Thinking, Fast and Slow - Daniel Kahneman

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You can see in the display that the gamble has an expected value of 50. However, one toss is worth nothing to Sam because he feels that the pain of losing a dollar is twice as intense as the pleasure of winning a dollar. After rewriting the gamble to reflect his loss aversion, Sam will find that the value of the gamble is 0. Now consider two tosses. The chances of losing have gone down to 25%. The two extreme outcomes (lose 200 or win 400) cancel out in value; they are equally likely, and the losses are weighted twice as much as the gain. But the intermediate outcome (one loss, one gain) is positive, and so is the compound gamble as a whole. Now you can see the cost of narrow framing and the magic of aggregating gambles. Here are two favorable gambles, which individually are worth nothing to Sam. If he encounters the offer on two separate occasions, he will turn it down both times. However, if he bundles the two offers together, they are jointly worth $50! Things get even better when three gambles are bundled. The extreme outcomes still cancel out, but they have become less significant. The third toss, although worthless if evaluated on its own, has added $62.50 to the total value of the package. By the time Sam is offered five gambles, the expected value of the offer will be $250, his probability of losing anything will be 18.75%, and his cash equivalent will be $203.125. The notable aspect of this story is that Sam never wavers in his aversion to losses. However, the aggregation of favorable gambles rapidly reduces the probability of losing, and the impact of loss aversion on his preferences diminishes accordingly. Now I have a sermon ready for Sam if he rejects the offer of a single highly favorable gamble played once, and for you if you share his unreasonable aversion to losses: 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 significantly closer to economic rationality: you win a few, you lose a few. The main purpose of the mantra is to control your emotional response when you do lose. If you can trust it to be effective, you should remind yourself of it when deciding whether or not to accept a small risk with positive expected value. Remember these qualifications when using the mantra: It works when the gambles are genuinely independent of each other; it does not apply to multiple investments in the same industry, which would all go bad together. It works only when the possible loss does not cause you to worry about your total wealth. If you would take the loss as significant bad news about your economic future, watch it! It should not be applied to long shots, where the probability of winning is very small for each bet. If you have the emotional discipline that this rule requires, Bght l d for e you will never consider a small gamble in isolation or be loss averse for a small gamble until you are actually on your deathbed—and not even then. This advice is not impossible to follow. Experienced traders in financial markets live by it every day, shielding themselves from the pain of losses by broad framing. As was mentioned earlier, we now know that experimental subjects could be almost cured of their loss aversion (in a particular context) by inducing them to “think like a trader,” just as experienced baseball card traders are not as susceptible to the endowment effect as novices are. Students made risky decisions (to accept or reject gambles in which they could lose) under different instructions. In the narrow-framing condition, they were told to “make each decision as if it were the only one” and to accept their emotions. The instructions for broad framing of a decision included the phrases “imagine yourself as a trader,” “you do this all the time,” and “treat it as one of many monetary decisions, which will sum together to produce a ‘portfolio.’” The experimenters assessed the subjects’ emotional response to gains and losses by physiological measures, including changes in the electrical conductance of the skin that are used in lie
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A 1 E=mc 2 This eBook is provided b
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Contents Introduction Part I. Two S
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Part V. Two Selves 35. Two Selves 3
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So this is my aim for watercooler c
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participants in our experiments ign
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easy to identify a small change in
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From what we know about the accurac
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agents in classical economics and i
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Psychologists have been intensely i
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Brace for the starter gun in a race
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event is detected that violates the
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attention on a boring book, when we
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You have been invited to think of t
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Start beating a steady rhythm (or b
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main finding was that the ability t
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Another is the prefrontal area of t
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Accelerating beyond my strolling sp
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The list of indications of depletio
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answer have missed an obvious socia
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In one of the most famous experimen
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“Unfortunately, she tends to say
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notion that we have limited access
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Studies of priming effects have yie
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ox changed significantly. The poste
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strain is affected by both the curr
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legs in packages of four. System 2
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message want to stay away from anyt
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kadirga, saricik, biwonjni, nansoma
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These findings add to the growing e
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of circumstances, events, actions,
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understand that I mean a normal tab
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attributions: infants under one yea
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ut the middle items in both display
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Real evidence of generosity is miss
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This procedure makes good use of th
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WY SIATI to help explain a long and
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constantly evaluated as good or bad
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For another example, consider the q
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What level of income in your profes
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“The punishment won’t feel just
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How happy are you with your life th
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Figure 9 As printed on the page, is
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The results this time were complete
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“We are using last year’s perfo
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A study of the incidence of kidney
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Large samples are more precise than
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The message about the poll contains
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interviewing of the pilots should s
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“The sample of observations is to
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parent’s demand that it be played
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operation of System 1. Although I d
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Uses and Abuses of Anchors By now y
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“The firm we want to acquire sent
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A dramatic event temporarily increa
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instructed to contract the zygomati
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found it difficult to find eight in
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The most influential studies of ava
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Differences between experts and the
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actual damage to health appear not
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usiness administration computer sci
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You probably ranked computer scienc
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epresentativeness when we judge the
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laziness. Some people ignore base r
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“They keep making the same mistak
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In the language of this book, we ha
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Which alternative is more probable?
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Björn Borg was the dominant tennis
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information was laid out in front o
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85% of the cabs in the city are Gre
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Interest in cycling is widespread i
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not draw from base-rate information
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chosen another surprising psycholog
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officer in the room to turn his bac
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Now let us go against the time arro
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piano playing = age + weekly hours
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Our difficulties with the concept o
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“Perhaps his second interview was
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Intensity matching yields predictio
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their usual mission, which was to e
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A Defense of Extreme Predictions? I
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Perhaps the most valuable contribut
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Overconfidence The Illusion of Unde
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sentence about an intuition that tu
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Although hindsight and the outcome
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The basic message of Built to Last
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someone’s shoulders and jump acro
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In 1984, Amos and I and our friend
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Some years ago I had an unusual opp
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The idea that the future is unpredi
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Short-term trends can be forecast,
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unpredictability. We describe them
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the values to make them comparable
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Even after being informed that the
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only task was to elicit relevant fa
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Professional controversies bring ou
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Klein elaborated this description i
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Acquiring expertise in chess is har
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Feedback and Practice Some regulari
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It is difficult to reconstruct what
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within the optimistic consensus of
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about an individual case rarely fee
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The diagnosis of and the remedy for
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Seymour’s statistical summary. If
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The evidence suggests that an optim
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had failed. A common thread of bold
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The consequence of competition negl
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one’s self-image. In essence, the
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ut I can still recite its first sen
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most significant work we ever did,
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The expected value of the gamble an
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how the sure outcome differs from t
Page 224 and 225: for so long to see the obvious. Sti
Page 226 and 227: problem 4. Obviously, other example
Page 228 and 229: Loss Aversion Many of the options w
Page 230 and 231: Figure 10 shows an abrupt change in
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Page 234 and 235: Students learn in introductory econ
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Page 240 and 241: The fundamental ideas of prospect t
Page 242 and 243: “He is a miser, and treats any do
Page 244 and 245: Some distinctions between good and
Page 246 and 247: Many of the messages that negotiato
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Page 250 and 251: The Fourfold Pattern Whenever you f
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Page 254 and 255: Table 4 You can see that the decisi
Page 256 and 257: Figure 13 The top row in each cel
Page 258 and 259: time to cut one’s losses. This is
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Page 262 and 263: People overestimate the probabiliti
Page 264 and 265: depend only on probability, not on
Page 266 and 267: The new hypothesis is that there wi
Page 268 and 269: another: “1,000 Americans will di
Page 270 and 271: experiments on choice from experien
Page 272 and 273: combining the two decision problems
Page 276 and 277: detection. As expected, broad frami
Page 278 and 279: dollar, money is a proxy for points
Page 280 and 281: provide a strong incentive: realizi
Page 282 and 283: Regret is not the same as blame. Ot
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Page 286 and 287: with long-term consequences. Hindsi
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Page 290 and 291: “How tall is John?” If John is
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Page 294 and 295: As we have seen, rationality is gen
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Page 298 and 299: thousands of such experiments, and
Page 300 and 301: If program B is adopted, there is a
Page 302 and 303: point, and they are not about the r
Page 304 and 305: large print, but the move is in the
Page 306 and 307: The term utility has had two distin
Page 308 and 309: Figure 15 When the procedure was ov
Page 310 and 311: not have a voice. The remembering s
Page 312 and 313: Other classic studies showed that e
Page 314 and 315: we want to know whether they were r
Page 316 and 317: How would this prospect affect your
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Page 320 and 321: exposure to loud noise, time pressu
Page 322 and 323: The satiation level beyond which ex
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the exact question they were asked,
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didn’t get it were significantly
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thinks much about. Thoughts of any
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stories and makes choices, and neit
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The mirror image of the same bias m
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explains how a rational agent with
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The example of a regulation about t
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The way to block errors that origin
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For an illustration of judgment by
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The values in parentheses are the n
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The illusion of validity. As we hav
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elementary demonstration of this ef
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imagine than unlikely ones; and tha
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event. The chain-like structure of
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lines or pages. Thus, people do not
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W. Edwards, “Conservatism in Huma
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Daniel Kahneman and Amos Tversky AB
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Figure 1. A Hypothetical Value Func
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If Program B is adopted, there is a
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same cd Cce f pattern of results wa
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In Figure 2, decision weights are l
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attractive if it is described as ef
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making, play a role analogous to th
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disadvantages as losses. Because lo
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The concepts of utility and value a
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McNeil, B., S. Pauker, H. Sox Jr.,
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editor could do as much as Eric did
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Us (New York: Guilford Press, 1999)
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working memory: Baddeley, Working M
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think with your body: Paula M. Nied
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engaged and analytic mode: Adam L.
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descriptions of two people: Solomon
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“Assimilation and Contrast Effect
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self-assessed contributions: Michae
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always weighted more: Jonathan St.
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inequality of income (measured by s
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outsiders, recruiting CEOs from com
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moderated by an arbiter: Mellers, H
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admiration of others: Entrepreneurs
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“history of one’s wealth”: Ot
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half of the tokens will change hand
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“acceptable/unacceptable”: Jos
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Samuel R. Gross and Kent D. Syverud
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“a sinking feeling”: Marcel Zee
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one embarrassing finding: Kuhn famo
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life as a whole these days: Another
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Los Angeles, Graduate School of Edu
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The index that appeared in the prin
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availability; affect and; and aware
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oken-leg rule budget forecasts Buil
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cognitive illusions; confusing expe
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default options denominator neglect
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Epley, Nick Epstein, Seymour equal-
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forecasts, see predictions and fore
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grades and grade point averages (GP
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inheritances injection puzzle In Se
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labor negotiations Lady Macbeth eff
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Mednick, Sarnoff Meehl, Paul meetin
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novelty Nudge (Thaler and Sunstein)
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t="-5%"> post-traumatic stress pove
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Rationality and the Reflective Mind
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Savage, Jimmie Save More Tomorrow S
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Steiger, James H. stereotypes; caus
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threats; possibility effect and 3-D
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wealth, see money and wealth weathe
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Grateful acknowledgment is made for
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Table of Contents Introduction 1. T
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Thank You W ant More Books? W e hop
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Thinking, Fast and Slow - Daniel Kahneman

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