Thinking, Fast and Slow

by Daniel Kahneman

the importance of an idea is often judged by the fluency (and emotional charge) with which that idea comes to mind.

The social norm against stereotyping, including the opposition to profiling, has been highly beneficial in creating a more civilized and more equal society. It is useful to remember, however, that neglecting valid stereotypes inevitably results in suboptimal judgments. Resistance to stereotyping is a laudable moral position, but the simplistic idea that the resistance is costless is wrong. The costs are worth paying to achieve a better society, but denying that the costs exist, while satisfying to the soul and politically correct, is not scientifically defensible. Reliance on the affect heuristic is common in politically charged arguments. The positions we favor have no cost and those we oppose have no benefits. We should be able to do better.

profoundly important conclusion. People who are taught surprising statistical facts about human behavior may be impressed to the point of telling their friends about what they have heard, but this does not mean that their understanding of the world has really changed.

There is a deep gap between our thinking about statistics and our thinking about individual cases. Statistical results with a causal interpretation have a stronger effect on our thinking than noncausal information. But even compelling causal statistics will not change long-held beliefs or beliefs rooted in personal experience. On the other hand, surprising individual cases have a powerful impact and are a more effective tool for teaching psychology because the incongruity must be resolved and embedded in a causal story.

You are more likely to learn something by finding surprises in your own behavior than by hearing surprising facts about people in general.

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. When a link is found, as in the case of Julie’s early reading, WY SIATI applies: your associative memory quickly and automatically constructs the best possible story from the information available.

The predictions are as extreme as the evidence.

if you use childhood achievements to predict grades in college without regressing your predictions toward the mean, you will more often than not be disappointed by the academic outcomes of early readers and happily surprised by the grades of those who learned to read relatively late.

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. Be warned: your intuitions will deliver predictions that are too extreme and you will be inclined to put far too much faith in them.

The explanatory stories that people find compelling are simple; are concrete rather than abstract; assign a larger role to talent, stupidity, and intentions than to luck; and focus on a few striking events that happened rather than on the countless events that failed to happen. Any recent salient event is a candidate to become the kernel of a causal narrative. Taleb suggests that we humans constantly fool ourselves by constructing flimsy accounts of the past and believing they are true.

The halo effect discussed earlier contributes to coherence, because it inclines us to match our view of all the qualities of a person to our judgment of one attribute that is particularly significant

The halo effect helps keep explanatory narratives simple and coherent by exaggerating the consistency of evaluations: good people do only good things and bad people are all bad.

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

Mentioning the single lucky incident actually makes it easier to underestimate the multitude of ways in which luck affected 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.

The core of the illusion is that 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.

The mind that makes up narratives about the past is a sense-making organ. When an unpredicted event occurs, we immediately adjust our view of the world to accommodate the surprise.

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.

decision makers who expect to have their decisions scrutinized with hindsight are driven to bureaucratic solutions—and to an extreme reluctance to take risks

The illusion that one has understood the past feeds the further illusion that one can predict and control the future. These illusions are comforting. They reduce the anxiety that we would experience if we allowed ourselves to fully acknowledge the uncertainties of existence.

It is difficult to imagine people lining up at airport bookstores to buy a book that enthusiastically describes the practices of business leaders who, on average, do somewhat better than chance. 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.

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. These stories induce and maintain an illusion of understanding, imparting lessons of little enduring value to readers who are all too eager to believe them.

Subjective confidence in a judgment is not a reasoned evaluation of the probability that this judgment is correct. Confidence is a feeling, which reflects the coherence of the information and the cognitive ease of processing it. 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.

Individual investors like to lock in their gains by selling “winners,” stocks that have appreciated since they were purchased, and they hang on to their losers. Unfortunately for them, recent winners tend to do better than recent losers in the short run, so individuals sell the wrong stocks. They also buy the wrong stocks. Individual investors predictably flock to companies that draw their attention because they are in the news.

We know that people can maintain an unshakable faith in any proposition, however absurd, when they are sustained by a community of like-minded believers. Given the professional culture of the financial community, it is not surprising that large numbers of individuals in that world believe themselves to be among the chosen few who can do what they believe others cannot.

Everything makes sense in hindsight, a fact that financial pundits exploit every evening as they offer convincing accounts of the day’s events. And we cannot suppress the powerful intuition that what makes sense in hindsight today was predictable yesterday. The illusion that we understand the past fosters overconfidence in our ability to predict the future.

people who spend their time, and earn their living, studying a particular topic produce poorer predictions than dart-throwing monkeys who would have distributed their choices evenly over the options.

Those who know more forecast very slightly better than those who know less. But those with the most knowledge are often less reliable. The reason is that the person who acquires more knowledge develops an enhanced illusion of her skill and becomes unrealistically overconfident.

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).

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.

The associative machine is set to suppress doubt and to evoke ideas and information that are compatible with the currently dominant story. A mind that follows WY SIATI will achieve high confidence much too easily by ignoring what it does not know. It is therefore not surprising that many of us are prone to have high confidence in unfounded intuitions.

us. If you are genetically endowed with an optimistic bias, you hardly need to be told that you are a lucky person—you already feel fortunate

One of the benefits of an optimistic temperament is that it encourages persistence in the face of obstacles. But persistence can be costly.

More generally, the financial benefits of self-employment are mediocre: given the same qualifications, people achieve higher average returns by selling their skills to employers than by setting out on their own. The evidence suggests that optimism is widespread, stubborn, and costly

An unbiased appreciation of uncertainty is a cornerstone of rationality—but it is not what people and organizations want.

Extreme uncertainty is paralyzing under dangerous circumstances, and the admission that one is merely guessing is especially unacceptable when the stakes are high. Acting on pretended knowledge is often the preferred solution.

Gambles represent the fact that the consequences of choices are never certain.

Every significant choice we make in life comes with some uncertainty—which

people’s choices are based not on dollar values but on the psychological values of outcomes, their utilities. The psychological value of a gamble is therefore not the weighted average of its possible dollar outcomes; it is the average of the utilities of these outcomes, each weighted by its probability.

The poorer man will happily pay a premium to transfer the risk to the richer one, which is what insurance is about.

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.

The reason you like the idea of gaining $100 and dislike the idea of losing $100 is not that these amounts change your wealth. You just like winning and dislike losing—and you almost certainly dislike losing more than you like winning.

When directly compared or weighted against each other, losses loom larger than gains. This asymmetry between the power of positive and negative expectations or experiences has an evolutionary history. Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce.

Prospect theory suggested that the willingness to buy or sell the bottle depends on the reference point—whether or not the professor owns the bottle now. If he owns it, he considers the pain of giving up the bottle. If he does not own it, he considers the pleasure of getting the bottle. The values were unequal because of loss aversion: giving up a bottle of nice wine is more painful than getting an equally good bottle is pleasurable.

Evidence from brain imaging confirms the difference. Selling goods that one would normally use activates regions of the brain that are associated with disgust and pain. Buying also activates these areas, but only when the prices are perceived as too high—when you feel that a seller is taking money that exceeds the exchange value. Brain recordings also indicate that buying at especially low prices is a pleasurable event.

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

The psychologist Paul Rozin, an expert on disgust, observed that a single cockroach will completely wreck the appeal of a bowl of cherries, but a cherry will do nothing at all for a bowl of cockroaches.