Thinking, Fast and Slow

• There are two systems: One is automatic (System 1), the other requires focused thought (System 2)
• System 1 makes associations automatically and can turn into beliefs and actions which often turn into actions
• System 2 is lazy and when weak more susceptible to System 1; people who are less rational accept System 1 impulses without vetting
• Cognitive ease can result in feelings of familiarity leading to illusions of remembering or illusions of truth
  • Mere exposure effect – we tend to like things if exposed to them multiple times
  • easier to read → more cognitive ease → more susceptible to messages
  • harder to read→ less cognitive ease → less susceptible to messages
• System 1 naturally craves coherence and may apply causal thinking inappropriately
• System 1 focuses on salient details and constructs best stories based on coherence, not quality or quantity of data
  • Often leads to incorrect overconfidence
  • Even more confident when only receiving one side of the story because more coherent story
• Difficult questions are often answered through substitution and intensity matching
  • Instead of answering what you think about a candidate’s policies, you may answer the easier question of whether you like the candidate and how much
  • Not intentional, system 1 works automatically, but system 2 often does not scrutinize

• Exaggerated faith in small numbers
  • Bigger variability with small sample sizes e.g. best schools and worst schools tend to be small
  • Once a pattern is seen, hard to accept that it was due to randomness so constantly looking for causality
• Anchoring can cause significant impact on guesses and decision making
  • Priming with random numbers impacts behavior
  • People tend to underestimate influence of anchors
  • System 1 tends to accept things as reality unless immediately rejected
• Availability Heuristic causes people to use the ease of remembering as a measure for how commonly something occurs
  • Public perception of risk often colored by media and overestimates risk of salient events, not grounded in statistics
• Base rate neglect – people tend to focus on descriptive information instead of actual statistics
• Linda experiment
  • “Linda is thirty-one years old, single, outspoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in antinuclear demonstrations.”
  • A) She is a bank teller
  • B) She is a bank teller and is active in the feminist movement
  • Participants weighted option B as more probable even though group B is a smaller subset of group A.
  • Coherent stories are plausible, but not necessarily more probable. Many people confuse these
• Regression to the mean – people attach casual interpretations to random fluctuations. reason why control groups are important.
• Tame intuitive predictions which aren’t regressive
  • Come up with a base rate estimate
  • Determine an estimate based on your impressions
  • Estimate the correlation between what you are comparing
  • Move from the base rate estimate to the impression estimate based on the correlation (e.g. move 30% if correlation is .3)

• Illusion of understanding – People assign a larger role to talent and intentions than to luck
  • Good stories are simple and coherent and make people think they understand why something happened
  • Ultimate test is whether you can predict, but almost no great story can be predicted because myriad of random events
• Illusion of validity – Confidence is a due to coherence and cognitive ease, not truth
  • Even experts generally not good at predicting events
• Intuitions vs Formulas
  • Paul Meehl wrote book studying predictions of algorithms vs trained professionals
  • 60% of studies showed significantly better accuracy for algorithms, the rest were a draw
  • Humans tend to be very inconsistent, giving different responses to the same set of information
  • Simple equal weighted formula often better than complicated ones. 6 weighing factors. scale of 1-5.
• Expert Intuition can be relied on when environment is regular and predictable. Many pundits blur the line of where their expertise stops
• People make risky decisions because based on delusional optimism and only considers specific circumstances (inside view)
  • Better to use rational weighting of gains, losses, and probabilities (outside view)
• Significant benefits with optimism, but should be grounded in reality
  • Often times, not socially acceptable or desirable to show hesitation or lack confidence
  • Pre-mortem is exercise that helps overcome group think and draws on imagination making it okay to express doubts

• Bernoulli studied relationship of people’s decisions and utility, but didn’t take into account decision makers’ context or reference point
• Prospect theory focuses on gains and losses not states of wealth
  • there is diminishing sensitivity to losses/gains and people tend to be loss averse

• In standard economic theory, people shouldn’t care where they are on an indifferent curve, but once someone is on a point, they are less likely to move due to loss aversion and changing preferences
  • Endowment effect – people tend to value something more after they own something

• The Fourfold pattern shows tendencies on when people are likely to be risk-averse or risk seeking when it comes to gains and losses
  • Many bad decisions are made when people act in a risky ways seeking to avoid big losses

• Denominator neglect – People are susceptible to rare events especially if salient. “1 out of 100 people” generally has more impact than “1% of people”.
• People assess decisions independently and will pay a premium to obtain a sure gain and pay another premium to avoid a sure loss, in the long-run very costly.
• Life is an aggregation of choices, if you take a broad view, you can more closer to economic rationality, must learn to control emotions when there are losses though
• Don’t have separate mental accounts. e.g. having a separate bucket for credit card debt and a savings account; cash is cash.
  • Fear of regret drives decision making, more likely to stick to status quo. Feel worse when bad result is due to deviation from norm.
• If looking at one category, mind can’t compare with other things. Joint comparisons can show absurdity.
  • Donations for saving dolphins were larger than donations to help farmers avoid skin cancer
  • in single evaluation, dolphins are compared with other animals people like or dislike
  • in single evaluation, plight of farm workers are compared with all human health issues
  • when both cases were presented, the amounts for farm workers were higher as most people prioritize helping humans over animals
• Logically equivalent sentences can evoke markedly different emotional responses i.e. Italy won the World Cup vs France lost the World cup
  • Given mathematically identical choices, people pick different options with different framing
  • Most passively accept decisions as they are framed and rarely think about how our decisions are frame-bound rather than rationality-bound

• We want brief pain and lasting pleasure, but memory and system 1 doesn’t work this way
  • Peak-end rule and Duration Neglect: we tend to evaluate something based on the intensity of the experience at the peak and the end.
  • Duration neglect: the duration has no effect on total evaluation
• People tend to evaluate lives in the same way, generally more emphasis on remembering self than experiencing self
• People tend to make massive errors of affective forecasting, or guessing how we will feel in the future
• Focusing illusion – people tend to think something is more important if they are thinking about it; remembering self is especially susceptible
  • Creates bias to favor goods and experiences that are initially exciting (buying fancy car), though eventually lose appeal
  • Under appreciate attention demanding activities like social gatherings or activities and long-term value of those
  • Mistake of focusing illusion involves attention to selected moments and neglect what happens at other times

• Does not make sense to evaluate life on last moments or give no weight to duration
  • Time is important and is the ultimate finite resource, but remembering self ignores this reality
  • Makes us favor short periods of intense joy over long period of moderate happiness
  • Some moments will be memorable because adds more value in future, but can only know this in hindsight
• In economics, people are assumed to act rationally or consistently
  • Humans do not and cannot act this way
  • Book Nudge advocates libertarian paternalism: state and institutions nudge people to serve their own long-term interests but allows opt out e.g. investing for future
• We think we are System 2, but many beliefs fed from System 1
  • While errors in System 1, must keep in mind that in most cases it works and is right
  • Difficult to change, but can try to recognize situations where error are more likely
  • Try to focus on others, because easier to see when other people do and then hopefully try to do for yourself