Thinking, Fast and Slow

„We are often confident even when we are wrong, and an objective observer is more likely to detect our errors than we are.”

„Social scientists are no exception; they rely on a view of human nature that provides the background of most discussions of specific behaviors but is rarely questioned. Social scientists in the 1970s broadly accepted two ideas about human nature. First, people are generally rational, and their thinking is normally sound. Second, emotions such as fear, affection, and hatred explain most of the occasions on which people depart from rationality.”

„luck plays a large role in every story of success”

„When the question is difficult and a skilled solution is not available, intuition still has a shot: an answer may come to mind quickly—but it is not an answer to the original question …. when faced with a difficult question, we often answer an easier one instead, usually without noticing the substitution.”

„The spontaneous search for an intuitive solution sometimes fails—neither an expert solution nor a heuristic answer comes to mind. In such cases we often find ourselves switching to a slower, more deliberate and effortful form of thinking. This is the slow thinking of the title. Fast thinking includes both variants of intuitive thought—the expert and the heuristic— as well as the entirely automatic mental activities of perception and memory, the operations that enable you to know there is a lamp on your desk or retrieve the name of the capital of Russia.”

„System 1 operates automatically and quickly, with little or no effort and no sense of voluntary control.System 2 allocates attention to the effortful mental activities that demand it, including complex computations. The operations of System 2 are often associated with the subjective experience of agency, choice, and concentration.”

„System 2 has some ability to change the way System 1 works, by programming the normally automatic functions of attention and memory.”

„Why is it so difficult for us to think statistically? We easily think associatively, we think metaphorically, we think causally, but statistics requires thinking about many things at once, which is something that System 1 is not designed to do.”

„Limitation of our mind: our excessive confidence in what we believe we know, and our apparent inability to acknowledge the full extent of our ignorance and the uncertainty of the world we live in. We are prone to overestimate how much we understand about the world and to underestimate the role of chance in events. Overconfidence is fed by the illusory certainty of hindsight.”

„the distinction between two selves, the experiencing self and the remembering self, which do not have the same interests.”

„you dispose of a limited budget of attention that you can allocate to activities, and if you try to go beyond your budget, you will fail.”

„The gorilla study illustrates two important facts about our minds: we can be blind to the obvious, and we are also blind to our blindness.”

„You generally believe your impressions and act on your desires”

„Conflict between an automatic reaction and an intention to control it is common in our lives.”

„the sympathy we would feel for the patient would not be under our control;”

„Because System 1 operates automatically and cannot be turned off at will, errors of intuitive thought are often difficult to prevent. Biases cannot always be avoided, because System 2 may have no clue to the error. Even when cues to likely errors are available, errors can be prevented only by the enhanced monitoring and effortful activity if System 2”

„learn to recognize situations in which mistakes are likely and try harder to avoid significant mistakes when the stakes are high.”

„it is easier to recognize other people’s mistakes than our own.”

„The mind—especially System 1—appears to have a special aptitude for the construction and interpretation of stories about active agents, who have personalities, habits, and abilities. You quickly formed a bad opinion of the thieving butler, you expect more bad behavior from him, and you will remember him for a while.”

„Eckhard Hess described the pupil of the eye as a window to the soul … He had noticed that the pupils are sensitive indicators of mental effort—they dilate substantially when people multiply two-digit numbers, and they dilate more if the problems are hard than if they are easy. His observations indicated that the response to mental effort is distinct from emotional arousal.”

„the most demanding that I ever observed. In the first 5 seconds, the pupil dilates by about 50% of its original area and heart rate increases by about 7 beats per minute.”

„Orienting and responding quickly to the gravest threats or most promising opportunities improved the chance of survival, and this capability is certainly not restricted to humans. Even in modern humans, System 1 takes over in emergencies and assigns total priority to self- protective actions.”

„As you become skilled in a task, its demand for energy diminishes. Studies of the brain have shown that the pattern of activity associated with an action changes as skill increases, with fewer brain regions involved.”

„A general “law of least effort”

„System 2 is the only one that can follow rules, compare objects on several attributes, and make deliberate choices between options … System 1 detects simple relations (“they are all alike,”

„the son is much taller than the father”

„One of the significant discoveries of cognitive psychologists in recent decades is that switching from one task to another is effortful, especially under time pressure.”

„We cover long distances by taking our time and conduct our mental lives by the law of least effort.”

„Several psychological studies have shown that people who are simultaneously challenged by a demanding cognitive task and by a temptation are more likely to yield to the temptation.”

„System 1 has more influence on behavior when System 2 is busy, and it has a sweet tooth. People who are cognitively busy are also more likely to make selfish choices, use sexist language, and make superficial judgments in social situations.”

„One of the main functions of System 2 is to monitor and control thoughts and actions “suggested”

„many people are overconfident, prone to place too much faith in their intuitions.”

„When people believe a conclusion is true, they are also very likely to believe arguments that appear to support it, even when these arguments are unsound.”

„Intelligence is not only the ability to reason; it is also the ability to find relevant material in memory and to deploy attention when needed.”

„System 1 is impulsive and intuitive; System 2 is capable of reasoning, and it is cautious, but at least for some people it is also lazy.”

„rationality should be distinguished from intelligence.”

„cognition is embodied; you think with your body, not only with your brain.”

„you know far less about yourself than you feel you do.”

„Another major advance in our understanding of memory was the discovery that priming is not restricted to concepts and words. You cannot know this from conscious experience, of course, but you must accept the alien idea that your actions and your emotions can be primed by events of which you are not even aware.”

„Evidently, a purely symbolic reminder of being watched prodded people into improved behavior.”

„System 1 provides the impressions that often turn into your beliefs, and is the source of the impulses that often become your choices and your actions.”

„His System 1 constructed a story, and his System 2 believed it. It happens to all of us.”

„A reliable way to make people believe in falsehoods is frequent repetition, because familiarity is not easily distinguished from truth.”

„If you cannot remember the source of a statement, and have no way to relate it to other things you know, you have no option but to go with the sense of cognitive ease.”

„The general principle is that anything you can do to reduce cognitive strain will help, so you should first maximize legibility.”

„More advice: if your message is to be printed, use high-quality paper to maximize the contrast between characters and their background. If you use color, you are more likely to be believed if your text is printed in bright blue or red than in middling shades of green, yellow, or pale blue.”

„If you care about being thought credible and intelligent, do not use complex language where simpler language will do.”

„Finally, if you quote a source, choose one with a name that is easy to pronounce.”

„Companies with pronounceable names do better than others for the first week after the stock is issued, though the effect disappears over time. Stocks with pronounceable trading symbols (like KAR or LUNMOO) outperform those with tongue-twisting tickers like PXG or RDO—and they appear to retain a small advantage over some time. A study conducted in Switzerland found that investors believe that stocks with fluent names like Emmi, Swissfirst, and Comet will earn higher returns than those with clunky labels like Geberit and Ypsomed.”

„The mere exposure effect does not depend on the conscious experience of familiarity. In fact, the effect does not depend on consciousness at all: it occurs even when the repeated words or pictures are shown so quickly that the observers never become aware of having seen them. They still end up liking the words or pictures that were presented more frequently.”

„System 1 can respond to impressions of events of which System 2 is unaware.”

„Zajonc argued that the effect of repetition on liking is a profoundly important biological fact, and that it extends to all animals.”

„To survive in a frequently dangerous world, an organism should react cautiously to a novel stimulus, with withdrawal and fear.”

„Mood evidently affects the operation of System 1: when we are uncomfortable and unhappy, we lose touch with our intuition. These findings add to the growing evidence that good mood, intuition, creativity, gullibility, and increased reliance on System 1 form a cluster. At the other pole, sadness, vigilance, suspicion, an analytic approach, and increased effort also go together. A happy mood loosens the control of System 2 over performance: when in a good mood, people become more intuitive and more creative but also less vigilant and more prone to logical errors.”

„Cognitive ease and smiling occur together, but do the good feelings actually lead to intuitions of coherence? Yes, they do.”

„a statement that can explain two contradictory outcomes explains nothing at all.”

„a large event is supposed to have consequences, and consequences need causes to explain them. We have limited information about what happened on a day, and System 1 is adept at finding a coherent causal story that links the fragments of knowledge at its disposal.”

„Your mind is ready and even eager to identify agents, assign them personality traits and specific intentions, and view their actions as expressing individual propensities.”

„“She can’t accept that she was just unlucky; she needs a causal story. She will end up thinking that someone intentionally sabotaged her work.”

„Jumping to conclusions is efficient if the conclusions are likely to be correct and the costs of an occasional mistake acceptable, and if the jump saves much time and effort.”

„Jumping to conclusions is risky when the situation is unfamiliar, the stakes are high, and there is no time to collect more information.”

„When uncertain, System 1 bets on an answer, and the bets are guided by experience. The rules of the betting are intelligent: recent events and the current context have the most weight in determining an interpretation. When no recent event comes to mind, more distant memories govern.”

„System 1 does not keep track of alternatives that it rejects, or even of the fact that there were alternatives.”

„when System 2 is otherwise engaged, we will believe almost anything. System 1 is gullible and biased to believe, System 2 is in charge of doubting and unbelieving, but System 2 is sometimes busy, and often lazy.”

„there is evidence that people are more likely to be influenced by empty persuasive messages, such as commercials, when they are tired and depleted.”

„evidence accumulates gradually and the interpretation is shaped by the emotion attached to the first impression.”

„The sequence in which we observe characteristics of a person is often determined by chance. Sequence matters, however, because the halo effect increases the weight of first impressions, sometimes to the point that subsequent information is mostly wasted.”

„Allowing the observers to influence each other effectively reduces the size of the sample, and with it the precision of the group estimate. To derive the most useful information from multiple sources of evidence, you should always try to make these sources independent of each other.”

„The principle of independent judgments (and decorrelated errors) has immediate applications for the conduct of meetings, an activity in which executives in organizations spend a great deal of their working days. A simple rule can help: before an issue is discussed, all members of the committee should be asked to write a very brief summary of their position. This procedure makes good use of the value of the diversity of knowledge and opinion in the group. The standard practice of open discussion gives too much weight to the opinions of those who speak early and assertively, causing others to line up behind them.”

„The confidence that individuals have in their beliefs depends mostly on the quality of the story they can tell about what they see, even if they see little. We often fail to allow for the possibility that evidence that should be critical to our judgment is missing—what we see is all there is.”

„The equivalence of the alternative formulations is transparent, but an individual normally sees only one formulation, and what she sees is all there is.”

„System 1 has been shaped by evolution to provide a continuous assessment of the main problems that an organism must solve to survive: How are things going? Is there a threat or a major opportunity? Is everything normal? Should I approach or avoid?”

„Todorov has found that people judge competence by combining the two dimensions of strength and trustworthiness. The faces that exude competence combine a strong chin with a slight confident-appearing smile. There is no evidence that these facial features actually predict how well politicians will perform in office.”

„System 1 represents categories by a prototype or a set of typical exemplars, it deals well with averages but poorly with sums.”

„Whenever your eyes are open, your brain computes a three-dimensional representation of what is in your field of vision, complete with the shape of objects, their position in space, and their identity.”

„The normal state of your mind is that you have intuitive feelings and opinions about almost everything that comes your way. You like or dislike people long before you know much about them; you trust or distrust strangers without knowing why; you feel that an enterprise is bound to succeed without analyzing it. Whether you state them or not, you often have answers to questions that you do not completely understand, relying on evidence that you can neither explain nor defend.”

„The technical definition of heuristic is a simple procedure that helps find adequate, though often imperfect, answers to difficult questions. The word comes from the same root as eureka.”

„“If you can’t solve a problem, then there is an easier problem you can solve: find it.”

„System 2 has the opportunity to reject this intuitive answer, or to modify it by incorporating other information. However, a lazy System 2 often follows the path of least effort and endorses a heuristic answer without much scrutiny of whether it is truly appropriate.”

„The present state of mind looms very large when people evaluate their happiness. The dominance of conclusions over arguments is most pronounced where emotions are involved.”

„System 2 is more of an apologist for the emotions of System 1 than a critic of those emotions—an endorser rather than an enforcer.”

„“Do we still remember the question we are trying to answer? Or have we substituted an easier one?”

„“He likes the project, so he thinks its costs are low and its benefits are high. Nice example of the affect heuristic.”

„Using a sufficiently large sample is the only way to reduce the risk. Researchers who pick too small a sample leave themselves at the mercy of sampling luck.”

„sustaining doubt is harder work than sliding into certainty”

„we are prone to exaggerate the consistency and coherence of what we see.”

„“To the untrained eye,”

„randomness appears as regularity or tendency to cluster.”

„We are far too willing to reject the belief that much of what we see in life is random.”

„The exaggerated faith in small samples is only one example of a more general illusion—we pay more attention to the content of messages than to information about their reliability, and as a result end up with a view of the world around us that is simpler and more coherent than the data justify. Jumping to conclusions is a safer sport in the world of our imagination than it is in reality.”

„Statistics produce many observations that appear to beg for causal explanations but do not lend themselves to such explanations. Many facts of the world are due to chance, including accidents of sampling. Causal explanations of chance events are inevitably wrong.”

„“I plan to keep the results of the experiment secret until we have a sufficiently large sample. Otherwise we will face pressure to reach a conclusion prematurely.”

„You know immediately that George Washington became president after 1776, and became president after 1776, and you also know that the boiling temperature of water at the top of Mount Everest is lower than 100°C. You have to adjust in the appropriate direction by finding arguments to move away from the anchor.”

„suggestion is a priming effect, which selectively evokes compatible evidence. …… System 1 tries its best to construct a world in which the anchor is the true number.”

„However, a key finding of anchoring research is that anchors that are obviously random can be just as effective as potentially informative anchors.”

„My advice to students when I taught negotiations was that if you think the other side has made an outrageous proposal, you should not come back with an equally outrageous counteroffer, creating a gap that will be difficult to bridge in further negotiations. Instead you should make a scene, storm out or threaten to do so, and make it clear—to yourself as well as to the other side— that you will not continue the negotiation with that number on the table.”

„The psychologists Adam Galinsky and Thomas Mussweiler proposed more subtle ways to resist the anchoring effect in negotiations. They instructed negotiators to focus their attention and search their memory for arguments against the anchor. The instruction to activate System 2 was successful. For example, the anchoring effect is reduced or eliminated when the second mover focuses his attention on the minimal offer that the opponent would accept, or on the costs to the opponent of failing to reach an agreement.”

„Anchoring effects have always been studied in tasks of judgment and choice that are ultimately completed by System 2. However, System 2 works on data that is retrieved from memory, in an automatic and involuntary operation of System 1. System 2 is therefore susceptible to the biasing influence of anchors that make some information easier to retrieve. Furthermore, System 2 has no control over the effect and no knowledge of it.”

„When you read a story about the heroic rescue of a wounded mountain climber, its effect on your associative memory is much the same if it is a news report or the synopsis of a film. Anchoring results from this associative activation. Whether the story is true, or believable, matters little, if at all. The powerful effect of random anchors is an extreme case of this phenomenon, because a random anchor obviously provides no information at all.”

„“The firm we want to acquire sent us their business plan, with the revenue they expect. We shouldn’t let that number influence our thinking. Set it aside.”

„“Plans are best-case scenarios. Let’s avoid anchoring on plans when we forecast actual outcomes. Thinking about ways the plan could go wrong is one way to do it.”

„“Our aim in the negotiation is to get them anchored on this number.”

„“Let’s make it clear that if that is their proposal, the negotiations are over. We do not want to start there.”

„“The defendant’s lawyers put in a frivolous reference in which they mentioned a ridiculously low amount of damages, and they got the judge anchored on it!”

„Maintaining one’s vigilance against biases is a chore—but the chance to avoid a costly mistake is sometimes worth the effort.”

„The explanation is a simple availability bias: both spouses remember their own individual efforts and contributions much more clearly than those of the other, and the difference in availability leads to a difference in judged frequency.”

„tensions often arise when several people at once feel that their efforts are not adequately recognized.”

„You will occasionally do more than your share, but it is useful to know that you are likely to have that feeling even when each member of the team feels the same way.”

„If you cannot easily come up with instances of meek behavior, you are likely to conclude that you are not meek at all.”

„Among the basic features of System 1 is its ability to set expectations and to be surprised when these expectations are violated. The system also retrieves possible causes of a surprise, usually by finding a possible cause among recent surprises. Furthermore, System 2 can reset the expectations of System 1 on the fly, so that an event that would normally be surprising is now almost normal. Suppose you are told that the three-year-old boy who lives next door frequently wears a top hat in his stroller. You will be far less surprised when you actually see him with his top hat than you would have been without the warning. In Schwarz’s experiment, the back ground music has been mentioned as a possible cause of retrieval problems. The difficulty of retrieving twelve instances is no longer a surprise and therefore is less likely to be evoked by the task of judging assertiveness.”

„The conclusion is that the ease with which instances come to mind is a System 1 heuristic, which is replaced by a focus on content when System 2 is more engaged. Multiple lines of evidence converge on the conclusion that people who let themselves be guided by System 1 are more strongly susceptible to availability biases than others who are in a state of higher vigilance. The following are some conditions in which people “go with the flow”

„“Because of the coincidence of two planes crashing last month, she now prefers to take the train. That’s silly. The risk hasn’t really changed; it is an availability bias.”

„“He underestimates the risks of indoor pollution because there are few media stories on them. That’s an availability effect. He should look at the statistics.”

„“She has been watching too many spy movies recently, so she’s seeing conspiracies everywhere.”

„“The CEO has had several successes in a row, so failure doesn’t come easily to her mind. The availability bias is making her overconfident.”

„Images of a worse disaster do not come easily to mind.”

„The media do not just shape what the public is interested in, but also are shaped by it.”

„The world in our heads is not a precise replica of reality; our expectations about the frequency of events are distorted by the prevalence and emotional intensity of the messages to which we are exposed.”

„In many domains of life, Slovic said, people form opinions and make choices that directly express their feelings and their basic tendency to approach or avoid, often without knowing that they are doing so.”

„Damasio and his colleagues have observed that people who do not display the appropriate emotions before they decide, sometimes because of brain damage, also have an impaired ability to make good decisions.”

„When people were favorably disposed toward a technology, they rated it as offering large benefits and imposing little risk; when they disliked a technology, they could think only of its disadvantages, and few advantages came to mind.”

„The affect heuristic simplifies our lives by creating a world that is much tidier than reality. Good technologies have few costs in the imaginary world we inhabit, bad technologies have no benefits, and all decisions are easy. In the real world, of course, we often face painful tradeoffs between benefits and costs.”

„out there,”

„real risk”

„objective risk.”

„a basic limitation in the ability of our mind to deal with small risks: we either ignore them altogether or give them far too much weight—nothing in between.”

„To decide whether a marble is more likely to be red or green, you need to know how many marbles of each color there are in the urn. The proportion of marbles of a particular kind is called a base rate.”

„There is one thing you can do when you have doubts about the quality of the evidence: let your judgments of probability stay close to the base rate.”

„To be useful, your beliefs should be constrained by the logic of probability. So if you believe that there is a 40% chance that it will rain sometime tomorrow, you must also believe that there is a 60% chance it will not rain tomorrow, and you must not believe that there is a 50% chance that it will rain tomorrow morning. And if you believe that there is a 30% chance that candidate X will be elected president, and an 80% chance that he will be reelected if he wins the first time, then you must believe that the chances that he will be elected twice in a row are 24%.”

„Bayes’s rule specifies how prior beliefs (in the examples of this chapter, base rates) should be combined with the diagnosticity of the evidence, the degree to which it favors the hypothesis over the alternative. For example, if you believe that 3% of graduate students are enrolled in computer science (the base rate), and you also believe that the description of Tom W is 4 times more likely for a graduate student in that field than in other fields, then Bayes’s rule says you must believe that the probability that Tom W is a computer scientist is now 11%. If the base rate had been 80%, the new degree of belief would be 94.1%. And so on.”

„The essential keys to disciplined Bayesian reasoning can be simply summarized: – Anchor your judgment of the probability of an outcome on a plausible base rate. – Question the diagnosticity of your evidence.”

„“The lawn is well trimmed, the receptionist looks competent, and the furniture is attractive, but this doesn’t mean it is a well-managed company. I hope the board does not go by representativeness.”

„“This start-up looks as if it could not fail, but the base rate of success in the industry is extremely low. How do we know this case is different?”

„“They keep making the same mistake: predicting rare events from weak evidence. When the evidence is weak, one should stick with the base rates.”

„“I know this report is absolutely damning, and it may be based on solid evidence, but how sure are we? We must allow for that uncertainty in our thinking.”

„The set of feminist bank tellers is wholly included in the set of bank tellers, as every feminist bank teller is a bank teller. Therefore the probability that Linda is a feminist bank teller must be lower than the probability of her being a bank teller. When you specify a possible event in greater detail you can only lower its probability.”

„The most coherent stories are not necessarily the most probable, but they are plausible, and the notions of coherence, plausibility, and probability are easily confused by the unwary.”

„The California earthquake scenario is more plausible than the North America scenario, although its probability is certainly smaller. As expected, probability judgments were higher for the richer and more detailed scenario, contrary to logic. This is a trap for forecasters and their clients: adding detail to scenarios makes them more persuasive, but less likely to come true.”

„The Linda problem and the dinnerware problem have exactly the same structure. Probability, like economic value, is a sum-like variable, as illustrated by this example: probability (Linda is a teller) = probability (Linda is feminist teller) + probability (Linda is non-feminist teller)”

„If you visit a courtroom you will observe that lawyers apply two styles of criticism: to demolish a case they raise doubts about the strongest arguments that favor it; to discredit a witness, they focus on the weakest part of the testimony.”

„“They constructed a very complicated scenario and insisted on calling it highly probable. It is not—it is only a plausible story.”

„“They added a cheap gift to the expensive product, and made the whole deal less attractive. Less is more in this case.”

„System 1 can deal with stories in which the elements are causally linked, but it is weak in statistical reasoning.”

„individuals feel relieved of responsibility when they know that others have heard the same request for help.”

„Changing one’s mind about human nature is hard work, and changing one’s mind for the worse about oneself is even harder.”

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

„“We can’t assume that they will really learn anything from mere statistics. Let’s show them one or two representative individual cases to influence their System 1.”

„important principle of skill training: rewards for improved performance work better than punishment of mistakes.”

„poor performance was typically followed by improvement and good performance by deterioration, without any help from either praise or punishment.”

„Because we tend to be nice to other people when they please us and nasty when they do not, we are statistically punished for being nice and rewarded for being nasty.”

„success = talent + luck great success = a little more talent + a lot of luck”

„Since you have no way of predicting the golfers’ luck on the second (or any) day, your best guess must be that it will be average, neither good nor bad. This means that in the absence of any other information, your best guess about the players’ score on day 2 should not be a repeat of their performance on day 1.”

„The more extreme the original score, the more regression we expect, because an extremely good score suggests a very lucky day.”

„This is why the pattern is called regression to the mean. “ - “The regressive prediction is reasonable, but its accuracy is not guaranteed.”

„A few of the golfers who scored 66 on day 1 will do even better on the second day, if their luck improves. Most will do worse, because their luck will no longer be above average.”

„The fact that you observe regression when you predict an early event from a later event should help convince you that regression does not have a causal explanation. Regression effects are ubiquitous, and so are misguided causal stories to explain them.”

„Overconfidence and the pressure of meeting high expectations are often offered as explanations. But there is a simpler account of the jinx: an athlete who gets to be on the cover of Sports Illustrated must have performed exceptionally well in the preceding season, probably with the assistance of a nudge from luck—and luck is fickle.”

„The story itself could even be true. Perhaps if we measured the athletes’ pulse before each jump we might find that they are indeed more relaxed after a bad first jump. And perhaps not. The point to remember is that the change from the first to the second jump does not need a causal explanation. It is a mathematically inevitable consequence of the fact that luck played a role in the outcome of the first jump.”

„The correlation coefficient between two measures, which varies between 0 and 1, is a measure of the relative weight of the factors they share. For example, we all share half our genes with each of our parents, and for traits in which environmental factors have relatively little influence, such as height, the correlation between parent and child is not far from .50.”

„correlation and regression are not two concepts—they are different perspectives on the same concept. The general rule is straightforward but has surprising consequences: whenever the correlation between two scores is imperfect, there will be regression to the mean.”

„…our mind is strongly biased toward causal explanations and does not deal well with “mere statistics.”

„Indeed, we pay people quite well to provide interesting explanations of regression effects. A business commentator who correctly announces that “the business did better this year because it had done poorly last year”

„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.”

„if you treated a group of depressed children for some time with an energy drink, they would show a clinically significant improvement. It is also the case that depressed children who spend some time standing on their head or hug a cat for twenty minutes a day will also show improvement. Most readers of such headlines will automatically infer that the energy drink or the cat hugging caused an improvement, but this conclusion is completely unjustified. Depressed children are an extreme group, they are more depressed than most other children—and extreme groups regress to the mean over time. The correlation between depression scores on successive occasions of testing is less than perfect, so there will be regression to the mean: depressed children will get somewhat better over time even if they hug no cats and drink no Red Bull. In order to conclude that an energy drink—or any other treatment—is effective, you must compare a group of patients who receive this treatment to a “control group”

„“She says experience has taught her that criticism is more effective than praise. What she doesn’t understand is that it’s all due to regression to the mean.”

„“Perhaps his second interview was less impressive than the first because he was afraid of disappointing us, but more likely it was his first that was unusually good.”

„“Our screening procedure is good but not perfect, so we should anticipate regression. We shouldn’t be surprised that the very best candidates often fail to meet our expectations.”

„Some predictive judgments, such as those made by engineers, rely largely on look-up tables, precise calculations, and explicit analyses of outcomes observed on similar occasions. Others involve intuition and System 1, in two main varieties. Some intuitions draw primarily on skill and expertise acquired by repeated experience. The rapid and automatic judgments and choices of chess masters, fireground commanders, and physicians that Gary Klein has described in Sources of Power and elsewhere illustrate these skilled intuitions, in which a solution to the current problem comes to mind quickly because familiar cues are recognized. Other intuitions, which are sometimes subjectively indistinguishable from the first, arise from the operation of heuristics that often substitute an easy question for the harder one that was asked. Intuitive judgments can be made with high confidence even when they are based on nonregressive assessments of weak evidence. Of course, many judgments, especially in the professional domain, are influenced by a combination of analysis and intuition.”

„Extreme predictions and a willingness to predict rare events from weak evidence are both manifestations of System 1.”

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

„“Our intuitive prediction is very favorable, but it is probably too high. Let’s take into account the strength of our evidence and regress the prediction toward the mean.”

„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.”

„Taleb suggests that we humans constantly fool ourselves by constructing flimsy accounts of the past and believing they are true.”

„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.”

„To think clearly about the future, we need to clean up the language that we use in labeling the beliefs we had in the past.”

„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. “ … “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.”

„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.”

„The worse the consequence, the greater the hindsight bias.”

„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. We all have a need for the reassuring message that actions have appropriate consequences, and that success will reward wisdom and courage”

„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.”

„Because of the halo effect, we get the causal relationship backward: we are prone to believe that the firm fails because its CEO is rigid, when the truth is that the CEO appears to be rigid because the firm is failing. This is how illusions of understanding are born.”

„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.”

„“The mistake appears obvious, but it is just hindsight. You could not have known in advance.”

„“He’s learning too much from this success story, which is too tidy. He has fallen for a narrative fallacy.”

„“She has no evidence for saying that the firm is badly managed. All she knows is that its stock has gone down. This is an outcome bias, part hindsight and part halo effect.”

„“Let’s not fall for the outcome bias. This was a stupid decision even though it worked out well.”

„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.”

„Most of the buyers and sellers know that they have the same information; they exchange the stocks primarily because they have different opinions. The buyers think the price is too low and likely to rise, while the sellers think the price is high and likely to drop.”

„If some people believe that the price of a stock will be higher tomorrow, they will buy more of it today. This, in turn, will cause its price to rise.”

„On average, the shares that individual traders sold did better than those they bought, by a very substantial margin: 3.2 percentage points per year, above and beyond the significant costs of executing the two trades.”

„Individual investors like to lock in their gains by selling “winners,”

„the evidence from more than fifty years of research is conclusive: for a large majority of fund managers, the selection of stocks is more like rolling dice than like playing poker. Typically at least two out of every three mutual funds underperform the overall market in any given year.”

„The subjective experience of traders is that they are making sensible educated guesses in a situation of great uncertainty. In highly efficient markets, however, educated guesses are no more accurate than blind guesses.”

„Why do investors, both amateur and professional, stubbornly believe that they can do better than the market, contrary to an economic theory that most of them accept, and contrary to what they could learn from a dispassionate evaluation of their personal experience? Many of the themes of previous chapters come up again in the explanation of the prevalence and persistence of an illusion of skill in the financial world. The most potent psychological cause of the illusion is certainly that the people who pick stocks are exercising high-level skills. They consult economic data and forecasts, they examine income statements and balance sheets, they evaluate the quality of top management, and they assess the competition. All this is serious work that requires extensive training, and the people who do it have the immediate (and valid) experience of using these skills. Unfortunately, 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. As Nassim Taleb pointed out in The Black Swan, 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.”

„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”

„Hedgehogs (fragili) “know one big thing”

„foxes (antifragili) recognize that reality emerges from the interactions of many different agents and forces, including blind luck, often producing large and unpredictable outcomes.”

„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).”

„Short-term trends can be forecast, and behavior and achievements can be predicted with fair accuracy from previous behaviors and achievements. But we should not expect performance in officer training and in combat to be predictable from behavior on an obstacle field—behavior both on the test and in the real world is determined by many factors that are specific to the particular situation.”

„You should expect little or nothing from Wall Street stock pickers who hope to be more accurate than the market in predicting the future of prices. And you should not expect much from pundits making long-term forecasts—although they may have valuable insights into the near future. The line that separates the possibly predictable future from the unpredictable distant future is yet to be drawn.”

„“He knows that the record indicates that the development of this illness is mostly unpredictable. How can he be so confident in this case? Sounds like an illusion of validity.”

„“She has a coherent story that explains all she knows, and the coherence makes her feel good.”

„“What makes him believe that he is smarter than the market? Is this an illusion of skill?”

„“She is a hedgehog. She has a theory that explains everything, and it gives her the illusion that she understands the world.”

„“The question is not whether these experts are well trained. It is whether their world is predictable.”

„Why are experts inferior to algorithms? One reason, which Meehl suspected, is that 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.”

„Another reason for the inferiority of expert judgment is that humans are incorrigibly inconsistent in making summary judgments of complex information. When asked to evaluate the same information twice, they frequently give different answers.”

„Because you have little direct knowledge of what goes on in your mind, you will never know that you might have made a different judgment or reached a different decision under very slightly different circumstances.”

„The research suggests a surprising conclusion: to maximize predictive accuracy, final decisions should be left to formulas, especially in low-validity environments.”

„conducting an interview is likely to diminish the accuracy of a selection procedure, if the interviewers also make the final admission decisions. Because interviewers are overconfident in their intuitions, they will assign too much weight to their personal impressions and too little weight to other sources of information, lowering validity.”

„formulas that assign equal weights to all the predictors are often superior, because they are not affected by accidents of sampling. The surprising success of equal-weighting schemes has an important practical implication: it is possible to develop useful algorithms without any prior statistical research. Simple equally weighted formulas based on existing statistics or on common sense are often very good predictors of significant outcomes.”

„Apgar jotted down five variables (heart rate, respiration, reflex, muscle tone, and color) and three scores (0, 1, or 2, depending on the robustness of each sign).”

„The prejudice against algorithms is magnified when the decisions are consequential.”

„it is unethical to rely on intuitive judgments for important decisions if an algorithm is available that will make fewer mistakes.”

„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.”

„do not simply trust intuitive judgment—your own or that of others—but do not dismiss it, either.”

„Suppose that you need to hire a sales representative for your firm. If you are serious about hiring the best possible person for the job, this is what you should do. First, select a few traits that are prerequisites for success in this position (technical proficiency, engaging personality, reliability, and so on). Don’t overdo it—six dimensions is a good number. The traits you choose should be as independent as possible from each other, and you should feel that you can assess them reliably by asking a few factual questions. Next, make a list of those questions for each trait and think about how you will score it, say on a 1– 5 scale. You should have an idea of what you will call “very weak”

„very strong.”

„close your eyes.”

„I looked into his eyes and liked what I saw.”

„“Whenever we can replace human judgment by a formula, we should at least consider it.”

„“He thinks his judgments are complex and subtle, but a simple combination of scores could probably do better.”

„““Let’s decide in advance what weight to give to the data we have on the candidates’ past performance. Otherwise we will give too much weight to our impression from the interviews.”

„“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.”

„The moral of Simon’s remark is that the mystery of knowing without knowing is not a distinctive feature of intuition; it is the norm of mental life.”

„All of us tense up when we approach a spot in which an unpleasant event occurred, even when there is no reason to expect it to happen again.”

„Emotional learning may be quick, but what we consider as “expertise”

„We are confident when the story we tell ourselves comes easily to mind, with no contradiction and no competing scenario. But ease and coherence do not guarantee that a belief held with confidence is true. 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 WYSIATI 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. Klein and I eventually agreed on an important principle: 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.”

„The answer comes from the two basic conditions for acquiring a skill: – an environment that is sufficiently regular to be predictable – an opportunity to learn these regularities through prolonged practice When both these conditions are satisfied, intuitions are likely to be skilled.”

„If a strong predictive cue exists, human observers will find it, given a decent opportunity to do so. 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. It is wrong to blame anyone for failing to forecast accurately in an unpredictable world. However, it seems fair to blame professionals for believing they can succeed in an impossible task. Claims for correct intuitions in an unpredictable situation are self-delusional at best, sometimes worse. In the absence of valid cues, intuitive “hits”

„Whether professionals have a chance to develop intuitive expertise depends essentially on the quality and speed of feedback, as well as on sufficient opportunity to practice. Expertise is not a single skill; it is a collection of skills, and the same professional may be highly expert in some of the tasks in her domain while remaining a novice in others.”

„An experienced psychotherapist knows that she is skilled in working out what is going on in her patient’s mind and that she has good intuitions about what the patient will say next. It is tempting for her to conclude that she can also anticipate how well the patient will do next year, but this conclusion is not equally justified. Short-term anticipation and long-term forecasting are different tasks, and the therapist has had adequate opportunity to learn one but not the other. Similarly, a financial expert may have skills in many aspects of his trade but not in picking stocks, and an expert in the Middle East knows many things but not the future. The clinical psychologist, the stock picker, and the pundit do have intuitive skills in some of their tasks, but they have not learned to identify the situations and the tasks in which intuition will betray them. 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 decisions. You can trust someone’s intuitions if these conditions are met. Unfortunately, associative memory also generates subjectively compelling intuitions that are false. Anyone who has watched the chess progress of a talented youngster knows well that skill does not become perfect all at once, and that on the way to near perfection some mistakes are made with great confidence. When evaluating expert intuition you should always consider whether there was an adequate opportunity to learn the cues, even in a regular environment. In a less regular, or low-validity, environment, the heuristics of judgment are invoked. System 1 is often able to produce quick answers to difficult questions by substitution, creating coherence where there is none.”

„judgments that answer the wrong question can also be made with high confidence.”

„It is difficult to reconstruct what it was that took us years, long hours of discussion, endless exchanges of drafts and hundreds of e-mails negotiating over words, and more than once almost giving up. But this is what always happens when a project ends reasonably well: once you understand the main conclusion, it seems it was always obvious.”

„“Does he really believe that the environment of start-ups is sufficiently regular to justify an intuition that goes against the base rates?”

„“She is very confident in her decision, but subjective confidence is a poor index of the accuracy of a judgment.”

„“Did he really have an opportunity to learn? How quick and how clear was the feedback he received on his judgments?”

„the baseline prediction should be the anchor for further adjustments. If you are asked to guess the height of a woman about whom you know only that she lives in New York City, your baseline prediction is your best guess of the average height of women in the city. If you are now given case-specific information, for example that the woman’s son is the starting center of his high school basketball team, you will adjust your estimate away from the mean in the appropriate direction.”

„The prevalent tendency to underweight or ignore distributional information is perhaps the major source of error in forecasting. Planners should therefore make every effort to frame the forecasting problem so as to facilitate utilizing all the distributional information that is available.”

„The forecasting method that Flyvbjerg applies is similar to the practices recommended for overcoming base-rate neglect: – Identify an appropriate reference class (kitchen renovations, large railway projects, etc.). – Obtain the statistics of the reference class (in terms of cost per mile of railway, or of the percentage by which expenditures exceeded budget). Use the statistics to generate a baseline prediction. – Use specific information about the case to adjust the baseline prediction, if there are particular reasons to expect the optimistic bias to be more or less pronounced in this project than in others of the same type.”

„“He’s taking an inside view. He should forget about his own case and look for what happened in other cases.”

„“She is the victim of a planning fallacy. She’s assuming a best-case scenario, but there are too many different ways for the plan to fail, and she cannot foresee them all.”

„“Suppose you did not know a thing about this particular legal case, only that it involves a malpractice claim by an individual against a surgeon. What would be your baseline prediction? How many of these cases succeed in court? How many settle? What are the amounts? Is the case we are discussing stronger or weaker than similar claims?”

„“We are making an additional investment because we do not want to admit failure. This is an instance of the sunk-cost fallacy.”

„Of course, the blessings of optimism are offered only to individuals who are only mildly biased and who are able to “accentuate the positive”

„Overconfidence is another manifestation of WYSIATI: when we estimate a quantity, we rely on information that comes to mind and construct a coherent story in which the estimate makes sense.”

„As Nassim Taleb has argued, inadequate appreciation of the uncertainty of the environment inevitably leads economic agents to take risks they should avoid. However, optimism is highly valued, socially and in the market; people and firms reward the providers of dangerously misleading information more than they reward truth tellers.”

„“Generally, it is considered a weakness and a sign of vulnerability for clinicians to appear unsure. Confidence is valued over uncertainty and there is a prevailing censure against disclosing uncertainty to patients.”

„Experts who acknowledge the full extent of their ignorance may expect to be replaced by more confident competitors, who are better able to gain the trust of clients. 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.”

„The effects of high optimism on decision making are, at best, a mixed blessing, but the contribution of optimism to good implementation is certainly positive. The main benefit of optimism is resilience in the face of setbacks.”

„In essence, the optimistic style involves taking credit for successes but little blame for failures.”

„When one has just had a door slammed in one’s face by an angry homemaker, the thought that “she was an awful woman”

„I am an inept salesperson.”

„I have yet to meet a successful scientist who lacks the ability to exaggerate the importance of what he or she is doing, and I believe that someone who lacks a delusional sense of significance will wilt in the face of repeated experiences of multiple small failures and rare successes, the fate of most researchers.”

„However, overconfidence is a direct consequence of features of System 1 that can be tamed—but not vanquished. The main obstacle is that 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.”

„Organizations may be better able to tame optimism and individuals than individuals are. The best idea for doing so was contributed by Gary Klein, my “adversarial collaborator”

„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.”

„The premortem has two main advantages: it overcomes the groupthink that affects many teams once a decision appears to have been made, and it unleashes the imagination of knowledgeable individuals in a much-needed direction.”

„The main virtue of the premortem is that it legitimizes doubts. Furthermore, it encourages even supporters of the decision to search for possible threats that they had not considered earlier. The premortem is not a panacea and does not provide complete protection against nasty surprises, but it goes some way toward reducing the damage of plans that are subject to the biases of WYSIATI and uncritical optimism.”

„“They have an illusion of control. They seriously underestimate the obstacles.”

„“They seem to suffer from an acute case of competitor neglect.”

„“This is a case of overconfidence. They seem to believe they know more than they actually do know.”

„“We should conduct a premortem session. Someone may come up with a threat we have neglected.”

„Gambles represent the fact that the consequences of choices are never certain. “ “Every significant choice we make in life comes with some uncertainty”

„Daniel Bernoulli anticipated Fechner’s reasoning and applied it to the relationship between the psychological value or desirability of money (now called utility) and the actual amount of money. He argued that a gift of 10 ducats has the same utility to someone who already has 100 ducats as a gift of 20 ducats to someone whose current wealth is 200 ducats.”

„One hundred years before Fechner, Bernoulli invented psychophysics to explain this aversion to risk. His idea was straightforward: 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. able 3 shows a version of the utility function that Bernoulli calculated; it presents the utility of different levels of wealth, from 1 million to 10 million. You can see that adding 1 million to a wealth of 1 million yields an increment of 20 utility points, but adding 1 million to a wealth of 9 million adds only 4 points. Bernoulli proposed that the diminishing marginal value of wealth (in the modern jargon) is what explains risk aversion— the common preference that people generally show for a sure thing over a favorable gamble of equal or slightly higher expected value. Consider this choice:”

„The expected value of the gamble and the “sure thing”

„moral expectation”

„he is well aware of the fact that at this time of year of one hundred ships which sail from Amsterdam to Petersburg, five are usually lost.”

„St. Petersburg paradox,”

„If I choose the sure thing, my wealth will double with certainty. This is very attractive. Alternatively, I can take a gamble with equal chances to quadruple my wealth or to gain nothing.”

„If I choose the sure thing, I lose half of my wealth with certainty, which is awful. Alternatively, I can take a gamble with equal chances to lose three-quarters of my wealth or to lose nothing.”

„The mystery is how a conception of the utility of outcomes that is vulnerable to such obvious counterexamples survived for so long.I can explain it only by a 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.”

„Many scholars have surely thought at one time or another of stories such as those of Anthony and Betty, or Jack and Jill, and casually noted that these stories did not jibe with utility theory. But they did not pursue the idea to the point of saying, “This theory is seriously wrong because it ignores the fact that utility depends on the history of one’s wealth, not only on present wealth.”

„“He was very happy with a $20,000 bonus three years ago, but his salary has gone up by 20% since, so he will need a higher bonus to get the same utility.”

„“Both candidates are willing to accept the salary we’re offering, but they won’t be equally satisfied because their reference points are different. She currently has a much higher salary.”

„“She’s suing him for alimony. She would actually like to settle, but he prefers to go to court. That’s not surprising—she can only gain, so she’s risk averse. He, on the other hand, faces options that are all bad, so he’d rather take the risk.”

„You know you have made a theoretical advance when you can no longer reconstruct why you failed for so long to see the obvious. “ “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.”

„Although Amos and I were not working with the two-systems model of the mind, it’s clear now that there are three cognitive features at the heart of prospect theory. They play an essential role in the evaluation of financial outcomes and are common o many automatic processes of perception, judgment, and emotion. They should be seen as operating characteristics of System 1. . Evaluation is relative to a neutral reference point, which is sometimes referred to as an “adaptation level.”

„The three principles that govern the value of outcomes are illustrated by figure 10. If prospect theory had a flag, this image would be drawn on it. The graph shows the psychological value of gains and losses, which are the “carriers”

„Many of the options we face in life are “mixed”

„For most people, the fear of losing $100 is more intense than the hope of gaining $150. We concluded from many such observations that “losses loom larger than gains”

„Consider a 5 0–5 0 gamble in which you can lose $10. What is the smallest gain that makes the gamble attractive? If you say $10, then you are indifferent to risk. If you give a number less than $10, you seek risk. If your answer is above $10, you are loss averse.”

„What about a possible loss of $500 on a coin toss? What possible gain do you require to off set it?”

„1. In mixed gambles, where both a gain and a loss are possible, loss aversion causes extremely risk-averse choices. 2.In bad choices, where a sure loss is compared to a larger loss that is merely probable, diminishing sensitivity causes risk seeking. In the mixed case, the possible loss looms twice as large as the possible gain, as you can see by comparing the slopes of the value function for losses and gains. In the bad case, the bending of the value curve (diminishing sensitivity) causes risk seeking. The pain of losing $900 is more than 90% of the pain of losing $1,000. These two insights are the essence of prospect theory.”

„has an expected return of $9,900—with exactly zero chance of losing more than $200. Even a lousy lawyer could have you declared legally insane for turning down this gamble.”

„the Humans described by prospect theory are guided by the immediate emotional impact of gains and losses, not by long-term prospects of wealth and global utility.”

„Have a good look at the following prospects. What would it be like to own them? A. one chance in a million to win $1 million B. 90% chance to win $12 and 10% chance to win nothing C. 90% chance to win $1 million and 10% chance to win nothing … Winning nothing is a nonevent in the first two cases, and assigning it a value of zero makes good sense. In contrast, failing to win in the third scenario is intensely disappointing. Like a salary increase that has been promised informally, the high probability of winning the large sum sets up a tentative new reference point. Relative to your expectations, winning nothing will be experienced as a large loss.”

„Problem 6: Choose between 90% chance to win $1 million OR $50 with certainty. Problem 7: Choose between 90% chance to win $1 million OR $150,000 with certainty. Compare the anticipated pain of choosing the gamble and not winning in the two cases. Failing to win is a disappointment in both, but the potential pain is compounded in problem 7 by knowing that if you choose the gamble and lose you will regret the “greedy”

„Scientists use theories as a bag of working tools, and they will not take on the burden of a heavier bag unless the new tools are very useful. Prospect theory was accepted by many scholars not because it is “true”

„“He suffers from extreme loss aversion, which makes him turn down very favorable opportunities.”

„“Considering her vast wealth, her emotional response to trivial gains and losses makes no sense.”

„“He weighs losses about twice as much as gains, which is normal.”

„Richard Thaler found many examples of what he called the endowment effect, especially for goods that are not regularly traded. You can easily imagine yourself in a similar situation. Suppose you hold a ticket to a sold-out concert by a popular band, which you bought at the regular price of $200. You are an avid fan and would have been willing to pay up to $500 for the ticket. Now you have your ticket and you learn on the Internet that richer or more desperate fans are offering $3,000. Would you sell? If you resemble most of the audience at sold-out events you do not sell. Your lowest selling price is above $3,000 and your maximum buying price is $500. This is an example of an endowment effect, and a believer in standard economic theory would be puzzled by it. Thaler was looking for an account that could explain puzzles of this kind.”

„What distinguishes these market transactions from Professor R’s reluctance to sell his wine, or the reluctance of Super Bowl ticket holders to sell even at a very high price? The distinctive feature is that both the shoes the merchant sells you and the money you spend from your budget for shoes are held “for exchange.”

„for use,”

„Loss aversion is built into the automatic evaluations of System 1.”

„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 authors of that study compared the behavior of owners of similar units who had bought their dwellings at different prices. For a rational agent, the buying price is irrelevant history—the current market value is all that matters. Not so for Humans in a down market for housing. Owners who have a high reference point and thus face higher losses set a higher price on their dwelling, spend a longer time trying to sell their home, and eventually receive more money.”

„No endowment effect is expected when owners view their goods as carriers of value for future exchanges, a widespread attitude in routine commerce and in financial markets.”

„In an exact replication of Jack Knetsch’s earlier experiment, List found that only 18% of the inexperienced traders were willing to exchange their gift for the other. In sharp contrast, experienced traders showed no trace of an endowment effect: 48% of them traded! At least in a market environment in which trading was the norm, they showed no reluctance to trade. Jack Knetsch also conducted experiments in which subtle manipulations made the endowment effect disappear. Participants displayed an endowment effect only if they had physical possession of the good for a while before the possibility of trading it was mentioned.”

„Veteran traders have apparently learned to ask the correct question, which is “How much do I want to have that mug, compared with other things I could have instead?”

„decision making under poverty”

„in the losses.”

„“She didn’t care which of the two offices she would get, but a day after the announcement was made, she was no longer willing to trade. Endowment effect!”

„“These negotiations are going nowhere because both sides find it difficult to make concessions, even when they can get something in return. Losses loom larger than gains.”

„“When they raised their prices, demand dried up.”

„“He just hates the idea of selling his house for less money than he paid for it. Loss aversion is at work.”

„“He is a miser, and treats any dollar he spends as a loss.”

„Some experimenters have reported that an angry face “pops out”

„The brain responds quickly even to purely symbolic threats. Emotionally loaded words quickly attract attention, and bad words (war, crime) attract attention faster than do happy words (peace, love). There is no real threat, but the mere reminder of a bad event is treated in System 1 as threatening.”

„“Bad emotions, bad parents, and bad feedback have more impact than good ones, and bad information is processed more thoroughly than good. The self is more motivated to avoid bad self-definitions than to pursue good ones. Bad impressions and bad stereotypes are quicker to form and more resistant to disconfirmation than good ones.”

„A reference point is sometimes the status quo, but it can also be a goal in the future: not achieving a goal is a loss, exceeding the goal is a gain. As we might expect from negativity dominance, the two motives are not equally powerful. The aversion to the failure of not reaching the goal is much stronger than the desire to exceed it. People often adopt short-term goals that they strive to achieve but not necessarily to exceed. They are likely to reduce their efforts when they have reached an immediate goal, with results that sometimes violate economic logic.”

„Economic logic implies that cabdrivers should work many hours on rainy days and treat themselves to some leisure on mild days, when they can “buy”

„Defending the Status Quo If you are set to look for it, the asymmetric intensity of the motives to avoid losses and to achieve gains shows up almost everywhere. It is an ever-present feature of negotiations, especially of renegotiations of an existing contract, the typical situation in labor negotiations and in international discussions of trade or arms limitations. The existing terms define reference points, and a proposed change in any aspect of the agreement is inevitably viewed as a concession that one side makes to the other. Loss aversion creates an asymmetry that makes agreements difficult to reach. The concessions you make to me are my gains, but they are your losses; they cause you much more pain than they give me pleasure. Inevitably, you will place a higher value on them than I do.”

„Animals, including people, fight harder to prevent losses than to achieve gains.”

„As initially conceived, plans for reform almost always produce many winners and some losers while achieving an overall improvement. If the affected parties have any political influence, however, potential losers will be more active and determined than potential winners; the outcome will be biased in their favor and inevitably more expensive and less effective than initially planned. Reforms commonly include grandfather clauses that protect current stake-holders—for example, when the existing workforce is reduced by attrition rather than by dismissals, or when cuts in salaries and benefits apply only to future workers. Loss aversion is a powerful conservative force that favors minimal changes from the status quo in the lives of both institutions and individuals. This conservatism helps keep us stable in our neighborhood, our marriage, and our job; it is the gravitational force that holds our life together near the reference point.”

„The entitlement is personal: the current worker has a right to retain his wage even if market conditions would allow the employer to impose a wage cut. The replacement worker has no entitlement to the previous worker’s reference wage, and the employer is therefore allowed to reduce pay without the risk of being branded unfair. The firm has its own entitlement, which is to retain its current profit. If it faces a threat of a loss, it is allowed to transfer the loss to others. A substantial majority of respondents believed that it is not unfair for a firm to reduce its workers’ wages when its profitability is falling. We described the rules as defining dual entitlements to the firm and to individuals with whom it interacts. When threatened, it is not unfair for the firm to be selfish. It is not even expected to take on part of the losses; it can pass them on.”

„Unfairly imposing losses on people can be risky if the victims are in a position to retaliate.”

„“This reform will not pass. Those who stand to lose will fight harder than those who stand to gain.”

„“Each of them thinks the other’s concessions are less painful. They are both wrong, of course. It’s just the asymmetry of losses.”

„“They would find it easier to renegotiate the agreement if they realized the pie was actually expanding. They’re not allocating losses; they are allocating gains.”

„“Rental prices around here have gone up recently, but our tenants don’t think it’s fair that we should raise their rent, too. They feel entitled to their current terms.”

„“My clients don’t resent the price hike because they know my costs have gone up, too. They accept my right to stay profitable.”

„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.”

„In problems A and B, which would you choose? A. 61% chance to win $520,000 OR 63% chance to win $500,000 B. 98% chance to win $520,000 OR 100% chance to win $500,000 If you are like most other people, you preferred the left-hand option in problem A and you preferred the right-hand option in problem B. If these were your preferences, you have just committed a logical sin and violated the rules of rational choice.”

„To see why these choices are problematic, imagine that the outcome will be determined by a blind draw from an urn that contains 100 marbles—you win if you draw a red marble, you lose if you draw white. In problem A, almost everybody prefers the left-hand urn, although it has fewer winning red marbles, because the difference in the size of the prize is more impressive than the difference in the chances of winning. In problem B, a large majority chooses the urn that guarantees a gain of $500,000. Furthermore, people are comfortable with both choices—until they are led through the logic of the problem. Compare the two problems, and you will see that the two urns of problem B are more favorable versions of the urns of problem A, with 37 white marbles replaced by red winning marbles in each urn. The improvement on the left is clearly superior to the improvement on the right, since each red marble gives you a chance to win $520,000 on the left and only $500,000 on the right. So you started in the first problem with a preference for the left-hand urn, which was then improved more than the right-hand urn—but now you like the one on the right! This pattern of choices does not make logical sense, but a psychological explanation is readily available: the certainty effect is at work. The 2% difference between a 100% and a 98% chance to win in problem B is vastly more impressive than the same difference between 63% and 61% in problem A.”

„It is difficult to assign a unique decision weight to very rare events, because they are sometimes ignored altogether, effectively assigned a decision weight of zero. On the other hand, when you do not ignore the very rare events, you will certainly overweight them. Most of us spend very little time worrying about nuclear meltdowns or fantasizing about large inheritances from unknown relatives. However, when an unlikely event becomes the focus of attention, we will assign it much more weight than its probability deserves. Furthermore, people are almost completely insensitive to variations of risk among small probabilities. A cancer risk of 0.001% is not easily distinguished from a risk of 0.00001%, although the former would translate to 3,000 cancers for the population of the United States, and the latter to 30. When you pay attention to a threat, you worry—and the decision weights reflect how much you worry. Because of the possibility effect, the worry is not proportional to the probability of the threat. Reducing or mitigating the risk is not adequate; to eliminate the worry the probability must be brought down to zero.”

„people attach values to gains and losses rather than to wealth, and the decision weights that they assign to outcomes are different from probabilities.”

„—The top row in each cell shows an illustrative prospect. —The second row characterizes the focal emotion that the prospect evokes. —The third row indicates how most people behave when offered a choice between a gamble and a sure gain (or loss) that corresponds to its expected value (for example, between “95% chance to win $10,000”

„$9,500 with certainty”

„—The top left is the one that Bernoulli discussed: people are averse to risk when they consider prospects with a substantial chance to achieve a large gain. They are willing to accept less than the expected value of a gamble to lock in a sure gain. —The possibility effect in the bottom left cell explains why lotteries are popular. When the top prize is very large, ticket buyers appear indifferent to the fact that their chance of winning is minuscule. A lottery ticket is the ultimate example of the possibility effect. Without a ticket you cannot win, with a ticket you have a chance, and whether the chance is tiny or merely small matters little. Of course, what people acquire with a ticket is more than a chance to win; it is the right to dream pleasantly of winning. —The bottom right cell is where insurance is bought. People are willing to pay much more for insurance than expected value—which is how insurance companies cover their costs and make their profits. Here again, people buy more than protection against an unlikely disaster; they eliminate a worry and purchase peace of mind. —The results for the top right cell initially surprised us. We were accustomed to think in terms of risk aversion except for the bottom left cell, where lotteries are preferred. When we looked at our choices for bad options, we quickly realized that we were just as risk seeking in the domain of losses as we were risk averse in the domain of gains (…) we identified two reasons for this effect. First, there is diminishing sensitivity. The sure loss is very aversive because the reaction to a loss of $900 is more than 90% as intense as the reaction to a loss of $1,000. The second factor may be even more powerful: the decision weight that corresponds to a probability of 90% is only about 71, much lower than the probability. The result is that 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. The same two factors enhance the attractiveness of the sure thing and reduce the attractiveness of the gamble when the outcomes are positive. (…) Many unfortunate human situations unfold in the top right cell. This is where people who face very bad options take desperate gambles, accepting a high probability of making things worse in exchange for a small hope of avoiding a large loss. Risk taking of this kind often turns manageable failures into disasters. The thought of accepting the large sure loss is too painful, and the hope of complete relief too enticing, to make the sensible decision that it is time to cut one’s losses. This is where businesses that are losing ground to a superior technology waste their remaining assets in futile attempts to catch up. Because defeat is so difficult to accept, the losing side in wars often fights long past the point at which the victory of the other side is certain, and only a matter of time.”

„Consider a large organization, the City of New York, and suppose it faces 200 “frivolous”

„“He is tempted to settle this frivolous claim to avoid a freak loss, however unlikely. That’s overweighting of small probabilities. Since he is likely to face many similar problems, he would be better off not yielding.”

„“We never let our vacations hang on a last-minute deal. We’re willing to pay a lot for certainty.”

„“They will not cut their losses so long as there is a chance of breaking even. This is risk-seeking in the losses.”

„“They know the risk of a gas explosion is minuscule, but they want it mitigated. It’s a possibility effect, and they want peace of mind.”

„My experience illustrates how terrorism works and why it is so effective: it induces an availability cascade. An extremely vivid image of death and damage, constantly reinforced by media attention and frequent conversations, becomes highly accessible, especially if it is associated with a specific situation such as the sight of a bus. The emotional arousal is associative, automatic, and uncontrolled, and it produces an impulse for protective action. System 2 may “know”

„Many stores in New York City sell lottery tickets, and business is good. The psychology of high-prize lotteries is similar to the psychology of terrorism. The thrilling possibility of winning the big prize is shared by the community and reinforced by conversations at work and at home. Buying a ticket is immediately rewarded by pleasant fantasies, just as avoiding a bus was immediately rewarded by relief from fear. In both cases, the actual probability is inconsequential; only possibility matters.”

„People overestimate the probabilities of unlikely events. People overweight unlikely events in their decisions.”

„Our mind has a useful capability to focus spontaneously on whatever is odd, different, or unusual.”

„The successful execution of a plan is specific and easy to imagine when one tries to forecast the outcome of a project. In contrast, the alternative of failure is diffuse, because there are innumerable ways for things to go wrong. Entrepreneurs and the investors who evaluate their prospects are prone both to overestimate their chances and to overweight their estimates.”

„adding irrelevant but vivid details to a monetary outcome also disrupts calculation.”

„Compare your cash equivalents for the following outcomes: — 21% (or 84%) chance to receive $59 next Monday — 21% (or 84%) chance to receive a large blue cardboard envelope containing $59 next Monday morning The new hypothesis is that there will be less sensitivity to probability in the second case, because the blue envelope evokes a richer and more fluent representation than the abstract notion of a sum of money. You constructed the event in your mind, and the vivid image of the outcome exists there even if you know that its probability is low. Cognitive ease contributes to the certainty effect as well: when you hold a vivid image of an event, the possibility of its not occurring is also represented vividly, and overweighted.”

„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,”

„probability”

„The probability of a rare event will (often, not always) be overestimated, because of the confirmatory bias of memory. Thinking about that event, you try to make it true in your mind. A rare event will be overweighted if it specifically attracts attention. Separate attention is effectively guaranteed when prospects are described explicitly (“99% chance to win $1,000, and 1% chance to win nothing”

„“Tsunamis are very rare even in Japan, but the image is so vivid and compelling that tourists are bound to overestimate their probability.”

„“It’s the familiar disaster cycle. Begin by exaggeration and overweighting, then neglect sets in.”

„“We shouldn’t focus on a single scenario, or we will overestimate its probability. Let’s set up specific alternatives and make the probabilities add up to 100%.”

„“They want people to be worried by the risk. That’s why they describe it as 1 death per 1,000. They’re counting on denominator neglect.”

„We are susceptible to WYSIATI and averse to mental effort, we tend to make decisions as problems arise, even when we are specifically instructed to consider them jointly.”

„The great Paul Samuelson—a giant among the economists of the twentieth century—famously asked a friend whether he would accept a gamble on the toss of a coin in which he could lose $100 or win $200. His friend responded, “I won’t bet because I would feel the $100 loss more than the $200 gain. But I’ll take you on if you promise to let me make 100 such bets.”

„Samuelson found his friend’s answer interesting and went on to analyze it. He proved that under some very specific conditions, a utility maximizer who rejects a single gamble should also reject the offer of many.”

„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, 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.”

„Closely following daily fluctuations is a losing proposition, because the pain of the frequent small losses exceeds the pleasure of the equally frequent small gains. Once a quarter is enough, and may be more than enough for individual investors. In addition to improving the emotional quality of life, the deliberate avoidance of exposure to short-term outcomes improves the quality of both decisions and outcomes. The typical short-term reaction to bad news is increased loss aversion. 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”

„“I decided to evaluate my portfolio only once a quarter. I am too loss averse to make sensible decisions in the face of daily price fluctuations.”

„“They never buy extended warranties. That’s their risk policy.”

„“Each of our executives is loss averse in his or her domain. That’s perfectly natural, but the result is that the organization is not taking enough risk.”

„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.”

„The purchase price does matter and should be considered, even by Econs. The disposition effect is a costly bias because the question of whether to sell winners or losers has a clear answer, and it is not that it makes no difference.”

„investors sell more losers in December, when taxes are on their mind.”

„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.”

„Closing a mental account with a gain is a pleasure, but it is a pleasure you pay for. The mistake is not one that an Econ would ever make, and experienced investors, who are using their System 2, are less susceptible to it than are novices.”

„All too often a company afflicted by sunk costs drives into the blizzard, throwing good money after bad rather than accepting the humiliation of closing the account of a costly failure.”

„Boards of directors are well aware of these conflicts and often replace a CEO who is encumbered by prior decisions and reluctant to cut losses. The members of the board do not necessarily believe that the new CEO is more competent than the one she replaces. They do know that she does not carry the same mental accounts and is therefore better able to ignore the sunk costs of past investments in evaluating current opportunities. The sunk-cost fallacy keeps people for too long in poor jobs, unhappy marriages, and unpromising research projects.”

„Regret is an emotion, and it is also a punishment that we administer to ourselves. The fear of regret is a factor in many of the decisions that people make (“Don’t do this, you will regret it”

„The common feature of these poignant stories is that they involve unusual events—and unusual events are easier than normal events to undo in imagination. Associative memory contains a representation of the normal world and its rules. 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.”

„In hindsight, it will be easier to imagine the normal choice; the abnormal choice will be easy to undo. True, a good outcome will contribute to the reputation of the physician who dared, but the potential benefit is smaller than the potential cost because success is generally a more normal outcome than is failure.”

„Losses are weighted about twice as much as gains in several contexts: choice between gambles, the endowment effect, and reactions to price changes.”

„The extremely high selling price reflects two features of this problem. In the first place, you are not supposed to sell your health; the transaction is not considered legitimate and the reluctance to engage in it is expressed in a higher price. Perhaps most important, you will be responsible for the outcome if it is bad. You know that if you wake up one morning with symptoms indicating that you will soon be dead, you will feel more regret in the second case than in the first, because you could have rejected the idea of selling your health without even stopping to consider the price. You could have stayed with the default option and done nothing, and now this counterfactual will haunt you for the rest of your life.”

„We spend much of our day anticipating, and trying to avoid, the emotional pains we inflict on ourselves. How seriously should we take these intangible outcomes, the self-administered punishments (and occasional rewards) that we experience as we score our lives? Econs are not supposed to have them, and they are costly to Humans. They lead to actions that are detrimental to the wealth of individuals, to the soundness of policy, and to the welfare of society. But the emotions of regret and moral responsibility are real, and the fact that Econs do not have them may not be relevant. Is it reasonable, in particular, to let your choices be influenced by the anticipation of regret? Susceptibility to regret, like susceptibility to fainting spells, is a fact of life to which one must adjust.”

„You can also take precautions that will inoculate you against regret. Perhaps the most useful is to be explicit about the anticipation of regret. 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. You should also know that regret and hindsight bias will come together, so anything you can do to preclude hindsight is likely to be helpful. My personal hindsight-avoiding policy is to be either very thorough or completely casual when making a decision with long-term consequences. Hindsight is worse when you think a little, just enough to tell yourself later, “I almost made a better choice.”

„“He has separate mental accounts for cash and credit purchases. I constantly remind him that money is money.”

„“We are hanging on to that stock just to avoid closing our mental account at a loss. It’s the disposition effect.”

„“We discovered an excellent dish at that restaurant and we never try anything else, to avoid regret.”

„“The salesperson showed me the most expensive car seat and said it was the safest, and I could not bring myself to buy the cheaper model. It felt like a taboo tradeoff.”

„In joint evaluation, he punitive award to the bank remained anchored on the loss it had sustained, but the award to the burned child increased, reflecting the outrage evoked by negligence that causes injury to a child.As we have seen, rationality is generally served by broader and more comprehensive frames, and joint evaluation is obviously broader than single evaluation. Of course, you should be wary of joint evaluation when someone who controls what you see has a vested interest in what you choose. Salespeople quickly learn that manipulation of the context in which customers see a good can profoundly influence preferences. Except for such cases of deliberate manipulation, there is a presumption that the comparative judgment, which necessarily involves System 2, is more likely to be stable than single evaluations, which often reflect the intensity of emotional responses of System 1. We would expect that any institution that wishes to elicit thoughtful judgments would seek to provide the judges with a broad context for the assessments of individual cases. I was surprised to learn from Cass Sunstein that jurors who are to assess punitive damages are explicitly prohibited from considering other cases. The legal system, contrary to psychological common sense, favors single evaluation”

„He concluded that “within categories, penalties seem extremely sensible, at least in the sense that the more serious harms are punished more severely. For occupational safety and health violations, the largest penalties are for repeated violations, the next largest for violations that are both willful and serious, and the least serious for failures to engage in the requisite record-keeping.”

„“The BTU units meant nothing to me until I saw how much air-conditioning units vary. Joint evaluation was essential.”

„“You say this was an outstanding speech because you compared it to her other speeches. Compared to others, she was still inferior.”

„“It is often the case that when you broaden the frame, you reach more reasonable decisions.”

„“When you see cases in isolation, you are likely to be guided by an emotional reaction of System 1.”

„losses evokes stronger negative feelings than costs.”

„The framing study yielded three main findings: — A region that is commonly associated with emotional arousal (the amygdala) was most likely to be active when subjects’ choices conformed to the frame. This is just as we would expect if the emotionally loaded words KEEP and LOSE produce an immediate tendency to approach the sure thing (when it is framed as a gain) or avoid it (when it is framed as a loss). The amygdala is accessed very rapidly by emotional stimuli—and it is a likely suspect for involvement in System 1. — A brain region known to be associated with conflict and self-control (the anterior cingulate) was more active when subjects did not do what comes naturally—when they chose the sure thing in spite of its being labeled LOSE. Resisting the inclination of System 1 apparently involves conflict. — The most “rational”

„rational”

„recognize the distracting effects of the frames and to simplify their task by adopting a common frame, perhaps by translating the LOSE amount into its KEEP equivalent. It would take an intelligent person (and an alert System 2) to learn to do this, and the few participants who managed the feat were probably among the “rational”

„Reframing is effortful and System 2 is normally lazy. Unless there is an obvious reason to do otherwise, most of us passively accept decision problems as they are framed and therefore rarely have an opportunity to discover the extent to which our preferences are frame-bound rather than reality-bound.”

„These enormous differences are a framing effect, which is caused by the format of the critical question. The high-donation countries have an opt out form, where individuals who wish not to donate must check an appropriate box. Unless they take this simple action, they are considered willing donors. The low-contribution countries have an opt-in form: you must check a box to become a donor. That is all.”

„A significant difference between believers in the rational-agent model and the skeptics who question it is that the believers simply take it for granted that the formulation of a choice cannot determine preferences on significant problems. They will not even be interested in investigating the problem—and so we are often left with inferior outcomes. Skeptics about rationality are not surprised. They are trained to be sensitive to the power of inconsequential factors as determinants of preference—my hope is that readers of this book have acquired this sensitivity.”

„“They will feel better about what happened if they manage to frame the outcome in terms of how much money they kept rather than how much they lost.”

„“Let’s reframe the problem by changing the reference point. Imagine we did not own it; how much would we think it is worth?”

„Charge the loss to your mental account of ‘general revenue’—you will feel better!”

„“They ask you to check the box to opt out of their mailing list. Their list would shrink if they asked you to check a box to opt in!”

„“Nature has placed mankind under the governance of two sovereign masters, pain and pleasure. It is for them alone to point out what we ought to do, as well as to determine what we shall do.”

„The experiencing self is the one that answers the question: “Does it hurt now?”

„How was it, on the whole?”

„ruined the whole experience.”

„Confusing experience with the memory of it is a compelling cognitive illusion— and it is the substitution that makes us believe a past experience can be ruined. The experiencing self does not have a voice. The remembering self is sometimes wrong, but it is the one that keeps score and governs what we learn from living, and it is the one that makes decisions. 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.”

„System 1 represents sets by averages, norms, and prototypes, not by sums. Each cold-hand episode is a set of moments, which the remembering self stores as a prototypical moment. This leads to a conflict. For an objective observer evaluating the episode from the reports of the experiencing self, what counts is the “area under the curve”

„Decisions that do not produce the best possible experience and erroneous forecasts of future feelings—both are bad news for believers in the rationality of choice. 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.”

„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.”

„“You are thinking of your failed marriage entirely from the perspective of the remembering self. A divorce is like a symphony with a screeching sound at the end—the fact that it ended badly does not mean it was all bad.”

„“This is a bad case of duration neglect. You are giving the good and the bad part of your experience equal weight, although the good part lasted ten times as long as the other.”

„A story is about significant events and memorable moments, not about time passing. Duration neglect is normal in a story, and the ending often defines its character. Duration neglect is normal in a story, and the ending often defines its character. The same core features appear in the rules of narratives and in the memories of colonoscopies, vacations, and films. This is how the remembering self works: it composes stories and keeps them for future reference.”

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

„we all care intensely for the narrative of our own life and very much want it to be a good story, with a decent hero.”

„In intuitive evaluation of entire lives as well as brief episodes, peaks and ends matter but duration does not.”

„As in the cold-hand experiment, right or wrong, people choose by memory when they decide whether or not to repeat an experience.”

„elimination of memories greatly reduces the value of the experience. In some cases, people treat themselves as they would treat another amnesic, choosing to maximize overall pleasure by returning to a place where they have been happy in the past.”

„I am my remembering self, and the experiencing self, who does my living, is like a stranger to me.”

„“He is desperately trying to protect the narrative of a life of integrity, which is endangered by the latest episode.”

„“The length to which he was willing to go for a one-night encounter is a sign of total duration neglect.”

„“You seem to be devoting your entire vacation to the construction of memories. Perhaps you should put away the camera and enjoy the moment, even if it is not very memorable?”

„She is an Alzheimer’s patient. She no longer maintains a narrative of her life, but her experiencing self is still sensitive to beauty and gentleness.”

„people’s evaluations of their lives and their actual experience may be related, but they are also different. Life satisfaction is not a flawed measure of their experienced well-being, as I thought some years ago. It is something else entirely.”

„“The objective of policy should be to reduce human suffering. We aim for a lower U-index in society. Dealing with depression and extreme poverty should be a priority.”

„“The easiest way to increase happiness is to control your use of time. Can you find more time to do the things you enjoy doing?”

„“Beyond the satiation level of income, you can buy more pleasurable experiences, but you will lose some of your ability to enjoy the less expensive ones.”

„The goals that people set for themselves are so important to what they do and how they feel about it that an exclusive focus on experienced well-being is not tenable. We cannot hold a concept of well-being that ignores what people want. On the other hand, it is also true that a concept of well-being that ignores how people feel as they live and focuses only on how they feel when they think about their life is also untenable. We must accept the complexities of a hybrid view, in which the well-being of both selves is considered.”

„Nothing in life is as important as you think it is when you are thinking about it.”

„“When do you get pleasure from your car?”

„How much pleasure do you get from your car when you think about it?”

„Pain and noise are biologically set to be signals that attract attention, and depression involves a self-reinforcing cycle of miserable thoughts.”

„Time is neglected, causing experiences that will retain their attention value in the long term to be appreciated less than they deserve to be.”

„We saw a different form of duration neglect in prospect theory, in which a state is represented by the transition to it. Winning a lottery yields a new state of wealth that will endure for some time, but decision utility corresponds to the anticipated intensity of the reaction to the news that one has won. The withdrawal of attention and other adaptations to the new state are neglected, as only that thin slice of time is considered. The same focus on the transition to the new state and the same neglect of time and adaptation are found in forecasts of the reaction to chronic diseases, and of course in the focusing illusion. The mistake that people make in the focusing illusion involves attention to selected moments and neglect of what happens at other times. The mind is good with stories, but it does not appear to be well designed for the processing of time.”

„“She thought that buying a fancy car would make her happier, but it turned out to be an error of affective forecasting.”

„“His car broke down on the way to work this morning and he’s in a foul mood. This is not a good day to ask him about his job satisfaction!”

„“She looks quite cheerful most of the time, but when she is asked she says she is very unhappy. The question must make her think of her recent divorce.”

„“Buying a larger house may not make us happier in the long term. We could be suffering from a focusing illusion.”

„“He has chosen to split his time between two cities. Probably a serious case of miswanting.”

„Why would people willingly expose themselves to unnecessary pain? Our subjects left the choice to their emembering self, preferring to repeat the trial that left the better memory, although it involved more pain.”

„It does not make sense to evaluate an entire life by its last moments, or to give no weight to duration in deciding which life is more desirable.”

„The remembering self is a construction of System 2. However, the distinctive features of the way it evaluates episodes and lives are characteristics of our memory. Duration neglect and the peak-end rule originate in System 1 and do not necessarily correspond to the values of System 2. We believe that duration is important, but our memory tells us it is not. The rules that govern the evaluation of the past are poor guides for decision making, because time does matter. The central fact of our existence is that time is the ultimate finite resource, but the remembering self ignores that reality. The neglect of duration combined with the peak-end rule causes a bias that favors a short period of intense joy over a long period of moderate happiness. The mirror image of the same bias makes us fear a short period of intense but tolerable suffering more than we fear a much longer period of moderate pain. Duration neglect also makes us prone to accept a long period of mild unpleasantness because the end will be better, and it favors giving up an opportunity for a long happy period if it is likely to have a poor ending. To drive the same idea to the point of discomfort, consider the common admonition, “Don’t do it, you will regret it.”

„In the duration-weighted perspective, we can determine only after the fact that a moment is memorable or meaningful.”

„The logic of duration weighting is compelling, but it cannot be considered a complete theory of well- being because individuals identify with their remembering self and care about their story.”

„The only test of rationality is not whether a person’s beliefs and preferences are reasonable, but whether they are internally consistent. A rational person can believe in ghosts so long as all her other beliefs are consistent with the existence of ghosts. A rational person can prefer being hated over being loved, so long as his preferences are consistent. Rationality is logical coherence—reasonable or not.”

„The definition of rationality as coherence is impossibly restrictive; it demands adherence to rules of logic that a finite mind is not able to implement. Reasonable people cannot be rational by that definition, but they should not be branded as irrational for that reason.”

„when we observe people acting in ways that seem odd, we should first examine the possibility that they have a good reason to do what they do. Psychological interpretations should only be invoked when the reasons become implausible”

„If a motorcycle rider chooses to ride without a helmet, a libertarian will support his right to do so. Citizens know what they are doing, even when they choose not to save for their old age, or when they expose themselves to addictive substances.”

„For behavioral economists, however, freedom has a cost, which is borne by individuals who make bad choices, and by a society that feels obligated to help them. The decision of whether or not to protect individuals against their mistakes therefore presents a dilemma for behavioral economists.”

„The default option is naturally perceived as the normal choice. Deviating from the normal choice is an act of commission, which requires more effortful deliberation, takes on more responsibility, and is more likely to evoke regret than doing nothing.”

„Humans, more than Econs, also need protection from others who deliberately exploit their weaknesses—and especially the quirks of System 1 and the laziness of System 2.”

„presentation greatly matters; if, for example, a potential outcome is framed as a loss, it may have more impact than if it is presented as a gain.”

„“System 1 does X”

„X occurs automatically.”

„System 2 is mobilized to do Y”

„arousal increases, pupils dilate, attention is focused, and activity Y is performed.”

„However, System 2 is not a paragon of rationality. Its abilities are limited and so is the knowledge to which it has access. We do not always think straight when we reason, and the errors are not always due to intrusive and incorrect intuitions. Often we make mistakes because we (our System 2) do not know any better.”

„System 1 is indeed the origin of much that we do wrong, but it is also the origin of most of what we do right—which is most of what we do. Our thoughts and actions are routinely guided by System 1 and generally are on the mark. One of the marvels is the rich and detailed model of our world that is maintained in associative memory: it distinguishes surprising from normal events in a fraction of a second, immediately generates an idea of what was expected instead of a surprise, and automatically searches for some causal interpretation of surprises and of events as they take place.”

„System 1 registers the cognitive ease with which it processes information, but it does not generate a warning signal when it becomes unreliable. Intuitive answers come to mind quickly and confidently, whether they originate from skills or from heuristics. There is no simple way for System 2 to distinguish between a skilled and a heuristic response.”

„Its only recourse is to slow down and attempt to construct an answer on its own, which it is reluctant to do because it is indolent. Many suggestions of System 1 are casually endorsed with minimal checking, as in the bat-and-ball problem. This is how System 1 acquires its bad reputation as the source of errors and biases. Its operative features, which include WYSIATI, intensity matching, and associative coherence, among others, give rise to predictable biases and to cognitive illusions such as anchoring, nonregressive predictions, overconfidence, and numerous others.”

„The upshot is that it is much easier to identify a minefield when you observe others wandering into it than when you are about to do so.”

„The subjective assessment of probability resembles the subjective assessment of physical quantities such as distance or size. These judgments are all based on data of limited validity, which are processed according to heuristic rules.”

„When no specific evidence is given, prior probabilities are properly utilized; when worthless evidence is given, prior probabilities are ignored.”

„Chance is commonly viewed as a self-correcting process in which a deviation in one direction induces a deviation in the opposite direction to restore the equilibrium. In fact, deviations are not “corrected”

„law of small numbers,”

„consider two variables X and Y which have the same distribution. If one selects individuals whose average X score deviates from the mean of X by k units, then the average of their Y scores will usually deviate from the mean of Y by less than k units. These observations illustrate a general phenomenon known as regression toward the mean, which was first documented by Galton more than 100 years ago.”

„Lifelong experience has taught us that, in general, instances of large classes are recalled better and faster than instances of less frequent classes; that likely occurrences are easier to imagine than unlikely ones; and that the associative connections between events are strengthened when the events frequently co- occur.”

„different starting points yield different estimates, which are biased toward the initial values. We call this phenomenon anchoring.”

„A complex system, such as a nuclear reactor or a human body, will malfunction if any of its essential components fails. Even when the likelihood of failure in each component is slight, the probability of an overall failure can be high if many components are involved. Because of anchoring, people will tend to underestimate the probabilities of failure in complex systems. Thus, the direction of the anchoring bias can sometimes be inferred from the structure of the event. The chain-like structure of conjunctions leads to overestimation, the funnel-like structure of disjunctions leads to underestimation.”

„The normative analysis is concerned with the nature of rationality and the logic of decision making. The descriptive analysis, in contrast, is concerned with people’s beliefs and preferences as they are, not as they should be.”

„Since the dispersion of prices is surely controlled by shoppers’ efforts to find the best buy, these results suggest that consumers hardly exert more effort to save $15 on a $150 purchase than to save $5 on a $50 purchase. The topical organization of mental accounts leads people to evaluate gains and losses in relative rather than in absolute terms , resulting in large variations in the rate at which money is exchanged for other things, such as the number of phone calls made to find a good buy or the willingness to drive a long distance to get one. Most consumers will find it easier to buy a car stereo system or a Persian rug, respectively, in the context of buying a car or a house than separately.”

„Going to the theater is normally viewed as a transaction in which the cost of the ticket is exchanged for the experience of seeing the play. Buying a second ticket increases the cost of seeing the play to a level that many respondents apparently find unacceptable. In contrast, the loss of the cash is not posted to the account of the play, and it affects the purchase of a ticket only by making the individual feel slightly less affluent.”

„In particular, it may be more pleasurable to save $5 on a $15 purchase than on a larger purchase, and it may be more annoying to pay twice for the same ticket than to lose $10 in cash. Regret, frustration, and self-satisfaction can also be affected by framing (Kahneman and Tversky 1982). If such secondary consequences are considered legitimate, then the observed preferences do not violate the criterion of invariance and cannot readily be ruled out as inconsistent or erroneous. On the other hand, secondary consequences may change upon reflection. The satisfaction of saving $5 on a $15 item can be marred if the consumer discovers that she would not have exerted the same effort to save $10 on a $200 purchase.”

„When it is more painful to give up an asset than it is pleasurable to obtain it, buying prices will be significantly lower than selling prices. That is, the highest price that an individual will pay to acquire an asset will be smaller than the minimal compensation that would induce the same individual to give up that asset, once acquired.”

„In general, loss aversion favors stability over change.”

„the instability of preferences produces a preference for stability.”

„An objective improvement can be experienced as a loss, for example, when an employee receives a smaller raise than everyone else in the office.”

„The complexity and subtlety of hedonic experience make it difficult for the decision maker to anticipate the actual experience that outcomes will produce. Many a person who ordered a meal when ravenously hungry has admitted to a big mistake when the fifth course arrived on the table. The common mismatch of decision values and experience values introduces an additional element of uncertainty in many decision problems. The prevalence of framing effects and violations of invariance further complicates the relation between decision values and experience values. The framing of outcomes often induces decision values that have no counterpart in actual experience. For example, the framing of outcomes of therapies for lung cancer in terms of mortality or survival is unlikely to affect experience, although it can have a pronounced influence on choice. In other cases, however, the framing of decisions affects not only decision but experience as well. For example, the framing of an expenditure as an uncompensated loss or as the price of insurance can probably influence the experience of that outcome. In such cases, the evaluation of outcomes in the context of decisions not only anticipates experience but also molds it.”