Thinking, Fast and Slow

by Daniel Kahneman

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.

“I-knew-it-all-along” effect, or hindsight bias,

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.

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

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

we should abandon the procedure in which the interviewers’ global evaluations of the recruit determined the final decision. Meehl’s book suggested that such evaluations should not be trusted and that statistical summaries of separately evaluated attributes would achieve higher validity.

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 confidence that people have in their intuitions is not a reliable guide to their validity. In other words, do not trust anyone—including yourself—to tell you how much you should trust their judgment.

Statistical algorithms greatly outdo humans in noisy environments for two reasons: they are more likely than human judges to detect weakly valid cues and much more likely to maintain a modest level of accuracy by using such cues consistently.

intuition cannot be trusted in the absence of stable regularities in the environment.

The familiar System 1 processes of WY SIATI and substitution produce both competition neglect and the above-average effect.

There is no evidence that risk takers in the economic domain have an unusual appetite for gambles on high stakes; they are merely less aware of risks than more timid people are.

premortem. The procedure is simple: 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. The premise of the session is a short speech: “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 write a brief history of that disaster.”

framing effects: the large changes of preferences that are sometimes caused by inconsequential variations in the wording of a choice problem.

Bernoulli’s insight was that a decision maker with diminishing marginal utility for wealth will be risk averse.

risk-seeking preference for the gamble, a behavior that is often observed in entrepreneurs and in generals when all their options are bad.

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

loss aversion. When directly compared or weighted against each other, losses loom larger than gains.

In mixed gambles, where both a gain and a loss are possible, loss aversion causes extremely risk-averse choices. In bad choices, where a sure loss is compared to a larger loss that is merely probable, diminishing sensitivity causes risk seeking.

In simple words, prospect theory cannot deal with disappointment. Disappointment and the anticipation of disappointment are real, however, and the failure to acknowledge them is as obvious a flaw as the counterexamples that I invoked to criticize Bernoulli’s theory.

two aspects of choice that the standard model of indifference curves does not predict. First, tastes are not fixed; they vary with the reference point. Second, the disadvantages of a change loom larger than its advantages, inducing a bias that favors the status quo.

The fundamental ideas of prospect theory are that reference points exist, and that losses loom larger than corresponding gains.

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

A basic rule of fairness, we found, is that the exploitation of market power to impose losses on others is unacceptable.

the possibility effect, which causes highly unlikely outcomes to be weighted disproportionately more than they “deserve.”

the certainty effect. Outcomes that are almost certain are given less weight than their probability justifies.

systematic deviations from expected value are costly in the long run—and this rule applies to both risk aversion and risk seeking. Consistent overweighting of improbable outcomes—a feature of intuitive decision making—eventually leads to inferior outcomes.

The psychology of high-prize lotteries is similar to the psychology of terrorism.

As predicted by denominator neglect, low-probability events are much more heavily weighted when described in terms of relative frequencies (how many) than when stated in more abstract terms of “chances,” “risk,” or “probability” (how likely).

Investors who get aggregated feedback receive such news much less often and are likely to be less risk averse and to end up richer. You are also less prone to useless churning of your portfolio if you don’t know how every stock in it is doing every day (or every week or even every month). A commitment not to change one’s position for several periods (the equivalent of “locking in” an investment) improves financial performance.

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.

A rational decision maker is interested only in the future consequences of current investments. Justifying earlier mistakes is not among the Econ’s concerns. 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.

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.

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.

Judgments and preferences are coherent within categories but potentially incoherent when the objects that are evaluated belong to different categories.

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.

neuroeconomics—the study of what a person’s brain does while he makes decisions.

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 both outcomes are negative.

framing should not be viewed as an intervention that masks or distorts an underlying preference. At least in this instance—and also in the problems of the Asian disease and of surgery versus radiation for lung cancer—there is no underlying preference that is masked or distorted by the frame. Our preferences are about framed problems, and our moral intuitions are about descriptions, not about substance.

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.

Caring for people often takes the form of concern for the quality of their stories, not for their feelings.

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

It appears that a small fraction of the population does most of the suffering—whether because of physical or mental illness, an unhappy temperament, or the misfortunes and personal tragedies in their life.

The feelings associated with different activities suggest that another way to improve experience is to switch time from passive leisure, such as TV watching, to more active forms of leisure, including socializing and exercise.

It is only a slight exaggeration to say that happiness is the experience of spending time with people you love and who love you.

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.

This is surprising because higher income undoubtedly permits the purchase of many pleasures, including vacations in interesting places and opera tickets, as well as an improved living environment. Why do these added pleasures not show up in reports of emotional experience? A plausible interpretation is that higher income is associated with a reduced ability to enjoy the small pleasures of life.

Life satisfaction is not a flawed measure of their experienced well-being, as I thought some years ago. It is something else entirely.

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.