundaries of their skill.

The aversion to algorithms making decisions that affect humans is rooted in the strong preference that many people have for the natural over the synthetic or artificial.

for most people, the cause of a mistake matters. The story of a child dying because an algorithm made a mistake is more poignant than the story of the same tragedy occurring as a result of human error, and the difference in emotional intensity is readily translated into a moral preference.

intuition adds value even in the justly derided selection interview, but only after a disciplined collection of objective information and disciplined scoring of separate traits.

“The situation has provided a cue; this cue has given the expert access to information stored in memory, and the information provides the answer. Intuition is nothing more and nothing less than recognition

A mind that follows WY SIATI will achieve high confidence much too easily by ignoring what it does not know.