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A more general lesson that I learned from this episode was do not simply trust intuitive judgment—your own or that of others—but do not dismiss it, either.
Remember this rule: intuition cannot be trusted in the absence of stable regularities in the environment.
The unrecognized limits of professional skill help explain why experts are often overconfident.
When can you trust an experienced professional who claims to have an intuition? Our conclusion was that for the most part it is possible to distinguish intuitions that are likely to be valid from those that are likely to be bogus. As in the judgment of whether a work of art is genuine or a fake, you will usually do better by focusing on its provenance than by looking at the piece itself. If the environment is sufficiently regular and if the judge has had a chance to learn its regularities, the associative machinery will recognize situations and generate quick and accurate predictions and
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substitution occurs automatically, you often do not know the origin of a judgment that you (your System 2) endorse and adopt. If it is the only one that comes to mind, it may be subjectively undistinguishable from valid judgments that you make with expert confidence. 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.
“Pallid” statistical information is routinely discarded when it is incompatible with one’s personal impressions of a case. In the competition with the inside view, the outside view doesn’t stand a chance.
Errors in the initial budget are not always innocent. The authors of unrealistic plans are often driven by the desire to get the plan approved—whether by their superiors or by a client—supported by the knowledge that projects are rarely abandoned unfinished merely because of overruns in costs or completion times.
An unbiased appreciation of uncertainty is a cornerstone of rationality—but it is not what people and organizations want.
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.
As in Fechner’s law, the psychological response to a change of wealth is inversely proportional to the initial amount of wealth, leading to the conclusion that utility is a logarithmic function of wealth.
people’s choices are based not on dollar values but on the psychological values of outcomes, their utilities.
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.
“losses loom larger than gains” and that people are loss averse.
the response to a loss is stronger than the response to a corresponding gain.
Being poor, in prospect theory, is living below one’s reference point. There are goods that the poor need and cannot afford, so they are always “in the losses.” Small amounts of money that they receive are therefore perceived as a reduced loss, not as a gain. The money helps one climb a little toward the reference point, but the poor always remain on the steep limb of the value function.
People who are poor think like traders, but the dynamics are quite different. Unlike traders, the poor are not indifferent to the differences between gaining and giving up. Their problem is that all their choices are between losses. Money that is spent on one good is the loss of another good that could have been purchased instead. For the poor, costs are losses.
A basic rule of fairness, we found, is that the exploitation of market power to impose losses on others is unacceptable.
Remarkably, altruistic punishment is accompanied by increased activity in the “pleasure centers” of the brain. It appears that maintaining the social order and the rules of fairness in this fashion is its own reward. Altruistic punishment could well be the glue that holds societies together.
The change from 5% to 10% doubles the probability of winning, but there is general agreement that the psychological value of the prospect does not double.
The improvement from 95% to 100% is another qualitative change that has a large impact, the certainty effect. Outcomes that are almost certain are given less weight than their probability justifies.
The psychological difference between a 95% risk of disaster and the certainty of disaster appears to be even greater; the sliver of hope that everything could still be okay looms very large. Overweighting of small probabilities increases the attractiveness of both gambles and insurance policies.
The conclusion is straightforward: 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.
people attach values to gains and losses rather than to wealth, and the decision weights that they assign to outcomes are different from probabilities.
when you consider a choice between a sure loss and a gamble with a high probability of a larger loss, diminishing sensitivity makes the sure loss more aversive, and the certainty effect reduces the aversiveness of the gamble.
A defendant with a weak case is likely to be risk seeking, prepared to gamble rather than accept a very unfavorable settlement. In the face-off between a risk-averse plaintiff and a risk-seeking defendant, the defendant holds the stronger hand.
Emotion and vividness influence fluency, availability, and judgments of probability—and thus account for our excessive response to the few rare events that we do not ignore.
Our mind has a useful capability to focus spontaneously on whatever is odd, different, or unusual.
The probability of a rare event is most likely to be overestimated when the alternative is not fully specified.
If your attention is drawn to the winning marbles, you do not assess the number of nonwinning marbles with the same care. Vivid imagery contributes to denominator neglect, at least as I experience it.
As in many other choices that involve moderate or high probabilities, people tend to be risk averse in the domain of gains and risk seeking in the domain of losses.
we are susceptible to WY SIATI and averse to mental effort, we tend to make decisions as problems arise, even when we are specifically instructed to consider them jointly. We have neither the inclination nor the mental resources to enforce consistency on our preferences, and our preferences are not magically set to be coherent, as they are in the rational-agent model.
I sympathize with your aversion to losing any gamble, but it is costing you a lot of money. Please consider this question: Are you on your deathbed? Is this the last offer of a small favorable gamble that you will ever consider? Of course, you are unlikely to be offered exactly this gamble again, but you will have many opportunities to consider attractive gambles with stakes that are very small relative to your wealth. You will do yourself a large financial favor if you are able to see each of these gambles as part of a bundle of small gambles and rehearse the mantra that will get you
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The combination of loss aversion and narrow framing is a costly curse. Individual investors can avoid that curse, achieving the emotional benefits of broad framing while also saving time and agony, by reducing the frequency with which they check how well their investments are doing.
The disposition effect is an instance of narrow framing. The investor has set up an account for each share that she bought, and she wants to close every account as a gain. A rational agent would have a comprehensive view of the portfolio and sell the stock that is least likely to do well in the future, without considering whether it is a winner or a loser.
Another argument against selling winners is the well-documented market anomaly that stocks that recently gained in value are likely to go on gaining at least for a short while.
An abnormal event attracts attention, and it also activates the idea of the event that would have been normal under the same circumstances.
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.
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.
The cold-hand study showed that we cannot fully trust our preferences to reflect our interests, even if they are based on personal experience, and even if the memory of that experience was laid down within the last quarter of an hour! Tastes and decisions are shaped by memories, and the memories can be wrong.
humans have consistent preferences and know how to maximize them, a cornerstone of the rational-agent model. An inconsistency is built into the design of our minds. 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.
This is the essence of the focusing illusion, which can be described in a single sentence: Nothing in life is as important as you think it is when you are thinking about it.
