Daniel Kahneman / Amos Tversky

More Than You Know: Finding Financial Wisdom in Unconventional Places (Updated and Expanded)
by Michael J. Mauboussin
Published 1 Jan 2006

Phillips, “Calibration of Probabilities,” in Judgment Under Uncertainty: Heuristics and Biases, ed. Daniel Kahneman, Paul Slovic, and Amos Tversky (Cambridge: Cambridge University Press, 1982), 306-34. 8 Peter Schwartz, Inevitable Surprises: Thinking Ahead in a Time of Turbulence (New York: Gotham Books, 2003). 9 Roger Lowenstein, When Genius Failed: The Rise and Fall of Long-Term Capital Management (New York: Random House, 2000); Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable (New York: Random House, 2007). 10 Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision Under Risk,” Econometrica 47 (1979): 263-91. 11 Nassim Nicholas Taleb, Fooled By Randomness: The Hidden Role of Chance in Markets and in Life (New York: Texere, 2001), 89-90.

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Thomas Gilovich, Dale Griffin, and Daniel Kahneman (Cambridge: Cambridge University Press, 2002), 716-29. 6 Gawande, Complications, 44. 7 Katie Haffner, “In an Ancient Game, Computing’s Future,” The New York Times, August 1, 2002. 8 James Surowiecki, The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations (New York: Doubleday, 2004). 9 Joe Nocera, “On Oil Supply, Opinions Aren’t Scarce,” The New York Times, September 10, 2005. 10 Philip E. Tetlock, Expert Political Judgment: How Good Is It? How Can We Know? (Princeton, N.J.: Princeton University Press, 2005), 68. 11 Ibid., 73-75. 7. The Hot Hand in Investing 1 Thomas Gilovich, Robert Valone, and Amos Tversky, “The Hot Hand in Basketball: On the Misperception of Random Sequences,” Cognitive Psychology 17 (1985): 295-314. 2 Amos Tversky and Daniel Kahneman, “Belief in the Law of Small Numbers,” Psychological Bulletin 76 (1971): 105-10. For an illustration, see Chris Wetzel, Randomness Web site, http://www.rhodes.edu/psych/faculty/wetzel/courses/wetzelsyllabus223.htm. 3 Adapted from Stephen Jay Gould, “The Streak of Streaks,” New York Review of Books, August 18, 1988, available from http://www.nybooks.com/articles/4337, accessed 25 May 2005. 4 Stephen Jay Gould, Triumph and Tragedy in Mudville (New York: W.

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Jensen, and Richard Roll, “The Adjustment of Stock Prices to New Information,” International Economic Review 10, no. 1 (February 1969); 1-21. 9 Stefano DellaVigna and Joshua Pollet, “Attention, Demographics, and the Stock Market,” Working Paper, November 23, 2003, http://fisher.osu.edu/fin/dice/seminars/pollet.pdf. 10 See chapter 1. 11 http://www2.cio.com/techpoll/index.cfm. 12 Amos Tversky and Daniel Kahneman, “Extensional Versus Intuitive Reasoning: The Conjunction Fallacy in Probability Judgment,” in Heuristics and Biases: The Psychology of Intuitive Judgment, ed. Thomas Gilovich, Dale Griffin, and Daniel Kahneman (Cambridge: Cambridge University Press, 2002), 19-48. 13 Sanford J. Grossman and Joseph E. Stiglitz, “On the Impossibility of Informationally Efficient Markets,” American Economic Review 70 (1980): 393-408. 18.

The Undoing Project: A Friendship That Changed Our Minds
by Michael Lewis
Published 6 Dec 2016

Kahneman, Daniel. “The Psychology of Possible Worlds.” Katz-Newcomb Lecture, April 1979. Kahneman, Daniel, and Amos Tversky. “The Simulation Heuristic.” In Judgment under Uncertainty: Heuristics and Biases, edited by Daniel Kahneman, Paul Slovic, and Amos Tversky, 3–22. Cambridge: Cambridge University Press, 1982. LeCompte, Tom. “The Disorient Express.” Air & Space, September 2008, 38–43. http://www.airspacemag.com/military-aviation/the-disorient-express-474780/. Tversky, Amos, and Daniel Kahneman. “The Framing of Decisions and the Psychology of Choice.” Science 211, no. 4481 (1981): 453–58. CHAPTER 12: THIS CLOUD OF POSSIBILITY Cohen, L.

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Science 176 (1972): 1191–1202. http://www.warnernorth.net/hurricanes.pdf. Kahneman, Daniel, and Amos Tversky. “On the Psychology of Prediction.” Psychological Review 80, no. 4 (1973): 237–51. Meehl, Paul E. “Why I Do Not Attend Case Conferences.” In Psychodiagnosis: Selected Papers, edited by Paul E. Meehl, 225–302. Minneapolis: University of Minnesota Press, 1973. CHAPTER 8: GOING VIRAL Redelmeier, Donald A., Joel Katz, and Daniel Kahneman. “Memories of Colonoscopy: A Randomized Trial,” Pain 104, nos. 1–2 (2003): 187–94. Redelmeier, Donald A., and Amos Tversky. “Discrepancy between Medical Decisions for Individual Patients and for Groups.”

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But—they went on to say—the author of Moneyball did not seem to realize the deeper reason for the inefficiencies in the market for baseball players: They sprang directly from the inner workings of the human mind. The ways in which some baseball expert might misjudge baseball players—the ways in which any expert’s judgments might be warped by the expert’s own mind—had been described, years ago, by a pair of Israeli psychologists, Daniel Kahneman and Amos Tversky. My book wasn’t original. It was simply an illustration of ideas that had been floating around for decades and had yet to be fully appreciated by, among others, me. That was an understatement. Until that moment I don’t believe I’d ever heard of either Kahneman or Tversky, even though one of them had somehow managed to win a Nobel Prize in economics.

Priceless: The Myth of Fair Value (And How to Take Advantage of It)
by William Poundstone
Published 1 Jan 2010

Journal of Risk and Uncertainty 16, 49–86. ———, and Eldar Shafir. “Amos Tversky (1937–1996).” American Psychologist 53, 793–94. ———, Paul Slovic, and Amos Tversky (1982). Judgment Under Uncertainty: Heuristics and Biases. Cambridge: Cambridge University Press. ———, and Amos Tversky (1973). “On the Psychology of Prediction.” Psychological Review 80, 237–51. ———, and Amos Tversky (1979). “Prospect Theory: An Analysis of Decision Under Risk.” Econometrica 47, 263–92. ———, and Amos Tversky (1984). “Choices, Values and Frames.” American Psychologist 39, 341–50. ———, and Amos Tversky (1996). “On the Reality of Cognitive Illusions.”

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In their experiments, subjects were unable to set prices consistent with what they wanted or the choices they made. Psychologists have been working out the consequences ever since. In the new view, internal prices are “constructed” as needed from hints in the environment. One demonstration of how that works is the “United Nations” experiment of Amos Tversky and Daniel Kahneman. Tversky and Kahneman are a legendary team of Israeli American psychologists. Kahneman, now in his mid-seventies, is a very active senior scholar at Princeton’s Woodrow Wilson School. Tversky, the younger man by three years, died of melanoma in 1996, at the age of fifty-nine. In 2002, Kahneman shared the Nobel Prize in Economic Sciences with American economist Vernon Smith.

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Today the Oregon Research Institute (ORI) is revered as a cradle of behavioral decision theory. ORI was the longtime professional home of Sarah Lichtenstein and Paul Slovic, the first to demonstrate clearly just how clueless people are about prices and decisions based on them. For one productive year, ORI was also home to Amos Tversky and Daniel Kahneman, perhaps the most influential psychologists of their age. Before getting to this illustrious group, it’s necessary to say something about their predecessors, and about the peculiar science of psychophysics. Well into the twentieth century, psychologists had a case of physics envy. There was agonizing over whether psychology was a science at all.

Thinking, Fast and Slow
by Daniel Kahneman
Published 24 Oct 2011

The same event can be compared to either a personal norm or the norm of other people, leading to different counterfactuals, different causal attributions, and different emotions (regret or blame): Herbert L. A. Hart and Tony Honoré, Causation in the Law (New York: Oxford University Press, 1985), 33. remarkably uniform: Daniel Kahneman and Amos Tversky, “The Simulation Heuristic,” in Judgment Under Uncertainty: Heuristics and Biases, ed. Daniel Kahneman, Paul Slovic, and Amos Tversky (New York: Cambridge University Press, 1982), 160–73. applies to blame: Janet Landman, “Regret and Elation Following Action and Inaction: Affective Responses to Positive Versus Negative Outcomes,” Personality and Social Psychology Bulletin 13 (1987): 524–36.

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liking of dolphins: There is evidence that questions about the emotional appeal of species and the willingness to contribute to their protection yield the same rankings: Daniel Kahneman and Ilana Ritov, “Determinants of Stated Willingness to Pay for Public Goods: A Study in the Headline Method,” Journal of Risk and Uncertainty 9 (1994): 5–38. superior on this attribute: Hsee, “Attribute Evaluability.” “requisite record-keeping”: Cass R. Sunstein, Daniel Kahneman, David Schkade, and Ilana Ritov, “Predictably Incoherent Judgments,” Stanford Law Review 54 (2002): 1190. 34: Frames and Reality unjustified influences of formulation: Amos Tversky and Daniel Kahneman, “The Framing of Decisions and the Psychology of Choice,” Science 211 (1981): 453–58.

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Petersburg paradox Strack, Fritz strangers, assessment of Strangers to Ourselves (Wilson) Streep, Meryl strength, assessments of structured settlements Stumbling to Happiness (Gilbert) substitution; and mood heuristic for happiness; and 3-D heuristic success, uot sum-like variables sunk-cost fallacy Sunstein, Cass Super Bowl supply and demand surgeons Surowiecki, James surprise survey and gift experiments survival-mortality experiment symbols System 1; characteristics of; conflict between System 2 and System 2; conflict between System 1 and; laziness of Taleb, Nassim talent task sets task switching Tate, Geoffrey taxes; child exemptions and temperament temptation Tenet, George terrorism Tetlock, Philip Thaler, Richard theory-induced blindness therapists thinking like a trader Thomas, Lewis threats; possibility effect and 3-D heuristic tickets; buying and selling of; sunk cost in time; use of time pressure Todorov, Alex token experiment Tom W problem “Trading Is Hazardous to Your Wealth” (Barber and Odean) transactions and trades Traviata, La (Verdi) Truman, Harry trustworthiness, assessments of truth, illusions of Tversky, Amos understanding, illusion of unique cases University College London University of California at Berkeley University of Chicago University of Michigan University of Minnesota University of Oregon unlikely events, see rare events unknown unknowns utility; decision; experienced; indifference map and; injection puzzle and; meanings of utility theory; certainty effect and; decision weights and probabilities in vacations vaccines validity: of clinical vs. statistical predictions; evaluating; illusion of Vallone, Robert value; see also utility Vancouver Island Venn diagrams venture capitalists victim compensation vividness; of outcomes; of probabilities vocabulary: of girls vs. boys; simple vs. pretentious Vohs, Kathleen vomit, effect of word Von Neumann, John voting Wainer, Howard walking wars Washington Post, The wealth, see money and wealth weather Weber, Ernste> weight and piano playing, measuring Weiner, Howard well-being; climate and; defining; disposition for; duration weighting and; see also happiness West, Richard what you see is all there is (WYSIATI); confidence and; curriculum team and; Julie problem and; optimistic bias and; premortem and; professorial candidate problem and; soldiers’ performance and; Tom W problem and wheel of fortune “wicked” environments Wilson, Timothy Wimbledon tournament wine Winter Olympics Wisdom of Crowds, The (Surowiecki) witnesses’ evidence Woods, Tiger words: complex vs. simple; emotionally-loaded World Cup World War II worry WYSIATI, see what you see is all there is X-rays Xu, Jing Yale exam problem Yom Kippur War Zajonc, Robert Zamir, Eyal Zeller, Kathryn Zweig, Jason Zwerling, Harris Farrar, Straus and Giroux 18 West 18th Street, New York 10011 Copyright © 2011 by Daniel Kahneman All rights reserved Grateful acknowledgment is made for permission to reprint the following previously published material: “Judgment Under Uncertainty: Heuristics and Biases” from Science, New Series, Vol. 185, No. 4157, copyright © 1974 by Amos Tversky and Dan"0%" te>X-rays Science. “Choices, Values, and Frames” from The American Psychologist, copyright © 1983 by Daniel Kahneman and Amos Tversky. Reprinted by permission of the American Psychological Association. Grateful acknowledgment is made for permission to reprint the following images: Image courtesy of Paul Ekman Group, LLC.

Think Twice: Harnessing the Power of Counterintuition
by Michael J. Mauboussin
Published 6 Nov 2012

For great examples of the failure of outside thinking in sports, see Michael Lewis, Moneyball: The Art of Winning an Unfair Game (New York: W.W. Norton & Company, 2003); and David Romer, “Do Firms Maximize? Evidence from Professional Football,” The Journal of Political Economy 114, no. 2 (2006): 340–365. 21. Daniel Kahneman and Amos Tversky, “Intuitive Prediction: Biases and Corrective Procedures,” in Judgment Under Uncertainty: Heuristics and Biases, ed. Daniel Kahneman, Paul Slovic, and Amos Tversky (Cambridge: Cambridge University Press, 1982), 414–421. For a simplified version, see Lovallo and Kahneman, “Delusions of Success.” 22. Stephen Jay Gould, Full House: The Spread of Excellence from Plato to Darwin (New York: Harmony Books, 1996), 45–56. 23.

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“Maps of Bounded Rationality: A Perspective on Intuitive Judgment and Choice.” Nobel Prize Lecture, December 8, 2002. Kahneman, Daniel, and Amos Tversky. “Prospect Theory: An Analysis of Decision Making Under Risk.” Econmetrica 47, no. 2 (1979): 263–291. Kahneman, Daniel, and Amos Tversky. “Intuitive Prediction: Biases and Corrective Procedures.” In Judgment Under Uncertainty: Heuristics and Biases, edited by Daniel Kahneman, Paul Slovic, and Amos Tversky, 414–421. Cambridge: Cambridge University Press, 1982. Kahneman, Danny. “A Short Course in Thinking about Thinking.” Edge.org, 2007. Katz, Elihu, and Paul F.

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As the story of George Steinbrenner made us aware, luck plays an important role in baseball, especially in the short term. Yet baseball announcers analyze the games play-by-play with little awareness that luck explains most of what’s going on. This same principle applies in business and markets. 2. Carefully consider the sample size. Daniel Kahneman and Amos Tversky established that people extrapolate unfounded conclusions from small sample sizes.24 But thinking clearly about sample size is essential for a few reasons. The more that luck contributes to the outcomes you observe, the larger the sample you will need to distinguish between skill and luck.

The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing
by Michael J. Mauboussin
Published 14 Jul 2012

Gary Belsky, “A Checkered Career: Marion Tinsley Hasn't Met a Man or Machine That Can Beat Him at His Game,” Sports Illustrated, December 28, 1992. 3. Jonathan Schaeffer, “Marion Tinsley: Human Perfection at Checkers?” Games of No Chance 26 (1996): 115–118. 4. Shlomo Maital, “Daniel Kahneman, Nobel Laureate 2002: A Brief Comment,” SABE Newsletter 10, no. 2 (Autumn 2002): 2. 5. Daniel Kahneman and Amos Tversky, “On the Psychology of Prediction,” Psychological Review 80, no. 4 (July 1973): 237–251. 6. Stanley Lieberson, “Modeling Social Processes: Some Lessons from Sports,” Sociological Forum 12, no. 1 (March 1997): 11–35. 7. Strictly speaking, sabermetrics is the study of baseball through the use of statistics, and a sabermetrician focuses only on that sport.

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For a good summary of the heuristics and biases research, see Max H. Bazerman and Don Moore, Judgment in Managerial Decision Making, 7th ed. (Hoboken, NJ: John Wiley & Sons, 2009), 13–41. 32. Kahneman, Thinking, Fast and Slow, 278–288; and Daniel Kahneman and Amos Tversky, eds., Choices, Values, and Frames (Cambridge, UK: Cambridge University Press, 2000). 33. Eldar Shafir, Peter Diamond, and Amos Tversky, “Money Illusion,” Quarterly Journal of Economics 112, no. 2 (May 1997): 341–374. 34. Hersh Shefrin and Meir Statman, “The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence,” Journal of Finance 40, no. 3 (July 1985): 777–790; and Terrance Odean, “Are Investors Reluctant to Realize Their Losses?”

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Ultimately, untangling skill and luck helps with the challenging task of prediction, and better predictions lead to greater success. Skill, Luck, and Prediction Shortly after winning the Nobel Prize in Economics in 2002, Daniel Kahneman, a retired professor of psychology at Princeton, was asked which of his 130-plus academic papers was his all-time favorite.4 He chose “On the Psychology of Prediction,” a paper he cowrote with the late Amos Tversky that was published in Psychological Review in 1973. The paper argues that intuitive judgments are often unreliable because people base predictions on how well an event seems to fit a story.

How Big Things Get Done: The Surprising Factors Behind Every Successful Project, From Home Renovations to Space Exploration
by Bent Flyvbjerg and Dan Gardner
Published 16 Feb 2023

International Journal of Project Management 21 (7): 1–8. Tversky, Amos, and Daniel Kahneman. 1973. “Availability: A Heuristic for Judging Frequency and Probability.” Cognitive Psychology 5 (2): 207–32. Tversky, Amos, and Daniel Kahneman. 1974. “Judgment Under Uncertainty: Heuristics and Biases.” Science 185 (4157): 1124–31. Tversky, Amos, and Daniel Kahneman. 1981. “The Framing of Decisions and the Psychology of Choice.” Science 211 (4481): 453–58. Tversky, Amos, and Daniel Kahneman. 1982. “Evidential Impact of Base Rates.” In Judgment Under Uncertainty: Heuristics and Biases, eds. Daniel Kahneman, Paul Slovic, and Amos Tversky. Cambridge, UK: Cambridge University Press, 153–62.

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The second school concentrates on “negative heuristics,” defined as heuristics that trip up people, violating basic laws of rationality and logic; e.g., the availability heuristic and the anchoring heuristic; see Amos Tversky and Daniel Kahneman, “Availability: A Heuristic for Judging Frequency and Probability,” Cognitive Psychology 5, no. 2 (September 1973): 207–32; Daniel Kahneman, “Reference Points, Anchors, Norms, and Mixed Feelings,” Organizational Behavior and Human Decision Processes 51, no. 2 (1992): 296–312. Daniel Kahneman and Amos Tversky are the leading exponents of this school. Both schools have demonstrated their relevance in impressive detail. Important disagreements exist between the two, to be sure; see Gerd Gigerenzer, “The Bias Bias in Behavioral Economics,” Review of Behavioral Economics 5, nos. 3–4 (December 2018): 303–36; Daniel Kahneman and Gary Klein, “Conditions for Intuitive Expertise: A Failure to Disagree,” American Psychologist 64, no. 6 (2009): 515–26.

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As psychologists have shown in countless experiments, final estimates made this way are biased toward the anchor, so a low anchor produces a lower estimate than a high anchor does. That means the quality of the anchor is critical. Use a good anchor, and you greatly improve your chance of making a good forecast; use a bad anchor, get a bad forecast. Unfortunately, it is easy to settle on a bad anchor. Daniel Kahneman and Amos Tversky pioneered research on this in a famous 1974 paper that included one of the stranger experiments in the history of psychology. They created a “wheel of fortune,” the dial of which displayed numbers from 1 to 100. Standing in front of test subjects, they gave the wheel a spin, and it stopped on a number.

Superforecasting: The Art and Science of Prediction
by Philip Tetlock and Dan Gardner
Published 14 Sep 2015

Spelling out this process makes it sound ponderous, slow, and calculating but it can happen entirely within System 1—making it automatic, fast, and complete within a few tenths of a second. You see the shadow. Snap! You are frightened—and running. That’s the “availability heuristic,” one of many System 1 operations—or heuristics—discovered by Daniel Kahneman, his collaborator Amos Tversky, and other researchers in the fast-growing science of judgment and choice. A defining feature of intuitive judgment is its insensitivity to the quality of the evidence on which the judgment is based. It has to be that way. System 1 can only do its job of delivering strong conclusions at lightning speed if it never pauses to wonder whether the evidence at hand is flawed or inadequate, or if there is better evidence elsewhere.

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The choice isn’t either/or, it is how to blend them in evolving situations. That conclusion is not as inspiring as a simple exhortation to take one path or the other, but it has the advantage of being true, as the pioneering researchers behind both perspectives came to understand. While Daniel Kahneman and Amos Tversky were documenting System 1’s failings, another psychologist, Gary Klein, was examining decision making among professionals like the commanders of firefighting teams, and discovering that snap judgments can work astonishingly well. One commander told Klein about going to a routine kitchen fire and ordering his men to stand in the living room and hose down the flames.

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When we make estimates, we tend to start with some number and adjust. The number we start with is called the anchor. It’s important because we typically underadjust, which means a bad anchor can easily produce a bad estimate. And it’s astonishingly easy to settle on a bad anchor. In classic experiments, Daniel Kahneman and Amos Tversky showed you could influence people’s judgment merely by exposing them to a number—any number, even one that is obviously meaningless, like one randomly selected by the spin of a wheel.10 So a forecaster who starts by diving into the inside view risks being swayed by a number that may have little or no meaning.

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street
by Justin Fox
Published 29 May 2009

Most of the information and all of the quotes in the foregoing paragraphs are from Kahneman’s autobiography, Les Prix Nobel 2002 (Stockholm: Nobel Foundation, 2003); also available at www.nobelprize.org. 4. I would repeat some of the questions Tversky asked, but they’re phrased in the arcane language of statistics. Amos Tversky and Daniel Kahneman, “Belief in the Law of Small Numbers,” Psychological Bulletin 2 (1971): 105–10. Reprinted in Daniel Kahneman, Paul Slovic, and Amos Tversky, Judgment Under Uncertainty: Heuristics and Biases (Cambridge, UK: Cambridge University Press, 1982), 23–31. 5. Herbert A. Simon, Models of My Life (New York: Basic Books, 1991), 144. 6. John F. Muth, “Rational Expectations and the Theory of Price Movements,” Econometrica (July 1961): 315–35.

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In flight training—or in investing, or in all manner of other endeavors clouded by statistical noise—that’s not the case at all, which is what Daniel Kahneman had suddenly realized.1 Decades later, after he had won a Nobel Prize in Economics for his work, Kahneman described this moment with the flight instructors as “the most satisfying Eureka experience of my career.” It was not an experience that he knew immediately what to do with. His own psychological research focused not on decision making but on technical matters like the dilation of people’s pupils as they memorized long numbers. It wasn’t until one day during the 1968–69 academic year, when Kahneman invited a younger colleague named Amos Tversky to speak to his students, that he began to figure out what to do with his insight.

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This post gave Simon a prominent speaking slot at the AEA’s annual meeting, which he used to talk about rationality and its limits. That presumably helped lead to his winning the next year’s Nobel Prize in Economics, “for his pioneering research into the decision-making process within economic organizations.”14 A year later, Daniel Kahneman and Amos Tversky built upon Simon’s ideas and their experiments to launch their first head-on attack on economics and its reliance on von Neumann and Morgenstern’s version of decision making under uncertainty. How do people really assess uncertain prospects? Kahneman and Tversky asked. First, they attach much importance to where things stand now, treating reductions in their current wealth significantly differently from reductions in future gains.

The Great Economists Ten Economists whose thinking changed the way we live-FT Publishing International (2014)
by Phil Thornton
Published 7 May 2014

. • Overconfidence in positive outcomes and in the decisionmakers’ own abilities contribute to financial booms and busts. • People often fail to fully account for the risks they are taking. Chapter 10 • Daniel Kahneman237 Further reading Dan Ariely, Predictably Irrational (HarperCollins, 2009). Daniel Kahneman, Attention and Effort (Prentice-Hall, 1973). Daniel Kahneman, Prospect Theory: an analysis of decision under risk (PN, 1977). Daniel Kahneman, Thinking, Fast and Slow (Penguin, 2012). Daniel Kahneman, Paul Slovic and Amos Tversky (eds), Judgment under Uncertainty: heuristics and biases (Cambridge University Press, 1982). Richard A. Thaler and Cass R. Sunstein, Nudge (Penguin, 2009). 

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In one particular set, they offered these choices: Prospect A: a 33% chance of winning $2,500; a 66% chance of $2,400; and a 1% chance of zero versus Prospect B: a certain win of $2,400 2. https://chronicle.com/article/The-Anatomy-of-Influence/129688/ 3. Daniel Kahneman and Amos Tversky, Econometrica, Vol. 47(2) (March 1979), pp. 263–92. Chapter 10 • Daniel Kahneman229 and Prospect C: a 33% chance of $2,500; and a 67% chance of zero versus Prospect D: a 34% chance of $2,400; and a 66% chance of zero Someone who picks A is a risk-seeker and according to the EUT should then also pick C as both have longer odds for a higher win.

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For instance, workers negotiating a pay rise will probably start bargaining against the first offer made by their employer rather than their goal. Each of these heuristics led to a range of biases that emerged from the misapplication of these decision-making short cuts. Kahneman identified six biases that emerged from the representativeness heuristic: base-rate neglect; insensitivity to 1. Amos Tversky and Daniel Kahneman, ‘Judgment under Uncertainty: heuristics and biases’, Science, New Series, Vol. 185(4157) (27 September 1974), pp. 1124–1131. 224 The Great Economists sample size; misconceptions of chance; insensitivity to predictability; the illusion of validity; and misconceptions of regression.

The Science of Fear: How the Culture of Fear Manipulates Your Brain
by Daniel Gardner
Published 23 Jun 2009

CHAPTER TWO 22: There is only the brain. 25: “Psychologists found that when they asked students to eat a piece of fudge. . . .” Like many of the references to the work of psychologists in this chapter and others that follow, this is drawn from Heuristics and Biases, edited by Thomas Gilovich, Dale Griffin, and Daniel Kahneman. Along with the earlier edition of the same work—edited by Paul Slovic, Amos Tversky, and Daniel Kahneman—it is the definitive text on the subject. 30: “. . . if you give it some careful thought . . . .” The answer is five cents. CHAPTER THREE 35: “Those who heard the higher number, guessed higher.” For the record, both groups were way off.

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Congratulations. You have a new customer. The Anchoring Rule, as influential as it is, is only a small part of a much wider scientific breakthrough with vast implications. As always in science, there are many authors and origins of this burgeoning field, but two who stand out are psychologists Daniel Kahneman and Amos Tversky. Four decades ago, Kahneman and Tversky collaborated on research that looked at how people form judgments when they’re uncertain of the facts. That may sound like a modest little backwater of academic work, but it is actually one of the most basic aspects of how people think and act.

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The idea of “bounded rationality” is now widely accepted, and its insights are fueling research throughout the social sciences. Even economists are increasingly accepting that Homo sapiens is not Homo economicus, and a dynamic new field called “behavioral economics” is devoted to bringing the insights of psychology to economics. Amos Tversky died in 1996. In 2002, Daniel Kahneman experienced the academic equivalent of a conquering general’s triumphal parade: He was awarded the Prize in Economic Sciences in Memory of Alfred Nobel. He is probably the only winner in the history of the prize who never took so much as a single class in economics. The amazing thing is that the Science article, which sent shock waves out in every direction, is such a modest thing on its face.

The Drunkard's Walk: How Randomness Rules Our Lives
by Leonard Mlodinow
Published 12 May 2008

A compelling and mathematically detailed analysis of coin-toss models in sports appears in chapter 2 of a book in progress by Charles M. Grinstead, William P. Peterson, and J. Laurie Snell, tentatively titled Fat Chance; www.math.dartmouth.edu/-prob/prob/NEW/bestofchance.pdf. Chapter 2: The Laws of Truths and Half-Truths 1. Daniel Kahneman, Paul Slovic, and Amos Tversky, eds., Judgment under Uncertainty: Heuristics and Biases (Cambridge: Cambridge University Press, 1982), pp. 90–98. 2. Amos Tversky and Daniel Kahneman, “Extensional versus Intuitive Reasoning: The Conjunction Fallacy in Probability Judgment,” Psychological Review 90, no. 4 (October 1983): 293–315. 3. Craig R. Fox and Richard Birke, “Forecasting Trial Outcomes: Lawyers Assign Higher Probabilities to Possibilities That Are Described in Greater Detail,” Law and Human Behavior 26, no. 2 (April 2002): 159–73. 4.

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IN 2002 THE NOBEL COMMITTEE awarded the Nobel Prize in Economics to a scientist named Daniel Kahneman. Economists do all sorts of things these days—they explain why teachers are paid so little, why football teams are worth so much, and why bodily functions help set a limit on the size of hog farms (a hog excretes three to five times as much as a human, so a farm with thousands of hogs on it often produces more waste than the neighboring cities).5 Despite all the great research generated by economists, the 2002 Nobel Prize was notable because Kahneman is not an economist. He is a psychologist, and for decades, with the late Amos Tversky, Kahneman studied and clarified the kinds of misperceptions of randomness that fuel many of the common fallacies I will talk about in this book.

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And so we begin our tour with some of the basic laws of probability and the challenges involved in uncovering, understanding, and applying them. One of the classic explorations of people’s intuition about those laws was an experiment conducted by the pair who did so much to elucidate our misconceptions, Daniel Kahneman and Amos Tversky.1 Feel free to take part—and learn something about your own probabilistic intuition. Imagine a woman named Linda, thirty-one years old, single, outspoken, and very bright. In college she majored in philosophy. While a student she was deeply concerned with discrimination and social justice and participated in antinuclear demonstrations.

Smarter Faster Better: The Secrets of Being Productive in Life and Business
by Charles Duhigg
Published 8 Mar 2016

bought lottery tickets Amos Tversky and Daniel Kahneman, “Availability: A Heuristic for Judging Frequency and Probability,” Cognitive Psychology 5, no. 2 (1973): 207–32; Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision Under Risk,” Econometrica: Journal of the Econometric Society 47, no. 2 (1979): 263–91; Amos Tversky and Daniel Kahneman, “Judgment Under Uncertainty: Heuristics and Biases,” Science 185, no. 4157 (1974): 1124–31; Amos Tversky and Daniel Kahneman, “The Framing of Decisions and the Psychology of Choice,” Science 211, no. 4481 (1981): 453–58; Daniel Kahneman and Amos Tversky, “Choices, Values, and Frames,” American Psychologist 39, no. 4 (1984): 341; Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Straus and Giroux, 2011); Daniel Kahneman and Amos Tversky, “On the Psychology of Prediction,” Psychological Review 80, no. 4 (1973): 237.

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bought lottery tickets Amos Tversky and Daniel Kahneman, “Availability: A Heuristic for Judging Frequency and Probability,” Cognitive Psychology 5, no. 2 (1973): 207–32; Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision Under Risk,” Econometrica: Journal of the Econometric Society 47, no. 2 (1979): 263–91; Amos Tversky and Daniel Kahneman, “Judgment Under Uncertainty: Heuristics and Biases,” Science 185, no. 4157 (1974): 1124–31; Amos Tversky and Daniel Kahneman, “The Framing of Decisions and the Psychology of Choice,” Science 211, no. 4481 (1981): 453–58; Daniel Kahneman and Amos Tversky, “Choices, Values, and Frames,” American Psychologist 39, no. 4 (1984): 341; Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Straus and Giroux, 2011); Daniel Kahneman and Amos Tversky, “On the Psychology of Prediction,” Psychological Review 80, no. 4 (1973): 237. how genes evolve Qiong Wang et al., “Naive Bayesian Classifier for Rapid Assignment of rRNA Sequences into the New Bacterial Taxonomy,” Applied and Environmental Microbiology 73, no. 16 (2007): 5261–67; Jun S. Liu, “The Collapsed Gibbs Sampler in Bayesian Computations with Applications to a Gene Regulation Problem,” Journal of the American Statistical Association 89, no. 427 (1994): 958–66.

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Thiel, “Cancer Patients’ Decision Making and Trial-Entry Preferences: The Effects of ‘Framing’ Information About Short-Term Toxicity and Long-Term Survival,” Medical Decision Making 15, no. 1 (1995): 4–12; David E. Bell, Howard Raiffa, and Amos Tversky, Decision Making: Descriptive, Normative, and Prescriptive Interactions (Cambridge: Cambridge University Press, 1988); Amos Tversky and Daniel Kahneman, “Rational Choice and the Framing of Decisions,” The Journal of Business 59, no. 4, part 2 (1986): S251–78. “inside their heads” In response to a fact-checking email, Johnson wrote: “The idea is that we think of a subset of the relevant information.”

The Art of Execution: How the World's Best Investors Get It Wrong and Still Make Millions
by Lee Freeman-Shor
Published 8 Sep 2015

Unfashionable insects One of the most important influences on the Rabbits is what I call NaFF-Bee – or narrative fallacy framing bias. I have to admit that every time I think of this term my mind conjures up an image of an insect with poor fashion sense, but it’s actually a very important concept. It is a condition that was alluded to in 1974 by two brilliant Israeli academics, Amos Tversky and his Nobel-Prize-winning collaborator Daniel Kahneman.3 (Their ideas will crop up throughout these points.) Tversky and Kahneman suggested that people’s decision making is influenced by a cognitive condition they referred to as a framing bias or anchoring heuristic. In other words, when people make decisions they tend to reach a conclusion based on the way a problem has been presented.

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I find it bizarre that top athletes and sportsmen and women have coaches but the majority of investment professionals do not. How can they expect to improve their game if they do not have constructive feedback? * * * 3 ‘Judgment under uncertainty: Heuristics and biases’, Science, by Amos Tversky and Daniel Kahneman (1974). 4 Free Radicals: The Secret Anarchy of Science, by Michael Brooks (2011). 5 The General Theory of Employment, Interest and Money, by John Maynard Keynes (1936). 6 How We Decide, by Johan Lehrer (2009). 7 ‘Money: A Bias for the Whole’, Journal of Consumer Research, by Himanshu Mishra, Arul Mishra and Dhananjay Nayakankuppam (2006). 8 ‘Denomination Effect’, Journal of Consumer Research, Priya Raghubir and Joydeep Srivastava (2009). 9 One Up on Wall Street, by Peter Lynch and John Rothchild (2000). 10 The Dhandho Investor, by Mohnish Pabrai (2007). 11 Quote attributed to Donald Rumsfeld. 12 Being Right or Making Money, by Ned Davis (2000). 13 Ibid. 14 Fortune’s Formula, by William Poundstone (2006). 15 blog.asmartbear.com/ignoring-the-wisdom-of-crowds.html 16 The Little Book of Behavioural Investing, by James Montier (2010). 17 An Astronaut’s Guide to Life on Earth, by Col.

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“[T]o be a great investor you should have a clear maximum time for the idea to play out.” 23 The Dhandho Investor, by Mohnish Pabrai (2007). 24 ‘Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice’, Management Science, Richard H. Thaler and Eric J. Johnson, (1990). Available at SSRN: ssrn.com/abstract=1424076 25 Lynch (2000). 26 ‘Prospect Theory: An Analysis of Decision Under Risk’, Econometrica, by Daniel Kahneman and Amos Tversky (1979). 27 ‘The disposition effect and underreaction to news,’ The Journal of Finance, by A. Frazzini (2006). 28 Extract from Warren Buffett’s annual letter to the shareholders of Berkshire Hathaway, (1993). 29 Pabrai (2007). 30 In nominal terms.

Decisive: How to Make Better Choices in Life and Work
by Chip Heath and Dan Heath
Published 26 Mar 2013

Repetition sparked trust: Alice Dechêne, et al. (2010), “The Truth About the Truth: A Meta-analytic Review of the Truth Effect,” Personality and Social Psychology Review 14: 238–57. 5 Loss aversion. The classic first discussion of loss aversion is Daniel Kahneman and Amos Tversky (1979), “Prospect Theory: An Analysis of Decision Under Risk,” Econometrica 47: 263–92. This paper by two psychologists appeared in the journal that is the high temple of technical economics and became the most cited paper ever to appear in the journal. It was one of the pieces of research discussed in Kahneman’s Nobel Prize citation (sadly, Amos Tversky had died a few years earlier). The coin-flip example is from that paper. Purchase protection: David M. Cutler and Richard Zeckhauser (2004), “Extending the Theory to Meet the Practice of Insurance,” Working paper, Harvard University.

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The Inc. magazine case study is Jennifer Alsever (January 24, 2012). “Case Study: To Sue or Not to Sue.” Inc., http://​www.​inc.​com/​magazine/​201202/​case-​study-​the-​rival-​mixed-​chicks-​sally-​beauty.​html. ACKNOWLEDGMENTS Anyone who writes about decision making owes a deep debt to Daniel Kahneman and Amos Tversky. Chip is grateful to Amos for introducing him to decision making and teaching him to admire elegant results. Some readers—you know who you are—gave us critical feedback on an early draft of the book. Your comments made such a difference; we hope you can see it in the final draft. It’s a lot better, thanks to you.

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Carroll and Chunka Mui (2008), Billion Dollar Lessons: What You Can Learn from the Most Inexcusable Business Failures of the Last Twenty-five Years (New York: Portfolio). The market-cap history is from Wolfram Alpha http://​www.​wolfram​alpha.​com/​input/?​i=​market+​cap+​eastman+​kodak+​history&​dataset= (accessed on July 20, 2012). 4 Amos Tversky and Eldar Shafir. Amos Tversky and Eldar Shafir (1992), “Choice Under Conflict: The Dynamics of Deferred Decision,” Psychological Science 3: 358–61. 5 Decided to eliminate submission deadlines. The Economic and Social Research Council example is from Colin Camerer, et al. (2003), “Regulation for Conservatives: Behavioral Economics and the Case for ‘Asymmetric Paternalism,’ ” University of Pennsylvania Law Review 151: 1211–54. 6 Partitioning study.

The Choice Factory: 25 Behavioural Biases That Influence What We Buy
by Richard Shotton
Published 12 Feb 2018

The answer lies in the concept of anchoring. 2. Ensure that the anchors that you communicate increases sales Anchoring occurs when exposure to a number serves as a reference point for subsequent decisions. This occurs whether that number is relevant or not. The original evidence for anchoring came from Amos Tversky and Daniel Kahneman, psychologists who at the time were based at Hebrew University in Jerusalem. In 1974, they published their findings on a seemingly bizarre experiment in the journal Science. The psychologists had recruited participants to spin a wheel of fortune. The wheel was rigged so that it stopped either on the number 10 or 65.

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Consumer.ology: The Truth About Consumers and the Psychology of Shopping [Philip Graves, 2010] David Ogilvy famously said, “People don’t think how they feel. They don’t say what they think and they don’t do what they say.” Graves proves this is true and outlines the implications for market research. Thinking, Fast and Slow [Daniel Kahneman, 2011] Kahneman won the Nobel Prize for Economics in 2002 for his work on behavioural economics with Amos Tversky. This book gives an overview of his major ideas. It’s not as easy to read as the other titles I’ve listed. Jordan Ellenberg, a professor at the University of Wisconsin-Madison, analysed data from Amazon’s Kindle to estimate how much of a book was read by the average reader.

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It should be installed in the CEO’s office and nowhere else, and certainly not in a basement room. 2. Introduce a higher-end line A simpler approach than forging a new comparison set is to adapt your own product range. Introducing a higher-end offering establishes a new comparison benchmark and, therefore, makes your other lines seem better value. An experiment by Amos Tversky and Itamar Simonson in 1993 quantified the effectiveness of this approach. The Stanford University psychologists questioned 221 participants about which camera they would prefer to buy. One group selected between two cameras: the Minolta X-370 priced at $170 or the Minolta Maxxum 3000i at $240.

Against the Gods: The Remarkable Story of Risk
by Peter L. Bernstein
Published 23 Aug 1996

The following people also made significant contributions to my work and warrant my deepest appreciation: Kenneth Arrow, Gilbert Bassett, William Baumol, Zalmon Bernstein, Doris Bullard, Paul Davidson, Donald Dewey, David Durand, Barbara Fotinatos, James Fraser, Greg Hayt, Roger Hertog, Victor Howe, Bertrand Jacquillat, Daniel Kahneman, Mary Kentouris, Mario Laserna, Dean LeBaron, Michelle Lee, Harry Markowitz, Morton Meyers, James Norris, Todd Petzel, Paul Samuelson, Robert Shiller, Charles Smithson, Robert Solow, Meir Statman, Marta Steele, Richard Thaler, James Tinsley, Frank Trainer, Amos Tversky,* and Marina von N. Whitman. Eight people generously undertook to read the manuscript in its entirety and to give me the benefit of their expert criticisms and suggestions.

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Extensive research and experimentation, however, reveal that departures from that model occur more frequently than most of us admit. You will discover yourself in many of the examples that follow. The most influential research into how people manage risk and uncertainty has been conducted by two Israeli psychologists, Daniel Kahneman and Amos Tversky. Although they now live in the United States-one at Princeton and the other at Stanford-both served in the Israeli armed forces during the 1950s. Kahneman developed a psychological screening system for evaluating Israeli army recruits that is still in use. Tversky served as a paratroop captain and earned a citation for bravery.

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Journal of Portfolio Management, Vol. 22, No. 1 (Fall), pp. 21-32. Kagel, John H., and Alvin E. Roth, eds., 1995. The Handbook of Experimental Economics. Princeton, New Jersey: Princeton University Press. Kahneman, Daniel, and Amos Tversky, 1979. "Prospect Theory: An Analysis of Decision under Risk." Econometrica, Vol. 47, No. 2, pp. 263-291.` Kahneman, Daniel, and Amos Tversky, 1984. "Choices, Values, and Frames." American Psychologist, Vol. 39, No. 4 (April), pp. 342-347. Kahneman, Daniel, Jack L. Knetsch, and Richard H. Thaler, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem."

Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions
by Dan Ariely
Published 19 Feb 2007

Chapter 1: The Truth about Relativity RELATED READINGS Amos Tversky, “Features of Similarity,” Psychological Review, Vol. 84 (1977). Amos Tversky and Daniel Kahneman, “The Framing of Decisions and the Psychology of Choice,” Science (1981). Joel Huber, John Payne, and Chris Puto, “Adding Asymmetrically Dominated Alternatives: Violations of Regularity and the Similarity Hypothesis,” Journal of Consumer Research (1982). Itamar Simonson, “Choice Based on Reasons: The Case of Attraction and Compromise Effects,” Journal of Consumer Research (1989). Amos Tversky and Itamar Simonson, “Context-Dependent Preferences,” Management Science (1993).

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Uri Simonsohn and George Loewenstein, “Mistake #37: The Impact of Previously Faced Prices on Housing Demand,” Economic Journal (2006). Chapter 3: The Cost of Zero Cost BASED ON Kristina Shampanier, Nina Mazar, and Dan Ariely, “How Small Is Zero Price? The True Value of Free Products,” Marketing Science (2007). RELATED READINGS Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision under Risk,” Econometrica (1979). Eldar Shafir, Itamar Simonson, and Amos Tversky, “Reason-Based Choice,” Cognition (1993). Chapter 4: The Cost of Social Norms BASED ON Uri Gneezy and Aldo Rustichini, “A Fine Is a Price,” Journal of Legal Studies (2000). James Heyman and Dan Ariely, “Effort for Payment: A Tale of Two Markets,” Psychological Science (2004).

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If we are thinking of buying a new house, we can be selective about the open houses we go to, skipping the houses that are above our means. If we are thinking about buying a new car, we can focus on the models that we can afford, and so on. We can also change our focus from narrow to broad. Let me explain with an example from a study conducted by two brilliant researchers, Amos Tversky and Daniel Kahneman. Suppose you have two errands to run today. The first is to buy a new pen, and the second is to buy a suit for work. At an office supply store, you find a nice pen for $25. You are set to buy it, when you remember that the same pen is on sale for $18 at another store 15 minutes away.

Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets
by Nassim Nicholas Taleb
Published 1 Jan 2001

This category of people includes Karl Popper (falsificationism and distrust of intellectual “answers,” actually of anyone who is confident that he knows anything with certainty), Friedrich Hayek and Milton Friedman (suspicion of governments), Adam Smith (intention of man), Herbert Simon (bounded rationality), Amos Tversky and Daniel Kahneman (heuristics and biases), the speculator George Soros, etc. The most neglected one is the misunderstood philosopher Charles Sanders Peirce, who was born a hundred years too early (he coined the term scientific “fallibilism” in opposition to Papal infallibility). Needless to say that the ideas of this book fall squarely into the Tragic category: We are faulty and there is no need to bother trying to correct our flaws.

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Go to the airport and ask travelers en route to some remote destination how much they would pay for an insurance policy paying, say, a million tugrits (the currency of Mongolia) if they died during the trip (for any reason).Then ask another collection of travelers how much they would pay for insurance that pays the same in the event of death from a terrorist act (and only a terrorist act). Guess which one would command a higher price? Odds are that people would rather pay for the second policy (although the former includes death from terrorism). The psychologists Daniel Kahneman and Amos Tversky figured this out several decades ago. The irony is that one of the sampled populations did not include people on the street, but professional predictors attending some society of forecasters’ annual meeting. In a now famous experiment they found that the majority of people, whether predictors or nonpredictors, will judge a deadly flood (causing thousands of deaths) caused by a California earthquake to be more likely than a fatal flood (causing thousands of deaths) occurring somewhere in North America (which happens to include California).

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It is a platitude that children learn only from their own mistakes; they will cease to touch a burning stove only when they are themselves burned; no possible warning by others can lead to developing the smallest form of cautiousness. Adults, too, suffer from such a condition. This point has been examined by behavioral economics pioneers Daniel Kahneman and Amos Tversky with regard to the choices people make in selecting risky medical treatments—I myself have seen it in my being extremely lax in the area of detection and prevention (i.e., I refuse to derive my risks from the probabilities computed on others, feeling that I am somewhat special) yet extremely aggressive in the treatment of medical conditions (I overreact when I am burned), which is not coherent with rational behavior under uncertainty.

The Irrational Economist: Making Decisions in a Dangerous World
by Erwann Michel-Kerjan and Paul Slovic
Published 5 Jan 2010

On checking out of our hotel five days later, we needed to verify the date of our arrival. It turned out to have been Friday the thirteenth! RECOMMENDED READING Kahneman, Daniel, Paul Slovic, and Amos Tversky, eds. (1982). Judgment Under Uncertainty: Heuristics and Biases. Cambridge: Cambridge University Press, 1982. Kahneman, Daniel, and Amos Tversky, eds. (2000). Choices, Values, and Frames. Cambridge: Cambridge University Press, 2000. Langer, Ellen J. (1982). “The Illusion of Control.” In Daniel Kahneman, Paul Slovic, and Amos Tversky, eds. Judgment Under Uncertainty: Heuristics and Biases. Cambridge: Cambridge University Press. Schelling, Thomas (1996). “Coping Rationally with Lapses from Rationality,” Eastern Economic Journal (Summer): 251-269.

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Fortunately, the story did not stop there. Stimulated by creative conceptual, methodological, and empirical work by the more senior authors in The Irrational Economist and many others, including Amos Tversky, Daniel Kahneman, and Richard Thaler, the trickle of studies challenging traditional economic assumptions of rationality became a torrent. Nobel prizes in economics awarded to Herbert Simon in 1978, to George Akerlof in 2001, and to Daniel Kahneman and Vernon Smith in 2002 for their contributions toward understanding the behavioral dynamics of economic decisions further contributed to what has become a revolution in thinking.

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(Maybe it is not a truly superstitious belief that if I drive without a license I’ll be stopped by an officer. It may be that if I drive without a license I cannot stop thinking I have no license, and cannot stop looking in the mirror for a police car. It’s my imagination I cannot control, not my logic.) We’ve been taught by psychologists Daniel Kahneman and Amos Tversky that many people are innocent of statistical sampling, that many get “anchored” by a randomly produced number, that many are seduced by “representativeness,” and many don’t understand “regression to the mean.” You walk into a public library in the suburb of a large city and see a man, dressed in tie and jacket, reading Thucydides; you have already learned that he is either a concert violinist or a truck driver.

Misbehaving: The Making of Behavioral Economics
by Richard H. Thaler
Published 10 May 2015

Notes Bibliography List of Figures Acknowledgments Index The foundation of political economy and, in general, of every social science, is evidently psychology. A day may come when we shall be able to deduce the laws of social science from the principles of psychology. —VILFREDO PARETO, 1906 PREFACE Before we get started, here are two stories about my friends and mentors, Amos Tversky and Daniel Kahneman. The stories provide some hints about what to expect in this book. Striving to please Amos Even for those of us who can’t remember where we last put our keys, life offers indelible moments. Some are public events. If you are as old as I am, one may be the day John F. Kennedy was assassinated (freshman in college, playing pickup basketball in the college gym).

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It was like discovering a new species. I had never met anyone in academia with their backgrounds. I ended up giving Fischhoff a ride to the airport. As we drove, Fisch-hoff told me he had completed a PhD in psychology at the Hebrew University in Israel. There he had worked with two guys whose names I had never heard: Daniel Kahneman and Amos Tversky. Baruch told me about his now-famous thesis on “hindsight bias.” The finding is that, after the fact, we think that we always knew the outcome was likely, if not a foregone conclusion. After the virtually unknown African American senator Barack Obama defeated the heavily favored Hillary Clinton for the Democratic Party presidential nomination, many people thought they had seen it coming.

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Wall Street Journal, October 1. Camerer, Colin F. 1989. “Bubbles and Fads in Asset Prices.” Journal of Economic Surveys 3, no. 1: 3–41. ———. 1997. “Progress in Behavioral Game Theory.” Journal of Economic Perspectives 11, no. 4: 167–88. ———. 2000. “Prospect Theory in the Wild: Evidence from the Field.” In Daniel Kahneman and Amos Tversky, eds., Choices, Values, and Frames. Cambridge, UK: Cambridge University Press. ———. 2003. Behavioral Game Theory: Experiments in Strategic Interaction. Princeton: Princeton University Press. ———, Teck-Hua Ho, and Juin-Kuan Chong. 2004. “A Cognitive Hierarchy Model of Games.” Quarterly Journal of Economics 119, no. 3: 861–98. ———, Samuel Issacharoff, George Loewenstein, Ted O’Donoghue, and Matthew Rabin. 2003.

Irrational Exuberance: With a New Preface by the Author
by Robert J. Shiller
Published 15 Feb 2000

The ranges serve as “anchors” to which they make their answers conform. Psychologists have shown that people’s decisions in ambiguous situations are influenced by whatever available anchor is at hand. When you must come up with an estimate, and you are unsure what to say, you take whatever number is before you. Psychologists Amos Tversky and Daniel Kahneman demonstrated this tendency clearly in an experiment involving a wheel of fortune: a large wheel with the numbers from 1 to 100 on it, similar to those used in television game shows, that is designed to stop at a random number when it is spun. Subjects were asked questions whose answers were numbers between 1 and 100, difficult questions such as the percentage of African nations in the United Nations.

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For a more comprehensive recent survey of the role of psychology in finance, see Hersh Shefrin, Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing (Boston: Harvard Business School Press, 2000); or Andrei Shleifer, Inefficient Markets: An Introduction to Behavioral Finance (Oxford: Oxford University Press, 2000). 2. See Amos Tversky and Daniel Kahneman, “Judgment under Uncertainty: Heuristics and Biases,” Science, 185 (1974): 1124–31. 3. See Robert J. Shiller, “Comovements in Stock Prices and Comovements in Dividends,” Journal of Finance, 44 (1989): 719–29. 4. See Steven L. Heston and K. Geert Rouwenhorst, “Does Industrial Structure Explain the Benefits of International Diversification?”

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Advanced Macroeconomics. New York: McGraw-Hill, 1996. Schäfer, Bodo. Der Weg zur finanziellen Freiheit: In sieben Jahren die erste Million. Frankfurt: Campus Verlag, 1999. Shafir, Eldar, Peter Diamond, and Amos Tversky. “Money Illusion.” Quarterly Journal of Economics, 112(2) (1997): 341–74. Shafir, Eldar, Itamar Simonson, and Amos Tversky. “Reason-Based Choice.” Cognition, 49 (1993): 11–36. Shafir, Eldar, and Amos Tversky. “Thinking through Uncertainty: Nonconsequential Reasoning and Choice.” Cognitive Psychology, 24 (1992): 449–74. Sharpe, Steven. “Stock Prices, Expected Returns and Inflation.” Unpublished paper, Board of Governors of the Federal Reserve System, Washington, D.C., 1999.

The Singularity Is Nearer: When We Merge with AI
by Ray Kurzweil
Published 25 Jun 2024

Thaler et al., “The Effect of Myopia and Loss Aversion on Risk Taking: An Experimental Test,” Quarterly Journal of Economics 112, no. 2 (May 1997): 647–61, https://www.jstor.org/stable/2951249; Daniel Kahneman and Amos Tversky, “The Psychology of Preferences,” Scientific American 246, no. 1 (January 1981): 160–73; Daniel Kahneman, Paul Slovic, and Amos Tversky, eds., Judgment Under Uncertainty: Heuristics and Biases (Cambridge, UK: Cambridge University Press, 1982); Amos Tversky and Daniel Kahneman, “Judgment Under Uncertainty: Heuristics and Biases,” Science 185, no. 4157 (September 27, 1974): 1124–31, http://doi.org/10.1126/science.185.4157.1124; Daniel Kahneman and Amos Tversky, “On the Study of Statistical Intuitions,” Cognition 11, no. 2 (March 1982): 123–41; Daniel Kahneman and Amos Tversky, “Variants of Uncertainty,” Cognition 11, no. 2 (March 1982): 143–57.

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Thaler et al., “The Effect of Myopia and Loss Aversion on Risk Taking: An Experimental Test,” Quarterly Journal of Economics 112, no. 2 (May 1997): 647–61, https://www.jstor.org/stable/2951249; Daniel Kahneman and Amos Tversky, “The Psychology of Preferences,” Scientific American 246, no. 1 (January 1981): 160–73; Daniel Kahneman, Paul Slovic, and Amos Tversky, eds., Judgment Under Uncertainty: Heuristics and Biases (Cambridge, UK: Cambridge University Press, 1982); Amos Tversky and Daniel Kahneman, “Judgment Under Uncertainty: Heuristics and Biases,” Science 185, no. 4157 (September 27, 1974): 1124–31, http://doi.org/10.1126/science.185.4157.1124; Daniel Kahneman and Amos Tversky, “On the Study of Statistical Intuitions,” Cognition 11, no. 2 (March 1982): 123–41; Daniel Kahneman and Amos Tversky, “Variants of Uncertainty,” Cognition 11, no. 2 (March 1982): 143–57. BACK TO NOTE REFERENCE 40 Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Straus and Giroux, 2011), 7; Daniel Kahneman and Amos Tversky, “On the Psychology of Prediction,” Psychological Review 80, no. 4 (1973): 237–51, https://doi.org/10.1037/h0034747. BACK TO NOTE REFERENCE 41 Tversky and Kahneman, “Judgment Under Uncertainty,” 1125–26. BACK TO NOTE REFERENCE 42 Tversky and Kahneman, “Judgment Under Uncertainty,” 1127–28.

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Pessimism can be a self-fulfilling prophecy.”[39] This is especially true now that social media aggregates alarming news from the entire planet—whereas previous generations were mainly just informed about local or regional events. Yet my converse observation is: “Optimism is not an idle speculation on the future but rather a self-fulfilling prophecy.” Belief that a better world is genuinely possible is a powerful motivator to work hard on creating it. Daniel Kahneman received the Nobel Prize in Economics for his work (some of it in collaboration with Amos Tversky) explaining invalid and unconscious heuristics that people use in making estimates about the world.[40] Their research demonstrated that people systematically disregard prior probability—the fact that things that are true about a group in general tend to be true about individuals from that group that one encounters.

Nudge: Improving Decisions About Health, Wealth, and Happiness
by Richard H. Thaler and Cass R. Sunstein
Published 7 Apr 2008

And one to which we will return: “No more than 25 percent of the guests at a university dinner party can come from the economics department without spoiling the conversation.” Although rules of thumb can be very helpful, their use can also lead to systematic biases. This insight, first developed decades ago by two Israeli psychologists, Amos Tversky and Daniel Kahneman (1974), has changed the way psychologists (and eventually economists) think about thinking. Their original work identified three heuristics, or rules of thumb—anchoring, availability, and representativeness—and the biases that are associated with each. Their research program has come to be known as the “heuristics and biases” approach to the study of human judgment.

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How We Know What Isn’t So: The Fallibility of Human Reason in Everyday Life. New York: Free Press, 1991. Gilovich, Thomas, Dale Gri¤n, and Daniel Kahneman. Heurisitics and Biases: The Psychology of Intuitive Judgment. Cambridge: Cambridge University Press, 2002. Gilovich, Thomas, Victoria H. Medvec, and Kenneth Savitsky. “The Spotlight Effect in Social Judgment: An Egocentric Bias in Estimates of the Salience of One’s Own Actions and Appearance.” Journal of Personality and Social Psychology 78 (2000): 211–22. Gilovich, Thomas, Robert Vallone, and Amos Tversky. “The Hot Hand in Basketball: On the Misperception of Random Sequences.” Cognitive Psychology 17 (1985): 295– 314.

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Journal of Risk and Uncertainty 1 (1988): 7–59. Schkade, David A., and Daniel Kahneman. “Does Living in California Make People Happy? A Focusing Illusion in Judgments of Life Satisfaction.” Psychological Science 9 (1998): 340–46. Schkade, David, Cass R. Sunstein, and Daniel Kahneman. “Deliberating About Dollars: The Severity Shift.” Columbia Law Review 100 (2000): 1139–76. Schneider, Carl E. The Practice of Autonomy: Patients, Doctors, and Medical Decisions. Oxford: Oxford University Press, 1998. Schreiber, Charles A., and Daniel Kahneman. “Determinants of the Remembered Welfare of Aversive Sounds.”

Dollars and Sense: How We Misthink Money and How to Spend Smarter
by Dr. Dan Ariely and Jeff Kreisler
Published 7 Nov 2017

Ziv Carmon (INSEAD) and Dan Ariely (MIT), “Focusing on the Forgone: How Value Can Appear So Different to Buyers and Sellers,” Journal of Consumer Research 27, no. 3 (2000): 360–370. 4. Daniel Kahneman (UC Berkeley), Jack L. Knetsch (Simon Fraser University), and Richard Thaler (Cornell), “Experimental Tests of the Endowment Effect and the Coarse Theorem,” Journal of Political Economy 98 (1990): 1325–1348. 5. James R. Wolf (Illinois State University), Hal R. Arkes (Ohio State University), and Waleed A. Muhanna (Ohio State University), “The Power of Touch: An Examination of the Effect of Duration of Physical Contact on the Valuation of Objects,” Judgment and Decision Making 3, no. 6 (2008): 476–482. 6. Daniel Kahneman (University of British Columbia) and Amos Tversky (Stanford), “Prospect Theory: An Analysis of Decision under Risk,” Econometrica: Journal of Econometric Society 47, no. 2 (1979): 263–291. 7.

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Once we’ve purchased a can of soda for a dollar, that decision stays with us and influences how we determine its value from that point forward. We have married a monetary amount with a product, for better or worse, till death—or shaken can of soda—do us part. Anchoring’s impact was originally demonstrated by Amos Tversky and Daniel Kahneman in a 1974 experiment regarding the United Nations.2 They had a group of college students spin a wheel that, because it was rigged, landed on either 10 or 65. They then asked the students two questions: 1.Is the percentage of African nations in the UN higher or lower than 10 or 65 (whichever number the wheel had landed on)?

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That will be us, on the beach, drinking that cerveza with those unemployed twenty-year-olds. We just hope they include either virtual weight loss or a virtual appreciation for “Dad bod,” too. IT’S IN THE WAY THAT YOU LOSE IT The endowment effect is deeply connected to LOSS AVERSION. The principle of loss aversion, first proposed by Daniel Kahneman and Amos Tversky,6 holds that we value gains and losses differently. We feel the pain of losses more strongly than we do the same magnitude of pleasure. And it’s not just a small difference—it’s about twice as much. In other words, we feel the pain of losing $10 about twice as strongly as we do the pleasure of winning $10.

Mindware: Tools for Smart Thinking
by Richard E. Nisbett
Published 17 Aug 2015

The research has also convinced some students of the law that self-reports about motives and goals can be highly unreliable—not for reasons of self-enhancement or self-protection, but because so much of mental life is inaccessible. The errors discovered in self-reports led me to a concern with the accuracy of our inferences in everyday life in general. Following the cognitive psychologists Amos Tversky and Daniel Kahneman, I compared people’s reasoning to scientific, statistical, and logical standards and found large classes of judgments to be systematically mistaken. Inferences frequently violate principles of statistics, economics, logic, and basic scientific methodology. Work by psychologists on these questions has influenced philosophers, economists, and policy makers.

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Such heuristics are helpful guides for judgment—they’ll often give us the right answer and normally beat a stab in the dark, often by a long shot. Marseille does indeed have a bigger population than Nice. But Toulouse has a bigger population than Nice. Several important heuristics were identified by the Israeli cognitive psychologists Amos Tversky and Daniel Kahneman. The most important of their heuristics is the representativeness heuristic.22 This rule of thumb leans heavily on judgments of similarity. Events are judged as more likely if they’re similar to the prototype of the event than if they’re less similar. The heuristic is undoubtedly helpful more often than not.

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Inequality: A Reassessment of the Effects of Family and Schooling in America. New York: Harper and Row, 1972. Jennings, Dennis, Teresa M. Amabile, and Lee Ross. “Informal Covariation Assessment: Data-Based Vs. Theory-Based Judgments.” In Judgment Under Uncertainty: Heuristics and Biases, edited by Amos Tversky and Daniel Kahneman. New York: Cambridge University Press, 1980. Ji, Li-Jun, Yanjie Su, and Richard E. Nisbett. “Culture, Change and Prediction.” Psychological Science 12 (2001): 450–56. Ji, Li-Jun, Zhiyong Zhang, and Tieyuan Guo. “To Buy or to Sell: Cultural Differences in Stock Market Decisions Based on Stock Price Trends.”

Infotopia: How Many Minds Produce Knowledge
by Cass R. Sunstein
Published 23 Aug 2006

Sunstein, ed., Behavioral Law and Economics (Cambridge, UK: Cambridge University Press, 2000). 2. See Amos Tversky and Daniel Kahneman, “Availability: A Heuristic for Judging Frequency and Probability,” Cognitive Psychology 5 (1973): 208 (discussing availability heuristic). 3. Paul Slovic, The Perception of Risk (London: Earthscan Publications, 2000), 37–48. Notes to Pages 70–76 / 241 4. Ibid., 40. 5. See Donald A. Redelmeier et al., “Understanding Patients’ Decisions: Cognitive and Emotional Perspectives,” Journal of the American Medical Association 270 (1993): 73 (discussing framing effects in medical context). 6. Amos Tversky and Daniel Kahneman, “Extensional versus Intuitive Reasoning: The Conjunction Fallacy in Probability Judgment,” in Gilovich et al., Heuristics and Biases, 19, 22–25 (discussing representativeness). 7.

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Amos Tversky and Daniel Kahneman, “Extensional versus Intuitive Reasoning: The Conjunction Fallacy in Probability Judgment,” in Gilovich et al., Heuristics and Biases, 19, 22–25 (discussing representativeness). 7. See Amos Tversky and Daniel Kahneman, “Judgment under Uncertainty: Heuristics and Biases,” in Judgment under Uncertainty: Heuristics and Biases, ed. Daniel Kahneman, Paul Slovic, and Amos Tversky (Cambridge, UK: Cambridge University Press, 1982), 11–12; Barbara Mellers et al., “Do Frequency Representations Eliminate Conjunction Effects?,” Psychological Science Journal 12 (2001). 8. See Stasser and Dietz-Uhler, “Collective Choice, Judgment, and Problem Solving,” 49–50.

How to Predict the Unpredictable
by William Poundstone

It sounds like I’m saying that people believe that random winning streaks will continue … except when they believe the complete opposite. The gambler’s fallacy and the hot hand theory are really two sides of the same coin. Both are consequences of the “law of small numbers.” That is a semifacetious rule proposed in 1971 by Amos Tversky and Daniel Kahneman. It runs, People’s intuitions about random sampling appear to satisfy the law of small numbers, which asserts that the law of large numbers applies to small numbers as well. To understand the point, and the verbal wit, you need to know what the “law of large numbers” is. It’s one of the most fundamental rules of probability.

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Be suspicious when too many numbers just top a psychologically significant threshold. • A last-two-digits test can help detect fraudulent managers who unconsciously favor certain digit pairs. See notes on this chapter Part Two The Hot Hand Theory Thirteen In the Zone Basketball was an obsession of 5'9" Israeli-American psychologist Amos Tversky. He watched the game as a fan, and he played it with friends, aggressively. “He was a rough player,” Tversky’s wife, Barbara, told me. “He came home from a basketball game wounded. I said, ‘Basketball is not a contact sport!’” As a fan, Tversky was aware of the hot hand theory. This is a belief in winning streaks, widespread among basketball players, coaches, commentators, and fans.

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Geoghegan, Bernard Dionysius (2011). “From Information Theory to French Theory: Jakobson, Lévi-Strauss, and the Cybernetic Apparatus.” Critical Inquiry 38, 96–126. Gilovich, Thomas (1993). How We Know What Isn’t So: The Fallibility of Human Reason in Everyday Life. New York: Free Press. Gilovich, Thomas, Robert Vallone, and Amos Tversky (1985). “The Hot Hand in Basketball: On the Misperception of Random Sequences.” Cognitive Psychology 17, 295–314. Gladstone, Beth Pinsker (2012). “Abandon online shopping cart, reap discount?” Reuters, Jun. 7, 2012. Golden, Daniel (2009). “Cash Me If You Can.” Portfolio.com, Mar. 18, 2009. Goodfellow, Louis D. (1992).

The Paradox of Choice: Why More Is Less
by Barry Schwartz
Published 1 Jan 2004

Evaluating the Information EVEN IF WE CAN ACCURATELY DETERMINE WHAT WE WANT AND THEN find good information, in a quantity we can handle, do we really know how to analyze, sift, weigh, and evaluate it to arrive at the right conclusions and make the right choices? Not always. Spear-headed by psychologists Daniel Kahneman and Amos Tversky, researchers have spent the last thirty years studying how people make decisions. Their work documents the variety of rules of thumb we use that often lead us astray as we try to make wise decisions. Availability IMAGINE THAT YOU’RE IN THE MARKET FOR A NEW CAR AND THAT YOU care about only two things: safety and reliability.

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Beyond the difference in presentation, though, there is no difference in the price structure at these two gas stations. A discount for paying cash is, effectively, the same as a surcharge for using credit. Nonetheless, fuel-hungry consumers will have very different subjective responses to the two different propositions. Daniel Kahneman and Amos Tversky call this effect framing. What determines whether a given price represents a discount or a surcharge? Consumers certainly can’t tell from the price itself. In addition to the current price, potential buyers would need to know the standard or “reference” price. If the reference price of gas is $1.55, then those who pay cash are getting a discount.

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As long as expectations keep pace with realizations, people may live better, but they won’t feel better about how they live. Prospects, Frames, and Evaluation IN CHAPTER 3, I DISCUSSED A VERY IMPORTANT FRAMEWORK FOR understanding how we assess subjective experience. It is called prospect theory, and it was developed by Daniel Kahneman and Amos Tversky. What the theory claims is that evaluations are relative to a baseline. A given experience will feel positive if it’s an improvement on what came before and negative if it’s worse than what came before. To understand how we will judge an experience, it is necessary first to find out where we set our hedonic zero point.

Why Nudge?: The Politics of Libertarian Paternalism
by Cass R. Sunstein
Published 25 Mar 2014

See generally ADVANCES IN BEHAVIORAL ECONOMICS (Colin F. Camerer et al. eds., 2003) (offering wide range of findings); ADVANCES IN BEHAVIORAL FINANCE, VOLUME II (Richard H. Thaler ed., 2005); CHOICES, VALUES, AND FRAMES (Daniel Kahneman & Amos Tversky eds., 2000) (offering a large number of relevant findings); HEURISTICS AND BIASES: THE PSYCHOLOGY OF INTUITIVE Judgment (Thomas Gilovich et al. eds., 2002) (outlining a variety of empirical findings). 2. DANIEL KAHNEMAN, THINKING, FAST AND SLOW (2011); see also RICHARD H. THALER & CASS R. SUNSTEIN, NUDGE: IMPROVING DECISIONS ABOUT HEALTH, WEALTH, AND HAPPINESS 19–22 (2008) (discussing “Humans” and “Econs”). 3.

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See SHAROT ET AL., supra note 50. 60. Id. at 1477. For some compelling evidence of the neural foundations of optimism, and particularly the more ready incorporation of good news than bad news, see SHAROT ET AL., supra note 52. 61. SHAROT ET AL., supra note 50, at 1477. 62. See id. 63. See Amos Tversky & Daniel Kahneman, Availability: A Heuristic for Judging Frequency and Probability, 5 COGNITIVE PSYCHOL. 207, 221 (1973). 64. See Elke U. Weber, Experience-Based and Description-Based Perceptions of Long-Term Risk: Why Global Warming Does Not Scare Us (Yet), 77 CLIMATIC CHANGE 103, 107–8 (2006). 65. See Laurette Dubé-Rioux & J.

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This is the basic argument of SARAH CONLY, AGAINST AUTONOMY: JUSTIFYING COERCIVE PATERNALISM (2012), who emphasizes the need to assess the full set of costs and benefits. 37. See CHRISTOPHER CHABRIS & DANIEL SIMONS, THE INVISIBLE GORILLA: AND OTHER WAYS OUR INTUITIONS DECEIVE US 6–8 (2010). 38. See OREN BAR-GILL, SEDUCTION BY CONTRACT 18–23 (2012). Early work by Daniel Kahneman focused on closely related questions. See DANIEL KAHNEMAN, ATTENTION AND EFFORT (1973). 39. See Victor Stango & Jonathan Zinman, Limited and Varying Consumer Attention: Evidence from Shocks to the Salience of Bank Overdraft Fees 27–28 (Fed. Reserve Bank of Phila., Working Paper No. 11–17, 2011), http://ssrn.com/abstract=1817916. 40.

Retirementology: Rethinking the American Dream in a New Economy
by Gregory Brandon Salsbury
Published 15 Mar 2010

In fact, the quaint notion that people will behave in ways that are predictable and observable ignores what 2002 Nobel Prize winner in Economics Dr. Daniel Kahneman calls “the human agent.” In an interview I conducted with Dr. Kahneman in 2004, this pioneer in behavioral finance told me about how his discipline doesn’t assume perfect rationality, which is why perceptual bias, complexity, and emotions like pride and anger, illustrated in our exercise, can overshadow sound financial decisions. For example, research from Dr. Kahneman and Dr. Amos Tversky showed that investors are more sensitive to decreases in the value of their portfolio than to increases in value.41 Even in good times, many investors tend to suffer from what experts refer to as “myopic loss aversion”—a basic tenet from the field of behavioral finance, which holds that people psychologically weigh losses twice as heavily as gains.

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The result is that they end up working much shorter hours on the very lucrative rainy days, when everyone is looking for a cab, and giving up the opportunity to earn much more money. Conversely, when a cabbie works much longer hours on sunny days when cabs are plentiful, he gives up the opportunity to do something that may be more profitable or enjoyable than trying to meet the $200 threshold he’s set for himself driving the cab. “Opportunity costs,” according to Daniel Kahneman, Amos Tversky and Richard Thaler, “typically receive much less weight than out-of-pocket costs.”9 It’s conceivable that if the cab driver were to maximize the opportunity to earn money when the weather was bad, he’d easily earn an average of $200 a day. When investors try to calculate the returns on their portfolios, they often don’t bother to use calculators.

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November 17, 2009. 31 The Heritage Foundation, “The Obama Budget: Spending, Taxes, and Doubling the National Debt,” March 16, 2009. 32 Reuters, “Obama seeks estate tax hike,” May 11, 2009. 33 The Heritage Foundation, “The Obama Budget: Spending, Taxes, and Doubling the National Debt,” March 16, 2009. 34 Center on Budget and Policy Priorities, “Tax Measures Help Balance State Budgets: A Common and Reasonable Response to Shortfalls,” July 9, 2009. 35 TheTrumpet.com, “California Budget Crisis About to Affect People’s Everyday Lives,” January 21, 2009. 36 Los Angeles Times, “California faces financial meltdown as debt grows by $1.7m an hour,” December 12, 2008. 37 The Dallas Morning News, “In bad economy, many Californians packing up and leaving,” January 11, 2009. 38 National Coalition on Healthcare, “Insurance: Issue Areas,” 2009. 39 Center on Budget and Policy Priorities, “Poverty Rose, Median Income Declined, and Job-Based Health Insurance Continued to Weaken in 2008; Recession Likely to Expand Ranks of Poor and Uninsured in 2009 and 2010,” September 10, 2009. 40 The Pew Charitable Trusts, Financial Report: Entitlement Programs Underfunded by Trillions, December 16, 2008. 41 Kahneman, Daniel, and Amos Tversky, “Prospect Theory: An Analysis of Decision Under Risk,” Econometrica, Vol. 47, No. 2 (March 1979), pp. 263–292. 42 USA Today, “Is this the next baby boom?” July 16, 2008. 1. Great Expectations MONELERIOUS: [mun-ih-lair-ee-uhs] The state of being wildly incorrect in one’s thinking about any given money matter.

The Irrational Bundle
by Dan Ariely
Published 3 Apr 2013

Chapter 1: The Truth about Relativity RELATED READINGS Amos Tversky, “Features of Similarity,” Psychological Review, Vol. 84 (1977). Amos Tversky and Daniel Kahneman, “The Framing of Decisions and the Psychology of Choice,” Science (1981). Joel Huber, John Payne, and Chris Puto, “Adding Asymmetrically Dominated Alternatives: Violations of Regularity and the Similarity Hypothesis,” Journal of Consumer Research (1982). Itamar Simonson, “Choice Based on Reasons: The Case of Attraction and Compromise Effects,” Journal of Consumer Research (1989). Amos Tversky and Itamar Simonson, “Context-Dependent Preferences,” Management Science (1993).

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If we are thinking of buying a new house, we can be selective about the open houses we go to, skipping the houses that are above our means. If we are thinking about buying a new car, we can focus on the models that we can afford, and so on. We can also change our focus from narrow to broad. Let me explain with an example from a study conducted by two brilliant researchers, Amos Tversky and Daniel Kahneman. Suppose you have two errands to run today. The first is to buy a new pen, and the second is to buy a suit for work. At an office supply store, you find a nice pen for $25. You are set to buy it, when you remember that the same pen is on sale for $18 at another store 15 minutes away.

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Chapter 1: Paying More for Less: Why Big Bonuses Don’t Always Work Based on Dan Ariely, Uri Gneezy, George Loewenstein, and Nina Mazar, “Large Stakes and Big Mistakes,” The Review of Economic Studies 76, vol. 2 (2009): 451–469. Racheli Barkan, Yosef Solomonov, Michael Bar-Eli, and Dan Ariely, “Clutch Players at the NBA,” manuscript, Duke University, 2010. Mihály Csíkszentmihályi, Flow: The Psychology of Optimal Experience (New York: Harper and Row, 1990). Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision under Risk,” Econometrica 47, no. 2 (1979): 263–291. Robert Yerkes and John Dodson, “The Relation of Strength of Stimulus to Rapidity of Habit-Formation,” Journal of Comparative Neurology and Psychology 18 (1908): 459–482. Robert Zajonc, “Social Facilitation,” Science 149 (1965): 269–274.

Adaptive Markets: Financial Evolution at the Speed of Thought
by Andrew W. Lo
Published 3 Apr 2017

Fortune favors the brave, and market prices reflect our innate tendency to avoid uncertainty. LOSING HURTS MORE THAN WINNING FEELS GOOD While the distinction between risk and uncertainty might seem subtle at first, even subtler biases are hardwired into our psychology. Two experimental psychologists, Daniel Kahneman and Amos Tversky, both outsiders to economics, made their careers studying these biases, and in so doing, they radically changed how scientists viewed the human decision-making process. Kahneman and Tversky were one of the great scientific partnerships of the modern era. They worked so closely together that they would randomly choose which author would appear first in their publication credits by tossing a coin—a method entirely fitting with their research focus: decision making under uncertainty.

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The representativeness heuristic also explains why people believe in winning streaks, from the picks of a hot stock market guru to the “hot hand” on a basketball court. Basketball fans and players alike believe in the hot hand phenomenon—the ability of a player to develop a streak of exceptional performance in sinking baskets—where a mathematician might say it’s due to luck. In 1985, Thomas Gilovich, Robert Vallone, and Amos Tversky (this time without Daniel Kahneman) set out to discover if the hot hand was actually true.27 The researchers had unprecedented access to the Philadelphia 76ers, including the team’s coach, all of whom were convinced that players developed hot hands from time to time. Professional sports are an excellent place to find large quantities of meticulously recorded behavioral data, and in this case, the team statistician for the Philadelphia 76ers had recorded every three-point attempt made by a player during Philadelphia’s home games in the 1980–81 season.

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In the bigger picture, if we let our fear instinct drive our reaction to financial crises, we’ll likely regret the responses produced by our amygdalas. This applies not only to investors, but also to regulators and policymakers, whose responses to fear can have much larger consequences on the financial system than any single player in the market. The psychologist Paul Slovic, a colleague of Daniel Kahneman and Amos Tversky, has studied in depth how people perceive risk while experiencing strong emotion. Slovic found a persistent emotional bias that colors our reactions to risk.12 If the potential risks and benefits of a policy are framed in a manner to provoke a negative emotional response, people overweigh the risks and downplay the benefits, while if a policy is framed in a positive manner, people overweigh the benefits and downplay the risks.

Licence to be Bad
by Jonathan Aldred
Published 5 Jun 2019

THE WEIRD WORLD OF NUDGE A widely discussed development in economics in recent years has been the emergence of behavioural economics. In essence, behavioural economics tries to study how people actually behave – in contrast to fantasies such as homo economicus which dominate orthodox economics. It uses ideas and methods from psychology, and it was two psychologists, Daniel Kahneman and Amos Tversky, who perhaps did more than anyone else to dislodge old orthodoxies in economics about how we think and choose. One big idea in behavioural economics began with Kahneman and Tversky’s Asian disease problem: Suppose you are told that an unusual Asian disease is expected to kill 600 people in your country.

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Forster famously contrasted a simple succession of facts – ‘The king died and then the queen died’ – with a plot: ‘The king died, and then the queen died of grief.’ There is more information in this plot, yet it is no harder to remember: it is cognitively more efficient.16 However, there is a catch. Daniel Kahneman and Amos Tversky provided the first clear evidence. The Linda Problem remains one of their most famous experiments: 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 anti-nuclear demonstrations.

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If economics needs deflating to a more humble and modest position in our culture, then we need not wait for economists to let the air out. Ultimately, we have the power to put economics back in its proper place. We should not delay. Further Reading At the end of his superb account of the collaboration between Daniel Kahneman and Amos Tversky, The Undoing Project, Michael Lewis provides a note on sources. But he warns the reader that when researchers write papers for publication in academic journals, they ‘aren’t trying to engage their readers, much less give them pleasure. They’re trying to survive them.’ In other words, most academic journal papers in fields such as economics don’t try to enter into dialogue with their readers.

The Panic Virus: The True Story Behind the Vaccine-Autism Controversy
by Seth Mnookin
Published 3 Jan 2012

Cl., August 27, 1993), footnote, 15. 17 “fills me with horror”: Tsouderos, “Autism ‘Miracle’ Called Junk Science.” 17 “If someone like Mark Geier comes up”: Kevin Leitch, interview with author, May 5, 2009. 18 in a series of groundbreaking papers in the 1970s: Daniel Kahneman and Amos Tversky, “Subjective Probability: A Judgment of Representativeness,” Cognitive Psychology 1973;3: 430–54; Daniel Kahneman and Amos Tversky, “Judgment Under Uncertainty: Heuristics and Biases,” Science 1974;185(4157): 1124–31; Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decisions Under Risk,” Econometrica March 1979;47(2): 313–27. See also: Preference, Belief, and Similarity—Selected Writings, Amos Tversky, edited by Eldar Shafir (Cambridge: Massachusetts Institute of Technology Press, 2004), Chapter 7, “Belief in the Law of Small Numbers,” 193–202; Chapter 9, “Extensional Versus Intuitive Reasoning: The Conjunction Fallacy in Probability Judgment,” 221–56. 18 A recent Hib outbreak in Minnesota: Centers for Disease Control and Prevention, “Invasive Haemophilus influenzae Type B Disease in Five Young Children—Minnesota, 2008,” Morbidity and Mortality Weekly Report, January 23, 2009;58(Early Release): 1–3. 19 Among those infected was Dana McCaffery: Toni and David McCaffery, interview and e-mails with author, 2009–2010. 19 A decade after the World Health Organization: World Health Organization, “Measles Eradication Still a Long Way Off,” Bulletin of the World Health Organization 2001;79(6), http://www.who.int/mediacentre/ factsheets/fs288/en/index.html. 19 In Great Britain, there’s been more than a thousandfold increase: “Agency Publishes Annual Measles Figures for 2008,” Health Protection Agency (U.K.), February 9, 2009. 19 outbreaks in many of the country’s most populous states: Centers for Disease Control and Prevention, “Update: Measles—United States, January–July 2008,” Morbidity and Mortality Weekly Report, August 22, 2008;57(33): 893–96. 19 “felt safe in making the choice”: “How My Son Spread the Measles,” Time, May 25, 2008. 20 Before the MMR vaccine was introduced: Nancy Shute, “Parents’ Vaccine Safety Fears Mean Big Trouble for Children’s Health,” usnews.com, March 1, 2010. 20 On the fourth morning of Matthew Lacek’s coma: Kelly Lacek, interview with author, May 7, 2009. 20 “We just celebrated [Matthew’s] 7th birthday”: Kelly Lacek, e-mail to author, “Subject: Re: from Seth Mnookin/via Trish at PKids,” April 12, 2010.

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A lot of parenting decisions come down to our gut reactions—science can’t tell us what’s an appropriate curfew for a sixteen-year-old or whether it’s better to indulge or resist a child who says he wants to quit violin lessons—and when it comes to vaccines, most of the “commonsense” arguments appear to line up on one side of the equation: Vaccines contain viruses, viruses are dangerous, infants’ immune systems aren’t fully developed, drug companies are interested only in profit, and the government can’t always be trusted. The problem, as psychologist and Nobel laureate Daniel Kahneman and his longtime research partner Amos Tversky demonstrated in a series of groundbreaking papers in the 1970s, is that in many situations regarding risk perception and data processing, “commonsense” arguments are precisely the ones that lead us astray.5 Because the risks associated with foregoing vaccines feel so hypothetical, and because the infinitesimally remote possibility that vaccines could hurt our children is so scary, and because there’s nothing in our daily experience to indicate that a little fluid administered through a needle would protect us from a threat we can’t even see, it’s very hard for parents working by intuition alone to know what’s best for their children in this situation.

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New England Journal of Medicine 2007;357(13): 1281–92. Trevelyan, Barry, et al. “The Spatial Dynamics of Poliomyelitis in the United States: From Epidemic Emergence to Vaccine-Induced Retreat, 1910–1971.” Annals of the Association of American Geographers 2005;95(2): 269–93. Tversky, Amos, and Daniel Kahneman. “Belief in the Law of Small Numbers.” Psychological Bulletin 1971;76(2): 105–10. Uhlmann, V., et al. “Potential Viral Pathogenic Mechanism for New Variant Inflammatory Bowel Disease.” Journal of Clinical Pathology: Molecular Pathology 2002;55(2): 84–90. Van Damme, Wim, et al. “Measles Vaccination and Inflammatory Bowel Disease.”

Currency Wars: The Making of the Next Gobal Crisis
by James Rickards
Published 10 Nov 2011

Merton, “The Self-Fulfilling Prophecy,” The Antioch Review 8, no. 2 (Summer 1948): 193–210. 197 A breakthrough in the impact of social psychology on economics . . . This work on what became the foundation of behavioral economics is contained in two volumes: Daniel Kahneman and Amos Tversky, eds., Choices, Values, and Frames, Cambridge: Cambridge University Press, 2000; and Daniel Kahneman et al., eds., Judgment under Uncertainty: Heuristics and Biases, Cambridge: Cambridge University Press, 1982. 201 If they are diverse they will respond differently to various inputs producing . . . The extended analysis that follows, including elements of diversity, connectedness, interdependence and adaptability, draws on a series of lectures under the title “Understanding Complexity,” delivered in 2009 by Professor Scott E.

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From iconoclastic mathematical genius Benoît Mandelbrot came insights that showed future prices are not independent of the past—that the market had a kind of “memory” that could cause it to react or overreact in disruptive ways, giving rise to alternating periods of boom and bust. Daniel Kahneman and his colleague Amos Tversky demonstrated in a series of simple but brilliantly constructed experiments that individuals were full of irrational biases. The subjects of their experiments were more concerned about avoiding a loss than achieving a gain, even though an economist would say the two outcomes had exactly the same value.

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Forty-eight hours later Bear Stearns was headed to bankruptcy after frightened Wall Street banks withdrew billions of dollars of credit lines. For Bear Stearns, this was a real-life version of Merton’s thought experiment. A breakthrough in the impact of social psychology on economics came with the work of Daniel Kahneman, Amos Tversky, Paul Slovic and others in a series of experiments conducted in the 1950s and 1960s. In the most famous set of experiments, Kahneman and Tversky showed that subjects, given the choice between two monetary outcomes, would select the one with the greater certainty of being received even though it did not have the highest expected return.

The Organized Mind: Thinking Straight in the Age of Information Overload
by Daniel J. Levitin
Published 18 Aug 2014

I’ve learned a lot from having this fly-on-the-wall view of companies in prosperity and companies in crisis. An organized mind leads effortlessly to good decision-making. As an undergraduate, I had two brilliant professors, Amos Tversky and Lee Ross, both of whom were pioneers in the science of social judgments and decision-making. They sparked a fascination for how we assess others in our social world and how we interact with them, the various biases and misinformation we bring to those relationships, along with how to overcome them. Amos, with his colleague Daniel Kahneman (who won the Nobel Prize for their work together a few years after Amos passed away), uncovered a host of systematic errors in the way the human brain evaluates evidence and processes information.

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Say that one item on your To Do list was “Make a decision about assisted living facilities for Aunt Rose.” You’ve already visited a few and gathered information, but you haven’t yet made the decision. On a morning scan of your cards, you find you aren’t ready to do it. Take two minutes now to think about what you need in order to make the decision. Daniel Kahneman and Amos Tversky said that the problem with making decisions is that we are often making them under conditions of uncertainty. You’re uncertain of the outcome of putting Rose in a home, and that makes the decision difficult. You also fear regret if you make the wrong decision. If more information will remove that uncertainty, then figure out what that information is and how to obtain it, then—to keep the system working for you—put it on an index card.

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Instead, we rely on trusted authorities, newspapers, radio, TV, books, sometimes your brother-in-law, the neighbor with the perfect lawn, the cab driver who dropped you at the airport, your memory of a similar experience. . . . Sometimes these authorities are worthy of our trust, sometimes not. My teacher, the Stanford cognitive psychologist Amos Tversky, encapsulates this in “the Volvo story.” A colleague was shopping for a new car and had done a great deal of research. Consumer Reports showed through independent tests that Volvos were among the best built and most reliable cars in their class. Customer satisfaction surveys showed that Volvo owners were far happier with their purchase after several years.

Big Mistakes: The Best Investors and Their Worst Investments
by Michael Batnick
Published 21 May 2018

In Charlie Munger: The Complete Investor, Tren Griffin writes, “In doing their due‐diligence analysis for Dexter Shoes, Buffett and Munger made the mistake of not making sure the business had a moat and being too focused on what they thought was an attractive purchase price.”19 Psychologists Dale Griffin and Amos Tversky wrote, “Intuitive judgments are overly influenced by the degree to which the available evidence is representative of the hypothesis in question.”20 The evidence Buffett had available, other than Dexter's financials and the proposed purchase price, was the success he experienced less than two years earlier with his purchase of H.

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Quoted in New York Times, “Company News; Berkshire Hathaway Set to Acquire Dexter Shoe,” October 1, 1993. 17. Warren Buffett, 1993 Berkshire Hathaway annual letter, March 1, 1994. 18. Alice Schroeder, The Snowball (New York: Bantam, 2009). 19. Tren Griffin, Charlie Munger: The Complete Investor (New York: Columbia University Press, 2015). 20. Dale Griffin and Amos Tversky, “The Weighing of Evidence and the Determinants of Confidence,” Cognitive Psychology 24 (1992): 411–435. 21. Anthony Bianco, “The Warren Buffett You Don't Know,” Bloomberg.com, July 5, 1999. 22. Warren Buffett, 1999 Berkshire Hathaway annual letter, March 1, 2000. 23. Warren Buffett, 2000 Berkshire Hathaway annual letter, February 28, 2001. 24.

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“It is quite possible to decide by inspection that a woman is old enough to vote without knowing her age or that a man is heavier than he should be without knowing his exact weight.”9 Graham was far ahead of his time, writing about behavioral economics, the study of how psychology affects financial decision making, long before the term even existed. Security Analysis was published the same year that Nobel laureate Daniel Kahneman, who took this field mainstream, was born. Graham identified some of the cognitive and emotional biases that caused investors to send a strong company diving 50% in 12 months. He examined the case of General Electric, which the stock market valued at $1.87 billion in 1937 and $784 million just one year later.

Capital Ideas Evolving
by Peter L. Bernstein
Published 3 May 2007

Although these questions have always been central to understanding the way investors behave and how their responses affect the performance of financial markets, no one made any systematic effort to provide the answers until the mid-1960s. The most significant and inf luential effort to approach these problems, a field of study that has come to be known as Behavioral Finance, began to take shape quite by accident when two junior psychology professors at Hebrew University in Jerusalem, Daniel Kahneman and Amos Tversky, happened to compare notes one day about their work and their life experiences. The hugely productive result of their friendship and subsequent collaboration has created a competing vision to the rational model of how people make choices and reach decisions under conditions of uncertainty.* The essence of this work is the study of man—of human behavior.

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“Maps of Bounded Rationality: Psychology for Behavioral Economics,” American Economic Review, Vol. 93, No. 5 ( Fall), pp. 1449–1475. Kahneman, Daniel, Harry Markowitz, Robert C. Merton, Myron Scholes, Bill Sharpe, and Peter Bernstein, 2005. “Most Nobel Minds,” CFA Magazine, November-December, pp. 36–43. Kahneman, Daniel, Paul Slovic, and Amos Tversky, 1974. “Judgment Under Uncertainty,” Science, Vol. 185, pp. 1124 –1131. Kahneman, Daniel, Paul Slovic, and Amos Tversky, 1982. Judgment Under Uncertainty: Heuristics and Biases, New York: Cambridge University Press. Kahneman, Daniel, and Tversky, Amos, 1979. “Prospect Theory,” Econometrica, Vol. 47, No. 2 (March). Kim, E. Han, Adair Morse, and Luigi Zingales, 2006.

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Thaler, Richard, Daniel Kahneman, and J. L. Knetsch, 1992. “The Endowment Effect, Loss Aversion and Status Quo Bias,” in Richard Thaler, The Winner ’s Curse, Princeton, NJ: Princeton University Press. Temin, Peter, and Hans-Joachim Voth, 2003. “Riding the South Sea Bubble,” MIT Economics Department Working Paper No. 04-02 ( December). Treynor, Jack, 1961. “Toward a Theory of Market Value of Risky Assets.” Unpublished manuscript. Treynor, Jack, and Fischer Black, 1973. “How to Use Security Analysis to Improve Portfolio Selection,” Journal of Business, Vol. 46, pp. 66–73. Tversky, Amos, and Daniel Kahneman, 1992.

Rationality: From AI to Zombies
by Eliezer Yudkowsky
Published 11 Mar 2015

For it is written: If you can lighten your burden you must do so. There is no straw that lacks the power to break your back. * 1. William S. Gilbert and Arthur Sullivan, The Mikado, Opera, 1885. 2. Tversky and Kahneman, “Extensional Versus Intuitive Reasoning.” 3. Amos Tversky and Daniel Kahneman, “Judgments of and by Representativeness,” in Judgment Under Uncertainty: Heuristics and Biases, ed. Daniel Kahneman, Paul Slovic, and Amos Tversky (New York: Cambridge University Press, 1982), 84–98. 7 Planning Fallacy The Denver International Airport opened 16 months late, at a cost overrun of $2 billion. (I’ve also seen $3.1 billion asserted.) The Eurofighter Typhoon, a joint defense project of several European countries, was delivered 54 months late at a cost of $19 billion instead of $7 billion.

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,” Behavioral and Brain Sciences 23, no. 5 (2000): 645–665, http://journals.cambridge.org/abstract_S0140525X00003435. 6. Timothy D. Wilson, David B. Centerbar, and Nancy Brekke, “Mental Contamination and the Debiasing Problem,” in Heuristics and Biases: The Psychology of Intuitive Judgment, ed. Thomas Gilovich, Dale Griffin, and Daniel Kahneman (Cambridge University Press, 2002). 7. Amos Tversky and Daniel Kahneman, “Extensional Versus Intuitive Reasoning: The Conjunction Fallacy in Probability Judgment,” Psychological Review 90, no. 4 (1983): 293–315, doi:10.1037/0033-295X.90.4.293. 8. Richards J. Heuer, Psychology of Intelligence Analysis (Center for the Study of Intelligence, Central Intelligence Agency, 1999). 9.

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Hillsdale, NJ: Lawrence Erlbaum Associates, Inc., 1978. Tversky, Amos, and Daniel Kahneman. “Extensional Versus Intuitive Reasoning: The Conjunction Fallacy in Probability Judgment.” Psychological Review 90, no. 4 (1983): 293–315. doi:10.1037/0033-295X.90.4.293. ———. “Judgment Under Uncertainty: Heuristics and Biases.” Science 185, no. 4157 (1974): 1124–1131. doi:10.1126/science.185.4157.1124. ———. “Judgments of and by Representativeness.” In Judgment Under Uncertainty: Heuristics and Biases, edited by Daniel Kahneman, Paul Slovic, and Amos Tversky, 84–98. New York: Cambridge University Press, 1982. Tzu, Sun.

Alchemy: The Dark Art and Curious Science of Creating Magic in Brands, Business, and Life
by Rory Sutherland
Published 6 May 2019

But, strange though it may seem, the study of economics has long been detached from how people behave in the real world, preferring to concern itself with a parallel universe in which people behave as economists think they should. It is to correct this circular logic that behavioural economics – made famous by experts such as Daniel Kahneman, Amos Tversky, Dan Ariely and Richard Thaler – has come to prominence. In many areas of policy and business there is much more value to be found in understanding how people behave in reality than how they should behave in theory.* Behavioural economics might well be described as the study of the nonsensical and the non-sensical aspects of human behaviour.

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This way, they were able to gain the potential custom of people who had previously avoided the product because of its artificiality, without creating an imagined taste change among its regular customers, who suddenly discovered they had been eating the healthier variant all along.* 6.9: The Focusing Illusion Attention affects our thoughts and actions far more than we realise. Daniel Kahneman, along with Amos Tversky, is one of the fathers of behavioural economics; ‘the focusing illusion’, as he calls it, causes us to vastly overestimate the significance of anything to which our attention is drawn. As he explains: ‘Nothing is as important as we think it is while we are thinking about it. Marketers exploit the focusing illusion.

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Just as dog breeders and pigeon fanciers understood the principles of natural selection before Darwin codified them, many people involved in selling things have an instinctive grasp of the difference between what people say and what they do. When he won a MacArthur Foundation fellowship in 1984, Amos Tversky said of his work as a cognitive psychologist, ‘What we do is take what is already instinctively known by used-car salesmen and advertising executives, and we examine them in a scientific way.’ We do not have a similar mechanism for politics, or for areas where there is no mechanism for distinguishing unconscious feelings from post-rationalised beliefs.

Virtual Competition
by Ariel Ezrachi and Maurice E. Stucke
Published 30 Nov 2016

Ismat Sarah Mangla, “3 Tricks to Help You Snag the Best Deals Online,” Time, September 8, 2014, http://time.com/money/3136612/dynamic-pricing -amazon-best-buy-walmart/. 50. Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision under Risk,” Econometrica 47 (1979): 263; U.K. Office of Fair Trading, Consumer Behavioural Biases in Competition: A Survey, Final Report, OFT1324 (May 2011), 3.10–3.201.11. 51. E. Vis and J. Toth, “ The Abolition of the No-Discrimination Rule,” (Amsterdam: ITM Research, March 2000), 7–10, http://www.creditslips.org/fi les /netherlands-no-discrimination-rule-study.pdf. Notes to Pages 111–115 293 52. Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler, “Fairness as a Constraint on Profit Seeking: Entitlements in the Market,” in Advances in Behavioral Economics, Colin F.

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Federal Trade Commission, Data Brokers: A Call for Transparency and Accountability (Washington, DC: Federal Trade Commission, May 2014), 19–20, https://www.ftc.gov/system/fi les/documents/reports/data-brokers-call -transparency-accountability-report-federal-trade-commission-may-2014 /140527databrokerreport.pdf. 14. Lifehack Quotes, http://quotes.lifehack.org/edward-norton/we-buy-things -we-dont-need-with/. 15. Karen Freeman, “Amos Tversky, Expert on Decision Making, Is Dead at 59,” New York Times, June 6, 1996, http://www.nytimes.com/1996/06/06/us/amos -tversky-expert-on-decision-making-is-dead-at-59.html. 16. Ned Welch, “A Marketer’s Guide to Behavioral Economics,” McKinsey Quarterly, February 2010, http://www.mckinsey.com/insights/marketing _ sales/a _marketers _ guide _to_behavioral _economics. 17.

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One popu lar Internet quote is “We buy things we don’t need with money we don’t have to impress people we don’t like.”14 So to increase demand for their products and ser vices, companies will likely appeal to our emotional wants. As noted earlier, most of us are not rational, self-interested individuals with willpower. The field of behavioral economics, as one of its pioneers, Amos Tversky, noted, has quantified what every good advertiser and car salesman already knew.15 We have cognitive biases, which refer to our tendency to react, think, or operate in a certain way, which diverge from assumed rationality. Biases can be observed. But businesses and governments can trigger consumers’ biases to achieve certain goals.16 As noted by Cialdini, factors such as relative pricing, reciprocity, and the illusion of scarcity play a powerful role in the persuasion game.17 One competition authority official told us in 2015 that the behavioral economics literature identifies over one hundred human biases linked to decision making, information processing, memory, and social interaction.

The Great Mental Models: General Thinking Concepts
by Shane Parrish
Published 22 Nov 2019

The best we can do is estimate the future by generating realistic, useful probabilities. So how do we do that? Probability is everywhere, down to the very bones of the world. The probabilistic machinery in our minds—the cut-to-the-quick heuristics made so famous by the psychologists Daniel Kahneman and Amos Tversky—was evolved by the human species in a time before computers, factories, traffic, middle managers, and the stock market. It served us in a time when human life was about survival, and still serves us well in that capacity.2 But what about today—a time when, for most of us, survival is not so much the issue?

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The simpler and thus more likely explanation is that they didn’t see you. It was a mistake. There was no intent. So why would you assume the former? Why do our minds make these kinds of connections when the logic says otherwise? The famous Linda problem, demonstrated by the psychologists Daniel Kahneman2 and Amos Tversky in a 1982 paper, is an illuminating example of how our minds work and why we need Hanlon’s Razor. It went like this: Linda is 31 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 anti-nuclear demonstrations.

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The best will always appear to get worse and the worst will appear to get better, regardless of any additional action. This is called regression to the mean, and it means we have to be extra careful when diagnosing causation. This is something that the general media and sometimes even trained scientists fail to recognize. Consider the example Daniel Kahneman gives in Thinking Fast and Slow:5 Depressed children treated with an energy drink improve significantly over a three-month period. I made up this newspaper headline, but the fact it reports is true: if you treated a group of depressed children for some time with an energy drink, they would show a clinically significant improvement.

The Behavioral Investor
by Daniel Crosby
Published 15 Feb 2018

Notes 27 Nathaniel Branden, The Psychology of Self-Esteem: A Revolutionary Approach to Self-Understanding that Launched a New Era in Modern Psychology (Jossey-Bass, 2001). 28 Daniel Crosby, You’re Not That Great (Word Association Publishers, 2012). 29 Dan Gilbert, ‘The surprising science of happiness’ TED Talk (February 2004). 30 Ibid. 31 Lee Ross and Craig Anderson, ‘Shortcomings in the attribution process: On the origins and maintenance of erroneous social assessments,’ in Daniel Kahneman, Paul Slovic and Amos Tversky (eds.), Judgment Under Uncertainty: Heuristics and Biases (Cambridge University Press, 1982), pp. 129–152. 32 2014 NTSB US Civil Aviation Acccident Statistics. 33 Gerd Gigerenzer, Risk Savvy: How to Make Good Decisions (Penguin, 2015). 34 Justin Kruger and David Dunning, ‘Unskilled and unaware of it: How difficulties in recognizing one’s own incompetence lead to inflated self-assessments,’ Journal of Personality and Social Psychology 77:6 (1999), pp. 1121–34.

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No matter what exotic economic measures professors and pundits may dream up in the future, there will always be some that show some fleeting correlation with stock returns, but fail to pass the sniff test of “Should it matter when determining whether or not to become partial owner of a business?” The coming wave of big data seems just as likely to yield a ton of false positives as it is any great new insights about the way markets behave. Too much of a good thing Daniel Kahneman and Amos Tversky’s ‘Linda the Bank Teller’ study provides yet another powerful example of how more information is not always better. The two researchers set out to prove something that they had observed empirically – that emotional signals can overwhelm probability. We now refer to this as base rate fallacy.

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The Swiss model demonstrates that our views are an outcropping of a specific way of viewing wealth rather than something deterministic about human nature. We are not our worst impulses and it is up to us to determine to support each other on the way to balance and true happiness, rather than prodding each other toward jealousy and excess. How much is enough? Daniel Kahneman helmed a Princeton study set out to answer the age-old question, “Can money buy happiness?” Their answer? Sort of. Researchers found that making little money did not cause sadness in and of itself, but it did tend to heighten and exacerbate existing worries. For instance, among people who were divorced, 51% of those who made less than $1,000/month reported having felt sad or stressed the previous day, whereas that number fell to 24% among those earning more than $3,000/month.

How Markets Fail: The Logic of Economic Calamities
by John Cassidy
Published 10 Nov 2009

.”: Ibid., 211. 193 “our telescopic faculty is defective . . .”: Pigou, The Economics of Welfare, 25. 194 “We spent hours each day . . .”: Daniel Kahneman, Nobel Prize autobiography, available at http://nobelprize.org/nobel_prizes/economics/laureates/2002/kahneman-autobio.html. 195 “put too much faith . . .”: Amos Tversky and Daniel Kahneman, “Judgement under Uncertainty: Heuristics and Biases,” Science 185, no. 4157 (1974): 1126. 195 “Steve is very shy . . .”: Ibid., 1124. 196 Hot hand theory: Thomas Gilovich, Robert Vallone, and Amos Tversky, “The Hot Hand in Basketball: On the Misperception of Random Sequences,” Cognitive Psychology 17 (1985): 295–314. 196 “with little or no regard . . .”: Tversky and Kahneman, “Judgement under Uncertainty,” 1126. 197 Likelihood of getting killed in a terrorist attack: See N.

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Within orthodox economics, beginning in the late 1960s, a new generation of researchers began working on a number of topics that didn’t fit easily within the free market model, such as information problems, monopoly power, and herd behavior. At about the same time, two experimental psychologists, Amos Tversky and Daniel Kahneman, were subjecting rational economic man—Homo economicus—to a withering critique. As only an economist would be surprised to discover, humans aren’t supercomputers: we have trouble doing sums, let alone solving the mathematical optimization problems that lie at the heart of many economic theories.

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It was in the aftermath of World War II that economists began to focus almost exclusively on Homo economicus, elevating rationality to a near-sacred principle. By the 1970s, economists had locked themselves in straitjackets, and it took external help to liberate them. Assistance arrived in the unlikely form of two Israeli experimental psychologists, Daniel Kahneman and Amos Tversky, who were studying how people choose between uncertain outcomes, a subject that most economists regarded as having been settled in the 1940s, when John von Neumann and Oskar Morgenstern, the founders of game theory, put forward the “expected utility hypothesis.” According to this theory, decision-makers weigh possible outcomes according to how likely they are.

This Could Be Our Future: A Manifesto for a More Generous World
by Yancey Strickler
Published 29 Oct 2019

They’re the customs, traditions, and social codes that form our tribes and nations. The rituals around births, weddings, and death. Why we wear one color and not another. They’re the narratives that we live within. The currents that pull us through life that are easy to miss. Behavioral economists Daniel Kahneman, Amos Tversky, Dan Ariely, Iris Bohnet, and others have demonstrated how susceptible we are to influence. Our choices are easily manipulated, especially when we’re not conscious it’s happening. This is the space where hidden defaults live. Kahneman and Tversky showed this with research on anchoring and bias—how the presence of a single word or irrelevant but memorable piece of information will shift our behavior.

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approval rate layered on top: Data on congressional approval ratings and reelection rates comes from the Center for Responsive Politics. “What’s water?”: The David Foster Wallace story is paraphrased from a commencement address he gave at Kenyon College called “This Is Water.” shift our behavior: Daniel Kahneman and Amos Tversky’s work is collected in the book Thinking, Fast and Slow. how we think: Dan Ariely writes about our emotions’ effect on our choices in his 2008 book Predictably Irrational: The Hidden Forces That Shape Our Decisions. 62 percent of personal bankruptcies: 62 percent of American bankruptcies are caused by medical bills according to a 2009 report published in the American Journal of Medicine (“Medical Bankruptcy in the United States, 2007: Results of a National Study” by David U.

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But in Maslow’s hierarchy, money is also quite “low” on the list. Though some people use money as a proxy for self-esteem, money is not a higher value on its own. It is, however, a necessary foundation for the pursuit of higher values. A 2010 study by the Nobel Prize–winning behavioral economist Daniel Kahneman sheds interesting light on this idea. Kahneman found a “statistically significant and quantitatively important” correlation between emotional well-being and income. The more money someone made, his research discovered, the happier the person was. But this was true only up to a point. The research found that up until a salary of $75,000 this was the case.

Critical: Science and Stories From the Brink of Human Life
by Matt Morgan
Published 29 May 2019

As I approached Joe’s bed in the white light of intensive care, there were all the telltale signs of what had happened. The book Blink by my hero, Malcolm Gladwell, beautifully describes the human brain’s immense ability to make accurate judgements from tiny snippets of information. (This was based on the work of Nobel Prize winner Daniel Kahneman and his late colleague Amos Tversky.) From simply a brief glance towards Joe’s bed, his problems were clear. Firstly, I could see the white propofol syringe slowly injecting its payload to keep him deeply unconscious. Next, I could see the ventilator fighting hard to keep Joe’s carbon dioxide levels just right.

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Patient reported outcome of adult perioperative anaesthesia in the United Kingdom: a cross-sectional observational study. British Journal of Anaesthesia 117, 758–766r (2016). ‘The book Blink by my hero, Malcolm Gladwell . . .’ Gladwell, M. Blink (Hachette UK, 2007). ‘(This was based on the work of Nobel Prize winner Daniel Kahneman and his late colleague Amos Tversky.)’ Kahneman, D. & Tversky, A. On the reality of cognitive illusions. Psychol Rev 103, 582–91– discussion 592–6 (1996). ‘Later, as a fighter pilot in the Second World War, he came close to death after landing his Gloster Gladiator biplane hard in the Egyptian desert and breaking his nose, fracturing his skull and being knocked unconscious.’

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CRM can help teams come together in the fog of a disaster and work together effectively and safely. During emergencies in critical care, I now take a step backwards rather than forwards to get an overview of the situation, assign roles and act on good ideas provided by others. The final transformative strand was built on the work of Nobel Prize-winning Daniel Kahneman in his life-affirming book, Thinking, Fast and Slow. Recognising that medical error is effectively a manifestation of ingrained human heuristics has allowed commonly described cognitive errors to be anticipated in healthcare. Every day, I see evidence of anchoring bias, where an incorrect diagnostic label is permanently attached to a patient after being applied earlier by another doctor.

The Loop: How Technology Is Creating a World Without Choices and How to Fight Back
by Jacob Ward
Published 25 Jan 2022

Scientists can often remain at odds with one another for years over a finding that in the meantime becomes the functional basis for whole industries. Scientists today publish roughly 2.5 million papers each year. Presumably they all hope each paper will make an impact. But only a tiny percentage ever do. The psychologists Daniel Kahneman and Amos Tversky wrote seven papers together between 1971 and 1979. They blew a gaping hole in their field with each one, and while their work is still being tested and replicated at the pace of science, their findings are already a tent pole of a whole industry of behavioral guidance. Working together in an extraordinarily tight and symbiotic professional partnership, they identified a series of commonly held biases—unconscious human preferences that manifest themselves under pressure and in moments of uncertainty, preferences that often produce bizarre and irrational decisions.

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Its process of making decisions is an unconscious form of mental activity that takes in information, decides what to do with it, and enacts a response. System 1 balances the easel, unscrews the caps of the paint tubes without dropping them, and holds the brush. System 2 is the part of your mind that’s meanwhile free to think, “Hmm, what shall I paint?” In 2002, after a career working variously alone and with Amos Tversky, who died of cancer in 1996, Daniel Kahneman won the Nobel Prize. In his speech to the committee (which I would have spent simply congratulating myself), he described his new interest in what Stanovich and West were talking about. He began by pointing out that he and Tversky had always imagined the biases they were identifying sprang from a place “between the automatic operations of perception and the deliberate operations of reasoning.”

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As a college math major, Fischhoff had taken psychology because students had to take a certain number of classes outside their major, and because the psychology department’s schedule fit his 4 p.m. to midnight work shift at Great Lake Lanes, the local bowling alley. When he decided he preferred life as a married academic, rather than as a divorced farmer, his unusual background in math and psychology earned him a place at Hebrew University of Jerusalem, studying for his PhD under Amos Tversky. “I was in a very progressive, activist part of my life,” Fischhoff recalls. “I was reading a lot of history, I was interested in politics, and the subject of hindsight was something I’d been thinking about.” Paul Meehl, a University of Minnesota professor of psychology, had just published, in 1973, a paper titled “Why I Do Not Attend Case Conferences,” a twelve-point critique of the tendencies of experts gathered at professional meetings to make a hash of their subject after endless arguing and schmoozing.

The Age of Entitlement: America Since the Sixties
by Christopher Caldwell
Published 21 Jan 2020

a move for which his defenders claimed: Bruce Ackerman, “Like the Emancipation Proclamation, Obama’s Order Forces Democracy,” Los Angeles Times, November 21, 2014. New York Times columnist Joe Nocera: Joe Nocera, “Tea Party’s War on America,” New York Times, August 2, 2011. 1 × 2 × 3 × 4: Amos Tversky and Daniel Kahneman, “Judgment Under Uncertainty: Heuristics and Biases,” in Judgment Under Uncertainty: Heuristics and Biases, edited by Daniel Kahneman, Paul Slovic, and Amos Tversky (Cambridge, England: Cambridge University Press, 1982), 15. Nudge: The discussion of Nudge draws on the following sources: Christopher Caldwell, “The Perils of Shaping Choice,” Financial Times, April 4, 2008.

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Nudge and behavioral economics The fallibility of human decision-making had lately preoccupied social scientists. They were out to show that Homo economicus, the reliably rational calculator of his own advantage who inhabits the works of Adam Smith and Alfred Marshall, did not exist. In 2002 the Israeli psychologist Daniel Kahneman of Princeton had won the Nobel Prize in economics for work done with his late compatriot Amos Tversky of Stanford. Their work in so-called behavioral economics described people’s tendency to mis-predict and mis-assess. Human reason, it turns out, can cut its way through problems only if the choices are laid out in the proper way. When you ask people what the product of the first eight integers is, much depends on whether you express the multiplication in the form 1 × 2 × 3 × 4 × 5 × 6 × 7 × 8 or in the form 8 × 7 × 6 × 5 × 4 × 3 × 2 × 1 Given five seconds to make an estimate, the average person thinks the product of the first string is 512 and of the second 2,250.

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Primitive Rebels. Manchester: Manchester University Press, 1959. Howe, Irving. Selected Writings, 1950–1990. San Diego: Harcourt Brace Jovanovich, 1990. Inglehart, Ronald. Culture Shift in Advanced Industrial Society. Princeton: Princeton University Press, 1990. Kahneman, Daniel, Paul Slovic, and Amos Tversky, eds. Judgment Under Uncertainty: Heuristics and Biases. Cambridge, England: Cambridge University Press, 1982. Kalven, Harry, Jr. The Negro and the First Amendment. Columbus: Ohio State University Press, 1965. Kaplan, Roberta, with Lisa Dickey. Then Comes Marriage: How Two Women Fought for and Won Equal Dignity for All.

Transport for Humans: Are We Nearly There Yet?
by Pete Dyson and Rory Sutherland
Published 15 Jan 2021

In the private sector, we see more ‘customer insights’ positions within airlines and rail companies, while automotive companies have widened their scope too: the launch of Ford Mobility to develop new products and infrastructure for cities is a good example. But ‘fluffy’ is often the word attached to this young science, often because organizations adopt ‘thinking behaviourally’ merely as a perspective, without applying analytical models, creative frameworks or rigorous trials. Amos Tversky – the pioneering economist who, with his colleague Daniel Kahneman, created much of the theory that underpins behavioural economics – explained that they ‘merely examined, in a scientific way, things about behaviour that were already known to advertisers and used-car salesmen’.26 Their work (for which Kahneman won the Nobel Memorial Prize in Economic Sciences) is the opposite of fluffy.

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Mr Crane is told that his flight left on time. Mr Thomas is told that his flight was delayed, and just left five minutes ago. Who is more upset? Did you decide that Mr Thomas was more likely to be upset? If so, you agree with 96% of the research subjects in an experiment conducted by Daniel Kahneman and Amos Tversky in 1982.14 Mr Thomas and Mr Crane faced the same situation, had the same outcome and neither was responsible for missing their flight, but the former came so close to making his flight. This is the simulation heuristic. If we narrowly fail to get a train or a bus or a flight, it’s easier to imagine an alternate reality in which we succeeded: if just one more set of traffic lights had been green, or if you’d been just one spot further forward in a queue.

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Our homes are designed so that cars live right outside our front doors, meaning we don’t even consider our other options. A study of Londoners’ travel behaviour showed that only 4% of drivers reported giving serious thought to which mode of travel they should use for a given journey.11 The psychologist Daniel Kahneman described this phenomenon with the phrase ‘what you see is all there is’. A behaviourally framed solution would make us walk to our cars by shifting residential parking out of sight, away from driveways and streets into separate car parks. Streets then become car free, with exceptions made for pick-up and drop-off zones.

How Doctors Think
by Jerome Groopman
Published 15 Jan 2007

She was an absolutely classic case—the rapid breathing, the shift in her blood electrolytes—and I missed it. I got cavalier." As there are classic clinical maladies, there are classic cognitive errors. Alter's misdiagnosis resulted from such an error, the use of a heuristic called "availability." Amos Tversky and Daniel Kahneman, psychologists from the Hebrew University in Jerusalem, explored this shortcut in a seminal paper more than two decades ago. Kahneman won the Nobel Prize in economics in 2002 for work illuminating the way certain patterns of thinking cause irrational decisions in the marketplace; Tversky certainly would have shared the prize had he not died an untimely death in 1996.

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Ironside, "Iatrogenic contributions to suicide and a report on 37 suicide attempts," New Zealand Medical Journal 69 (1969), p. 207; John Maltsberger and Donald Buie, "Countertransference hate in the treatment of suicidal patients," Archives of General Psychiatry 30 (1974), pp. 625–633. The connections between cognition and emotion are beautifully described in Antonio Damasio's Descartes' Error: Emotion, Reason, and the Human Brain (Itasca, Ill.: Putnam, 1994). 2. Lessons from the Heart Amos Tversky and Daniel Kahneman were the pioneers in categorizing cognitive biases. Kahneman was awarded a Nobel Prize for their work; alas, Tversky died before the Nobel Committee's decision. Valuable articles by these researchers on errors include "Availability: A heuristic for judging frequency and probability," Cognitive Psychology 5 (1973), pp. 207–232, and "Judgment under uncertainty: Heuristics and biases," Science 185 (1974), pp. 1124–1131.

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Its simplicity and comprehensiveness make it a useful aid that can move a doctor away from the far end of the Yerkes-Dodson curve where anxiety impairs performance. I wish that I'd learned these ABCs before my first day of internship when I froze in front of Mr. Morgan. Earlier, I cited the extraordinary insights of Amos Tversky and Daniel Kahneman. Their exploration of availability errors is found in "Availability: A heuristic for judging frequency and probability," Cognitive Psychology 5 (1973), pp. 207–232. Note how incomplete communication and cognitive pitfalls are linked in the case of Blanche Begaye. Once Alter had anchored his assumption that she had a viral infection, he limited his dialogue with her.

The Joys of Compounding: The Passionate Pursuit of Lifelong Learning, Revised and Updated
by Gautam Baid
Published 1 Jun 2020

Planning Fallacy and the Critical Role of a Premortem Overly optimistic forecasts of the outcome of projects are evident everywhere. This bias, a phenomenon in which predictions about how much time or cost will be needed to complete a future task display an overly optimistic view, is called “planning fallacy,” a term coined by Daniel Kahneman and Amos Tversky. Planning fallacy occurs when plans and forecasts assume a best-case scenario and ignore the base rates of similar cases in the past. This, in turn, leads to significant time and cost overruns. What causes people to succumb to the planning fallacy? The “inside view,” according to Kahneman and Tversky, is the culprit here.

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The threat of potential loss plays a significant role in our decision-making, and we have a natural tendency to be loss averse. Or, in Munger’s words, “The quantity of a man’s pleasure from a ten-dollar gain does not exactly match the quantity of his displeasure from a ten-dollar loss.”7 This is the foundational principle of Daniel Kahneman and Amos Tversky’s prospect theory (figure 31.3). FIGURE 31.3 Prospect theory. Source: Dave Rothschild, “How People Think About Buying New Products,” JTBD.info, August 21, 2015, https://jtbd.info/getting-consumers-to-switch-to-your-solution-fa292bb29cea. When reframing the problem from a “gain frame” to a “loss frame,” we shift from a sure-shot (conservative) option toward the riskier option—gambling.

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Peter Bevelin gave me some of the finest pieces of work on multidisciplinary thinking and inversion. Thornton Oglove, Howard Schilit, and Charles Mulford educated me on how to assess the quality of reported earnings. Stephen Penman and Baruch Lev taught me the finer nuances of interpreting accounting information from the vantage point of a business analyst and a value investor. Daniel Kahneman, Amos Tversky, Richard Thaler, Dan Ariely, and James Montier educated me on the various cognitive biases. Herbert Simon enlightened me on bounded rationality, that is, the cognitive limitations of our minds. Fred Schwed made me aware of the inherent conflicts of interest in the investment industry.

To Sell Is Human: The Surprising Truth About Moving Others
by Daniel H. Pink
Published 1 Dec 2012

Research Report R-1424-08-RR (October 2008), available at http://www.artsusa.org/pdf/information_services/research/policy_roundtable/readytoinnovatefull.pdf. 11. Robert B. Cialdini, Influence: Science and Practice, 5th ed. (Boston: Allyn & Bacon, 2009), 12–16. 12. For a good introduction, see Daniel Kahneman and Amos Tversky, “The Framing of Decisions and the Psychology of Choice,” Science 211 (1981): 453–58; Daniel Kahneman and Amos Tversky, “Rational Choice and the Framing of Decisions,” in Robin M. Hogarth and Melvin W. Reder, eds., Rational Choice: The Contrast Between Economics and Psychology (Chicago: University of Chicago Press, 1987); Erving Goffman, Frame Analysis: An Essay on the Organization of Experience (Cambridge MA: Harvard University Press, 1974). 13.

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Damien Erceau and Nicolas Guéguen, “Tactile Contact and Evaluation of the Toucher,” Journal of Social Psychology 147, no. 4 (August 2007): 441–44. 22. See also Liam C. Kavanagh, Christopher L. Suhler, Patricia S. Churchland, and Piotr Winkielman, “When It’s an Error to Mirror: The Surprising Reputational Costs of Mimicry,” Psychological Science 22, no. 10 (October 2011): 1274–76. 23. Daniel Kahneman, Ed Diener, and Norbert Schwarz, eds., Well-Being: The Foundations of Hedonic Psychology (New York: Russell Sage Foundation, 1999), 218. 24. P. T. Costa Jr. and R. R. McCrae, NEO PI-R Professional Manual (Odessa, FL: Psychological Assessment Resources, Inc., 1992), 15; Susan Cain, Quiet: The Power of Introverts in a World That Can’t Stop Talking (New York: Crown, 2012). 25.

The Strange Order of Things: The Biological Roots of Culture
by Antonio Damasio
Published 6 Feb 2018

Opitz, Bruna Martins, Michiko Sakaki, and Mara Mather, “Thinking About a Limited Future Enhances the Positivity of Younger and Older Adults’ Recall: Support for Socioemotional Selectivity Theory,” Memory and Cognition 44, no. 6 (2016): 869–82; Mara Mather, “The Affective Neuroscience of Aging,” Annual Review of Psychology 67 (2016): 213–38. 31. Daniel Kahneman, “Experienced Utility and Objective Happiness: A Moment-Based Approach,” in Choices, Values, and Frames, eds. Daniel Kahneman and Amos Tversky (New York: Russell Sage Foundation, 2000); Daniel Kahneman, “Evaluation by Moments: Past and Future,” in ibid.; Bruna Martins, Gal Sheppes, James J. Gross, and Mara Mather, “Age Differences in Emotion Regulation Choice: Older Adults Use Distraction Less Than Younger Adults in High-Intensity Positive Contexts,” Journals of Gerontology Series B: Psychological Sciences and Social Sciences (2016): gbw028. 9 CONSCIOUSNESS 1.

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But perhaps the not so good memories do not gain strength with time in contrast to the good memories that replay better than on past recalls. It would be a case not of suppressing details of bad memories but of lingering less over them, thus diminishing their negativity. The upshot is a highly adaptive increase in well-being.30 The peak-end effect described by Daniel Kahneman and Amos Tversky could contribute as well. We would be prone to creating strong memories for the more rewarding aspects of a past scene and obscure the rest. Memory is imperfect.31 Not everyone reports this sort of affectively positive reshaping of remembrances. Some people consider that their recollections are precisely as they should be, neither better nor worse.

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Epicurus and Bertrand Russell would have been pleased to know that their philosophical concerns for human happiness have not been forgotten. Epicurus, The Epicurus Reader, eds. B. Inwood and L. P. Gerson (Indianapolis: Hackett, 1994); Bertrand Russell, The Conquest of Happiness (New York: Liveright, 1930); Daniel Kahneman, “Objective Happiness,” in Well-Being: Foundations of Hedonic Psychology, eds. Daniel Kahneman, Edward Diener, and Norbert Schwarz (New York: Russell Sage Foundation, 1999); Amartya Sen, “The Economics of Happiness and Capability,” in Capabilities and Happiness, eds. Luigino Bruni, Flavio Comim, and Maurizio Pugno (New York: Oxford University Press, 2008); Richard Davidson and Brianna S.

Thinking in Bets
by Annie Duke
Published 6 Feb 2018

Don’t fall in love or even date anybody if you want only positive results. The world is structured to give us lots of opportunities to feel bad about being wrong if we want to measure ourselves by outcomes. Don’t fall for it! Second, being wrong hurts us more than being right feels good. We know from Daniel Kahneman and Amos Tversky’s work on loss aversion, part of prospect theory (which won Kahneman the Nobel Prize in Economics in 2002), that losses in general feel about two times as bad as wins feel good. So winning $100 at blackjack feels as good to us as losing $50 feels bad to us. Because being right feels like winning and being wrong feels like losing, that means we need two favorable results for every one unfavorable result just to break even emotionally.

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Stanford Law Review 64 (2012): 851–906. Kahan, Dan, Ellen Peters, Erica Dawson, and Paul Slovic. “Motivated Numeracy and Enlightened Self-Government.” Behavioural Public Policy 1, no. 1 (May 2017): 54–86. Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011. Kahneman, Daniel, and Amos Tversky. “Prospect Theory: An Analysis of Decision Under Risk.” Econometrica: Journal of the Econometric Society 47, no. 2 (March 1979): 263–91. Katyal, Neil. “Washington Needs More Dissent Channels.” New York Times, July 1, 2016. https://www.nytimes.com/2016/07/02/opinion/washington-needs-more-dissent-channels.html.

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When we work backward from results to figure out why those things happened, we are susceptible to a variety of cognitive traps, like assuming causation when there is only a correlation, or cherry-picking data to confirm the narrative we prefer. We will pound a lot of square pegs into round holes to maintain the illusion of a tight relationship between our outcomes and our decisions. Different brain functions compete to control our decisions. Nobel laureate and psychology professor Daniel Kahneman, in his 2011 best-selling Thinking, Fast and Slow, popularized the labels of “System 1” and “System 2.” He characterized System 1 as “fast thinking.” System 1 is what causes you to hit the brakes the instant someone jumps into the street in front of your car. It encompasses reflex, instinct, intuition, impulse, and automatic processing.

Reinventing Capitalism in the Age of Big Data
by Viktor Mayer-Schönberger and Thomas Ramge
Published 27 Feb 2018

Sloan Jr., My Years with General Motors (New York: Doubleday, 1990), 129, quoted in Garvin and Levesque, “Executive Decision Making at General Motors.” a range of fundamental cognitive limitations: Amos Tversky and Daniel Kahneman, “Judgment Under Uncertainty: Heuristics and Biases,” Science 185, no. 4157 (September 27, 1974), 1124–1131. In 2002, Kahneman earned the Nobel Prize in Economics for the Tversky-Kahneman research; Tversky died in 1996 and therefore did not share in the honor. See also Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Straus and Giroux, 2011); on how Kahneman and Tversky achieved their breakthrough insights, see Michael Lewis, The Undoing Project: A Friendship That Changed Our Minds (New York: W.

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But much of the efficiency gains have now been absorbed, and to reap further benefits firms will have to focus on improving information processing among a firm’s top decision makers. There, however, firms face a far more difficult challenge: constraints in human cognition. As psychologists Daniel Kahneman and Amos Tversky pointed out in their groundbreaking studies (which fueled the creation of a new academic field, behavioral economics), humans are plagued by a range of fundamental cognitive limitations that impair our general ability to decide well. We have seen this in the context of price, but the constraints are far more universal.

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simplifying data to make it more digestible: Mayer-Schönberger and Cukier, Big Data, 164–165, 168. tools to shape the flow of information: Ludwig Siegele and Joachim Zepelin, Matrix der Welt: SAP und der neue globale Kapitalismus (Frankfurt: Campus Verlag, 2009). the “noise” they create in the organization: Daniel Kahneman, Andrew M. Rosenfield, Linnea Gandhi, and Tom Blaser, “Noise: How to Overcome the High, Hidden Cost of Inconsistent Decision Making,” Harvard Business Review (October 2016), https://hbr.org/2016/10/noise. Checklists in aircraft: Brigette M. Hales and Peter J. Pronovost, “The Checklist—a Tool for Error Management and Performance,” Journal of Critical Care 21 (2006), 231–235.

Wait: The Art and Science of Delay
by Frank Partnoy
Published 15 Jan 2012

For most of the twentieth century, economists assumed that people discount the future at a consistent rate for both the short term and the long term.28 If our discount rate is 10 percent, they assumed, we use that same rate regardless of when we owe money—in a day, a month, or a year.29 Economists also assumed we use the same rate regardless of our level of wealth, or whether we owe or are owed money. The standard economic model assumed that people think about these factors and are consistent about risk and time. Then, in 1979, psychologists began dropping bombs on these assumptions. Daniel Kahneman and Amos Tversky published an article in Econometrica, a prestigious economics journal, arguing that the standard economic model of decisions was wrong. A few economists, particularly Richard Thaler, showed that people’s discount rates vary dramatically depending on how far into the future they are discounting.

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It questions the long-held assumptions by financial economists that investors are rational and act in their self-interest, as well as the mathematical equations that purport to show how markets are largely predictable and efficient. A few economists, such as Eugene Fama, one of the founding fathers of efficient market theory, continue to cling to some of these assumptions. But many financial economists are jumping ship. A wave of research, spurred on by Daniel Kahneman, Amos Tversky, and Richard Thaler, has demonstrated that investors have systematic biases. Numerous researchers have documented how we make mistakes in our financial decisions.2 We anchor around certain numbers and concepts, we travel in herds, we overreact, we are overconfident, and we are very, very bad at assessing risk.3 We trade too frequently.

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IMDb, “Memorable Quotes for ‘Fight Club,’” http://www.imdb.com/title/tt0137523/quotes. 5 | BAD CALL Psychologists often say there are two systems of the mind: system 1, which is automatic and involuntary, and system 2, which is effortful and deliberative. They don’t really mean there are two separate physical systems. As Nobel laureate Daniel Kahneman has written, “The two systems do not really exist in the brain or anywhere else.”1 But some scientists find this two-system idea to be a useful metaphor in describing our different mental approaches. So far in this book, we have been looking at what a psychologist would refer to as system 1.

Innovation and Its Enemies
by Calestous Juma
Published 20 Mar 2017

Sheth, “Psychology of Innovation Resistance: The Less Developed Concept (LDC) in Diffusion Research,” in Research in Marketing, vol. 4, ed. Jagdish N. Sheth (Greenwich, CT: JAI Press, 1981), 273–282. 90. Sheth, “Psychology of Innovation Resistance.” 91. Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision under Risk,” Econometrica 47, no. 2 (1979): 263–292. 92. For a more detailed explanation, see Daniel Kahneman and Amos Tversky, “Choices, Frames, and Values,” American Psychologist 39, no. 4 (1984): 341–350; and Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Straus and Giroux, 2011). 93. Bazerman and Moore, Judgment. 94. William Samuelson and Richard Zeckhauser, “Status Quo Bias in Decision Making,” Journal of Risk and Uncertainty 1 (1988): 7–59. 95.

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See Center for Veterinary Medicine, “AquAdvantage Salmon: Environmental Assessment,” FDA, November 12, 2015, http://www.fda.gov/downloads/AnimalVeterinary/DevelopmentApprovalProcess/GeneticEngineering/GeneticallyEngineeredAnimals/UCM466218.pdf. 26. Van Eenennaam, Muir, and Hallermann, Unaccountable Regulatory Delay, 3. 27. Max H. Bazerman and Don Moore, Judgment in Managerial Decision Making (New York: Wiley, 2008). 28. Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision under Risk,” Econometrica 47, no. 2 (1979): 263–292. 29. Alison L. van Eenennaam, Eric M. Hallerman, and William M. Muir, The Science and Regulation of Food from Genetically Engineered Animals (Washington, DC: Council for Agricultural Science and Technology, 2011). 30.

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William Samuelson and Richard Zeckhauser, “Status Quo Bias in Decision Making,” Journal of Risk and Uncertainty 1 (1988): 7–59. 95. Bazerman and Moore, Judgment. 96. Ilans Ritov and Jonathan Baron, “Reluctance to Vaccinate: Omission Bias and Ambiguity,” Journal of Behavioral Decision Making 3 (1990): 263–277. 97. Ritov and Baron, “Reluctance to Vaccinate”; Daniel Kahneman and Dale T. Miller, “Norm Theory: Comparing Reality to Its Alternatives,” Psychological Review 93, no. 2 (1986): 136–153. 98. Ritov and Baron, “Reluctance to Vaccinate.” 99. Nidhi Gupta, Arnout Fischer, and Lynn Frewer, “Socio-psychological Determinants of Public Acceptance of Technologies: A Review,” Public Understanding of Science 22 (2012): 817–831. 100.

The Self-Made Billionaire Effect: How Extreme Producers Create Massive Value
by John Sviokla and Mitch Cohen
Published 30 Dec 2014

Who are we going to chase?’ 3. http://onlinenevada.org/kirk_kerkorian. 4. Michael Specter, “Branson’s Luck,” New Yorker, May 14, 2007. 5. The original paper was published by Econometrica. See Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision Under Risk,” Econometrica 47, no. 2 (March 1979): 263–91. For a more approachable treatment, see Daniel Kahneman, Thinking Fast and Slow (New York: Farrar, Straus and Giroux, 2011), in which Kahneman revisits that work with thirty years of perspective and corroborating experiments. 6. Quote published at www.womenofchina.cn/html/womenofchina/report/123585-1.htm, accessed February 3, 2014. 7.

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More important, the real source of risk resides in other places than the average professional would see them. Risk is a matter of perception. This may seem like an uncontroversial statement, but viewing risk as a subjective rather than objective factor moves against economic orthodoxy—not to mention corporate practice. The Nobel Prize winner Daniel Kahneman and his research partner Amos Tversky first proposed the subjective nature of risk in a 1979 paper in which they describe a series of experiments they conducted to come up with their famous Prospect Theory, a model for human decision making. At its core, Prospect Theory argues that individual perceptions of risk can be influenced by how an opportunity is framed, the context in which it is presented, personal experience, and other factors.

Doing Good Better: How Effective Altruism Can Help You Make a Difference
by William MacAskill
Published 27 Jul 2015

within economics the number of people who seek academic employment more closely matches the number of academic jobs: Richard B. Freeman, “It’s Better Being an Economist (But Don’t Tell Anyone),” Journal of Economic Perspectives 13, no. 3 (Summer 1999), 139–45. Daniel Kahneman and Amos Tversky were psychologists who caused a revolution within economics: For an excellent overview of this pathbreaking research, see Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Straus and Giroux, 2011). this field has improved our ability to cause desirable behavior change: For examples, see “Poor Behaviour: Behavioural Economics Meets Development Policy,” The Economist, December 6, 2014, and Dean Karlan and Jacob Appel, More Than Good Intentions: How a New Economics Is Helping to Solve Global Poverty (New York: Dutton, 2011).

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There are far more combinations of fields than there are individual fields, and research tends to be influenced by traditional disciplinary distinctions, so research at the intersection of two disciplines is often particularly neglected and can for that reason be very high-impact. For example, Daniel Kahneman and Amos Tversky were psychologists who caused a revolution within economics: they applied methods developed in psychology to test assumptions about rational choice that were prevalent within economics, thereby leading to the new field of “behavioral economics.” By giving us a better understanding of human behavior, this field has improved our ability to cause desirable behavior change, including in development.

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Scientists who have clearly had a huge positive effect on the world include Fritz Haber and Carl Bosch, who invented synthetic fertilizer; Karl Landsteiner, who discovered blood groups, thus allowing blood transfusions to be possible; Grace Eldering and Pearl Kendrick, who developed the first whooping cough vaccine; and Françoise Barré-Sinoussi and Luc Montagnier, who discovered HIV. In each of these cases, even after taking into account that these developments would have eventually happened anyway, the good each of these researchers did should be measured in the millions of lives saved. And clearly many other researchers, from Isaac Newton to Daniel Kahneman, have made a huge contribution to human progress even if it’s not easy to quantify their impact in terms of lives saved. Like innovative entrepreneurship, research is an area that is drastically undersupplied by the market because the benefits are open to everyone, and because much of the benefit of research occurs decades into the future.

The Scandal of Money
by George Gilder
Published 23 Feb 2016

Most alert to the problem, the Austrian school of economics, led by Friedrich Hayek and Ludwig von Mises, laboriously makes room for human creativity and entrepreneurship, “opportunity scouts” and arbitrageurs.5 Then they explain it all away as a function of “spontaneous order,” apparently restricting human beings to finding price differences and “assembling or reassembling chemical elements” in an effort to restore “equilibrium.” We are back again to the great machine purring away as deterministically as the stars and planets of Newton’s galaxy. In recent years, some pioneers of what is called behavioral economics—led by the psychologists Daniel Kahneman and Amos Tversky—have caused a stir by challenging our faith in Homo economicus.6 Kahneman won a Nobel Prize. But astonishingly enough, the behavioralists question the concept only to diminish it further, by denying the rationality that makes the machine operational and its outcomes just. The putatively rational economic agents—who’da thunk it?

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Boudreaux, Choice: Cooperation, Enterprise and Human Action (Oakland, CA: Independent Institute, 2015). For the definitive texts, see Ludwig von Mises, Human Action, and Friedrich Hayek, The Road to Serfdom, both available in many editions. 6.Daniel Kahneman, Thinking, Fast and Slow (New York, NY: Farrar, Straus and Giroux, 2011). The Israeli cognitive psychologist Amos Tversky was his collaborator. CHAPTER 1: THE DREAM AND THE DOLLAR 1.Louis Simpson, “In California,” in The Owner of the House: New Collected Poems, 1940–2001 (Rochester, NY: BOA Editions, 2003), 173. 2.“There was virtually no growth before 1750, and thus there is no guarantee that growth will continue indefinitely.

The Geek Way: The Radical Mindset That Drives Extraordinary Results
by Andrew McAfee
Published 14 Nov 2023

These departures from rationality are fascinating, and we’ve been investigating them within organizational scholarship for about half a century. Much of this work was sparked by the landmark paper “Judgment Under Uncertainty: Heuristics and Biases,” published in Science in 1974 by psychologists Amos Tversky and Daniel Kahneman. Their work was instrumental in launching the field of behavioral decision-making, which is still going strong. It’s a field that has led to Nobel Prizes (for Kahneman and others), MacArthur “genius grants” (for Tversky and others), and countless important insights into how our minds work.

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Kimenye, Eunice Mailu, Enos Masini, Philip Owiti, and David Rand, “Digital Health Support in Treatment for Tuberculosis,” New England Journal of Medicine, vol. 381, no. 10 (2019), 986–87, https://doi.org/10.1056/nejmc1806550. 31 “everybody has plans until they get hit”: “Everybody Has Plans Until They Get Hit for the First Time,” Quote Investigator, accessed February 13, 2023, https://quoteinvestigator.com/2021/08/25/plans-hit/. 32 “On Aims and Methods of Ethology”: Nikolaas Tinbergen, “On Aims and Methods of Ethology,” Zeitschrift für Tierpsychologie, vol. 20, no. 4 (1963), 410–33, https://doi.org/10.1111/j.1439-0310.1963.tb01161.x. 33 “List of Cognitive Biases”: “List of Cognitive Biases,” Wikipedia, accessed February 13, 2023, https://en.wikipedia.org/wiki/List_of_cognitive_biases. 34 “Judgment Under Uncertainty”: Amos Tversky and Daniel Kahneman, “Judgment Under Uncertainty: Heuristics and Biases,” Science, vol. 185, no. 4157 (1974), 1124–31, https://doi.org/10.1126/science.185.4157.1124. 35 “Nobody is ever going to invent an ethics class”: “Business Ethics,” Jonathan Haidt (blog), accessed February 13, 2023, https://jonathanhaidt.com/business-ethics/.

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Our press secretaries tell us that we’re above average in all things, including our ability to get things done on time. And we listen to our press secretaries. As we saw in chapter 4, Danny Kahneman is both professionally and personally familiar with overconfidence. He writes, “Overly optimistic forecasts of the outcome of projects are found everywhere.” He and his frequent collaborator, Amos Tversky, thought the phenomenon was so widespread that it deserved its own label; they called it “the planning fallacy.”2 There’s also an obvious relationship between bureaucracy and delays. Endless meetings, approval loops, and reviews don’t lend themselves to getting things done on time. In 2010, when mobile phone maker Nokia was down but not yet out, journalist Mikko-Pekka Heikkinen talked to more than a dozen former employees for the Finnish newspaper Helsingin Sanomat.

Luxury Fever: Why Money Fails to Satisfy in an Era of Excess
by Robert H. Frank
Published 15 Jan 1999

“Another Year, Another Bundle,” New York Times, December 5, 1997: D1, D4. Tversky, Amos, and Dale Griffen. “Endowment and Contrast in Judgments of Well-being,” in Strategy and Choice, ed. Richard Zeckhauser, Cambridge: MIT Press, 1991: 297-319. Tversky, Amos, and Daniel Kahneman. “Judgment Under Uncertainty: Heuristics and Biases,” in Judgment Under Uncertainty: Heuristics and Biases, ed. Daniel Kahneman, Paul Slovic, and Amos Tversky, New York: Cambridge University Press, 1982. Uchitelle, Louis. “As Taste for Comfort Rises, So Do Corporations’ Profits,” New York Times, September 14, 1997: A1, A34. U.S. Bureau of the Census. Statistical Abstract of the United States: 1996 (116th ed.), Washington, DC, 1996.

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For example, students who are shown brief violent cartoons by experimenters are more likely than others to employ physical violence when involved in disputes with their classmates.2 And subjects in jury experiments who are shown slasher films, such as Nightmare on Elm Street and Texas Chain Saw Massacre, are considerably less likely than control subjects to express sympathy for a rape victim.3 The information to which we are exposed can affect our responses even when we have every reason to believe that it is manifestly irrelevant. In one remarkable experiment, for example, the psychologists Daniel Kahneman and Amos Tversky showed that people’s responses to an estimation problem were strongly influenced by a number they knew to be completely random. The specific problem they posed to subjects was to estimate the percentage of African countries in the United Nations.4 But before even asking this question, Kahneman and Tversky had subjects spin a random number wheel with an indicator that was equally likely to stop on any whole number between 0 and 100.

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“National Differences in Subjective Well-Being,” in Understanding Well-Being: Scientific Perspectives on Enjoyment and Suffering, ed. Daniel Kahneman, Ed Diener, and Norbert Schwartz, New York: Russell Sage, 1998. Diener, Ed, and Frank Fujita, “Social Comparisons and Subjective Well-Being,” in Health, Coping, and Social Comparison, B. Buunk and R. Gibbons , Hillsdale, NJ: Erlbaum, forthcoming. Diener, Ed, and Richard E. Lucas. “Personality and Subjective Well-Being,” in Understanding Well-Being: Scientific Perspectives on Enjoyment and Suffering, ed. Daniel Kahneman, Ed Diener, and Norbert Schwartz, New York, Russell Sage, 1998. Diener, Ed; Ed Sandvik; Larry Seidlitz; and Marissa Diener .

How Not to Network a Nation: The Uneasy History of the Soviet Internet (Information Policy)
by Benjamin Peters
Published 2 Jun 2016

Boyd Rayward and Mary Ellen Bowden, 15–28 (Medford, NJ: Information Today, 2004). 23. Arturo Rosenblueth, Norbert Wiener, and Julian Bigelow, “Behavior, Purpose, and Teleology,” Philosophy of Science 10 (1943): 18–24. 24. Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decisions under Risk,” Econometrica 47 (2) (1979): 263–291. See also Daniel Kahneman and Amos Tversky, eds., Choices, Values and Frames (New York: Cambridge University Press and Russell Sage Foundation, 2000). 25. David Stark, The Sense of Dissonance: Accounts of Worth in Economic Life (Princeton: Princeton University Press, 2009), 1–34. 26.

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Twentieth World Congress of Philosophy (1998), accessed October 11, 2011, http://www.bu.edu/wcp/Papers/Comp/CompJurc.htm. Kahnemann, Daniel. Thinking Fast and Slow. New York: Farrar, Straus, and Giroux, 2011. Kahneman, Daniel and Amos Tversky. “Prospect Theory: An Analysis of Decisions under Risk,” Econometrica 47 (2) (1979): 263–291. Kahneman, Daniel and Amos Tversky, eds., Choices, Values and Frames. New York: Cambridge University Press and Russell Sage Foundation, 2000. Kapitonova, Yulia O., and Aleksandr A. Letichevsky, Paradigmi i idei akademika V. M. Glushkova [Paradigms and ideas of academician V.

This Will Make You Smarter: 150 New Scientific Concepts to Improve Your Thinking
by John Brockman
Published 14 Feb 2012

Some considerations about each of these questions: Question 1: If you said that the university should remodel on the grounds that it was expensive to build the old hospital, you have fallen into the “sunk-cost trap” shorthand abstraction (SHA)identified by economists. The money spent on the hospital is irrelevant—it’s sunk—and has no bearing on the present choice. Amos Tversky and Daniel Kahneman pointed out that people’s ability to avoid such traps might be helped by a couple of thought experiments like the following: Imagine that you have two tickets to tonight’s NBA game in your city and that the arena is forty miles away. But it’s begun to snow, and you’ve found out that your team’s star has been injured and won’t be playing.

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And if this is true, this anecdotalism will give new legs to the tragic misconception that the mentally ill are more dangerous than the rest of us. So maybe when I argue for anecdotalism going into everyone’s cognitive toolkit, I am really arguing for two things to be incorporated: (a) an appreciation of how distortive it can be; and (b) recognition, in a salute to the work of people like Amos Tversky and Daniel Kahneman, of its magnetic pull, its cognitive satisfaction. As social primates complete with a region of the cortex specialized for face recognition, we find that the individual face—whether literal or metaphorical—has a special power. But unappealing, unintuitive patterns of statistics and variation generally teach us much more.

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Douglas Rushkoff Technologies Have Biases Our widespread inability to recognize or even acknowledge the biases of the technologies we use renders us incapable of gaining any real agency through them. Gerald Smallberg Bias Is the Nose for the Story Our brains evolved having to make the right bet with limited information. Jonah Lehrer Control Your Spotlight Too often, we assume that willpower is about having strong moral fiber. But that’s wrong. Daniel Kahneman The Focusing Illusion The mismatch in the allocation of attention between thinking about a life condition and actually living it is the cause of the focusing illusion. Carlo Rovelli The Uselessness of Certainty The very foundation of science is to keep the door open to doubt.

Adapt: Why Success Always Starts With Failure
by Tim Harford
Published 1 Jun 2011

Available at: http://timharford.com/2006/05/the-poker-machine/; and Tim Harford, The Logic of Life (New York: Random House, 2008). 32 The brain refuses to register: Gary Smith, Michael Levere and Robert Kurtzman, ‘Poker Player Behavior after Big Wins and Big Losses’, Management Science, Vol. 55, No. 9 (September 2009), pp. 1547–55. 32 The great economic psychologists Daniel Kahneman and Amos Tversky: Daniel Kahneman and Amos Tversky, ‘Prospect Theory: An Analysis of Decision under Risk’, Econometrica, Vol. 47, No. 2 (1979), p. 287. 33 Found the perfect setting to analyse the way we respond to losses: Thierry Post, Martijn J. Van den Assem, Guido Baltussen and Richard H. Thaler, ‘Deal or No Deal?

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Acknowledging the loss and recalculating one’s strategy would be the right thing to do, but that is too painful. Instead, the player makes crazy bets to rectify what he unconsciously believes is a temporary situation. It isn’t the initial loss that does for him, but the stupid plays he makes in an effort to deny that the loss has happened. The eat economic psychologists Daniel Kahneman and Amos Tversky summarised the behaviour in their classic analysis of the psychology of risk: ‘a person who has not made peace with his losses is likely to accept gambles that would be unacceptable to him otherwise’. Even those of us who aren’t professional poker players know how it feels to chase a loss.

SuperFreakonomics
by Steven D. Levitt and Stephen J. Dubner
Published 19 Oct 2009

. / 169 There is much to be read about the influence of uncertainty, especially as it compares with its cousin risk. The Israeli psychologists Amos Tversky and Daniel Kahneman, whose work is generally credited with giving ultimate birth to behavioral economics, conducted pioneering research on how people make decisions under pressure and found that uncertainty leads to “severe and systematic errors” in judgment. (See “Judgment Under Uncertainty: Heuristics and Biases,” from Judgment Under Uncertainty: Heuristics and Biases, ed. Daniel Kahneman, Paul Slovic, and Amos Tversky [Cambridge University Press, 1982].) We wrote about the difference between risk and uncertainty in a New York Times Magazine column (“The Jane Fonda Effect,” September 16, 2007) about the fear over nuclear power: “[The economist Frank Knight] made a distinction between two key factors in decision making: risk and uncertainty.

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While teaching there, he also served on the President’s Council of Economic Advisors; List was the lone economist on a forty-two-person U.S. delegation to India to help negotiate the Kyoto Protocol. He was by now firmly at the center of experimental economics, a field that had never been hotter. In 2002, the Nobel Prize for economics was shared by Vernon Smith and Daniel Kahneman, a psychologist whose research on decision-making laid the groundwork for behavioral economics. These men and others of their generation had built a canon of research that fundamentally challenged the status quo of classical economics, and List was following firmly in their footsteps, running variants of Dictator and other behavioralist lab games.

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ULTIMATUM AND DICTATOR: The first paper on Ultimatum as it is commonly known is Werner Guth, Rolf Schmittberger, and Bernd Schwarze, “An Experimental Analysis of Ultimatum Bargaining,” Journal of Economic Behavior and Organization 3, no. 4 (1982). For a good background on the evolution of such games, see Steven D. Levitt and John A. List, “What Do Laboratory Experiments Measuring Social Preferences Tell Us About the Real World,” Journal of Economic Perspectives 21, no. 2 (2007). See also: Daniel Kahneman, Jack L. Knetsch, and Richard Thaler, “Fairness as a Constraint on Profit Seeking: Entitlements in the Market,” American Economic Review 76, no. 4 (September 1986); Robert Forsythe, Joel L. Horowitz, N. E. Savin, and Martin Sef-ton, “Fairness in Simple Bargaining Experiments,” Games and Economic Behavior 6, no. 3 (May 1994); Colin F.

Framers: Human Advantage in an Age of Technology and Turmoil
by Kenneth Cukier , Viktor Mayer-Schönberger and Francis de Véricourt
Published 10 May 2021

Only when these uses were flipped around did the technologies catch on. Thomas Edison in the early 1900s believed motion pictures would replace classrooms—a vision only realized a century later when Zoom became the new schoolhouse. The term framing is well established in the social sciences. The psychologists Daniel Kahneman and Amos Tversky eloquently explained how different characterizations of outcomes influence decision-making—which they called the “framing effect,” and described it as a flaw in human reasoning. Though we share the same term, the meaning here is somewhat different: not how something is positioned but a deliberate act of harnessing mental models to elicit options prior to making a decision.

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Rosen, “The Magical, Revolutionary Telephone,” Atlantic, March 7, 2012, https://www.theatlantic.com/technology/archive/2012/03/the-magical-revolutionary-telephone/254149/; “History of the Cylinder Phonograph,” Library of Congress, accessed November 10, 2020, https://www.loc.gov/collections/edison-company-motion-pictures-and-sound-recordings/articles-and-essays/history-of-edison-sound-recordings/history-of-the-cylinder-phonograph/. On Edison and education: Todd Oppenheimer, The Flickering Mind: Saving Education from the False Promise of Technology (New York: Random House, 2004). On Kahneman and Tversky’s “framing effect”: Amos Tversky and Daniel Kahneman, “The Framing of Decisions and the Psychology of Choice,” Science 211, no. 4481 (January 30, 1981): 453–58. On Kuhn’s “paradigm shift”: Thomas S. Kuhn, The Structure of Scientific Revolutions (Chicago: University of Chicago Press, 1962). On the origin of art perspective: Giorgio Vasari, “The Life of Filippo Brunelleschi, Sculptor and Architect,” in The Lives of the Artists, trans.

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When we imagine a situation and play it out in our minds, we can experience it almost like a bystander watching an alternative reality as it unfolds. Rather than having to painstakingly conceptualize how a situation might play out, we can simply watch our dreams. That is less belabored and more visual; it’s easier for us to envisage something that doesn’t exist than to think it through in purely conceptual terms. As Daniel Kahneman, the renowned psychologist, has put it, “The most important aspect . . . of mental simulation is that it is experienced as an act of observation, not as an act of construction.” It is “the sense that the outcome is observed, not contrived.” The fourth benefit of counterfactuals is that they tap into our implicit knowledge.

Inside the Nudge Unit: How Small Changes Can Make a Big Difference
by David Halpern
Published 26 Aug 2015

Prior to this, David was Chief Analyst in the Prime Minister’s Strategy Unit (2001–2007), and has held academic positions at the Universities of Cambridge, Oxford and Harvard. To the elected FOREWORD ONE OF THE most powerful and pernicious of the many cognitive biases that have been uncovered by behavioural scientists is ‘hindsight bias’, first investigated by Baruch Fischhoff when he was a graduate student studying at the Hebrew University with Daniel Kahneman and Amos Tversky. Simply put, hindsight bias is the phenomenon that after the fact, we think we knew it all along. Would America elect an African-American as President before a woman? Sure, we all thought that could happen. Did we think in 2000 that fifteen years later most of us would be carrying powerful computers in our pockets that could keep us up-to-date with email, answer nearly any factual question just by speaking to it, and get us anywhere without getting lost?

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The rise of empirical social psychology marked a decisive shift in approach to the study of human behaviour, from the armchair musings of philosophers into an empirical project. In so doing, it has had profound ramifications for how we think of everything from war and wickedness, to kindness and love. Third, cognitive psychology has looked into our internal thought processes. To most contemporary psychologists, the ground-breaking work of Amos Tversky and Daniel Kahneman from the 1970s onwards stands out, highlighting the mental shortcuts that people use in everyday decision-making. For example, people generally don’t estimate the safety of air versus car travel by dividing the number of crashes over the last year by the number of planes versus cars travelling in the world over that time.

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It considers whether behavioural insights have anything to add to the deepest and most daunting challenges that face us today, including how we get along with our fellow humans – challenges and frontiers that ‘nudgers’ are starting to explore. Suffice it to say that when the time came for the two-year sunset review of BIT, far from shutting the team down the Prime Minister decided to expand it. The Nobel Laureate Daniel Kahneman, whose research has led the field, commended the team’s work. The press, civil service and political parties turned – for the most part – from sceptics to supporters. Love it, or hate it, nudging is here to stay. The history and remarkable results of the 10 Downing Street Behavioural Insights Team have led governments across the world to adopt similar approaches, many advised by the Behavioural Insights Team itself.

Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe
by Greg Ip
Published 12 Oct 2015

Another approach is to imagine you flipped a coin 100 times. You’d probably come up heads 50 times and win $50,000, which works out to $500 per coin flip. 9 Amos Tversky and Daniel Kahneman, two Israeli psychologists: The findings of Tversky and Kahneman are based on their papers “Advances in Prospect Theory: Cumulative Representation of Uncertainty,” Journal of Risk and Uncertainty 5 (1992): 297–323, and ”Prospect Theory: An Analysis of Decision under Risk,” Econometrica 47, no. 2 (1979): 263–291, and Daniel Kahneman’s book Thinking, Fast and Slow (New York: Farrar, Straus and Giroux, 2011). I have modified one of their examples to express the value of the bet in dollars; their original paper didn’t specify a currency. 10 In other words, the typical: The expected value is the reward, times its probability.

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That simply demonstrates that real people are not “risk neutral”: they value certainty so much that they will give up economic value to achieve it. This observation was first made by the Swiss mathematician Daniel Bernoulli in 1738 and has been confirmed repeatedly in real life and experimental settings. Amos Tversky and Daniel Kahneman, two Israeli psychologists, concluded after a series of experiments that the expected value of a gamble would have to be worth twice as much as the sure thing before people found it equally appealing. In other words, the typical person wouldn’t pick the coin flip over $500 in an envelope until he was promised $2,000 for winning the coin flip.

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This tends to happen in the case of extreme events—devastating floods, earthquakes, and financial crises—when insurance must cope with two problems: emotional consumers, and emotional insurance companies. Recall that Howard Kunreuther, a risk expert at the Wharton School, says that consumers suffer from “disaster myopia”: they are simply incapable of evaluating risk when probabilities are small. Kunreuther, Nathan Novemsky, and Daniel Kahneman demonstrated this incisively in an experiment they reported on in 2001. They asked several hundred participants to consider a scenario that described a chemical plant in an urban New Jersey area that used a dangerous chemical called Syntox (in fact, a fictitious agent). An accidental release of the chemical could produce a deadly toxic plume.

The Upside of Irrationality: The Unexpected Benefits of Defying Logic at Work and at Home
by Dan Ariely
Published 31 May 2010

Chapter 1: Paying More for Less: Why Big Bonuses Don’t Always Work Based on Dan Ariely, Uri Gneezy, George Loewenstein, and Nina Mazar, “Large Stakes and Big Mistakes,” The Review of Economic Studies 76, vol. 2 (2009): 451–469. Racheli Barkan, Yosef Solomonov, Michael Bar-Eli, and Dan Ariely, “Clutch Players at the NBA,” manuscript, Duke University, 2010. Mihály Csíkszentmihályi, Flow: The Psychology of Optimal Experience (New York: Harper and Row, 1990). Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision under Risk,” Econometrica 47, no. 2 (1979): 263–291. Robert Yerkes and John Dodson, “The Relation of Strength of Stimulus to Rapidity of Habit-Formation,” Journal of Comparative Neurology and Psychology 18 (1908): 459–482. Robert Zajonc, “Social Facilitation,” Science 149 (1965): 269–274.

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The funny thing about this theory is that if you follow it to its logical conclusion, you would not only pay CEOs ridiculously high salaries, but you would also force them to spend more time with their friends and families and send them on expensive vacations in order to complete the picture of a perfect life—because this would be the best way to motivate other people to try to become CEOs. *Each participant played in a different, random order. The order of the games did not make a difference in terms of performance. *Loss aversion is a powerful idea that was introduced by Danny Kahneman and Amos Tversky, and it has been applied to many domains. For this line of work, Danny received the 2002 Nobel Prize in Economics (sadly, Amos had already passed away in 1996). *I suspect that economists who fully believe in the rationality of businesses have never worked a day outside academia. *In defense of those who place too much confidence in their intuition, the payment-to-performance link is not easy to figure out or study.

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Leone, “Psychological Implications of Customer Participation in Co-Production,” Journal of Marketing 67, no. 1 (2003): 14–28. Ziv Carmon and Dan Ariely, “Focusing on the Forgone: How Value Can Appear So Different to Buyers and Sellers,” Journal of Consumer Research 27, no. 3 (2000): 360–370. Daniel Kahneman, Jack Knetsch, and Richard Thaler, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias,” Journal of Economic Perspectives 5, no. 1 (1991): 193–206. Daniel Kahneman, Jack Knetsch, and Richard Thaler, “Experimental Tests of the Endowment Effect and the Coase Theorem,” The Journal of Political Economy 98, no. 6 (1990): 1325–1348. Jack Knetsch, “The Endowment Effect and Evidence of Nonreversible Indifference Curves,” The American Economic Review 79, no. 5 (1989): 1277–1284.

Deep Value
by Tobias E. Carlisle
Published 19 Aug 2014

Like the lay investor, they too commit the investment sin of putting too much weight on the recent past for the particular stock under examination, rather than a rational prior, which is the probability of returns to glamorous, high-growth story stocks. This is a common judgment error not just in the stock market, but also in many situations requiring predictions about uncertain future states. It is known as “neglect of the base rate,” and it was first examined by two pioneers in behavioral finance research, Daniel Kahneman and Amos Tversky, who gave it a prominent place in their groundbreaking paper, “Judgment under Uncertainty: Heuristics and Biases” (1974).42 Kahneman and Tversky found that we make decisions about uncertain future events based on three heuristics—short cuts or simple rules of thumb—that help us break down complex cognitive tasks into simpler operations.

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Bogle to the United States Senate Governmental Affairs Subcommittee,” November 3, 2003. Available at http:// www.vanguard.com/bogle_site/sp20031103.html. 41. J. Lakonishok, A. Shleifer, and R.W. Vishny.“Contrarian Investments, Extrapolation, and Risk.” Journal of Finance, Vol. XLIX, No. 5, (1994) pp. 1541–1578. 42. Amos Tversky and Daniel Kahneman. “Judgment under Uncertainty: Heuristics and Biases.”Science,New Series,Vol.185,No.4157.(Sep.27,1974),pp.1124–1131. http://www.jstor.org/pss/1738360. 43. Leonard Mlodinow. The Drunkard’s Walk: How Randomness Rules Our Lives. (New York: Pantheon Books) Reprint edition, 2009. 44. John B.

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Working Paper, University of Florida, November 2004. 18. Ibid. 19. Warren Buffett. “Chairman’s Letter.” Berkshire Hathaway, Inc. Annual Report, 1985. 20. Sebastien Brant. The Ship of Fools. Translated by Alexander Barclay. (Edinburgh: William Paterson) 1874. Available at http://www.gutenberg.org/ files/20179/20179-h/images/t311.png. 21. Daniel Kahneman. “Daniel Kahneman—Autobiographical.” The Nobel Prizes 2002, Editor Tore Frängsmyr, Nobel Foundation, Stockholm, 2003. Available at http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2002/ kahneman-bio.html. 22. J. Lakonishok, A. Shleifer, and R.W. Vishny. “Contrarian Investments, Extrapolation, and Risk.”

Smart Money: How High-Stakes Financial Innovation Is Reshaping Our WorldÑFor the Better
by Andrew Palmer
Published 13 Apr 2015

The guinea pigs in the trial got e-mails that included extra sentences designed to act as savings cues.20 The idea was to test another big behavioral quirk: the effect that exposure to arbitrary numbers, or “anchors,” can have on people. The effect was first formally identified by Amos Tversky and Daniel Kahneman, a pair of psychologists whose studies of human decision making laid the foundations for the field of behavioral economics. In a 1974 experiment, they rigged a roulette wheel to stop at either 10 or 65 and then asked people to estimate the percentage of African countries in the United Nations.

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Evidence from Capuchin Monkey Trading Behaviour,” Journal of Political Economy (2006). 19. Shlomo Bernartzi and Richard Thaler, “Behavioural Economics and the Retirement Savings Crisis,” Science (March 8, 2013). 20. James Choi et al., “Small Cues Change Savings Choices” (NBER Working Paper 17843, February 2012). 21. Amos Tversky and Daniel Kahnemann, “Judgment Under Uncertainty: Heuristics and Biases,” Science (September 1974). 22. “Reverse Mortgages: Report to Congress” (Consumer Financial Protection Bureau, June 2012). 23. Esteban Calvo, Kelly Haverstick, and Natalia Zhivan, “Determinants and Consequences of Moving Decisions for Older Americans” (Center for Retirement Research at Boston College, August 2009). 24.

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Financial traders do significantly better than other bank employees in classic tests of cognitive reasoning like the following question: “A bat and a ball cost $1.10 in total. The bat costs $1.00 more than the ball. How many cents does the ball cost?” It may well be that the best traders are those who can switch off the rules of thumb and use a more reflective style of thinking—what Daniel Kahneman, a pioneer of behavioral finance, would call using a System 2 process rather than a System 1 process.11 The most recent crisis showed how thin on the ground such stars are. Most investors used fallible heuristics to guide their decision making. Most obviously, home buyers and lenders fell for the rule of thumb that stated house prices in the United States do not fall nationwide.

Originals: How Non-Conformists Move the World
by Adam Grant
Published 2 Feb 2016

Now, we’re willing to do whatever it takes to avoid that loss, even if it means risking an even bigger one. We’re going to lose thousands of jobs anyway, so we throw caution to the wind and make the big gamble, hoping that we’ll lose nothing. This line of research was conducted by psychologists Amos Tversky and Daniel Kahneman; it helped give rise to the field of behavioral economics and win Kahneman a Nobel Prize. It revealed that we can dramatically shift risk preferences just by changing a few words to emphasize losses rather than gains. This knowledge has major implications for understanding how to motivate people to take risks.

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Bateman, “Individual Environmental Initiative: Championing Natural Environmental Issues in U.S. Business Organizations,” Academy of Management Journal 43 (2000): 548–70. sense of urgency: John Kotter, Leading Change (Boston: Harvard Business School Press, 1996). dramatically shift risk preferences: Amos Tversky and Daniel Kahneman, “The Framing of Decisions and the Psychology of Choice,” Science 211 (1981): 453–58; Max Bazerman, Judgment in Managerial Decision Making (New York: John Wiley, 1994). perceive the new behavior as safe or risky: Alexander J. Rothman, Roger D. Bartels, Jhon Wlaschin, and Peter Salovey, “The Strategic Use of Gain- and Loss-Framed Messages to Promote Healthy Behavior: How Theory Can Inform Practice,” Journal of Communication 56 (2006): 202–20.

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On the golf course, people drive electric carts around all day long. Why will they use this instead? Jobs, meanwhile, stuck to his intuition about novelty: “If enough people see the machine, you won’t have to convince them to architect cities around it. People are smart, and it’ll happen.” As Nobel Prize–winning psychologist Daniel Kahneman and decision expert Gary Klein explain, intuitions are only trustworthy when people build up experience making judgments in a predictable environment. If you’re confronting a patient’s symptoms as a doctor or entering a burning building as a firefighter, experience will make your intuitions more accurate.

Willful: How We Choose What We Do
by Richard Robb
Published 12 Nov 2019

Instead of adhering to plans that are dictated by preferences, the Homo ludens chooses how to respond to new scenarios as they arise and which challenges to tackle. These choices and the ensuing struggle are for-itself. This depiction of choice through time shares elements with prospect theory, an influential thrust of behavioral economics. In 1979, Daniel Kahneman and Amos Tversky proposed this psychological account of various anomalies such as the tendency to become more risk averse when confronting small losses rather than small gains or to take inordinate risks to earn back previous losses. According to prospect theory, a person facing choice under uncertainty begins by computing a base-case outcome or reference point, then characterizes each outcome as a gain or loss relative to that reference point.

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Enjoying a dramatic plot with a buildup of tension is no more paradoxical than the paradox of choice. The second puzzle is called the “disjunction effect.” It occurs when someone can’t act until he determines his motive, even if all possible motives justify the same action. It is supposed to represent a deviation from rationality. Amos Tversky and Eldar Shafir coined “disjunction effect” after conducting the following experiment: undergraduates are told to imagine that they have just taken a grueling qualifying exam. They will learn the next day, before the winter holiday, whether they passed or failed. They can buy a five-day vacation to Hawaii at an exceptionally low price today, pay a small nonrefundable fee for the option of buying the trip in two days when they know the exam results, or pass up the opportunity altogether.

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Iyengar, Sheena S., and Mark R. Lepper. “When Choice Is Demotivating: Can One Desire Too Much of a Good Thing?” Journal of Personality and Social Psychology 79, no. 6 (2000): 995–1006. Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011. Kahneman, Daniel, and Amos Tversky. “Prospect Theory: An Analysis of Decision under Risk.” Econometrica 47, no. 2 (1979): 263–291. Karabarbounis, Loukas. “The Labor Wedge: MRS vs. MPN.” Review of Economic Dynamics 17, no. 2 (2014): 206–223. Kestenbaum, David. “Keynes Predicted We Would Be Working 15-Hour Weeks. Why Was He So Wrong?”

Progress: Ten Reasons to Look Forward to the Future
by Johan Norberg
Published 31 Aug 2016

Indeed, when they don’t cover it, we often make up a worst-case scenario ourselves. When news reporters do not have access to a spectacular event, we often fill in the gaps with rumours and horror stories. When something bad happens anywhere, two billion smartphones will nowadays make sure that we find out, even if no reporters are on the scene. The psychologists Daniel Kahneman and Amos Tversky have shown that people do not base their estimates of how frequent something is on data, but on how easy it is to recall examples from memory.16 This ‘availability heuristic’ means that the more memorable an incident is, the more probable we think it is, so we imagine that horrible and shocking things, which stay in our thoughts, are more frequent than they are.

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Washington, ‘Estimating the future number of cases in the Ebola epidemic – Liberia and Sierra Leone, 2014–2015’, Morbidity and Mortality Weekly Report Supplements, 63, 3 (2014), 1–14. 13 ‘Predictions with a Purpose’, The Economist, 7 February 2015. 14 Strömstads Tidning, 30 June 2007. 15 Anders Bolling, Apokalypsens gosiga mörker. Stockholm: Bonniers, 2009, p. 51. 16 Amos Tversky and Daniel Kahneman, ‘Availability: a heuristic for judging frequency and probability’, Cognitive Psychology, 5, 2 (1973), 207–232. 17 Steven Pinker, ‘If everything is getting better, why are people so pessimistic?’, Cato Policy Report, January/February 2015. 18 Roy F. Baumeister, Ellen Bratslavsky, Catrin Finkenauer and Kathleen D.

Everydata: The Misinformation Hidden in the Little Data You Consume Every Day
by John H. Johnson
Published 27 Apr 2016

Malkiel, “Returns from Investing in Equity Mutual Funds, 1971–1991,” Journal of Finance 50 (1995), 549–572. 24. Not to mention the distinction between causation and correlation, which we talked about in chapter 4. 25. Esteemed economist Daniel Kahneman shared the Nobel Prize in 2002 for his work related to psychological factors that affect our decisions. Much of Kahneman’s work was done in collaboration with Amos Tversky, who passed away in 1996 and was therefore ineligible for the Nobel Prize. 26. In case you’re wondering, the first example is the Johns Hopkins Hospital (“The Johns Hopkins Hospital Ranked Among the Top Hospitals in the Nation in 2015,” Johns Hopkins Medicine website, accessed September 1, 2015, http://www.hopkinsmedicine.org/usnews/); the second is Mayo Clinic (Mayo Clinic website homepage, accessed September 1, 2015, http://www.mayoclinic.org/); and the third is New York-Presbyterian (“Awards and Recognition,” New York-Presbyterian website, accessed September 1, 2015, http://nyp.org/about/americas-top-doctors.html). 27.

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That said, there is conflicting research in terms of whether or not athletes can have a so-called “hot hand,” with one paper finding that “[t]he belief in the hot hand and the ‘detection’ of streaks in random sequences is attributed to a general misconception of chance” (Thomas Gilovich, Robert Vallone, and Amos Tversky, “The Hot Hand in Basketball: On the Misperception of Random Sequences,” Cognitive Psychology 17 (1985): 295–314, http://citeseerx.ist.psu.edu/viewdoc/summary?doi=10.1.1.115.6700), while a study from Harvard found that “players who are outperforming will continue to do so, conditional on the difficulty of their present shot” (Andrew Bocskocsky, John Ezekowitz, and Carolyn Stein, “The Hot Hand: A New Approach to an Old ‘Fallacy,’” presented at the MIT Sloan Sports Analytics Conference, February 28–March 1, 2014, http://www.sloansportsconference.com/wp-content/uploads/2014/02/2014_SSAC_The-Hot-Hand-A-New-Approach.pdf). 26.

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Ola Svenson, “Are We All Less Risky and More Skillful Than Our Fellow Drivers?,” Acta Psychologica 47, no. 2 (February 1981): 143–148. 43. “Podcast,” A Prairie Home Companion website, accessed September 1, 2015, http://prairiehome.org/listen/podcast/. 44. If you want to learn more about these biases, pick up a copy of Daniel Kahneman’s Thinking, Fast and Slow (New York: Farrar, Straus and Giroux, 2013). 45. Adrian Furnham, Joanna Moutafi, and Thomas Chamorro-Premuzic, “Personality and Intelligence: Gender, the Big Five, Self-Estimated and Psychometric Intelligence,” International Journal of Selection and Assessment 13 (March 4, 2005): 11–24, doi: 10.1111/j.0965-075X.2005.00296.x. 46.

The Social Animal: The Hidden Sources of Love, Character, and Achievement
by David Brooks
Published 8 Mar 2011

Mitchell Waldrop put it, “Theoretical economists use their mathematical prowess the way great stags of the forest use their antlers: to do battle with one another and to establish dominance. A stag who doesn’t use his antlers is nothing.” Behavioral economists argue that the caricature is not accurate enough to produce reliable predictions about real events. Two psychologists, Daniel Kahneman and Amos Tversky, were the pioneers. Then their insights were picked up by economists proper: including Richard Thaler, Sendhil Mullainathan, Robert Schiller, George Akerlof, and Colin Camerer. These scholars investigate cognition that happens below the level of awareness. Rationality is bounded by emotion.

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In the aroused state, 46 percent said they could imagine it. In the nonaroused state, 20 percent said they would try to have sex with their date after she said no. In the aroused state, 45 percent said they would keep trying. Finally, there is loss aversion. Losing money brings more pain than winning money brings pleasure. Daniel Kahneman and Amos Tversky asked people if they would accept certain bets. They found that people needed the chance of winning $40 if they were going to undergo a bet that might cost them $20. Because of loss aversion investors are quicker to sell stocks that have made them money than they are to sell stocks that have been declining.

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Ornstein, Multimind: A New Way of Looking at Human Behavior (New York: Houghton Mifflin, 1996), 86. 21 high Social Security numbers Dan Ariely, “The Fallacy of Supply and Demand,” Huffington Post, March 20, 2008, http://www.huffingtonpost.com/dan-ariely/the-fallacy-of-supply-and_b_92590.html. 22 People who are given Hallinan, 50. 23 “Their predictions became” Jonah Lehrer, How We Decide (New York: Houghton Mifflin Co., 2009), 146. 24 They just stick with Thaler and Sunstein, 34. 25 The picture of the smiling Hallinan, 101. 26 In the aroused state Ariely, 96 and 106. 27 Daniel Kahneman and Amos Tversky Jonah Lehrer, “Loss Aversion,” The Frontal Cortex, February 10, 2010, http://scienceblogs.com/cortex/2010/02/loss_aversion.php. CHAPTER 12: FREEDOM AND COMMITMENT 1 In Guess culture Oliver Burkerman, “This Column Will Change Your Life,” The Guardian, May 8, 2010, http://www.guardian.co.uk/lifeandstyle/2010/may/08/change-life-asker-guesser. 2 Thirty-eight percent of young Americans “Pew Report on Community Satisfaction,” Pew Research Center (January 29, 2009): 10, http://pewsocialtrends.org/assets/pdf/Community-Satisfaction.pdf. 3 In Western Europe William A.

Spies, Lies, and Algorithms: The History and Future of American Intelligence
by Amy B. Zegart
Published 6 Nov 2021

We use them without even thinking about it—skimming Yelp reviews to pick a restaurant, watching shows recommended by Netflix’s search algorithm, and voting party-line tickets rather than carefully assessing each candidate for every local position. But mental shortcuts are also prone to error.34 To see this in action, consider one of the early and controversial experiments conducted by Amos Tversky and Daniel Kahneman, pioneers in the psychology field. Participants were given the following description about an imaginary woman named Linda: Linda is 31 years old, single, outspoken and very bright. She majored in philosophy. As a student, she was deeply concerned with the issue of discrimination and social justice, and also participated in antinuclear demonstrations.

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.: Georgetown University Press, 2008), 122–37. 32. “Chairman Khrushchev’s Letter to President Kennedy, October 23, 1962,” John F. Kennedy Presidential Library and Museum, https://microsites.jfklibrary.org/cmc/oct23/doc6.html. 33. Weintraub, MacArthur’s War, 197. 34. Kahneman, Thinking, Fast and Slow. 35. Amos Tversky and Daniel Kahneman, “Extensional versus Intuitive reasoning: The conjunction fallacy in probability judgement,” Psychological Review 90, no. 4 (October 1983): 293–315. 36. “List of cognitive biases,” Wikipedia, https://en.wikipedia.org/wiki/List_of_cognitive_biases (accessed April 26, 2021). 37. Charles G.

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Ward Casscells, Arno Schoenberger, and Thomas Grayboys, “Interpretation by physicians of clinical laboratory results,” New England Journal of Medicine 299 (1978): 999–1000; David M. Eddy, “Probabilistic Reasoning in Clinical Medicine: Problems and Opportunities,” in Judgment Under Uncertainty: Heuristics and Biases, edited by Dan Kahneman, Paul Slovic, and Amos Tversky (Cambridge, U.K.: Cambridge University Press, 1982), 249–67. 110. Gigerenzer and Hoffrage, “How to improve Bayesian reasoning,” 684–704. 111. This section draws from Chang et al., “Developing expert political judgment.” 112. Another initiative was the creation of the Intelligence Advanced Research Projects Activity (IARPA).

Never Split the Difference: Negotiating as if Your Life Depended on It
by Chris Voss and Tahl Raz
Published 3 Oct 1989

For years after that book came out, everybody—including the FBI and the NYPD—focused on a problem-solving approach to bargaining interactions. It just seemed so modern and smart. Halfway across the United States, a pair of professors at the University of Chicago was looking at everything from economics to negotiation from a far different angle. They were the economist Amos Tversky and the psychologist Daniel Kahneman. Together, the two launched the field of behavioral economics—and Kahneman won a Nobel Prize—by showing that man is a very irrational beast. Feeling, they discovered, is a form of thinking. As you’ve seen, when business schools like Harvard’s began teaching negotiation in the 1980s, the process was presented as a straightforward economic analysis.

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What I am saying is that while our decisions may be largely irrational, that doesn’t mean there aren’t consistent patterns, principles, and rules behind how we act. And once you know those mental patterns, you start to see ways to influence them. By far the best theory for describing the principles of our irrational decisions is something called Prospect Theory. Created in 1979 by the psychologists Daniel Kahneman and Amos Tversky, prospect theory describes how people choose between options that involve risk, like in a negotiation. The theory argues that people are drawn to sure things over probabilities, even when the probability is a better choice. That’s called the Certainty Effect. And people will take greater risks to avoid losses than to achieve gains.

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To locate a specific passage, please use the search feature on your e-book reader CHAPTER 1: THE NEW RULES 1.Robert Mnookin, Bargaining with the Devil: When to Negotiate, When to Fight (New York: Simon & Schuster, 2010). 2.Roger Fisher and William Ury, Getting to Yes: Negotiating Agreement Without Giving In (Boston: Houghton Mifflin, 1981). 3.Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Straus & Giroux, 2011). 4.Philip B. Heymann and United States Department of Justice, Lessons of Waco: Proposed Changes in Federal Law Enforcement (Washington, DC: U.S. Department of Justice, 1993). CHAPTER 2: BE A MIRROR 1.George A. Miller, “The Magical Number Seven, Plus or Minus Two: Some Limits on Our Capacity for Processing Information,” Psychological Review 63, no. 2 (1956): 81–97.

Work Rules!: Insights From Inside Google That Will Transform How You Live and Lead
by Laszlo Bock
Published 31 Mar 2015

Unfortunately, the Nobel is not awarded posthumously. At his Nobel acceptance speech, Kahneman’s first words were, “The work on which the award was given… was done jointly with Amos Tversky during a long period of unusually close collaboration. He should have been here.” Prize Lecture by Daniel Kahneman, Stockholm University, December 8, 2002, http://www.nobelprize.org/mediaplayer/?id=531. 203. “Inflation Calculator.” 204. Amos Tversky and Daniel Kahneman, “The Framing of Decisions and the Psychology of Choice,” Science 211, no. 4481 (January 30, 1981): 453–458, http://psych.hanover.edu/classes/cognition/papers/tversky81.pdf. 205.

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We believe we know ourselves, and that certainty is part of the problem. In his book Thinking, Fast and Slow, Daniel Kahneman, a Nobel Prize–winning professor emeritus of Princeton University, describes us as having two brains. One brain is slow, thoughtful, reflective, and data driven, and the other is fast, intuitive, and impulse driven. It’s the second brain we rely on most, which is why even when we think we’re being rational, we’re probably not. For example, how much is $5 worth to you? Would you be willing to leave a store and drive twenty minutes to save that much? In 1981, Kahneman and his colleague, Amos Tversky,202 wondered if we were consistent in how we valued money and time.

The Price of Inequality: How Today's Divided Society Endangers Our Future
by Joseph E. Stiglitz
Published 10 Jun 2012

Know Your Values and Frame the Debate (White River Junction, VT: Chelsea Green, 2004). 11. This is called the anchoring effect. See discussions of anchoring and framing effects on judgments and preferences in Daniel Kahneman, Paul Slovic, and Amos Tversky, eds., Judgment under Uncertainty: Heuristics and Biases (Cambridge: Cambridge University Press, 1982); and Daniel Kahneman and Amos Tversky, eds., Choices, Values and Frames (New York: Cambridge University Press, 2000). For a popular and recent discussion, see Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Straus and Giroux, 2011); and Richard Thaler and Cass Sunstein, Nudge: Improving Decisions about Health, Wealth, and Happiness (New Haven and London: Yale University Press, 2008). 12.

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This turns out to raise theoretical issues that are closely akin to the measurement of risk, and my early work, four decades ago, was done jointly with Michael Rothschild. Subsequently, I began work with a former student, Ravi Kanbur, on the measurement of socioeconomic mobility. The influence of behavioral economics on my thinking should be evident in this work. I was first introduced to these ideas some forty years ago by the late Amos Tversky, a pioneer in this field, and subsequently Richard Thaler and Danny Kahneman have greatly influenced my thinking. (When I founded the Journal of Economic Perspectives in the mid-1980s, I asked Richard to do a regular column on the subject.) I benefited enormously from the discussions with Edward Stiglitz of some of the legal issues treated in chapter 7, and with Robert Perkinson on the issues related to America’s high incarceration rate.

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For a discussion of these outcomes (and the sums people will accept or veto in ultimatum games), see Colin Camerer and Richard Thaler, “Anomalies: Ultimatums, Dictators and Manners,” Journal of Economic Perspectives 9, no. 2 (1995): 209–19. 16. For a sample of the large literature, see, e.g., Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler, “Fairness and the Assumptions of Economics,” Journal of Business 59, no. 4 (1986): S285–S300; Gary E. Bolton and Axel Ockenfels, “ERC: A Theory of Equity, Reciprocity, and Competition,” American Economic Review 90, no. 1 (March 2000): 166–93; Armin Falk, Ernst Fehr, and Urs Fischbacher, “On the Nature of Fair Behavior,” Economic Inquiry 41, no. 1 (January 2003): 20–26; Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler, “Fairness as a Constraint on Profit Seeking: Entitlements in the Market,” American Economic Review 76, no. 4 (1986): 728–41; Amartya Sen, “Moral Codes and Economic Success,” in Market Capitalism and Moral Values, ed.

Cheap: The High Cost of Discount Culture
by Ellen Ruppel Shell
Published 2 Jul 2009

(If they won’t pay more than $200 for the ticket, then $300 should in theory be worth more to them than the ticket.) In fact, utility maximization doesn’t explain many ways in which real people relate to money. In their seminal “Prospect Theory: An Analysis of Decision Under Risk,” published in the journal Econometrica in 1979, Israel-born psychologists Daniel Kahneman and Amos Tversky challenged the homo economicus orthodoxy. They argued that human decision making is less a matter of weighing evidence and calculating probabilities than it is of reconciling new information with old familiar patterns branded into the brain from as early as birth. These patterns of mind, or what psychologists call “heuristics,” allow us to make judgments quickly.

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Those who were asked to memorize a long list were much more likely to choose chocolate cake, which the authors theorize indicates that their higher order brain is swamped in thought, allowing their lower order, more impulsive brain to assert itself. 60 “response to block the cognitive assessment”: Jodie Ferguson, “Beliefs of Fair Price Setting Rules: Pervasiveness in the Marketplace and Effects on Perceptions of Price Fairness,” dissertation delivered in abstract form at Fordham Pricing Conference, September 28, 2007, Fordham University, New York. 61 “the laws of society, is not altogether without it”: Adam Smith, The Theory of Moral Sentiments (1790, 6th edition), Part 1, Sec. 1, Ch 1:9. 62 “An Analysis of Decision Under Risk”: Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision Under Risk,” Econometrica 47, no. 2 (1979): 363-91. 63 are projected far into the future: See, for example, D. Soman et al., “The Psychology of Intertemporal Discounting: Why Are Distant Events Valued Differently from Proximal Ones?” Marketing Letters 16, nos. 3/4 (2005): 347-60. 63 the distance estimated by the students: Plenary lecture at the annual meeting of the American Association for the Advancement of Science, February 15, 2008, in Boston. 64 “for a new field of research”: As announced in the press release from the Royal Swedish Academy of Science, October 9, 2002, available at http://nobelprize. org/nobel__prizes/economics/laureates/2002/press.html. 65 when making financial transactions: Thaler compressed and compiled many of these cases into a book.

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Discount retailers rely heavily on psychological manipulation to set customers up for the buy, but as Burman demonstrated, this tactic can backfire if customers get wise to it. “High-cognition customers will feel cheated, and this negative feeling will be transferred onto the product,” she said. “The value perception of the product itself may be reduced.” Again, most of us are highly sensitive to what we perceive as the fairness of transactions. Daniel Kahneman once surveyed randomly selected adults, asking them whether they thought it was okay for a hardware store to raise the price of snow shovels during a snowstorm, and the response was a resounding no. Years later another team of social scientists asked the same question of a large group of executives and got pretty much the same response.

Fancy Bear Goes Phishing: The Dark History of the Information Age, in Five Extraordinary Hacks
by Scott J. Shapiro

The conjunction rule states that the probability of two events occurring can never be greater than the probability of either of those events occurring by itself: Conjunction Rule: Prob(x) ≥ Prob(x AND y) Thus, the probability that a coin will land heads twice in a row (for two tosses) cannot be greater than the probability that a coin lands heads just once (for one toss). Similarly, the probability that Linda is a feminist bank teller cannot be greater than the probability that Linda is a bank teller. The Linda problem, first formulated by the Israeli psychologists Daniel Kahneman and Amos Tversky, is perhaps the most famous example of human violations of the basic rules of probability theory. Kahneman and Tversky spent their careers uncovering how mistaken our judgments and choices can be. The human mind is riddled with upcode that causes us to make biased predictions and irrational choices.

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Google domain name: Because of trademark disputes, some users in the U.K. and Germany have googlemail email addresses. See Andy B, “Change to Gmail from Google Mail,” July 21, 2016, https://support.google.com/mail/forum/ AAAAK7un8RUvxxPMMv5kXg/?hl=en&gpf=%23!topic%2Fgmail%2FvxxPMMv5kXg%3Bcontext-place%3Dforum%2Fgmail. “word starts with a K”: Amos Tversky and Daniel Kahneman, “Availability: A Heuristic for Judging Frequency and Probability,” Cognitive Psychology 5 (1973): 211. Availability Heuristic: In another Kahneman and Tversky experiment, participants listened to lists of names containing either nineteen famous women and twenty less famous men or nineteen famous men and twenty less famous women.

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Johnson, “The Affect Heuristic in Judgments of Risks and Benefits,” Journal of Behavioral Decision Making 13 (2000): 5. Nigerian Astronaut: Katharine Trendacosta, “Here’s the Best Nigerian Prince Email Scam in the Galaxy,” Gizmodo, February 12, 2016, https://gizmodo.com/we-found-the-best-nigerian-prince-email-scam-in-the-gal-1758786973. “loss averse”: Amos Tversky and Daniel Kahneman, “Loss Aversion in Riskless Choice: A Reference-Dependent Model,” The Quarterly Journal of Economics, November 1991. Jack and Jill example from Kahneman, Thinking, Fast and Slow, 275. promise gains: Teodor Sommestad and Henrik Karlzén, “A Meta-Analysis of Field Experiments on Phishing Susceptibility” (2019 APWG Symposium on Electronic Crime Research [eCrime]).

Quantitative Value: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors
by Wesley R. Gray and Tobias E. Carlisle
Published 29 Nov 2012

This is not a matter of simply incorrectly guessing our performance on the test because the errors all tend to be in one direction—we reliably overestimate how well we perform. Further, the more difficult the questions, and the less familiar we are with the content, the more we tend overestimate how well we performed. The two pioneers of the field of behavioral finance, Daniel Kahneman and Amos Tversky, suggest that our overconfidence may stem from two other biases, self-attribution bias and hindsight bias.34 Self-attribution bias refers to our propensity to ascribe our successes to our skill, while blaming our failures on bad luck, rather than a lack of skill. For example, the stocks we buy that go up show our great stock picking skills, while those we buy that go down do so because of some outside factor, like Congress changing the law or the Federal Reserve increasing interest rates.

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Wall Street Journal, Fund Track (December 31, 2009), http://online.wsj.com/article/SB10001424052748704876804574628561609012716.html. 33. Jesse J. Prinz, Gut Reactions: A Perceptual Theory of Emotion (Philosophy of Mind) (Oxford: Oxford University Press, USA, 2004). 34. Nicholas Barberis and Richard Thaler, “A Survey of Behavioral Finance.” NBER Working Paper No. 9222, September 2002, www.nber.org/papers/w9222. 35. Amos Tversky and Daniel Kahneman, “Judgment under Uncertainty: Heuristics and Biases.” Science, New Series 185(4157) (September 27, 1974): 1124–1131; www.jstor.org/pss/1738360. 36. Dan Ariely, Predictably Irrational: The Hidden Forces that Shape Our Decisions (New York: HarperCollins, 2008). 37. Philip E. Tetlock.

Possible Minds: Twenty-Five Ways of Looking at AI
by John Brockman
Published 19 Feb 2019

For the same reason, rationality is the standard assumption in inverse-reinforcement-learning models that try to make inferences from human behavior—perhaps with the concession that humans are not perfectly rational agents and sometimes randomly choose to act in ways unaligned with or even opposed to their best interests. The problem with rationality as a basis for modeling human cognition is that it is not accurate. In the domain of decision making, an extensive literature—spearheaded by the work of cognitive psychologists Daniel Kahneman and Amos Tversky—has documented the ways in which people deviate from the prescriptions of rational models. Kahneman and Tversky proposed that in many situations people instead follow simple heuristics that allow them to reach good solutions at low cognitive cost but sometimes result in errors. To take one of their examples, if you ask somebody to evaluate the probability of an event, they might rely on how easy it is to generate an example of such an event from memory, consider whether they can come up with a causal story for that event’s occurring, or assess how similar the event is to their expectations.

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These scenarios echo Kurt Vonnegut’s 1961 short story “Harrison Bergeron,” in which exceptional aptitude is suppressed in deference to the mediocre lowest common denominator of society. Thought experiments like John Searle’s Chinese Room and Isaac Asimov’s Three Laws of Robotics all appeal to the sorts of intuitions plaguing human brains that Daniel Kahneman, Amos Tversky, and others have demonstrated. The Chinese Room experiment posits that a mind composed of mechanical and Homo sapiens parts cannot be conscious, no matter how competent at intelligent human (Chinese) conversation, unless a human can identify the source of the consciousness and “feel” it.

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Like machines, human beings use algorithms to make decisions or solve problems; the remarkable difference lies in the human brain’s overall level of success despite the comparative limits on computational resources. The efficacy of human algorithms springs from what AI researchers refer to as “bounded optimality.” As psychologist Daniel Kahneman has notably pointed out, human beings are rational only up to a point. If you were perfectly rational, you would risk dropping dead before making an important decision—whom to hire, whom to marry, and so on—depending on the number of options available for your review. “With all of the successes of AI over the last few years, we’ve got good models of things like images and text, but what we’re missing are good models of people,” Tom says.

Daughter Detox: Recovering From an Unloving Mother and Reclaiming Your Life
by Peg Streep
Published 14 May 2017

The deck—yes, the unconscious processes that drive the car that is you and everyone else—is totally stacked in favor of hanging in, even when it makes us feel lousy. We can all thank evolution for that (and, yes, I am being ironic.) Humans are famously conservative, preferring to avert possible loss even when considering potential gain, as the work of psychologists Amos Tversky and Daniel Kahneman showed, earning a Nobel Prize in Economics for the latter. Moreover, when we contemplate change, we’re likely to frame the discussion in terms of what we already have invested instead of the possible gains we might reap from moving on. Focusing solely on our investment—which could be time, money, energy—gets in the way whether we’re thinking about leaving a marriage, another relationship, a job, or even selling a clunker car we’ve repaired again and again.

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Erbas, Yasemin, Eva Ceulemans, Madeline Lee Pe, Peter Koval, and Peter Kuppens. Negative Emotion Differentiation: Its Personality and Well-being Correlates and a Comparison of Different Assessment Methods. Cognition and Emotion , 2014, vol. 28(7), pp. 1196-1213. Kahneman, Daniel. Thinking, Fast and Slow . New York: Farrar, Straus & Giroux, 2011. Kahneman, Daniel, and Amos Tversky. Prospect Theory: An Analysis of Decision Under Risk. Econometrica , 1979, vol. 47(2), pp. 263-292. Kay, Aaron C., S. Christian Wheeler, John A. Bargh, and Lee Ross. Material Priming: The Influence of Mundane Physical Objects on Situational Construal and Competitive Behavior Choice. Organizational Behavior and Human Decision Processes , 2004, vol. 95(1), pp. 83-96.

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ABOUT THE EXERCISES IN DAUGHTER DETOX Most of the work involved in reclaiming your life from the effects of a toxic childhood is about bringing unconscious patterns of thinking and feeling to the surface so that they can be changed through consciousness. It’s all about connecting the dots. A great deal of research attests to the fact that much of what we think is, in fact, not governed by rational and conscious deliberation but by automatic, unconscious thought processes that the brain uses as shortcuts. (To use psychologist Daniel Kahneman’s terms, slow thinking versus fast thinking.) Thought processes are also affected by what are called “primes” in the environment, as research by John A. Bargh and Tanya L. Chartrand showed. So the environment in which you do these exercises, including journaling, matters. Choose a place to sit that makes you feel calm and focused.

Stocks for the Long Run, 4th Edition: The Definitive Guide to Financial Market Returns & Long Term Investment Strategies
by Jeremy J. Siegel
Published 18 Dec 2007

Until recently, finance was dominated by theories that assumed investors maximized their expected utility, or well-being, and always acted rationally. This was an extension of the rational theory of consumer choice under certainty applied to uncertain outcomes. In the 1970s two psychologists, Amos Tversky and Daniel Kahneman, noted that many individuals did not behave as this theory predicted. They developed a new model—called prospect theory—of how individuals actually behave and make decisions when faced with uncertainty.3 Their CHAPTER 19 Behavioral Finance and the Psychology of Investing 323 model established them as the pioneers of behavioral finance, and their research has been making much headway in the finance profession.

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This was confirmed by a social psychologist named Solomon Asch. He conducted a famous experiment where subjects were presented with four lines and asked to pick the two that were the same length. The right answer was obvious, but when confederates of Dr. Asch presented conflicting views, the subjects often gave the incorrect answer.6 3 Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision under Risk,” Econometrica, vol. 47, no. 2 (March 1979). 4 Robert Shiller, “Stock Prices and Social Dynamics,” Brookings Papers on Economic Activity, Washington, D.C.: Brookings Institution, 1984. 5 Robert Shiller, “Do Stock Prices Move Too Much to Be Justified by Subsequent Movements in Dividends?”

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Now he says that only one-third of his trades make money, but overall he’s way ahead. When things don’t work out as he planned, he gets rid of losing trades quickly while holding on to his winners. There is an old adage on Wall Street that sums up successful trading: “Cut your losers short and let your winners ride.” 22 Amos Tversky and Daniel Kahneman, “Judgment under Uncertainty: Heuristics and Biases,” Science, vol. 185 (1974), pp. 1124–1131. 23 Terrance Odean, “Are Investors Reluctant to Realize Their Losses,” Journal of Finance, vol. 53, no. 5 (October 1998), p. 1786. CHAPTER 19 Behavioral Finance and the Psychology of Investing 331 Rules for Avoiding Behavioral Traps Dave: I don’t feel secure enough to trade again soon.

Stocks for the Long Run 5/E: the Definitive Guide to Financial Market Returns & Long-Term Investment Strategies
by Jeremy Siegel
Published 7 Jan 2014

Until recently, finance was dominated by theories that assumed investors maximized their expected utility, or well-being, and always acted rationally. This was an extension of the rational theory of consumer choice under certainty applied to uncertain outcomes. In the 1970s two psychologists, Daniel Kahneman and Amos Tversky, noted that many individuals did not behave as this theory predicted. Kahneman and Tversky developed a new model—called prospect theory—of how individuals actually behave and make decisions when faced with uncertainty.3 Their model established them as the pioneers of behavioral finance, and their research has been making much headway in the finance profession.

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Currently, about two-thirds of the Dow Industrial stocks pay dividends in the first half of the month, which means that the difference between the first- and second-half returns is greater than reported here. Chapter 22 1. David Dreman, Contrarian Investment Strategies: The Next Generation, New York: Simon & Schuster, 1998. 2. Frank J. Williams, If You Must Speculate, Learn the Rules, Burlington, VT: Freiser Press, 1930. 3. Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision Under Risk,” Econometrica, vol. 47, no. 2 (March 1979). 4. Robert Shiller, “Stock Prices and Social Dynamics,” Brookings Papers on Economic Activity, Washington, DC: Brookings Institution, 1984. 5. Robert Shiller, “Do Stock Prices Move Too Much to Be Justified by Subsequent Movements in Dividends?”

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Hersh Shefrin and Meir Statman, “The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence,” Journal of Finance, vol. 40, no. 3 (1985), pp. 777-792. 22. See Tom Chang, David Solomon, and Mark Westerfield, “Looking for Someone to Blame: Delegation, Cognitive Dissonance, and the Disposition Effect,” May 2013. 23. Leroy Gross, The Art of Selling Intangibles, New York: New York Institute of Finance, 1982. 24. Amos Tversky and Daniel Kahneman, “Judgment Under Uncertainty: Heuristics and Biases,” Science, vol. 185 (1974), pp. 1124-1131. 25. Terrance Odean, “Are Investors Reluctant to Realize Their Losses?” Journal of Finance, vol. 53, no. 5 (October 1998), p. 1786. 26. Hersh Shefrin and Richard Thaler, “An Economic Theory of Self-Control,” Journal of Political Economy, vol. 89, no. 21 (1981), pp. 392-406. 27.

Engineering Security
by Peter Gutmann

[155] “Banks phishes its own customers”, Peter Gutmann, posting to the cryptography@metzdowd.com mailing list, message-ID E1MB80g-0001a31Y@wintermute01.cs.auckland.ac.nz, 2 June 2009. [156] “Judgement under uncertainty: Heuristics and biases”, Amos Tversky and Daniel Kahneman, Science, Vol.185, Issue 4157 (27 September 1974), p.1124. [157] “Judgment under Uncertainty: Heuristics and Biases”, Daniel Kahneman, Paul Slovic and Amos Tversky, Cambridge University Press, 1982. [158] “The Logic of Scientific Discovery”, Karl Popper, Basic Books, 1959. [159] “Critical Thinking Skills in Tactical Decision Making: A Model and A Training Strategy”, Marvin Cohen, Jared Freeman and Bryan Thompson, in References [160] [161] [162] [163] [164] [165] [166] [167] [168] [169] [170] [171] [172] [173] [174] [175] [176] [177] [178] [179] [180] 213 “Making Decisions Under Stress: Implications for Individual and Team Training”, American Psychological Association (APA), 1998, p.155.

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“The framing of decisions and the psychology of choice”, Amos Tversky and Daniel Kahneman, Science, Vol.211, No.4481 (30 January 1981), p.453. “Gain-Loss Frames and Cooperation in Two-Person Social Dilemmas: A Transformational Analysis”, Carsten de Dreu and Christopher McCusker, Journal of Personality and Social Psychology, Vol.72, No.5 (1997), p.1093. “Framing of decisions and selection of alternatives in health care”, Dawn Wilson, Robert Kaplan and Lawrence Schneiderman, Social Behaviour, No.2 (1987). p.51. “Prospect Theory: An Analysis of Decision under Risk”, Daniel Kahneman and Amos Tversky, Econometrica, Vol.47, No.2 (March 1979), p.263.

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The article that this talk is derived from was published as “Computer Security in the Real World”, Butler Lampson, IEEE Computer, Vol.37, No.6 (June 2004), p.37, although this version doesn't contain the Voltaire quote. “Information and Efficiency: Another Viewpoint”, Harold Demsetz, Journal of Law and Economics, Vol.12, No.1 (April 1969), p.1. 96 Problems [59] [60] [61] [62] [63] [64] [65] [66] [67] [68] [69] [70] [71] [72] “Prospect Theory: An Analysis of Decision under Risk”, Daniel Kahneman and Amos Tversky, Econometrica, Vol.47, No.2 (March 1979), p.263. “A Funny Thing Happened on the Way to the Market”, Sean Smith, IEEE Security and Privacy, Vol.1, No.6 (November/December 2003), p.74. “Zero as a Special Price: The True Value of Free Products”, Kristina Shampanier, Nina Mazar and Dan Ariely, Marketing Science, Vol.26, No.6 (November/December 2007), p.742.

Stubborn Attachments: A Vision for a Society of Free, Prosperous, and Responsible Individuals
by Tyler Cowen
Published 15 Oct 2018

Jones-Lee, M.W., ed. 1982. The Value of Life and Safety. North-Holland Publishing Company. Kagan, Shelley. 1998. Normative Ethics. Boulder: Westview Press. Kagan, Shelly. 2011. “Do I Make a Difference?” Philosophy and Public Affairs 39, no. 2: 105–141. Kahneman, Daniel, Paul Slovic, and Amos Tversky, eds. 1982. Judgment Under Uncertainty: Heuristics and Biases. Cambridge: Cambridge University Press. Kahneman, Daniel, et al., 2006. “Would You Be Happier if You Were Richer? A Focusing Illusion.” Science 312: 1908-1910. Keeley, Lawrence H. 1996. War Before Civilization: The Myth of the Peaceful Savage.

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In Handbook of Bereavement Research: Consequences, Coping, and Care, edited by Margaret S. Stroebe, Robert O. Hansson, and Wolfgang Stroebe, 263–283. Washington, D.C.: American Psychological Association. Argyle, M. 1999. “Causes and Correlates of Happiness.” In Well-Being: The Foundations of Hedonic Psychology, edited by Daniel Kahneman, Edward Diener, and Nelson Schwarz. New York: Russell Sage Foundation. Arrow, Kenneth J., Edward Leamer, Howard Schuman, and Robert Solow. 1994. “Comments of Proposed NOAA Scope Test.” Appendix D of Comments of Proposed NOAA/DOI Regulations on Natural Resource Damage Assessment. U.S. Environmental Protection Agency.

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Journal of Economic Perspectives 19, no. 4 (Fall): 25–42. Frederick, Shane. 2006. “Valuing Future Life and Future Lives: A Framework for Understanding Discounting.” Journal of Economic Psychology 27: 667–680. Frederick, Shane, and George Loewenstein. 1999. “Hedonic Adaptation.” In Well-Being: The Foundations of Hedonic Psychology, edited by Daniel Kahneman, Ed Diener, and Norbert Schwarz, 302–329. New York: Russell Sage Foundation. Frederick, Shane, George Loewenstein, and Ted O’Donoghue. 2002. “Time Discounting and Time Preference: A Critical Review.” Journal of Economic Literature 40, no. 2: 351–401. Frey, Bruno S., and Alois Stutzer. 2000.

The Intelligent Investor (Collins Business Essentials)
by Benjamin Graham and Jason Zweig
Published 1 Jan 1949

Many investment experts now feel that deflation, or falling prices, is an even greater threat than inflation; the best way to hedge against that risk is by including bonds as a permanent component of your portfolio. (See the commentary on Chapter 4.) 3 For more insights into this behavioral pitfall, see Eldar Shafir, Peter Diamond, and Amos Tversky, “Money Illusion,” in Daniel Kahneman and Amos Tversky, eds., Choices, Values, and Frames (Cambridge University Press,2000), pp. 335–355. 4 That year, President Jimmy Carter gave his famous “malaise” speech, in which he warned of “a crisis in confidence” that “strikes at the very heart and soul and spirit of our national will” and “threatens to destroy the social and the political fabric of America.” 5 See Stanley Fischer, Ratna Sahay, and Carlos A.

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But when stocks drop, that financial loss fires up your amygdala—the part of the brain that processes fear and anxiety and generates the famous “fight or flight” response that is common to all cornered animals. Just as you can’t keep your heart rate from rising if a fire alarm goes off, just as you can’t avoid flinching if a rattlesnake slithers onto your hiking path, you can’t help feeling fearful when stock prices are plunging.9 In fact, the brilliant psychologists Daniel Kahneman and Amos Tversky have shown that the pain of financial loss is more than twice as intense as the pleasure of an equivalent gain. Making $1,000 on a stock feels great—but a $1,000 loss wields an emotional wallop more than twice as powerful. Losing money is so painful that many people, terrified at the prospect of any further loss, sell out near the bottom or refuse to buy more.

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(The bars at the far right show a market index fund for comparison.) Source: Profs. Brad Barber, University of California at Davis, and Terrance Odean, University of California at Berkeley Unfortunately, for every IPO like Microsoft that turns out to be a big winner, there are thousands of losers. The psychologists Daniel Kahnerman and Amos Tversky have shown when humans estimate the likelihood or frequency of an event, we make that judgment based not on how often the event has actually occurred, but on how vivid the past examples are. We all want to buy “the next Microsoft”—precisely because we know we missed buying the first Microsoft.

The Signal and the Noise: Why So Many Predictions Fail-But Some Don't
by Nate Silver
Published 31 Aug 2012

If you forecast that a particular incumbent congressman will win his race 90 percent of the time, you’re also forecasting that he should lose it 10 percent of the time.28 The signature of a good forecast is that each of these probabilities turns out to be about right over the long run. Tetlock’s hedgehogs were especially bad at understanding these probabilities. When you say that an event has a 90 percent chance of happening, that has a very specific and objective meaning. But our brains translate it into something more subjective. Evidence from the psychologists Daniel Kahneman and Amos Tversky suggests that these subjective estimates don’t always match up with the reality. We have trouble distinguishing a 90 percent chance that the plane will land safely from a 99 percent chance or a 99.9999 percent chance, even though these imply vastly different things about whether we ought to book our ticket.

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Shannon, “Programming a Computer for Playing Chess,” Philosophical Magazine, Series 7, 41, 314, March 1950. http://archive.computerhistory.org/projects/ chess/related_materials/software/2-0%20and%202-1.Programming_a_computer_for_playing_chess.shannon/2-0%20and%202-1.Programming_a_computer_for_playing_chess.shannon.062303002.pdf. 9. William G. Chase and Herbert A. Simon, “The Mind’s Eye in Chess” in Visual Information Processing (New York: Academic Press, 1973). 10. Douglas Harper, Online Etymology Dictionary. http://www.etymonline.com/index.php?term=eureka. 11. Amos Tversky and Daniel Kahneman, “Judgement Under Uncertainty: Heuristics and Biases,” Science, 185 (September 27, 1974), pp. 1124–1131. http://www.econ.yale.edu/~nordhaus/homepage/documents/tversky_kahn_science.pdf. 12. Lauren Himiak, “Bear Safety Tips,” National & States Parks, About.com. http://usparks.about.com/od/backcountry/a/Bear-Safety.htm. 13. billwall, “Who Is the Strongest Chess Player?”

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Department of Homeland Security, University of Maryland. http://www.start.umd.edu/gtd/search/Results.aspx?page=2&casualties_type=b&casualties_max=&start_yearonly=1979&end_yearonly=2000&dtp2=all&sAttack=1&count=100&expanded=no&charttype=line&chart=overtime&ob=GTDID&od=desc#results-table. 39. Amos Tversky and Daniel Kahneman, “Availability: A Heuristic for Judging Frequency and Probability,” Cognitive Psychology, 5, 2 (Setepmber 1973), pp. 207–232. http://www.sciencedirect.com/science/article/pii/0010028573900339. 40. “Nineteen hijackers using commercial airliners as guided missiles to incinerate three thousand men, women, and children was perhaps the most horrific single unknown unknown America has experienced.”

The Confidence Game: The Psychology of the Con and Why We Fall for It Every Time
by Maria Konnikova
Published 28 Jan 2016

The players and coaches, too, seemed to believe it—even going so far as to select certain draft picks because they were perceived to be playing hot at the time. To Gilovich, the whole thing seemed highly unlikely. He was a cognitive psychologist, studying rationality and its departures, and there was simply no reason to assume that people’s talent and skills could show such tremendous, lasting deviations. He’d also been working with Amos Tversky, who, along with Daniel Kahneman, had identified the “belief in the law of small numbers” some ten years prior: that we believe that chance rates seen over the long term should also be reflected in the short term, and if they are not, something else must be going on. For instance, since a coin is supposed to land on heads half the time, we expect it to do so if we toss it, say, ten times.

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Anticipated regret makes us want to keep doing what we’re doing; anticipated stress makes us want to cope proactively, by not doing anything that might provoke said stress; and anticipated guilt makes us likewise want to prevent it from ever happening. In one of their famous thought experiments, Daniel Kahneman and Amos Tversky described two individuals who’d been playing the stock market. Both had just lost $1,200 on a certain stock. The difference between them was in how they’d lost it. The first had lost it after initially buying one stock and then, after a bit of thought, switching to another. The second had made the mistake of sticking with a losing stock rather than, after some reflection, switching to a winner.

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While we’re good at the overt bodily cues, we are not so great at the cues of the mind. We infer entire belief systems from one rogue statement, craft personalities and backstories with no bearing on reality from one surface clue. We simplify when we should caveat and gloss where we should elaborate. Often, we use snap judgments—what Daniel Kahneman calls heuristics—when we meet someone new, and end up with a superficial, highly stereotyped version of what they are like. Take Saalfield’s impression of Mitchell: charming, comforting, pretty. And indeed, Mitchell is always elegant, impeccably dressed, well coiffed and manicured, with an enticing, open smile.

The Little Black Book of Decision Making
by Michael Nicholas
Published 21 Jun 2017

However, because they evolved to enable us to cope with an evolutionary past when we were living on the plains, hunting and gathering, the biases they introduce are often imperfect and may lead to terrible mistakes. Mental shortcuts can even lead to inappropriate biases in life or death situations, as demonstrated by a study by Amos Tversky which looked at how the way that data is presented can affect doctors’ choices. All of the participants received the same data on the effectiveness of two interventions for lung cancer: surgery and radiation treatment. It indicated that radiation offered a much better chance of survival in the short term, but a lower life expectancy over the next few years.

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How did NASA, an organisation that places such importance on safety, end up so flagrantly violating its own rules and appear to have so little regard for human life? “Our comforting conviction that the world makes sense rests on a secure foundation: our almost unlimited ability to ignore our ignorance.” —Daniel Kahneman, Nobel Prize-winning Professor of Psychology and international best-selling author on judgment and decision making When a decision has gone badly, the benefit of hindsight often makes the correct decision look as though it should have been blindingly obvious. But once you are aware of this bias, you'll see it everywhere – from the immediate aftermath of the horrendous terrorist atrocities in Paris in November 2015, where the press began questioning how intelligence services had failed to anticipate the attacks as soon as the “facts” leading up to them began to emerge, to football supporters who believe they have far greater expertise at picking the team than the manager, to the times when we second-guess our own decisions: “I should have known not to take that job”, “I knew the housing market would collapse/go up”, “I should have known that he was being unfaithful to me”, “I knew that if I trusted her she'd hurt me”, “I should have listened to my intuition”, and on it goes … This “hindsight bias” refers to the tendency for uncertain outcomes to seem more likely once we know the outcome that has occurred.

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We'll begin to address the first of them now, and then cover points two and three, which are related, in the next chapter. The Myth of Rationality “We think, each of us, that we're much more rational than we are. And we think that we make our decisions because we have good reasons to make them. Even when it's the other way around. We believe in the reasons, because we've already made the decision.” Daniel Kahneman The assumption of rational choice is essentially the belief that when faced with alternatives, human beings have the ability to make a decision that stands the test of reason. And because this capability is highly valued, we have learnt to associate logic with intellectual strength and even personal qualities such as stability and honesty.

Essentialism: The Disciplined Pursuit of Less
by Greg McKeown
Published 14 Apr 2014

Richard Milne, “Debate Heralds Change for Norway’s Oil Fund,” FT.com, June 30, 2013, www.ft.com/cms/s/0/8466bd90-e007-11e2-9de6-00144feab7de.html#axzz2ZtQp4H13. 4. See Roland Huntford, The Last Place on Earth: Scott and Amundsen’s Race to the South Pole (New York: Modern Library, 1999). 5. Jim Collins and Morten T. Hansen, Great by Choice: Uncertainty, Chaos, and Luck—Why Some Thrive Despite Them All (New York: Harper Business, 2011). 6. Daniel Kahneman and Amos Tversky, “Intuitive Prediction: Biases and Corrective Procedures,” TIMS Studies in Management Science 12 (1979): 313–27. 7. Roger Buehler, Dale Griffin, and Michael Ross, “Exploring the ‘Planning Fallacy’: Why People Underestimate Their Task Completion Times,” Journal of Personality and Social Psychology 67, no. 3 (1994): 366–81, doi:10.1037/0022-3514.67.3.366. 8.

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As the saying goes, nobody in the history of the world has washed their rental car! This is because of something called “the endowment effect,” our tendency to undervalue things that aren’t ours and to overvalue things because we already own them. In one study demonstrating the power of the endowment effect, the Nobel Prize–winning researcher Daniel Kahneman and colleagues randomly gave coffee mugs to only half the subjects in an experiment.5 The first group was asked how much they would be willing to sell their mug for, while the second group was asked what they would be willing to pay for it. It turned out the students who “owned” the mugs refused to sell for less than $5.25, while those without the cups were willing to pay only $2.25 to $2.75.

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She would make a far greater contribution on all these rushed endeavors if she were simply to create a buffer. Have you ever underestimated how long a task will take? If you have, you are far from alone. The term for this very common phenomenon is the “planning fallacy.”6 This term, coined by Daniel Kahneman in 1979, refers to people’s tendency to underestimate how long a task will take, even when they have actually done the task before. In one study thirty-seven students were asked how long they thought it would take them to complete their senior thesis. When the students were asked to estimate how long it would take “if everything went as well as it possibly could,” their averaged estimate was 27.4 days.

Radical Uncertainty: Decision-Making for an Unknowable Future
by Mervyn King and John Kay
Published 5 Mar 2020

And so the meaning of risk is a product of the plans and expectations of that household or institution. Risk is necessarily particular. It does not mean the same thing to J. P. Morgan as it does to a paraglider or mountain climber, or to a household saving for retirement or the children’s education. In 1979, Daniel Kahneman and Amos Tversky, the two Israeli psychologists working in America who were popularised in Michael Lewis’s bestseller The Undoing Project , offered ‘prospect theory’ as an alternative account of behaviour under uncertainty to the conventional ‘rational’ view based on the Friedman– Savage axioms. Uncertainty was ‘coded’ relative to some reference point around which gains were valued less than losses of similar amount were resented.

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and the wise sovereign would sensibly seek not another economic model, but another adviser on economic issues. It is not necessary to have an alternative tool available to know that the plumber who arrives armed only with a screwdriver is not the tradesman we need. In Michael Lewis’s book The Undoing Project , a revealing passage describes the transformation of Amos Tversky’s thinking after he gave a seminar in the course run by Daniel Kahneman. 19 Before that, Lewis describes Tversky’s thinking as ‘Until you could replace a theory with a better theory – a theory that better predicted what actually happened – you didn’t chuck a theory out.’ After the seminar, ‘he treated theories that he had more or less accepted as sound and plausible as objects of suspicion’.

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And our knowledge of the world would lead us to think it more likely that Lenin met Rosa Luxemburg (the leader of the German communist revolution of 1918) than that he met James Joyce (if you are interested, Lenin and Luxemburg did meet when Lenin and his wife changed trains in Berlin in 1908). 8 Philadelphia is not the capital of Pennsylvania, and anyone who offers odds on the answer to such a question is a knave (and anyone who accepts them a fool). You will wind up with an earful of cider. The ‘Linda problem’ is one of the most frequently reported experiments in behavioural economics. In his bestseller Thinking, Fast and Slow , Daniel Kahneman describes it thus: ‘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 anti-nuclear demonstrations. Which of the following is more likely?

The Logic of Life: The Rational Economics of an Irrational World
by Tim Harford
Published 1 Jan 2008

But it’s nearly a sphere, and for many purposes the simplification that the Earth is spherical will do nicely. I’VE CLAIMED THAT we’re smart, but I’ve admitted that we make mistakes. The laboratory work of psychologists and “behavioral” economists has provided plenty of proof. One of the most famous examples was a discovery by Daniel Kahneman and Amos Tversky: Their experiments showed that people make different choices depending on how the choices are framed. (Although he is a psychologist, Kahneman won the Nobel Prize in economics in 2002; Tversky had died a few years earlier, or he would have shared it.) To one group of subjects, Kahneman and Tversky offered this choice: Imagine that the U.S. is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people.

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Smoking rates have fallen dramatically: According to the WHO Tobacco Atlas, www.who.int/tobacco/statistics/tobacco_atlas/en/, smoking among adult men in the United States fell from 52 to 26 percent between 1965 and 1999, and for women from 34 percent to 22 percent. In the United Kingdom, the fall was from 61 to 28 percent among men and 42 to 26 percent among women, between 1960 and 1999. To one group of subjects: Amos Tversky and Daniel Kahneman, “The Framing of Decisions and the Psychology of Choice,” Science 211 (1981): 453–58. “I was a sports card dealer”: Telephone interview with John List, January 2007. That’s why Professor List: John A. List, “Does Market Experience Eliminate Anomalies?” Quarterly Journal of Economics, February 2003.

The Power of Passive Investing: More Wealth With Less Work
by Richard A. Ferri
Published 4 Nov 2010

Behavioral finance helps explain why overconfidence exists. Behavioral Finance Behavioral finance is a branch of financial analysis that uses social, cognitive, and emotional factors to understand the economic beliefs and decisions of investors. Its beginnings stem from a revolutionary 1979 paper by Daniel Kahneman and Amos Tversky on investor behavior. Their paper proposed a new theory called prospect theory (prospect in this sense means “lottery”). Prospect theory describes how people make choices based on how they analyze potential losses and payouts.3 Prospect theory is very involved and beyond the scope of this book.

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LeRoy Gross, The Art Selling Intangibles: How to Make Your Millions Investing Other People’s Money (New York: Simon & Schuster, 1988). The firm I worked for was Kidder, Peabody, Inc. The firm was wholly acquired by General Electric in the late 1989 and sold in part to UBS in 1994. 2. John R. Nofsinger, The Psychology of Investing, 3rd ed. (New Jersey: Pearson, 2008), 11. 3. Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision under Risk,” Econometrica 47 (1979): 263–291. 4. Jason Zweig, Your Money & Your Brain (New York: Simon & Schuster, 2007), 1. 5. Anonymous, “Confessions of a Former Mutual Funds Reporter,” Fortune, April 26, 1999. 6. James J. Cramer, “Cramer: Mutual Fund Advertising” April 2, 2008, www.abcnews.go.com. 7.

The End of Accounting and the Path Forward for Investors and Managers (Wiley Finance)
by Feng Gu
Published 26 Jun 2016

The implications of this much-diminished usefulness of the bottom line for investors, lenders, and others relying on this seemingly important indicator (“earnings move markets”) are obvious.15 INVESTORS ALERT: AN ACCOUNTING LOSS ISN’T WHAT IT USED TO BE “Losses loom larger than gains” famously said Amos Tversky and the Nobel (economics) laureate Daniel Kahneman, meaning that people strongly prefer avoiding losses to acquiring gains.16 So, reporting a loss is a big deal for a company and its constituents, and it better be a credible signal of a company in distress, not a false alarm. Which brings us to another surprise for you: Many of the losses reported by companies are due to accounting procedures that don’t really reflect a permanent deterioration of business fundamentals.

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However, the continual expansion of the balance sheet approach [by the FASB] is gradually destroying the forward-looking usefulness of earnings, mainly through the effect of various asset revaluations, which manifest as noise in the process of generating normal operating earnings.” In “On the Balance Sheet-Based Model of Financial Reporting,” Occasional Paper Series, Center for Excellence in Accounting and Security Analysis, Columbia Business School, 2007, p. 2. Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decisions Under Risk,” Econometrica, 47 (2) (1979): 263−292. This, of course, is a reflection of the widely known phenomenon—“mean reversion,” namely extreme observations in one period, will tend to get closer to the average in subsequent period. The speed of such reversion to the mean indicates the impact of chance, or transitory items on the observation (earnings in our case). 

Rationality: What It Is, Why It Seems Scarce, Why It Matters
by Steven Pinker
Published 14 Oct 2021

Normative models also serve as benchmarks against which we can assess how human schlemiels do reason, the subject matter of psychology and the other behavioral sciences. The many ways in which ordinary people fall short of these benchmarks have become famous through the Nobel Prize–winning research of Daniel Kahneman, Amos Tversky, and other psychologists and behavioral economists.15 When people’s judgments deviate from a normative model, as they so often do, we have a puzzle to solve. Sometimes the disparity reveals a genuine irrationality: the human brain cannot cope with the complexity of a problem, or it is saddled with a bug that cussedly drives it to the wrong answer time and again.

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Liebenberg 2013/2021, p. 104. 11. Liebenberg 2020 and personal communication, May 27, 2020. 12. Moore 2005. See also Pew Forum on Religion and Public Life 2009, and note 8 to chapter 10 below. 13. Vosoughi, Roy, & Aral 2018. 14. Pinker 2010; Tooby & DeVore 1987. 15. Amos Tversky (1937–1996) and Daniel Kahneman (1934– ) pioneered the study of cognitive illusions and biases; see Tversky & Kahneman 1974, Kahneman, Slovic, & Tversky 1982, Hastie & Dawes 2010, and Kahneman’s bestseller, Thinking, Fast and Slow (2011). Their lives and collaboration are described in Michael Lewis’s The Undoing Project (2016) and Kahneman’s autobiographical statement for his 2002 Nobel Prize (Kahneman 2002). 16.

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The decision weight graph differs from fig. 4 in Kahneman & Tversky 1979 and is instead based on fig. 12.2 in Hastie & Dawes 2010, which I believe is a better visualization of the theory. 35. Based on Kahneman & Tversky 1979. 36. This pervasive asymmetry is called the Negativity bias; Tierney & Baumeister 2019. 37. Maurice Allais, Herbert Simon, Daniel Kahneman, Richard Thaler, George Akerlof. 38. Gigerenzer 2008b, p. 20. 39. Abito & Salant 2018; Braverman 2018. 40. Sydnor 2010. 41. Gigerenzer & Kolpatzik 2017; see also Gigerenzer 2014, for a similar argument on breast cancer screening. CHAPTER 7: HITS AND FALSE ALARMS (SIGNAL DETECTION AND STATISTICAL DECISION THEORY) 1.

Success and Luck: Good Fortune and the Myth of Meritocracy
by Robert H. Frank
Published 31 Mar 2016

That’s why behavioral economics—a cross-disciplinary effort that draws insights from economics, psychology, biology, and other fields—has been the most vibrant and rapidly growing specialty in economics for the past three decades. Inspired by the pioneering work of the psychologists Daniel Kahneman and the late Amos Tversky, this field has cataloged a large inventory of behavioral anomalies in which people clearly violate the predictions and prescriptions of standard economic models.2 It is common, for example, for someone to be willing to drive across town to save $10 on a $20 clock radio, but unwilling to do so to save $10 on a $1,000 television set.

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Chris McKittrick, “Bryan Cranston: ‘Without Luck You Will Not Have a Successful Career,’ ” Daily Actor, October 31, 2012, http://www.dailyactor.com/tv/bryan-cranston-acting-luck/. CHAPTER 5: WHY FALSE BELIEFS ABOUT LUCK AND TALENT PERSIST 1. Michael Mauboussin, The Success Equation, Cambridge, MA: Harvard Business Review Press, 2012. 2. Much of this research is elegantly summarized in Daniel Kahneman, Thinking Fast and Slow, New York: Farrar, Strauss, and Giroux, 2011. For an extremely readable account of how this work became important to economists, see Richard H. Thaler, Misbehaving, New York: W. W. Norton, 2015. 3. P. Cross, “Not Can but Will College Teachers Be Improved?,” New Directions for Higher Education 17 (1977): 1–15. 4.

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Chunliang Feng, Yi Luo, Ruolei Gu, Lucas S Broster, Xueyi Shen, Tengxiang Tian, Yue-Jia Luo, Frank Krueger, “The Flexible Fairness: Equality, Earned Entitlement, and Self-Interest,” PLOS ONE 8.9 (September 2013), http://www.plosone.org/article/info%3Adoi%2F10.1371%2Fjournal.pone.0073106. 7. Mechanical Turk, https://www.mturk.com/mturk/welcome. 8. John Locke, Second Treatise on Civil Government, 1689, chap. 5, section 27, http://www.constitution.org/jl/2ndtr05.htm. 9. Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias,” Journal of Economic Perspectives 5.1 (1991): 193–206. 10. Liam Murphy and Thomas Nagel, The Myth of Ownership, New York: Oxford University Press, 2001. 11. David DeSteno, Monica Y.

Good Economics for Hard Times: Better Answers to Our Biggest Problems
by Abhijit V. Banerjee and Esther Duflo
Published 12 Nov 2019

These vagaries make them unhappy, but perhaps not as unhappy as making an active choice that ends up, purely as a result of bad luck, making them worse off than if they had done nothing. The status quo, the outcome of letting things be, serves as a natural benchmark. Any loss relative to that benchmark is particularly painful. This concept was named loss aversion by Daniel Kahneman and Amos Tversky, two psychologists who have been incredibly influential in economics. (Kahneman won the Nobel Prize in economics in 2002 and Tversky would probably have as well, but for his untimely demise.) Since their original work, a vast literature has demonstrated the existence of loss aversion and its ability to explain many apparently strange behaviors.

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Khandelwal, and Adam Osman, “Exporting and Firm Performance: Evidence from a Randomized Experiment,” Quarterly Journal of Economics 132, no. 2 (2017): 551–615. 33 “Rankings by Country of Average Monthly Net Salary (After Tax) (Salaries and Financing),” Numbeo, accessed March 18, 2019, https://www.numbeo.com/cost-of-living/country_price_rankings?itemId=105. 34 Abhijit V. Banerjee and Esther Duflo, “Reputation Effects and the Limits of Contracting: A Study of the Indian Software Industry,” Quarterly Journal of Economics 115, no. 3 (2000): 989–1017. 35 Amos Tversky and Daniel Kahneman, “The Framing of Decisions and Psychology of Choice,” Science 211 (1981): 453–58. 36 Jean Tirole, “A Theory of Collective Reputations (with Applications to the Persistence of Corruption and to Firm Quality),” Review of Economic Studies 63, no. 1 (1996): 1–22. 37 Rocco Machiavello and Ameet Morjaria, “The Value of Relationships: Evidence from Supply Shock to Kenyan Rose Exports,” American Economic Review 105, no. 9 (2015): 2911–45. 38 Wang Xiaodong, “Govt Issues Guidance for Quality of Products,” China Daily, updated September 14, 2017, accessed March 29, 2019, http://www.chinadaily.com.cn/china/2017-09/14/content_31975019.htm. 39 Gujanita Kalita, “The Emergence of Tirupur as the Export Hub of Knitted Garments in India: A Case Study,” ICRIER, accessed April 21, 2019, https://www.econ-jobs.com/research/52329-The-Emergence-of-Tirupur-as-the-Export-Hub-of-Knitted-Garments-in-India-A-Case-Study.pdf. 40 L.

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COHERENT ARBITRARINESS50 We know that people will go to great lengths to avoid evidence that would force them to revise their opinions on what they consider to be their core value system (including their opinion about other races or immigrants), because it is so related to their views of themselves. Unfortunately, it does not follow that people are particularly thoughtful about forming those initial opinions. In one of the most famous experiments in the field of behavioral economics, Daniel Kahneman and Richard Thaler chose college students randomly to receive a mug or a pen. Immediately following the gifts, they offered to buy them back from the newly endowed mug and pen owners. At the same time, they also offered those who did not get a mug or a pen the opportunity to buy what they did not get.

Hard Times: The Divisive Toll of the Economic Slump
by Tom Clark and Anthony Heath
Published 23 Jun 2014

If people blame ‘rising prices’ rather than falling wages for their difficulties, they may blame shops (for high prices) or the government (for failing to control inflation), rather than bosses (for having cut pay). 28. Daniel Kahneman and Amos Tversky dominate the relevant literature. One important early paper in which they developed the idea of ‘anchoring’ (i.e. making decisions with reference to gains and losses from a particular starting point, rather than on the basis of final outcomes) was Amos Tversky and Daniel Kahneman, ‘Judgment under uncertainty: Heuristics and biases source’, Science, NS 185:4157 (1974), pp. 1124–31, at: www.socsci.uci.edu/∼bskyrms/bio/readings/tversky_k_heuristics_biases.pdf This developed into the ‘prospect theory’ of decision making in: D.

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‘Suicide in England and Wales 1861–2007: A time-trends analysis’, International Journal of Epidemiology, 39:6 (2010), pp. 1464–75, available at: http://ije.oxfordjournals.org/content/39/6/1464.full Tocqueville, Alexis de. Democracy in America, Fontana/HarperCollins, London, 1994 [1840]. Tversky, Amos and Daniel Kahneman. ‘Judgment under uncertainty: Heuristics and biases source’, Science, NS 185:4157 (1974), pp. 1124–31, available at: www.socsci.uci.edu/∼bskyrms/bio/readings/tversky_k_heuristics_biases.pdf Walkerdine, Valerie and Luis Jimenez. Gender, Work and Community after De-Industrialisation: A psychosocial approach to affect, Palgrave Macmillan, London, 2012.

Super Thinking: The Big Book of Mental Models
by Gabriel Weinberg and Lauren McCann
Published 17 Jun 2019

However, there is no reason to jump immediately to the complex explanation when you have simpler alternatives to explore first. If you don’t simplify your assumptions, you can fall into a couple of traps, described in our next mental models. First, most people are, unfortunately, hardwired to latch onto unnecessary assumptions, a predilection called the conjunction fallacy, studied by Amos Tversky and Daniel Kahneman, who provided this example in the October 1983 Psychological Review: Linda is 31 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 anti-nuclear demonstrations.

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These purchase prices are arbitrary numbers, independent of the current value of the assets, but they are meaningful to you because they represent losses or gains. Similarly, you may avoid killing a project because that would mean admitting the loss of your efforts up to that point. Daniel Kahneman and Amos Tversky’s work on this topic, detailed in the October 1992 issue of the Journal of Risk and Uncertainty, demonstrated that across many risky situations, such as winning or losing money based on a coin toss, people tend to want the potential payoff to be around double the potential loss before they are willing to take the gamble.

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DON’T TRUST YOUR GUT You make most of your everyday decisions using your intuition, with your subconscious automatically intuiting what to do from instinct or encoded knowledge. It’s your common or sixth sense, your gut feeling, drawing on your past experiences and natural programming to react to circumstances. In his book Thinking, Fast and Slow, economics Nobel laureate Daniel Kahneman makes a distinction between this intuitive fast thinking and the more deliberate, logical thinking you do when you slow down and question your intuitive assumptions. He argues that when you do something frequently, it gradually gets encoded in your brain until at some point your intuition, via your fast thinking, takes over most of the time and you can do the task mindlessly: driving on the highway, doing simple arithmetic, saying your name.

Descartes' Error: Emotion, Reason and the Human Brain
by António R. Damásio
Published 1 Jan 1994

But first, get a lot of paper and a pencil sharpener, and a large desk, and do not expect anybody to wait until you are finished. It is also important to note that the flaws of the common-sense view are not confined to the issue of limited memory capacity. Even with paper and pencil to hold the necessary knowledge in place, the reasoning strategies themselves are fraught with weaknesses, as Amos Tversky and Daniel Kahneman have demonstrated.4 One of those important weaknesses may well be humans’ devastating ignorance and defective use of probability theory and statistics, as Stuart Sutherland has suggested.5 Nonetheless, our brains can often decide well, in seconds, or minutes, depending on the time frame we set as appropriate for the goal we want to achieve, and if they can do so, they must do the marvelous job with more than just pure reason.

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But although ages of evolution and dedicated neural systems may confer some independence to each of these reasoning/decision-making “modules,” I suspect they are all interdependent. When we witness signs of creativity in contemporary humans, we are probably witnessing the integrated operation of sundry combinations of these devices. THE HELP OF EMOTION, FOR BETTER AND FOR WORSE The work of Amos Tversky and Daniel Kahneman demonstrates that the objective reasoning we employ in day-to-day decisions is far less effective than it seems and than it ought to be.16 To put it simply, our reasoning strategies are defective and Stuart Sutherland strikes an important chord when he talks about irrationality as an “enemy within.”17 But even if our reasoning strategies were perfectly tuned, it appears, they would not cope well with the uncertainty and complexity of personal and social problems.

Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism
by George A. Akerlof and Robert J. Shiller
Published 1 Jan 2009

“Samuelson’s Dictum and the Stock Market.” Economic Inquiry 43(2):221–28. Kahn, Richard F. 1931. “The Relation of Home Investment to Unemployment.” Economic Journal 41(162):173–98. Kahn, Shulamit. 1997. “Evidence of Nominal Wage Stickiness from Microdata.” American Economic Review 87(5):993–1008. Kahneman, Daniel, and Amos Tversky. 1979. “Prospect Theory: An Analysis of Decision under Risk.” Econometrica 47(2):263–92. ———. 2000. Choices, Values and Frames. Cambridge, Mass.: Cambridge University Press. Kahneman, Daniel, Jack Knetsch, and Richard H. Thaler. 1986a. “Fairness as a Constraint on Profit-Seeking: Entitlements in the Market.”

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“Recent Inflation in the United States.” Study Paper 1, Joint Economic Committee, 86th Cong., 1st sess., September. Schumpeter, Joseph A. 1939. Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process. New York: McGraw-Hill. Shafir, Eldar, Peter Diamond, and Amos Tversky. 1997. “Money Illusion.” Quarterly Journal of Economics 112(2):341–74. Shapiro, Carl, and Joseph E. Stiglitz. 1984. “Equilibrium Unemployment as a Worker Discipline Device.” American Economic Review 74(3):433–44. Shea, John. 1995a. “Union Contracts and the Life-Cycle/Permanent-Income Hypothesis.”

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It would be like burping loudly at a fancy dinner. It is just not done. Questionnaires But studies of fairness do indicate the strong possibility that such concerns will override the effects of rational economic motivation. One of our favorite studies comes from a team consisting of a psychologist, Daniel Kahneman, and two economists, Jack Knetsch and Richard Thaler.4 The study asked respondents about their reactions to a number of vignettes. Was the action taken acceptable or unfair? The first question, dealing with the price of snow shovels after a snowstorm, illustrates the method and the answers. According to the vignette, there has been a snowstorm, and the local hardware store has increased the price of snow shovels.

Irresistible: The Rise of Addictive Technology and the Business of Keeping Us Hooked
by Adam L. Alter
Published 15 Feb 2017

Punishments are effective when they’re genuinely unpleasant, but some people might stop using a device that makes them feel bad. The trick for those people is to find a method that isn’t aversive. I was wrapping up my PhD at Princeton University in 2008, when Nobel prizewinner Daniel Kahneman invited me to his office. “You can tell me about your research,” he said. I was excited. Kahneman and his colleague Amos Tversky had pioneered the field of judgment and decision making, and now, forty years later, I was a young researcher in the same field. I told Kahneman that I wanted to invent a tiny alarm clock that followed each of us around and rang whenever we were about to make an important decision.

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Abrams, “Reward and Punishment Act as Distinct Factors in Guiding Behavior,” Cognition 139 (June 2015): 154–67; Ronald G. Fryer, Steven D. Levitt, John List, and Sally Sadoff, “Enhancing the Efficacy of Teacher Incentives Through Loss Aversion: A Field Experiment,” Working Paper 18237, National Bureau of Economic Research, Cambridge, MA, 2012; Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision under Risk,” Econometrica 47, no. 2 (March 1979): 263–92. Don’t Waste Your Money game: Paul Simpson, Assessing and Treating Compulsive Internet Use (Brentwood, TN: Cross Country Education, 2013). Relational spending: Elizabeth Dunn and Michael Norton, Happy Money: The Science of Happier Spending (New York: Simon & Schuster, 2013).

Don't Trust Your Gut: Using Data to Get What You Really Want in LIfe
by Seth Stephens-Davidowitz
Published 9 May 2022

The Dataist revolution, which has just started and, Harari says, may take decades or more to be fully embraced, questioned the feelings-centered worldview of the humanists. The quasi-religious status of our feelings was called into question by life scientists and biologists. They discovered that, in Harari’s words, “organisms are algorithms” and feelings merely “processes of biochemical calculations.” Further, legendary behavioral scientists, such as Amos Tversky and Daniel Kahneman, discovered that our feelings frequently lead us astray. The mind, Tversky and Kahneman told us, is riddled with biases. Think your gut is a reliable guide? Not so, they said. We are frequently too optimistic; overestimate the prevalence of easily remembered stories; latch on to information that fits what we want to believe; wrongly conclude that we can explain events that, at the time, were unpredictable; and on and on and on.

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Because while it may be easy for us, while looking at actual data that the patients gave us during their colonoscopies, to say how bad a particular colonoscopy was, it turns out to be very difficult for the actual patient, without being shown the data, to recall precisely how bad it was. People tend to forget just how painful their colonoscopy was. The evidence: a paper by Donald Redelmeier and Daniel Kahneman where these charts were shown. The researchers recruited a whole bunch of colonoscopy patients and asked them to record their pain for every minute of the procedure, producing moment utility charts like those shown above. But what really made this paper special was another question that the scholars asked.

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Dataism: Yuval Noah Harari, Homo Deus: A Brief History of Tomorrow (New York: Random House, 2016). “organisms are algorithms”: “Yuval Noah Harari. Organisms Are Algorithms. Body Is Calculator. Answer = Sensation~Feeling~Vedan?,” YouTube, uploaded by Rashid Kapadia, June 13, 2020, https://www.youtube.com/watch?v=GrQ7nY-vevY. riddled with biases: Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Straus & Giroux, 2011). Chapter 1: The AI Marriage “the most important decision that you make”: https://www.wesmoss.com/news/why-who-you-marry-is-the-most-important-decision-you-make/. compared the field of relationship science to an adolescent: Harry T.

Obliquity: Why Our Goals Are Best Achieved Indirectly
by John Kay
Published 30 Apr 2010

And the attack on Franklin’s rule as the epitome of rational thought comes today from many quarters, especially the projects on decision making led by Gerd Gigerenzer. Behavioral economics tends, as I have described, to persist in the notion that the failure of standard concepts of rationality is a problem in our own behavior rather than in our models, but the work of Dan Kahneman and Amos Tversky must nevertheless be credited with a transformation in the way I—and many others—think about economic behavior. Ansoff, H. Igor. Corporate Strategy. Harmondsworth, UK: Penguin, 1985. Ariely, Dan. Predictably Irrational. London: HarperCollins, 2008. Aristotle. Nicomachean Ethics. Cambridge: Cambridge University Press, 2000.

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Chapter 5: Objectives, Goals and Actions—How the Means Help Us Discover the End 1 Plutarch, Plutarch’s Lives (London, William Heinemann, 1948), p. 483. 2 Daniel Nettle, Happiness: The Science Behind Your Smile (Oxford: Oxford University Press, 2005), p. 18. 3 See, for example, C. D. Ryff, “Happiness Is Everything, or Is It?” Journal of Personality and Social Psychology 57, no. 6 (1989); Daniel Kahneman, “Objective Happiness,” in Daniel Kahneman, Ed Diener, and Norbert Schwarz, Well-being: The Foundations of Hedonic Psychology (New York, Russell Sage Foundation, 2001). 4 Jack Welch, “Jack Welch Elaborates: Shareholder Value,” BusinessWeek, March 16, 2009. 5 Ed Smith, What Sport Tells Us About Life (London: Penguin, 2008), p. 28. 6 Bob Rotella with Bob Cullen, Golf Is Not a Game of Perfect (London: Pocket Books, 2004).

The People vs Tech: How the Internet Is Killing Democracy (And How We Save It)
by Jamie Bartlett
Published 4 Apr 2018

McLuhan’s prescient 50-year-old ‘probes’ (he called his ideas probes) into how technology would change behaviour are still significantly more insightful than almost every ‘thought-provoking’ TED Talk. But McLuhan wasn’t a scientist. He didn’t conduct studies or test theories. Fortunately Daniel Kahneman, the academic most associated with examining bias in human decision-making, did. Through decades of empirical research with long-time collaborator Amos Tversky, he pioneered the study of how we take decisions – and especially irrational ones. I won’t recite the Stanford Prison Experiments or the Ultimatum Game, but Kahneman’s main point was that there are two basic systems that govern human behaviour.

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On ‘post-truth’, see books by Matthew D’Ancona, James Ball and Evan Davies. 6 Bruce Drake, ‘Six new findings about Millennials’, www.pewresearch.org, 7 March 2014. A survey repeatedly found that millennials have fewer institutional attachments than their parents, are more politically independent, but do ‘connect’ to personalised networks. 7 Daniel Kahneman, Thinking, Fast and Slow (Farrar, Straus and Giroux, 2011). S. Messing and S.J. Westwood (2014), ‘Selective exposure in the age of social media: Endorsements trump partisan source affiliation when selecting news online’. Communication Research, 41(8), 1042–1063. E. Bakshy, S. Messing and L.A.

Rapt: Attention and the Focused Life
by Winifred Gallagher
Published 9 Mar 2009

Next, he listens to a visitor’s attempt to put a temperament in a nutshell: “Do you want to spend more time today by yourself or with other people?” He considers this, then says, “That’s a good one. Although the answer would depend very much on your immediate context—on how much time you’re spending with other people now. You’d have to refine the question.” In their work on decision-making, Kahneman and his late partner Amos Tversky made the art of the refined query into a science. “Our research method was to write one question at a time, formulated to make a specific point,” he says. “Then we published our questions, answers, and predictions. That is what we did.” Of the Nobel, he says, “I got the prize because some economists became convinced that you could do economics in a slightly different way—by being more realistic about psychology.”

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On the other hand, by zeroing in on certain criteria—a school’s status, say, or geographical location—and ignoring others, they can end up focused on one dimension of an important experience that might not prove to be as vital as they thought. Early in his long and varied career, the Princeton psychologist Daniel Kahneman wrote a book about attention, and the subject figures prominently in his more recent work on the decision-making process. In 2002, this research brought him the Nobel Prize in economics, yet Kahneman remains every inch a psychologist. His demeanor is that of a certain kind of therapist: not the warm, fuzzy sort but the penetrating, hard-hat type who doesn’t miss a thing.

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Realizing that he has ventured into deep water, he laughs merrily and says, “Mind is not like any other thing, so it’s hard to explain. Just as air can’t explain fire, or space explain earth.” In the rinpoche’s tradition, paying attention is the way to experience true clarity about what is—knowledge that can’t be accessed through thinking, but only through being. (In the psychologist Daniel Kahneman’s terms, this awareness comes from the experiencing rather than the remembering self.) Within Buddhism, someone who sustains this effortless rapt focus on the right here, right now on a continual basis is said to be “enlightened” or “realized.” In the rinpoche’s Kargyu world, the ranks of these special individuals include elite yogi-monks called togdens.

Prediction Machines: The Simple Economics of Artificial Intelligence
by Ajay Agrawal , Joshua Gans and Avi Goldfarb
Published 16 Apr 2018

No prediction machine would make an error like this. But perhaps humans don’t take such tasks seriously, since they may feel as if they are playing a game. Would they make similar errors if the consequences are decidedly not game-like? The answer—demonstrated over many experiments by psychologists Daniel Kahneman and Amos Tversky—is decidedly yes.2 When they told people to consider two hospitals—one with forty-five births per day and another with fifteen births per day—and asked which hospital would have more days when 60 percent or more of the babies born are boys, very few gave the correct answer—the smaller hospital.

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Sixty percent of the time you choose X and are correct 60 percent of the time, while 40 percent of the time you choose O and are correct only 40 percent of the time. On average, this is 0.6^2 + 0.4^2 = 0.52. 2. Amost Tversky and Daniel Kahneman, “Judgment under Uncertainty: Heuristics and Biases,” Science 185, no. 4157 (1974): 1124–1131, https://people.hss.caltech.edu/~camerer/Ec101/JudgementUncertainty.pdf. 3. See Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Strauss and Giroux, 2011); and Dan Ariely, Predictably Irrational (New York: HarperCollins, 2009). 4. Michael Lewis, Moneyball (New York: Norton, 2003). 5.

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Tesla CEO Elon Musk has been one of the most consistent, high-profile, and experienced individuals sounding alarm bells: “I have exposure to the very cutting-edge AI, and I think people should be really concerned about it … I keep sounding the alarm bell, but until people see robots going down the street killing people, they don’t know how to react, because it seems so ethereal.”1 Another learned expert with an opinion on this is renowned psychologist and Nobel laureate Daniel Kahneman. Among non-academics, he may be best known for his 2011 book, Thinking, Fast and Slow. In 2017, at a conference we organized in Toronto on the economics of artificial intelligence, he explained why he thinks AIs will be wiser than humans: A well-known novelist wrote me some time ago that he’s planning a novel.

Numbers Rule Your World: The Hidden Influence of Probability and Statistics on Everything You Do
by Kaiser Fung
Published 25 Jan 2010

As the professors showed us, a few well-chosen numbers paint a far richer picture than hundreds of thousands of disorganized data. Conclusion Statistical thinking is hard,” the Nobel prize winner Daniel Kahneman told a gathering of mathematicians in New York City in 2009. A revered figure in the world of behavioral economics, Professor Kahneman spoke about his renewed interest in this topic, which he first broached in the 1970s with his frequent collaborator Amos Tversky. The subject matter is not inherently difficult, but our brains are wired in such a way that it requires a conscious effort to switch away from the default mode of reasoning, which is not statistical.

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As with traditional economics, queuing theory makes an assumption about rational human behavior that does not match reality. For example, in putting up signs showing inflated estimates of waiting time, the Disney engineers counted on irrationality, and customer surveys consistently confirmed their judgment. For further exploration of the irrational mind, see the seminal work of Daniel Kahneman, starting with his 2003 overview article “Maps of Bounded Rationality: Psychology for Behavioral Economics” in American Economic Review, and Predictably Irrational by Dan Ariely. Political considerations often intrude on the work of applied scientists. For instance, Minnesota state senator Dick Day seized upon the highway congestion issue to score easy points with his constituents, some of whom blamed the ramp-metering policy for prolonging their commute times.

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Two books in the finance area also fit the bill: in The Black Swan, Nassim Taleb harangues theoreticians of financial mathematics (and other related fields) on their failure in statistical thinking, while in My Life as a Quant, Emanuel Derman offers many valuable lessons for financial engineers, the most important of which is that modelers in the social sciences—unlike physicists—should not seek the truth. Daniel Kahneman summarized his Nobel-prize-winning research on the psychology of judgment, including the distinction between intuition and reasoning, in “Maps of Bounded Rationality: Psychology for Behavioral Economics,” published in American Economic Review. This body of work has tremendous influence on the development of behavioral economics.

Investment: A History
by Norton Reamer and Jesse Downing
Published 19 Feb 2016

Behavioral finance essentially attempts to explain empirical anomalies and deviations from the classical risk models, including the efficient market hypothesis. Instead of considering market participants as hyperrational agents obeying arguably overly elegant utility functions, they are thought of as possessing biases, prejudices, and tendencies that have real and measurable effects on markets and financial transactions. Daniel Kahneman and Amos Tversky wrote a seminal paper in the field outlining what they call prospect theory, a description of individuals’ optimization outside of the classical expected utility framework. Their pioneering paper noted many 252 Investment: A History of the known behaviors that represent aberrations from expected utility theory, including lottery problems (in which individuals tend to elect a lump-sum payment up front even if that is smaller than the expected value of receiving a larger amount or zero when a coin flip is involved) and probabilistic insurance (in which individuals have a more disproportionate dislike for a form of insurance that would cover losses based on a coin flip more than the math suggests they should).

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Benjamin Graham, The Intelligent Investor (New York: Harper, 1949). 44. Benjamin Graham, “A Conversation with Benjamin Graham,” Financial Analysts Journal 32, no. 5 (September–October 1976): 22. 45. Warren Buffett, “The Superinvestors of Graham-and-Doddsville,” Hermes (Columbia Business School), Fall 1984, 4–15. 46. Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision under Risk,” Econometrica 47, no. 2 (March 1979): 265–278. 47. Rajnish Mehra and Edward C. Prescott, “The Equity Premium: A Problem,” Journal of Monetary Economics 15, no. 2 (March 1985): 145–161. 48. Stephen J. Brown, William N. Goetzmann, and Stephen A.

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Morgan Chase & Co. Annual Report 2013. April 9, 2014. http://investor .shareholder.com/jpmorganchase/annual.cfm. Kabele, Thomas. “James Dodson, First Lecture on Insurances, 1757: Discussion.” Kabele and Associates (New Canaan, CT), May 2, 2008. http:// www.kabele.us/papers/dodsonms2.pdf. Kahneman, Daniel, and Amos Tversky. “Prospect Theory: An Analysis of Decision under Risk.” Econometrica 47, no. 2 (March 1979): 263–292. Kaul, Chandrika. “From Empire to Independence: The British Raj in India, 1858–1947.” BBC. Last modified March 3, 2011. http://www.bbc.co.uk /history/british/modern/independence1947_01.shtml. Kedmey, Dan. “2 Years and 900 Pages Later, the Volcker Rule Gets the Green Light.”

In Pursuit of the Perfect Portfolio: The Stories, Voices, and Key Insights of the Pioneers Who Shaped the Way We Invest
by Andrew W. Lo and Stephen R. Foerster
Published 16 Aug 2021

While most traditional models assume that all investors and decision makers are rational, behavioral finance recognizes that this is not always the case. The origin of behavioral economics is often traced to the development of prospect theory in 1979 by the famous social scientist duo of Daniel Kahneman and Amos Tversky.81 This theory describes the way individuals make risky choices when they are unsure about the probability of the outcome. Prospect theory attempts to capture mathematically the value of this choice relative to monetary gains and losses. According to prospect theory, such a relationship isn’t always one-to-one.

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Market efficiency, like all classical microeconomics, assumes that investors are rational. Market efficiency is just simple supply and demand economics brought to asset markets. A camp of academics, known as the behavioralists, questioned this assumption. The best-known behavioral critics of rationality included Nobel laureate Daniel Kahneman and his longtime collaborator Amos Tversky (whose untimely passing almost certainly prevented him from sharing the award with Kahneman) as well as fellow Nobel laureates Robert Shiller and Richard (Dick) Thaler. As described in chapter 2, Kahneman and Tversky’s famous 1979 prospect theory presented a decision-making model in which people made decisions by weighing losses much more heavily than their gains.

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“The Performance of Mutual Funds in the Period 1945–64.” Journal of Finance 23, no. 2: 389–416. ________. 1978. “Some Anomalous Evidence regarding Market Efficiency.” Journal of Financial Economics 6, no. 2–3: 95–101. Kahneman, Daniel. 2011. Thinking, Fast and Slow. New York: Farrar, Strauss and Giroux. Kahneman, Daniel, and Amos Tversky. 1979. “Prospect Theory: An Analysis of Decision under Risk.” Econometrica 47, no. 2: 263–92. Kalamazoo College. 2013. “Alumnus Wins Nobel Prize.” October 22, http://www.kzoo.edu/news/alumnus-wins-nobel-prize/. Kampmann, Ursula. 2012a. “The History of Coinage 2—The Cash.” CoinsWeekly, October 10, https://coinsweekly.com/the-history-of-chinese-coinage-2-the-cash/. ________. 2012b.

Traffic: Why We Drive the Way We Do (And What It Says About Us)
by Tom Vanderbilt
Published 28 Jul 2008

Waterson, “Are We Looking Where We Are Going? An Exploratory Examination of Eye Movement in High Speed Driving.” Paper 04-2602, Proceedings of the 83rd Annual Meeting of the Transportation Research Board (Washington D.C., January 2004). “loss aversion”: The notion of loss aversion was first hypothesized by Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision Under Risk,” Econometrica, vol. 47 (1979), pp. 263–91. sensitive to loss: See Sabrina M. Tom, Craig R. Fox, Christopher Trepel, and Russell A. Poldrack, “The Neural Basis of Loss Aversion in Decision-Making Under Risk,” Science, vol. 315, no. 5811 (26 January 2007), pp. 515–18.

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to walk somewhere: Travel Behaviour Research Baseline Survey 2004: Sustainable Travel Demonstration Towns (SUSTRANS and Socialdata, 2004). Retrieved from http://www.sustrans.org.uk/webfiles/travelsmart/STDT%20Research%20FINAL.pdf. was at work: The “availability heuristic” is credited to Daniel Kahneman and Amos Tversky. (Heuristic is a sophisticated-sounding word that really just means “mental shortcut.”) When people are asked to imagine how often something happens, they tend to overestimate the probability of things that can be more easily recalled from memory—that is, that are “available”—or that loom more vividly in the imagination.

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The fact that we spend more time seeing losses than gains while driving in congestion plays perfectly into a well-known psychological theory called “loss aversion.” Any number of experiments have shown that humans register losses more powerfully than gains. Our brains even seem rigged to be more sensitive to loss. In what psychologist Daniel Kahneman has called the “endowment affect,” once people have been given something, they are instantly more hesitant to give it up. Do you remember the childlike glee you felt the last time you found a parking spot at the mall on a crowded day? You may have left the spot with a certain reluctance, particularly if someone else was waiting for it.

How to Read Numbers: A Guide to Statistics in the News (And Knowing When to Trust Them)
by Tom Chivers and David Chivers
Published 18 Mar 2021

It found remarkable results, like those discussed above, or – in the case of social priming – that priming someone with words related to age (like ‘bingo’, ’wrinkle’ or ‘Florida’ – Americans associate Florida with retirement, apparently) makes them walk more slowly when they leave the experimenter’s office. Social priming was a huge deal. Daniel Kahneman, the great psychologist and pioneer of our understanding of cognitive biases – he won the Nobel Prize in Economic Sciences for his work with Amos Tversky – wrote in 2011 that ‘disbelief is not an option’ when it came to the astonishing priming effects.3 A picture of a pair of eyes above an honesty box led people to put more money in it if than if there was a neutral picture of flowers.4 Thinking about a shameful action, like stabbing a colleague in the back, leads people to buy more soap and disinfectant than they normally would, to scrub their soul clean: the ‘Lady Macbeth effect.’5 But by the time that BBC article – and others, such as a long piece in The Atlantic from 20146 – were published, research into money priming was struggling.

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D., ‘Alcohol consumption and risk of heart failure: The atherosclerosis risk in communities study’, European Heart Journal, 36 (14) (14 April 2015), pp. 939–45 https://doi.org/10.1093/eurheartj/ehu514 Chapter 15: Demand for Novelty 1. Lucy Hooker, ‘Does money make you mean?’, BBC News, 2015 https://www.bbc.co.uk/news/magazine-31761576 2. Vohs, K. D., Mead, N. L. and Goode, M. R., ‘The psychological consequences of money,’ Science, 314 (17 November 2006). 3. Daniel Kahneman, Thinking, Fast and Slow, Allen Lane, 2011. 4. Bateson, M., Nettle, D. and Roberts, G., ‘Cues of being watched enhance cooperation in a real-world setting’, Biology Letters, 2(3) (2006), pp. 412–14 doi:10.1098/rsbl.2006.0509 5. Zhong, C.-B. and Liljenquist, K., ‘Washing away your sins: Threatened morality and physical cleansing’, Science, 313 (8 September 2006), pp. 1451–2 doi:10.1126/science.1130726. 6.

The End of Alchemy: Money, Banking and the Future of the Global Economy
by Mervyn King
Published 3 Mar 2016

The main challenge to the economists’ assumption of optimising behaviour comes from ‘behavioural economics’, a relatively new field often associated with Daniel Kahneman, Richard Thaler and Amos Tversky.20 It studies the emotional and psychological dimensions of economic choices.21 Behavioural economics has identified an impressive array of cognitive biases in the way people behave in practice. For example, people are observed both to display overconfidence in their ability to judge probabilities and to underestimate the likelihood of rare events. But behavioural economics assumes that deviations from traditional optimising behaviour result from the fact that humans are hardwired to behave in a way that is ‘irrational’. Daniel Kahneman suggested that decisions are made by two different systems in the mind: one fast and intuitive, the other slower, deliberate, and closer to optimising behaviour.22 In this way he was able to explain aspects of behaviour that appear anomalous in the traditional approach.

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Jarvie, J.R. (1934), The Old Lady Unveiled: A Criticism and Explanation of the Bank of England, Wishart & Company, London. Johnson, Paul (1997), A History of the American People, Weidenfeld and Nicolson, London. Kahneman, Daniel (2011), Thinking, Fast and Slow, Farrar, Straus and Giroux, New York. Kahneman, Daniel and Amos Tversky (1979), ‘Prospect Theory: An Analysis of Decision under Risk’, Econometrica, Vol. 47, pp. 263–91. Kalemli-Ozcan, Sebnem, Bent E. Sorensen and Sevcan Yesiltas (2012), ‘Leverage Across Firms, Banks and Countries’, Federal Reserve Bank of Dallas Conference on Financial Frictions and Monetary Policy in an Open Economy, mimeo.

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Turner, Adair (2014), ‘Central Banking and Monetary Policy after the Crisis’, City Lecture at the Official Monetary and Financial Institutions Forum (OMFIF), London, 9 December 2014. —— (2015), Between Debt and the Devil, Princeton University Press, Princeton, New Jersey. Tversky, Amos and Daniel Kahneman (1974), ‘Judgment under Uncertainty: Heuristics and Biases’, Science, Vol. 185, No. 4157, pp. 1124–31. Waley, Arthur (1938), The Analects of Confucius, Allen and Unwin, London. Weale, Martin (2015), ‘Prospects for Supply Growth in Western Europe’, Speech at the Rijksuniversiteit, Groningen, 12 October, Bank of England website.

The Problem of Political Authority: An Examination of the Right to Coerce and the Duty to Obey
by Michael Huemer
Published 29 Oct 2012

The Singing Revolution (documentary film). 94 min. Mountain View Productions. Tversky, Amos. 1969. ‘Intransitivity of Prefentryerences’, Psychological Review 76: 31–48. Tversky, Amos, and Daniel Kahneman. 1981. ‘The Framing of Decisions and the Psychology of Choice’, Science 211: 453–8. ——. 1982. ‘Evidential Impact of Base Rates’. Pp. 153–60 in Judgment under Uncertainty: Heuristics and Biases, ed. Daniel Kahneman, Paul Slovic, and Amos Tversky. Cambridge: Cambridge University Press. ——. 1986. ‘Rational Choice and the Framing of Decisions’, Journal of Business 59: S251–S278. ——. 2002. ‘Extensional versus Intuitive Reasoning: The Conjunction Fallacy in Probability Judgment’.

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Rethinking Social Policy: Race, Poverty and the Underclass. Cambridge, MA: Harvard University Press. Julich, S. 2005. ‘“Stockholm Syndrome” and Child Sexual Abuse’, Journal of Child Sexual Abuse 14: 107–29. Juvenal, Decimus Junius. 1967. The Sixteen Satires, tr. Peter Green. Baltimore: Penguin. Kahneman, Daniel, Paul Slovic, and Amos Tversky, eds. 1982. Judgment under Uncertainty: Heuristics and Biases. Cambridge: Cambridge University Press. Kant, Immanuel. 1957. Perpetual Peace, ed. and tr. Lewis White Beck. Indianapolis: Bobbs-Merrill. Originally published 1795. Karsh, Efraim. 2002. The Iran-Iraq War 1980–1988. Oxford: Osprey.

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Gat, Azar. 2006. War in Human Civilization. Oxford: Oxford University Press. Gaus, Gerald. 2003. Contemporary Theories of Liberalism: Public Reason as a Post-Enlightenment Project. London: Sage. Gauthier, David. 1986. Morals by Agreement. Oxford: Clarendon Press. Gilovich, Thomas, Dale Griffin, and Daniel Kahneman. 2002. Heuristics and Biases: The Psychology of Intuitive Judgment. Cambridge: Cambridge University Press. Gleditsch, Nils P. 1992. ‘Democracy and Peace’, Journal of Peace Research 29: 369–76. Goldstein, Amy. 2007. ‘More Security Firms Getting Police Powers: Some See Benefits To Public Safety, But Others Are Wary’, San Francisco Chronicle, Sunday, January 7, A3, www.sfgate.com/cgi-bin/article.cgi?

Data-Ism: The Revolution Transforming Decision Making, Consumer Behavior, and Almost Everything Else
by Steve Lohr
Published 10 Mar 2015

In short, what is the sensible division of labor in decision making between man and machine? In the fall of 2013, IBM held a symposium at its Watson research lab that probed that issue, in the context of computer software that keeps getting smarter and smarter. The first speaker was Daniel Kahneman, the Princeton psychologist and Nobel Prize winner in economics. His 2011 best seller, Thinking, Fast and Slow, describes his research, with Amos Tversky, a mathematical psychologist, into the basis of common human errors. Humans, Kahneman explains, are often error-prone when we make decisions by applying rules of thumb and biases. The culprit is “fast” thinking, the quick assessment of a situation to take action.

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“But we were kind of sad when Watson no longer answered Wonder Woman,” recalls Jennifer Chu-Carroll, a scientist on the Watson team, as if a bit of whimsy had departed from their creation. Wonder Woman was soon shunted aside, as Watson’s knowledge base became larger, more detailed, and more refined. The computerized knowledge systems being developed at IBM, Google, other companies, and universities are starting to put together “a rich and accurate model of the world,” as Daniel Kahneman summed up the virtue of human-style fast thinking. That sort of cognitive model is the engine of intuition, inference, and cause-and-effect reasoning—getting to the “why” of things, to understanding. It is a horizon of connection that is well beyond correlation. But there is a lively debate among data enthusiasts as to whether the pursuit of causes is even necessary.

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But what struck me while reporting these stories, and what came up repeatedly in conversations with artificial intelligence experts, is what awesome things the human brain and what we call general human intelligence really are. The general intelligence involves the effortless capacity to tap life experience, and make intuitive connections and quick decisions—what Daniel Kahneman calls “thinking fast.” Then there is the human brain as a processor, cramming incredible computing power into a tiny space and using only 20 watts of energy. By contrast, the Watson computer that won its Jeopardy! contest with human champions burned 85,000 watts. Still, the virtuous cycle of more and more varied data and smarter and smarter algorithms, written by human programmers, is delivering a big-data-fueled renaissance in artificial intelligence.

Spite: The Upside of Your Dark Side
by Simon McCarthy-Jones
Published 12 Apr 2021

Sitkin and his colleagues argue that companies should undertake stretch goals when they are already well positioned and on a winning streak. A company that attempts stretch goals when it is weak communicates fear and desperation. Unfortunately, this is when management may be most likely to attempt them. To make this point, Sitkin draws on the psychological literature on loss aversion and decision-making. Psychologists Daniel Kahneman and Amos Tversky famously showed that failure makes people more inclined to take risks to dig themselves out of a hole.53 As a result, struggling firms are more likely to take risky actions. The other implication of Kahneman and Tversky’s work is that successful firms are likely to be more risk averse, despite the fact that they are the ones with the resources and motivation to fruitfully take risks and achieve stretch goals.

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They just did not understand the game!”10 Despite these reactions, researchers around the world have found similar results to Güth’s. Indeed, a couple of years later, and six thousand kilometers west, another research group independently came up with the idea for an Ultimatum Game. This group included Daniel Kahneman, who would go on to win the Nobel Prize in Economic Sciences. They found the same pattern of results as Güth. What struck them was how the rejection of low offers clashed with economic theory. “It’s the resentment, the willingness to punish at cost, that is the whole thing,” Kahneman remarked.

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Finding the right amount of revenge—and the right amount of spite—is a challenging process of what Barclay notes is “brinkmanship.” Spite is a powerful tool not only to influence the behavior of other individuals but also to use against corporations that are acting in their narrow self-interest. As Daniel Kahneman and colleagues point out, profit-maximizing firms will be incentivized to be fair if customers are prepared to spite them for their unfair practices.44 We need to be prepared to refrain from buying products we like, costing ourselves pleasure and corporations money, when we know the products are problematic.

When to Rob a Bank: ...And 131 More Warped Suggestions and Well-Intended Rants
by Steven D. Levitt and Stephen J. Dubner
Published 4 May 2015

Loss Aversion in the NFL (SJD) Football coaches are known for being extraordinarily conservative when it comes to calling risky plays, since a single bad decision (or even a good decision that doesn’t work out) can get you fired. In the jargon of behavioral economics, coaches are “loss-averse”; this concept, pioneered by Amos Tversky and Daniel Kahneman, holds that we experience more pain with a loss of x than we experience pleasure with a gain of x. Who experiences loss aversion? Well, just about everyone: day traders, capuchin monkeys, and especially football coaches. Which is why the last play of yesterday’s Chiefs-Raiders game was so interesting.

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Now it seems only logical that someone will step up to try to sue McDonald’s for putting all those extra pounds on the passengers in the first place. Daniel Kahneman Answers Your Questions (SDL) One of the first times I met Danny Kahneman was over dinner, just after SuperFreakonomics was published. “I enjoyed your new book,” Danny said. “It will change the future of the world.” I beamed with pride. Danny, however, was not done speaking. “It will change the future of the world—and not for the better.” While I’m sure many people would agree, he was the only person who ever said it to my face! If you don’t know the name, Daniel Kahneman is the non-economist who has had the greatest influence on economics of any non-economist who ever lived.

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Unlike that first post, the vast majority of the blog entries were written by just one of us, not the pair, as in our book writing. We sometimes asked friends (and even enemies) to write for the blog; we’ve held “quorums” (asking a bunch of smart people to answer a tough question) and Q&As (with people like Daniel Kahneman and a high-end call girl named Allie). For several years, The New York Times hosted the blog, which gave it a veneer of legitimacy that wasn’t quite warranted. But the Times eventually came to its senses and sent us off to do the thing we do, once more on our lonesome. All these years, we routinely asked ourselves why we kept blogging.

The Wisdom of Frugality: Why Less Is More - More or Less
by Emrys Westacott
Published 14 Apr 2016

He won’t allow the first to reason about or examine anything except how a little money can be made into great wealth. And he won’t allow the second to value or admire anything but wealth and wealthy people or to have any ambition other than the acquisition of wealth or whatever might contribute to getting it.8 The “sunk cost” fallacy: Research by psychologists Daniel Kahneman and Amos Tversky in the 1970s led them to conclude that for most human beings a concern to avoid losses is a more powerful motivator than the desire to realize gains. Many other psychologists have followed in their footsteps and investigated the phenomenon of loss aversion. A study by Hal Arkes and Catherine Blumer is representative and revealing.

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It should be noted that Wilkinson and Pickett’s methodology, evidence, and conclusions have been challenged. See, for instance, Peter Saunders, “Beware False Prophets: Equality, the Good Society and the Spirit Level,” Policy Exchange, July 8, 2010. 22. Daniel Kahneman and Angus Deaton, “High Income Improves Evaluation of Life but Not Emotional Well-Being, Proceedings of the National Academy of Sciences of the United States of America, August 4, 2010. 23. See Daniel Kahneman, Thinking Fast and Slow (New York: Farrar, Straus and Giroux, 2011), p. 396. 24. Skidelsky and Skidelsky, How Much Is Enough?, p. 75. 25. Plato, Republic, 4.442a. 26. Nietzsche, The Gay Science, bk. 1, 14. 27.

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After all, a much higher income than $75,000 would enable one to travel to exotic places, buy expensive concert tickets, try out fancy restaurants, and in general treat oneself to a few more luxuries. And it seems reasonable to suppose that increasing the number and quality of pleasurable experiences would make one happier. So why does this seem not to occur? Daniel Kahneman suggests one partial explanation that harks back to points made earlier about the simple life: as people become richer, their ability to savor small, simple, everyday pleasures is reduced.23 A study in which subjects seemed to derive less pleasure from eating chocolate after they had been primed with wealth-related ideas possibly lends support to this hypothesis.

Economics Rules: The Rights and Wrongs of the Dismal Science
by Dani Rodrik
Published 12 Oct 2015

Simon Wren-Lewis, “When Economics Students Rebel,” Mainly Macro (blog), April 24, 2014, http://mainlymacro.blogspot.co.uk-2014-04-when=economocs=students=rebel.html. 11. Herbert A. Simon, “A Behavioral Model of Rational Choice,” Quarterly Journal of Economics 69 (February 1955): 99–118; Richard R. Nelson and Sidney G. Winter, An Evolutionary Theory of Economic Change (Cambridge, MA: Belknap Press of Harvard University Press, 1982). 12. Daniel Kahneman, Paul Slovic, and Amos Tversky, Judgement under Uncertainty: Heuristics and Biases (Cambridge: Cambridge University Press, 1982). 13. Werner F. M. De Bondt and Richard Thaler, “Does the Stock Market Overreact?” Journal of Finance 40, no. 3 (1985): 793–805. 14. David Laibson, “Golden Eggs and Hyperbolic Discounting,” Quarterly Journal of Economics 112, no. 2 (1997): 443–77; Brigitte C.

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The postulate always had its critics from within economics, such as Herbert Simon, who argued for a limited form of rationality (called “bounded rationality”), and Richard Nelson, who proposed that firms move by trial and error rather than by optimization—not to mention Adam Smith himself, who may have been the first behavioral economist.11 But it was the work of psychologist Daniel Kahneman and his coauthors that had the greatest impact on mainstream economics.12 This contribution was recognized by a Nobel memorial prize in economics given to Kahneman in 2002, the first time that the prize was awarded to a noneconomist.# Kahneman and his colleagues’ experiments cataloged a long list of behavioral regularities that violated rationality, as the concept is used in economics.

Planet Ponzi
by Mitch Feierstein
Published 2 Feb 2012

If that’s not what you signed up for when you started this chapter, remember I did try to warn you. I’m not short your house, but still … Sorry. 13 A brief flash of reality One of the most important papers in the history of the social sciences reported the results of a strange little experiment conducted by researchers Amos Tversky and Daniel Kahneman. It’s a paper which, ideally, every investor and every regulator should read. Everyone with an interest in the financial markets, in fact‌—‌a group which includes all those who have money and all those who would like to. The study was simple and emphatic. It took a group of subjects and asked them various questions‌—‌for example, the percentage of African countries among the United Nations member states.

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You can get more recent information by searching the CoreLogic site at www.corelogic.com. 12 ‘Self harm,’ The Economist, Sept. 3, 2011. 13 FHFA report on ‘Housing and mortgage markets in 2010,’ figure 16. 14 Justin Fox, ‘A slow-motion wreck for commercial real estate,’ Time, Jan. 18, 2010. 15 John Gittelsohn, ‘Shiller says U.S. home-price declines of 10% to 25% “wouldn’t surprise me”,’ Bloomberg, June 9, 2011. Chapter 13: A brief flash of reality 1 Amos Tversky and Daniel Kahneman, ‘Judgment under uncertainty: heuristics and biases,’ Science, vol. 185, no. 4157, Sept. 1974, pp. 1124–31. 2 Tali Sharot, Alison M. Riccardi, Candace M. Raio, and Elizabeth A. Phelps, ‘Neural mechanisms mediating optimism bias,’ Nature, vol. 450, Oct. 2007, pp. 102–5. 3 Go to the UK Treasury website (www.hm-treasury.gov.uk) and search for ‘Optimism bias.’ 4 Goldman Sachs, Global Economic Outlook 2011, Dec. 2010.

Everyday Utopia: What 2,000 Years of Wild Experiments Can Teach Us About the Good Life
by Kristen R. Ghodsee
Published 16 May 2023

We accept the way things are because we’ve never known them to be different. Behavioral economists call this the “status quo bias.” People prefer things to stay the same so they don’t have to take responsibility for decisions that might potentially change things for the worse.9 The psychologists Daniel Kahneman and Amos Tversky famously found that people want to avoid feeling regret, and that they are more likely to feel regret about a bad outcome resulting from a decision they made compared to a bad outcome that came from inaction. It’s just so much easier to do nothing. Accepting the status quo—even if we hate it—means the potential for fewer regrets.10 We might not want to admit it, but many of us are too scared, too tired, or too lazy to dream.

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Alix Kates Shulman, freely available at the Anarchist Library, https://www.theanarchistlibrary.org/library/emma-goldman-socialism-caught-in-the-political-trap. 8 Karl Mannheim, Ideology and Utopia: An Introduction to the Sociology of Knowledge (1936; New York: Martin, 2015): 341–43. 9 William Samuelson and Richard Zeckhauser, “Status Quo Bias in Decision-Making,” Journal of Risk and Uncertainty 1, no. 1 (February 1988): 7–59. 10 Daniel Kahneman and Amos Tversky, “The Psychology of Preferences,” Scientific American 246, no. 1 (January 1982): 160–73. 11 Scott Timberg, “The Novel That Predicted Portland,” New York Times, December 12, 2008, https://www.nytimes.com/2008/12/14/fashion/14ecotopia.html. 12 Mannheim, Ideology and Utopia, 232–33. 13 Thomas Piketty, Capital in the 21st Century (Cambridge, MA: Harvard University Press, 2013). 14 Rutger Bregman, Utopia for Realists: How We can Build the Ideal World (New York: Little, Brown, 2017). 15 Wade Davis, “Keynote Speech: The Ethnosphere and the Academy,” 2014, https://www.wheretherebedragons.com/wp-content/uploads/2014/09/DavisEthnosphereAcademy.pdf. 16 For the full text and a video of the 1997 Apple “Think Different” ad, see: http://www.thecrazyones.it/spot-en.html. 17 See the website of the Center for Climate Repair at Cambridge University: https://www.climaterepair.cam.ac.uk. 18 Fred Pearce, “Geoengineer the Planet?

The Data Detective: Ten Easy Rules to Make Sense of Statistics
by Tim Harford
Published 2 Feb 2021

It’s possible, of course, for shocking news to be positive. But the psychologist Steven Pinker has argued that good news tends to unfold slowly, while bad news is often more sudden.16 That sounds right—it is, after all, quicker to knock something down than to build it. Following a thought experiment the great psychologist Amos Tversky once shared with a young Pinker,17 imagine the best possible thing that could happen to you today. You could win the lottery, I suppose. (Would that really be good news?) There are certain other moments where something wonderful could happen: you could have been hoping for a baby after many months of fruitless trying, and finally the pregnancy test comes back positive; you might have applied for a promotion or a place at university, and you get it.

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All we need to do is acquire the habit of stopping to think.22 Another study found that people who were best able to distinguish real from fake news were also the people who scored highly on what is called a cognitive reflection test.23 These tests—created by Shane Frederick, a behavioral economist, and made famous by Daniel Kahneman’s book Thinking, Fast and Slow—ask questions such as: A bat and ball cost $1.10, and the bat costs a dollar more than the ball. How much does the ball cost? and: A lake contains a patch of lily pads which doubles in size each day. If it takes 48 days for the patch to cover the entire lake, how long would it take for the patch to cover half of the lake?

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The problem is that the news carries tales of lottery wins and fairy-tale romances, terrorist atrocities and gruesome assaults by strangers, and of course the latest trends, which are often not nearly as popular as they seem. None of these stories reflect everyday life; all of them are viscerally memorable and seem to take place in our living rooms. We form our impressions accordingly. As the great psychologist Daniel Kahneman explained in Thinking, Fast and Slow: “When faced with a difficult question, we often answer an easier one instead, usually without noticing the substitution.” Rather than asking, “Are terrorists likely to kill me?” we ask ourselves, “Have I recently seen a news report about terrorism?” Instead of saying, “Out of all the teenage girls I know, how many are already mothers?”

Our Final Invention: Artificial Intelligence and the End of the Human Era
by James Barrat
Published 30 Sep 2013

Maybe we’re in that period right now with AI, and only an accident or a near-death experience will jar us awake. Another reason AI and human extinction do not often receive serious consideration may be due to one of our psychological blind spots—a cognitive bias. Cognitive biases are open manholes on the avenues of our thinking. Israeli American psychologists Amos Tversky and Daniel Kahneman began developing the science of cognitive biases in 1972. Their basic idea is that we humans make decisions in irrational ways. That observation alone won’t earn you a Nobel Prize (Kahneman received one in 2002); the stunner is that we are irrational in scientifically verifiable patterns.

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H+ Magazine, February 5, 2010, http://hplusmagazine.com/2010/02/05/how-long-till-human-level-ai/ (accessed March 4, 2010). Furthermore, experts claim: Sandburg Anders, and Nick Bostrom, “Machine Intelligence Survey,” 2011, http://www.fhi.ox.ac.uk/__data/assets/pdf_file/0015/21516/MI_survey.pdf (accessed December 4, 2011). the science of cognitive biases: Kahneman, Daniel, Paul Slovic, and Amos Tversky, Judgment under Uncertainty: Heuristics and Biases (Cambridge: Cambridge University Press, 1982), 11. fire ranks well down the list: Centers for Disease Control and Prevention, “Accidents or Unintentional Injuries,” March 28, 2011, http://www.cdc.gov/nchs/fastats/acc-inj.htm (accessed April 4, 2011).

Smarter Investing
by Tim Hale
Published 2 Sep 2014

Lesson: Do not believe that you have predictive powers – you do not, I assure you. I will throw my anchor out here thanks The human mind really likes to use ‘anchors’ when forming opinions, which in many cases leads to extraordinarily inaccurate estimates of outcomes. As an example, experiments undertaken by two of the most respected behavioural economists, Amos Tversky and Daniel Kahneman, used a wheel-of-fortune with the numbers 1 to 100 on it. Before asking their subjects a number of difficult questions, such as how many African nations are in the United Nations, they span the wheel. They first asked if the number was higher or lower than the number on the wheel, and then asked for the participants’ guesses.

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Evolution occurs by a process of natural selection where the favorable heritable traits exhibited by an individual (defined by its genes) become more common in successive generations of a population. Physiological responses that made us run from shadows, avoid pain, devour sources of plenty in a greedy way would have been selected for. As Amos Tversky, one of the leading behavioural economists points out (Zweig, 2007): ‘Sensitivity to losses was probably more [beneficial] than the appreciation of gains … it would have been wonderful to be a species that was almost insensitive to pain and had the infinite capacity to appreciate pleasure. But you probably wouldn’t have survived the evolutionary battle.’

Whiteshift: Populism, Immigration and the Future of White Majorities
by Eric Kaufmann
Published 24 Oct 2018

The manager of the Oakland A’s baseball team, Billy Beane, in Michael Lewis’s Moneyball showed that large-scale datasets could reveal truths that scouts acting on gut instinct failed to see.5 On-base percentage mattered more than how athletic a batter looked or how many big hits he had. The scouts, like all of us, think in terms of vivid images, which lead us to make what Daniel Kahneman and Amos Tversky term ‘fast-thinking’ decisions.6 These can be misleading. In approaching populism, many have been seduced by stories of ‘left-behind’ working-class whites, the opioid crisis and rusting factories, so we’ve had numerous media ‘safaris’ into Trumpland which tend to simply confirm reporters’ biases.7 Journalists have been mesmerized by election maps.

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Vance’s autobiographical and evocative Hillbilly Elegy, about growing up in backwoods poverty in Appalachia. Some tramped the byways of rustbelt Ohio or reported from struggling post-industrial towns to suggest that economic misery explained Trump’s success. None performed any sophisticated individual-level data analysis. Daniel Kahneman and Amos Tversky emphasize that our brains are wired to work with vivid images such as a coal miner in a down-at-the-heel West Virginia town.108 Like Billy Beane in Michael Lewis’s Moneyball, we are better off ignoring gut feel and looking at the individual-level data. It’s much harder for us to digest the fact that the psychological differences between two Appalachian miners matter more for the Trump vote than the social distance between Youngstown, Ohio, and the northern Virginia suburbs.

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They tap into both authoritarianism – the desire for order and stability – and conservatism, a preference for continuity with the past. Perceptions of the nation are imagined through the media as well as by travelling around the country or hearing travel tales related by friends and relatives. Given people’s tendency to ‘fast think’ through what Amos Tversky and Daniel Kahneman term ‘system 1’ cognition, vivid images and stories will tend to carry more weight than representative data and rational ‘system 2’ deliberation.54 The media has an important role in reinforcing perceptions, but isn’t the only influence on whether people imagine threats to the nation.

Strategy: A History
by Lawrence Freedman
Published 31 Oct 2013

Chase, “Skill in Chess,” American Scientist 61, no. 4 (July 1973): 394–403. 12. Amos Tversky and Daniel Kahneman, “Judgment Under Uncertainty: Heuristics and Biases,” Science 185, no. 4157 (September 1974): 1124. See also Daniel Kahneman, “A Perspective on Judgment and Choice: Mapping Bounded Rationality,” American Psychologist 56, no. 9 (September 2003): 697–720. 13. “IRRATIONALITY: Rethinking thinking,” The Economist, December 16, 1999, available at http://www.economist.com/node/268946. 14. Amos Tversky and Daniel Kahneman, “The Framing of Decisions and the Psychology of Choice,” Science 211, no. 4481 (1981): 453–458; “Rational Choice and the Framing of Decisions,” Journal of Business 59, no. 4, Part 2 (October 1986): S251–S278. 15.

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When the empirical work demonstrated strong and consistent patterns of behavior this might reflect the rational pursuit of egotistical goals, but alternatively these patterns might reflect the influence of powerful conventions that inclined people to follow the pack. Building upon Simon’s work, Amos Tversky and Daniel Kahneman introduced further insights from psychology into economics. To gain credibility, they used sufficient mathematics to demonstrate the seriousness of their methodology and so were able to create a new field of behavioral economics. They demonstrated how individuals used shortcuts to cope with complex situations, relying on processes that were “good enough” and interpreted information superficially using “rules of thumb.”

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The designations System 1 and System 2 come from Keith Stanovich and Richard West, “Individual Differences in Reasoning: Implications for the Rationality Debate,” Behavioral and Brain Sciences 23 (2000): 645–665. Daniel Kahneman has popularized the terms in his Thinking Fast and Slow (London: Penguin Books, 2011). J. St. B. T. Evans, “In Two Minds: Dual-Process Accounts of Reasoning,” Trends in Cognition Science 7, no. 10 (October 2003): 454–459; “Dual-Processing Accounts of Reasoning, Judgment and Social Cognition,” The Annual Review of Psychology 59 (January 2008): 255–278. 43. Andreas Glöckner and Cilia Witteman, “Beyond Dual-Process Models: A Categorisation of Processes Underlying Intuitive Judgement and Decision Making,” Thinking & Reasoning 16, no. 1 (2009): 1–25. 44. Daniel Kahneman, Thinking Fast and Slow, 42. 45.

Busy
by Tony Crabbe
Published 7 Jul 2015

Occasionally you might be asked to do some long division when you don’t have a calculator on hand, but most of the time, we breeze through our decisions. There are two reasons for this: The first is that when faced with too much choice, we simply move on and don’t make a decision at all. The second reason we are seldom stumped was identified by Amos Tversky and Daniel Kahneman early in their work together. When faced with a hard question, we simply substitute it with a much easier one. The following experiment shows this nicely. German students were given a survey including the following questions: • How happy are you these days? • How many dates did you have last month?

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The worst offender of all is the part responsible for decision-making, the most recent part of the brain to evolve: the prefrontal cortex. This isn’t just any old 4 x 4, it’s a 6.6-liter Hummer! This means that making rational choices is hard work, so the brain does all it can to avoid the effort. Psychologists, such as the Nobel Prize–winning Daniel Kahneman, have split our thinking into two forms: System One and System Two.2 System One is fast, automatic and unconscious; System Two is slow, effortful and conscious. Both systems are always on while you are awake. System One automatically and effortlessly responds to experiences, generating immediate impressions, intentions and feelings.

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Great research and humor Author: Daniel Goleman Title: Focus Why you should read it: Describes the importance and mechanisms of focus Author: Jonathan Haidt Title: The Happiness Hypothesis Why you should read it: Accessible blend of modern and ancient wisdom Author: Edward Hallowell Title: CrazyBusy Why you should read it: Description of busy, likening it to ADHD Author: Tim Harford Title: Adapt Why you should read it: Why we have to fail to succeed—a great read Author: Chip and Dan Heath Title: Decisive Why you should read it: Great book on how we decide Author: Chip and Dan Heath Title: Switch Why you should read it: One of the best on how to make changes Author: Arianna Huffington Title: Thrive Why you should read it: Inspiring read on how to thrive today Author: Maggie Jackson Title: Distracted Why you should read it: This book really influenced my thinking Author: Daniel Kahneman Title: Thinking, Fast and Slow Why you should read it: A brilliant overview of System One and Two thinking Author: Tim Kasser Title: The High Price of Materialism Why you should read it: Explains the research behind Chapter 9 Author: Robert Kegan and Lisa Laskow Lahey Title: Immunity to Change Why you should read it: A great book: make deep, adaptive change Author: George Leonard Title: Mastery Why you should read it: Describes the joy of practice Author: Jim Loehr and Tony Schwartz Title: The Power of Full Engagement Why you should read it: Inspiring book on managing your energy Author: Steve Peters Title: The Chimp Paradox Why you should read it: A simple concept that helps manage emotions Author: David Rock Title: Your Brain at Work Why you should read it: Remarkably simple application of neuroscience Author: Brigid Schulte Title: Overwhelmed Why you should read it: Fantastic, and relevant book on the subject of busy Author: Barry Schwartz Title: The Paradox of Choice Why you should read it: The subtitle says it all: “Why more is less” Author: Martin Seligman Title: Flourish Why you should read it: The latest book by the founder of Positive Psychology Author: Sherry Turkle Title: Alone Together Why you should read it: Insightful: our response to technological immersion Author: Timothy D.

I.O.U.: Why Everyone Owes Everyone and No One Can Pay
by John Lanchester
Published 14 Dec 2009

The economics profession, however, is split between economic rationalists in the Milton Friedman tradition and economic liberals in the tradition of John Maynard Keynes, and the subject of strict rationality is the occasion of a permanent pitched battle. The fact that noneconomists see the general assumption of rationality as self-evidently ridiculous has no effect on economists. What has had an effect, however, is the work of two Israeli psychologist-economists, Daniel Kahneman and Amos Tversky, who have produced a body of work studying “the susceptibility to erroneous intuitions of intelligent, sophisticated, and perceptive individuals,” in the words of the fascinating autobiography written by Kahneman on the occasion of winning the Nobel Prize in 2002. I have a confession to make about Kahneman and Tversky.

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I can’t claim to have been onto this story early, but once I started working on it in the late summer of 2007, it was immediately clear to me that the global banking system was facing a structural crisis. If it was clear to me, why wasn’t it as obvious to the people in charge of the economy and to the people whose job it is to advise them? It’s the kind of question Daniel Kahneman has profitably studied. There is some really interesting work being done in the field of psychology and engineering (where it deeply matters) about “expert overconfidence”: the likelihood of experts in a field to place too high a confidence in their own judgments. It may be that the reason why some journalists were more alert to the imminent crunch than their betters were was because of expert overconfidence combined with an overreliance on the idea that because a crisis of this sort hadn’t happened, it therefore couldn’t happen.

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I’d also like to thank Ann LoLordo, Fern Shen, Lisa Evans, Mary Waldrow, Tony Damazio, and Philip Robinson. I would also like to thank Fram Dinshaw, Rhomaios Ram, Nicolas Doisy, and Richard Smith. I would like to thank The Atlantic for permission to quote Simon Johnson’s article “The Quiet Coup,” and the Nobel Foundation for permission to quote Daniel Kahneman’s Biography. SOURCES This is a list both of sources and of suggestions for further reading. These are all books from which I have learnt a great deal. Ahamed, Liaquat. Lords of Finance: The Bankers Who Broke the World. Penguin Press, New York, 2009. Akerlof, George, and Robert Shiller.

Plenitude: The New Economics of True Wealth
by Juliet B. Schor
Published 12 May 2010

Developments in the measurement of subjective well-being. Journal of Economic Perspectives 20 (1): 3-24. Kahneman, Daniel, Alan B. Krueger, David A. Schkade, Norbert Schwarz, and Arthur A. Stone. 2006. Would you be happier if you were richer? A focusing illusion. Science 312 (30): 1776-80. Kahneman, Daniel, and Amos Tversky. 2000. Choices, values and frames. New York: Cambridge University Press. Kasser, Tim, and Kirk W. Brown. 2003. On time, happiness, and ecological footprints. In Take back your time: Fighting overwork and time poverty in America, edited by John De Graaf. San Francisco: Berrett-Koehler, 107-12.

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In a series of studies, the psychologists Tim Kasser and Kennon Sheldon found that being time-affluent is positively associated with well-being, even controlling for income. In some of their studies, time trumped material goods in importance. Kasser and Kirk Brown found that working hours are negatively correlated with life satisfaction. The study on neighbors’ incomes cited above had a similar finding. The Nobel laureate Daniel Kahneman and his Princeton colleague Alan Krueger, using a sample of working women in Texas, report that the three activities most likely to elicit a bad mood are the evening commute, work, and the morning commute. A study among European Union countries found that the higher the working hours, the lower the happiness level, again controlling for other variables.

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Luttmer found that the impact of neighbors’ income rising is equivalent to a similarly sized fall in one’s own income. 178 anticipate that additional income will yield more happiness . . . projection bias: On overvaluing income, or projection bias, see Loewenstein, O’Donoghue, and Rabin (2003); on the related concept of the focusing illusion, see Kahneman et al. (2006). 178 In a series of studies, the psychologists Tim Kasser and Kennon Sheldon: Kasser and Sheldon (2009). 178 Kasser and Kirk Brown found that working hours: Kasser and Brown (2003). 178 Nobel laureate Daniel Kahneman and his Princeton colleague: Kahneman and Krueger (2006), table 2. 178 A study among European Union countries: Alesina, Glaeser, and Sacerdote (2005), table 15. 178 Data from a large-scale German survey: Pouwels, Siegers, and Vlasblom (2008). 178 income is positional, but leisure time is not: Vacations and shorter hours not being positional is from Solnick and Hemenway (1998).

The Education of a Value Investor: My Transformative Quest for Wealth, Wisdom, and Enlightenment
by Guy Spier
Published 8 Sep 2014

Checking the stock price too frequently uses up my limited willpower since it requires me to expend unnecessary mental energy simply resisting these calls to action. Given that my mental energy is a scarce resource, I want to direct it in more constructive ways. We also know from behavioral finance research by Daniel Kahneman and Amos Tversky that investors feel the pain of loss twice as acutely as the pleasure of gain. So I need to protect my brain from the emotional storm that occurs when I see that my stocks—or the market—are down. If there’s average volatility, the market is typically up in most years over a 20-year period.

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This is not a science book or a weighty tome about the structure of the brain, but it’s worth taking a few moments to ponder why it’s so hard to think and invest in a rational manner. People often misguidedly regard the brain as one structure: a neocortex that rationally takes in information, computes it, and spits out the answer. Daniel Kahneman, a trailblazing psychologist who won a Nobel Prize for economics in 2002, describes this aspect of the brain’s processes with the phrase “thinking slow.” For my part, I used to have a deluded image of myself as the equivalent of a fighter pilot, intensely focusing on the instrument panel in the cockpit of my jet, making optimal decisions and operating in full control of all the aircraft’s levers.

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Force: The Hidden Determinants of Human Behavior by David Hawkins Simple Heuristics That Make Us Smart by Gerd Gigerenzer and Peter Todd The Archaeology of Mind: Neuroevolutionary Origins of Human Emotions by Jaak Panksepp and Lucy Biven The Art of Thinking Clearly by Rolf Dobelli The Developing Mind: How Relationships and the Brain Interact to Shape Who We Are by Daniel Siegel The Feeling of What Happens: Body and Emotion in the Making of Consciousness by Antonio Damasio The 48 Laws of Power by Robert Greene The Neuroscience of Psychotherapy: Healing the Social Brain by Louis Cozolino There Are No Accidents: Synchronicity and the Stories of Our Lives by Robert Hopcke Thinking, Fast and Slow by Daniel Kahneman Waking the Tiger: Healing Trauma by Peter Levine with Ann Frederick Willpower: Rediscovering the Greatest Human Strength by Roy Baumeister and John Tierney Science At Home in the Universe: The Search for the Laws of Self-Organization and Complexity by Stuart Kauffman Connected: The Surprising Power of Our Social Networks and How They Shape Our Lives by Nicholas Christakis and James Fowler Deep Simplicity: Bringing Order to Chaos and Complexity by John Gribbin Emergence: The Connected Lives of Ants, Brains, Cities, and Software by Steven Johnson How Nature Works: The Science of Self-Organized Criticality by Per Bak Journey to the Ants: A Story of Scientific Exploration by Bert Hölldobler and Edward O.

The Ascent of Money: A Financial History of the World
by Niall Ferguson
Published 13 Nov 2007

This brings us to the second reason for the inherent instability of the financial system: human behaviour. As we have seen, all financial institutions are at the mercy of our innate inclination to veer from euphoria to despondency; our recurrent inability to protect ourselves against ‘tail risk’; our perennial failure to learn from history. In a famous article, Daniel Kahneman and Amos Tversky demonstrated with a series of experiments the tendency that people have to miscalculate probabilities when confronted with simple financial choices. First, they gave their sample group 1,000 Israeli pounds each. Then they offered them a choice between either a) a 50 per cent chance of winning an additional 1,000 pounds or b) a 100 per cent chance of winning an additional 500 pounds.

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Barro, ‘Rare Disasters and Asset Markets in the Twentieth Century’, Harvard University Working Paper (4 December 2005). 5 Nassim Nicholas Taleb, Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets (2nd edn., New York, 2005) 6 Idem, The Black Swan: The Impact of the Highly Improbable (London, 2007). 7 Georges Soros, The New Paradigm for Financial Markets: The Credit Crash of 2008 and What It Means, (New York, 2008), pp. 91 ff. 8 See Frank H. Knight, Risk, Uncertainty and Profit (Boston, 1921). 9 John Maynard Keynes, ‘The General Theory of Employment’, Economic Journal, 51, 2 (1937), p. 214. 10 Daniel Kahneman and Amos Tversky, ‘Prospect Theory: An Analysis of Decision under Risk’, Econometrica, 47, 2 (March 1979), p. 273. 11 Eliezer Yudkowsky, ‘Cognitive Biases Potentially Affecting Judgment of Global Risks’, in Nick Bostrom and Milan Cirkovic (eds.), Global Catastrophic Risks (Oxford University Press, 2008), pp. 91-119.

A Mathematician Plays the Stock Market
by John Allen Paulos
Published 1 Jan 2003

A number of psychologists in recent years have pointed out the countless ways in which we’re all subject to other sorts of counterproductive behavior that spring from cognitive blind spots that are analogues, perhaps, of optical illusions. These psychological illusions and foibles often make us act irrationally in a variety of disparate endeavors, not the least of which is investing. Amos Tversky and Daniel Kahneman are the founders of this relatively new field of study, many of whose early results are reported upon in the classic book Judgment Under Uncertainty , edited by them and Paul Slovic. (Kahneman was awarded the 2002 Nobel Prize in economics, and Tversky almost certainly would have shared it had he not died.)

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Siegel, Jeremy J., Stocks for the Long Run, New York, McGraw-Hill, 1998. Shiller, Robert J., Irrational Exuberance, Princeton, Princeton University Press, 2000. Taleb, Nassim Nicholas, Fooled by Randomness, New York, Texere, 2001. Thaler, Richard, The Winner’s Curse, Princeton, Princeton University Press, 1992. Tversky, Amos, Daniel Kahneman, and Paul Slovic, Judgment Under Uncertainty: Heuristics and Biases, Cambridge, Cambridge University Press, 1982. Index accounting practices assumptions vs. practices auditors and comparing corporate and personal accounting conflict of interest and deciphering company financial health Enron reforms transparency vagueness and subjectivity of value investing and WorldCom (WCOM) accounting scandals. see also fraud Benford’s Law and deciphering company financial health Efficient Market Hypothesis and psychology of cover ups volatility and WCOM fraud Al Qaeda Albert, Réka anchoring effect financial numbers and number experiments online chatroom example arithmetic mean. see also mean value IPO purchases/sales outstripping geometric mean rate of return Arthur Andersen Arthur, W.

Bold: How to Go Big, Create Wealth and Impact the World
by Peter H. Diamandis and Steven Kotler
Published 3 Feb 2015

“[People] will do things because others are doing them,” Musk explains, “because there is a trend, because they see everyone moving in one direction and decide that’s the best direction to go. Sometimes this is correct, but sometimes this will take you right off a cliff. Thinking in first principles protects you from these errors.” When it comes to scale, these aren’t the only errors one must guard against. Daniel Kahneman and Amos Tversky won the Nobel Prize for their work on human irrationality. One great example of this is what happens when two of the most common cognitive biases—loss aversion and narrow framing—begin to overlap. Loss aversion is the idea that humans are more sensitive to losses—even small losses—than gains, while narrow framing is our tendency to treat every risk we encounter as an isolated incident.

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v=O4MtQGRIIuA. 8 Dominic Basulto, “The new #Fail: Fail fast, fail early and fail often,” Washington Post, May 30, 2012, http://www.washingtonpost.com/blogs/innovations/post/the-new-fail-fail-fast-fail-early-and-fail-often/2012/05/30/gJQAKA891U_blog.html. 9 John Anderson, “Change on a Dime: Agile Design,” UX Magazine, July 19, 2011, http://uxmag.com/articles/change-on-a-dime-agile-design. 10 AI with Ismail, 2013. 11 For an amazing breakdown of these ideas, see Dan Pink, “RSA Animate—Drive: The surprising truth about what motivates us,” RSA, April 1, 2010, https://www.youtube.com/watch?v=u6XAPnuFjJc. 12 Daniel Kahneman, “The riddle of experience vs. memory,” TED, March 1, 2010, http://www.ted.com/talks/daniel_kahneman_the_riddle_of_experience_vs_memory. 13 Daniel H. Pink, Drive: The Surprising Truth About What Motivates Us (New York: Riverhead Books, 2010). 14 Christopher Mims, “When 110% won’t do: Google engineers insist 20% time is not dead—it’s just turned into 120% time” qz.com, August 16, 2013. 15 James Marshall Reilly, “The Zappos Story: How Failure can Fuel Business Success,” Monster.com, http://hiring.monster.com/hr/hr-best-practices/workforce-management/hr-management-skills/business-success.aspx. 16 All Astro Teller quotes come from a series of AIs conducted between 2013 and 2014. 17 Susan Wojcicki, “The Eight Pillars of Innovation,” thinkwithgoogle.com, July 2011, http://www.thinkwithgoogle.com/articles/8-pillars-of-innovation.html. 18 For a much deeper look at flow and its impact on performance see Steven Kotler, The Rise of Superman: Decoding the Science of Ultimate Human Performance (New York: New Harvest, 2014). 19 AI with John Hagel conducted 2014. 20 Steven Kotler and Jamie Wheal, “Five Surprising Ways Richard Branson Harnessed Flow to Build A Multi-Billion Dollar Empire,” Forbes, March 25, 2014, http://www.forbes.com/sites/stevenkotler/2014/03/25/five-surprising-ways-richard-branson-harnessed-flow-to-build-a-multi-billion-dollar-empire/. 21 Steven Kotler, “The Rise of Superman: 17 Flow Triggers,” Slideshare.net, March 2014, http://www.slideshare.net/StevenKotler/17-flow-triggers. 22 AI with Ned Hallowell conducted 2013. 23 Kevin Rathunde, “Montessori Education and Optimal Experience: A Framework for New Research,” The NAMTA Journal (Winter 2001): 11–43. 24 Mihaly Csikszentmihalyi, Flow: The Psychology of Optimal Experience (New York: Harper & Row, 1990), 48–70. 25 For a great breakdown of group flow and the social triggers see Keith Sawyer, Group Genius: The Creative Power of Collaboration (New York: Basic Books), 2008. 26 AI with Ismail, 2013.

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But once tasks become slightly more complex—such as shaping those nailed boards into a house—once they require even the slightest bit of conceptual ability, money actually has the exact opposite effect: It lowers motivation, hinders creativity, and decreases performance.11 What’s more, this isn’t the only issue with money as a motivator. Money, it now appears, is only an effective motivator until our basic biological needs are met, with a little left over for discretionary spending. This is why, in America, as the Nobel laureate Daniel Kahneman recently discovered, when you plot happiness and life satisfaction alongside income, they overlap until $70,000—i.e., the point at which money stops being a major issue—then wildly diverge.12 Once we pay people enough so that meeting basic needs is no longer a constant cause for concern, extrinsic rewards lose their effectiveness, while intrinsic rewards—meaning internal, emotional satisfactions—become far more critical.

Beyond the Random Walk: A Guide to Stock Market Anomalies and Low Risk Investing
by Vijay Singal
Published 15 Jun 2004

In this way, prices can move away from fundamental values for an extended period of time, which makes arbitrage positions riskier and less profitable. Behavioral finance won worldwide recognition when the 2002 Nobel prize was awarded to Daniel Kahneman for having integrated insights from psychological research into economic science, especially concerning human judgment and decision making under uncertainty, and to Vernon Smith for having established laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms. Amos Tversky (who died in 1996) deserves as much credit as Daniel Kahneman for explaining the role of human behavior in economic decision making. Lessons from Behavioral Finance Though behavioral finance is here to stay, it is not important whether one agrees with the assumption of pervasive irrational behavior.

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The Effect of Market Segmentation and Illiquidity on Asset Prices: Evidence from Exchange Listings. Journal of Finance 49(2), 611–36. Kahneman, Daniel, Jack L. Knetsch, and Richard H. Thaler. 1991. Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias. Journal of Economic Perspectives 5(1), 193–206. Kahneman, Daniel, and Amos Tversky. 1979. Prospect Theory: An Analysis of Decision Under Risk. Econometrica 47(2), 263–92. Mackenzie, Craig. 1997. Where Are the Motives? A Problem with Evidence in the Work of Richard Thaler. Journal of Economic Psychology 18(1), 123–35. Merton, Robert C. 1987. Presidential Address: A Simple Model of Capital Market Equilibrium with Incomplete Information.

The Tyranny of Experts: Economists, Dictators, and the Forgotten Rights of the Poor
by William Easterly
Published 4 Mar 2014

We project that today’s (temporarily) high growth will continue to be miraculous forever. We give autocrats credit for a future that has not even happened yet and that will likely never happen. The key insight on this subject came from a paper about basketball.13 One author of this study was Kahneman’s longstanding coauthor of many key insights, psychologist Amos Tversky, who died in 1996. In basketball, a player has a “hot hand” when he or she has made a string of baskets in a row. The obvious recommendation to that player’s teammates would seem to be to pass the ball to the player with the hot hand the next time they go down the court. But Tversky compiled actual data on shots, made baskets, and missed baskets and found this recommendation was wrong—the “hot hand” player is no more likely to make the next basket than any other player.

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USAID Ethiopia, Country Development Cooperation Strategy 2011–2015, page 3. 12. World Bank President Jim Kim speech at Brookings Institution, July 19, 2012; http://www.worldbank.org/en/news/2012/07/18/world-bank-group-president-jim-yong-kim-brookings-institution, accessed January 14, 2013. 13. Thomas Gilovich, Robert Vallone, and Amos Tversky, “The Hot Hand in Basketball: On the Misperception of Random Sequences,” Cognitive Psychology 17 (1985): 295–314. Available at www.psych.cornell.edu/sites/default/files/Gilo.Vallone.Tversky.pdf, accessed August 31, 2013. 14. In 2010 Ghana was the world’s second largest producer of cocoa beans (after Côte d’Ivoire).

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DANGEROUS PROBABILITIES Unfortunately, before we can get to testing the weaker variant that some autocrats are benevolent, we have to deal with some psychological biases in favor of the stronger variant that most or all autocrats are benevolent and produce high growth. Psychologists have documented systematic biases in the way we think about evidence. The leading psychologist on these topics is the Nobel laureate Daniel Kahneman, whose book Thinking, Fast and Slow is essential reading. Kahneman discusses how “thinking fast”—acting on gut reactions—can be an amazing problem-solver for most real-life situations, when there is not enough time for formal deductive reasoning (“thinking slow”). However, one area where thinking fast does badly is probability and statistics—in other words, in interpreting evidence.4 Thinking fast, then, has systematic biases, and most of these biases reinforce strong beliefs in benevolent autocrats.

Everybody Lies: Big Data, New Data, and What the Internet Can Tell Us About Who We Really Are
by Seth Stephens-Davidowitz
Published 8 May 2017

Even the most sophisticated neuroimaging methodologies can tell us how a thought is splayed out in 3-D space, but not what the thought consists of. As if the tradeoff between tractability and richness weren’t bad enough, scientists of human nature are vexed by the Law of Small Numbers—Amos Tversky and Daniel Kahneman’s name for the fallacy of thinking that the traits of a population will be reflected in any sample, no matter how small. Even the most numerate scientists have woefully defective intuitions about how many subjects one really needs in a study before one can abstract away from the random quirks and bumps and generalize to all Americans, to say nothing of Homo sapiens.

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Ellenberg realized he could compare how frequently quotes were highlighted at the beginning of the book versus the end of the book. This would give a rough guide to readers’ propensity to make it to the end. By his measure, more than 90 percent of readers finished Donna Tartt’s novel The Goldfinch. In contrast, only about 7 percent made it through Nobel Prize economist Daniel Kahneman’s magnum opus, Thinking, Fast and Slow. Fewer than 3 percent, this rough methodology estimated, made it to the end of economist Thomas Piketty’s much discussed and praised Capital in the 21st Century. In other words, people tend not to finish treatises by economists. One of the points of this book is we have to follow the Big Data wherever it leads and act accordingly.

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Google Will See You Now,” New York Times, August 11, 2013, SR12. 32 biggest dataset ever assembled on human relationships: Lars Backstrom and Jon Kleinberg, “Romantic Partnerships and the Dispersion of Social Ties: A Network Analysis of Relationship Status on Facebook,” in Proceedings of the 17th ACM Conference on Computer Supported Cooperative Work & Social Computing (2014). 33 people consistently rank: Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Straus and Giroux, 2011). 33 asthma causes about seventy times more deaths: Between 1979 and 2010, on average, 55.81 Americans died from tornados and 4216.53 Americans died from asthma. See Annual U.S. Killer Tornado Statistics, National Weather Service, http://www.spc.noaa.gov/climo/torn/fatalmap.php and Trends in Asthma Morbidity and Mortality, American Lung Association, Epidemiology and Statistics Unit. 33 Patrick Ewing: My favorite Ewing videos are “Patrick Ewing’s Top 10 Career Plays,” YouTube video, posted September 18, 2015, https://www.youtube.com/watch?

Simple Rules: How to Thrive in a Complex World
by Donald Sull and Kathleen M. Eisenhardt
Published 20 Apr 2015

.” [>] Chris Bingham, a professor: Christopher B. Bingham and Kathleen M. Eisenhardt, “Rational Heuristics: The ‘Simple Rules’ that Strategists Learn from Process Experience,” Strategic Management Journal 32, no. 13 (2011): 1437–64. [>] They lack the information: Daniel Kahneman, Thinking Fast and Thinking Slow (New York: Farrar, Straus and Giroux, 2011). See also Amos Tversky and Daniel Kahneman, “Judgment Under Uncertainty: Heuristics and Biases,” Science 185, no. 4157 (1974): 1124–31. [>] This pattern of improving: Paul J. Feltovich, Michael J. Prietula, and K. Anders Ericsson, “Studies of Expertise from Psychological Perspectives,” in Cambridge Handbook of Expertise and Expert Performance, edited by K.

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Despite this cultural and geographic diversity, Chris and Kathy observed an identical pattern for improving simple rules across the countries. First off, Chris and Kathy found that people usually begin with poor rules or even no conscious rules at all. They lack the information and time to develop quality rules at the outset, so they engage in what Nobel Prize–winning psychologist Daniel Kahn­e­man termed fast thinking—rather than expending conscious cognitive effort, they adopt innate universal heuristics that are cognitively easy, like representativeness (“Pick what is usual”) and availability (“Pick what first comes to mind”). For example, every Finnish team began operating in Sweden as their first foreign country, although there was no particular reason for this choice beyond familiarity.

Heads I Win, Tails I Win
by Spencer Jakab
Published 21 Jun 2016

The other is that there will be a huge amount of choppiness over the years if we do commit it to equities, and losses sting more than profits please. As I briefly mentioned a couple of chapters back, there’s a scientific basis for that assertion. The two psychologists who laid the foundations of behavioral finance, Daniel Kahneman and Amos Tversky, showed in the 1970s that we feel the pain of a loss more acutely than the pleasure of a gain and that this affects our financial decision making. The bias exists even among savvy subjects. Kahneman, who went on to win a Nobel Prize in Economics for those insights, offered his students a coin flip in which they can lose $10 or win a higher amount.

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There’s a reason that five of the seven worst months were bad ones for the market rather than good ones. Losing money hurts in two ways—financially and psychologically. The pain of a loss has been shown to be far worse than an equivalent monetary gain, a concept called prospect theory that won its cocreator, psychologist Daniel Kahneman, the Nobel Prize in Economics. Those brilliant experiments measured the loss or gain of an equivalent dollar amount. A far less brilliant insight, but one more relevant to what I’m about to discuss, can be gleaned from some arithmetic that you probably learned in fifth grade or thereabouts: that it takes an increasingly large percentage gain to make yourself whole the bigger your initial loss.

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Knowing what to do and even making a conscious decision to approach a certain situation such as a bear market differently the next time doesn’t mean you actually will. Some exceptionally bright people who understand investing foibles far better than I do still are prone to money mistakes, particularly near market extremes when most of the damage is done to our portfolios. Take Daniel Kahneman, the psychologist who won the Nobel Prize in Economics for his pioneering work in behavioral economics whom I’ve mentioned throughout this book. I was amused to read a recent interview with him about his own financial decisions. He said that even though he knows all about cognitive errors—heck, he discovered many of them—he continues to make those mistakes again and again with his own portfolio.

Narrative Economics: How Stories Go Viral and Drive Major Economic Events
by Robert J. Shiller
Published 14 Oct 2019

Schizophrenia is a serious mental illness that can manifest as a disorder of narrative, as it often involves hearing imaginary voices delivering a fantastic and jumbled narrative.22 Hearing voices as a symptom of schizophrenia is correlated with volume deficits in specific brain areas.23 The narrative disruption found in autism spectrum disorder also is related to brain anomalies.24 Framing, the Representativeness Heuristic, and the Affect Heuristic Narrative psychology also relates to the psychological concept of framing.25 If we can create an amusing story that will get retold, it can establish a point of view, a reference point, that will influence decisions. Framing is related to the Daniel Kahneman and Amos Tversky representativeness heuristic (1973), whereby people form their expectations based on some idealized story or model, judging these expectations based on the prominence of the idealized story rather than estimated probabilities. For example, we may judge the danger of an emerging economic crisis by its similarity to a remembered story of a previous crisis, rather than by any logic.

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“The Watchman: What Became of the Christian Intellectuals?” Harper’s Magazine, September, 54–60. Jevons, William Stanley. 1878. “Commercial Crises and Sun-Spots.” Nature 19:33–37. Johnson, Edgar H. 1910. “The Economics of Henry George’s ‘Progress and Poverty.’ ” Journal of Political Economy 18(9):714–35. Johnson, Eric J., and Amos Tversky. 1983. “Affect, Generalization, and the Perception of Risk.” Journal of Personality and Social Psychology 45(1):20–31. Johnson, Marcia K., and Mary Ann Foley. 1984. “Differentiating Fact from Fantasy: The Reliability of Children’s Memory.” Journal of Social Issues 40(2):33–50. Johnson, Marcia K., Shahin Hashtroudi, and D.

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“Short-Sale Constraints and Stock Returns.” Journal of Financial Economics 66(2–3):207–39. Jung, Carl. 1919. “Instinct and the Unconscious III.” British Journal of Psychology 10(1):15–23. Kahn, Richard F. 1931. “The Relation between Home Investment and Unemployment.” Economic Journal 41(162):173–98. Kahneman, Daniel, and Amos Tversky. 1973. “On the Psychology of Prediction.” Psychological Review 80(4):237–51. ________. 2000. Choices, Values and Frames. Cambridge: Cambridge University Press. Kasparov, Garry. 2017. Deep Thinking: Where Machine Intelligence Ends and Human Creativity Begins. New York: PublicAffairs. Katona, George. 1975.

Actionable Gamification: Beyond Points, Badges and Leaderboards
by Yu-Kai Chou
Published 13 Apr 2015

For the full rules of Texas Hold’em Poker, visit: http://www.yukaichou.com/PokerRules↩ Daniel Kahneman and Amos Tversky. Econometrica, 47:263-91.* “Prospect Theory: an analysis of decision under risk”. 1979.↩ Richard Thaler, and Cass Sunstein. Nudge: Improving Decisions about Health, Wealth, and Happiness. New Haven, CT: Yale University Press. 02/24/2009.↩ Gary Belsky and Thomas Gilovich. Why Smart People Make Big Money Mistakes - and How to Correct Them. Simon & Schuster, New York. 01/12/2010.↩ Daniel Kahneman. *Thinking, Fast and Slow.” P284. Farrar, Straus and Giroux. New York, NY. 2013.↩ An example would be the German billionaire Adolf Merckle who committed suicide after his wealth dropped from £8.5 billion to £6 billion.↩ Howard Leventhal, Robert Singer, and Susan Jones.

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“Focusing on the Forgone: How Value Can Appear So Different to Buyers and Sellers”. 2000.↩ Daniel Kahneman. *Thinking, Fast and Slow.” P297. Farrar, Straus and Giroux. New York, NY. 2013.↩ James Heyman, Yesim Orhun, and Dan Ariely. Journal of Interactive Marketing.”Auction Fever: The Effect of Opponents and Quasi-Endowment on Product Valuations”. 2004.↩ Daniel Kahneman. *Thinking, Fast and Slow.” P294. Farrar, Straus and Giroux. New York, NY. 2013.↩ John A. List, *Quarterly Journal of Economics 118. “Does Marketing Experience Eliminate Market Anomalies?”. P46-71. 2003.↩ Daniel Kahneman. *Thinking, Fast and Slow.” P339. Farrar, Straus and Giroux.

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It looks like this ingrained sense of Ownership & Possession, along with some added benefits of novelty (Core Drive 7: Unpredictability & Curiosity), made products like Pet Rocks, Tamagotchi, and later on Facebook games like Farmville or Pet Society4 such big successes worldwide. The Endowment Effect There is quite a bit of scientific research on how our psychology changes when we believe we own something. Much of it is summed up in what Academics call the Endowment Effect. In his book Thinking: Fast and Slow, Economics Nobel Prize Laureate Daniel Kahneman describes how a certain well-respected academic and wine lover becomes very reluctant to sell a bottle of wine from his collection for $100, but would also not pay more than $35 for a wine of similar quality. This made little economic sense because the same or similar wine should hold the same value in a person’s mind.

Mastermind: How to Think Like Sherlock Holmes
by Maria Konnikova
Published 3 Jan 2013

After you’ve made your ranking, take a look at two pairs of statements in particular: Bill plays jazz for a hobby and Bill is an accountant who plays jazz for a hobby, and Linda is a bank teller and Linda is a bank teller and is active in the feminist movement. Which of the two statements have you ranked as more likely in each pair? I am willing to bet that it was the second one in both cases. If it was, you’d be with the majority, and you would be making a big mistake. This exercise was taken verbatim from a 1983 paper by Amos Tversky and Daniel Kahneman, to illustrate our present point: when it comes to separating crucial details from incidental ones, we often don’t fare particularly well. When the researchers’ subjects were presented with these lists, they repeatedly made the same judgment that I’ve just predicted you would make: that it was more likely that Bill was an accountant who plays jazz for a hobby than it was that he plays jazz for a hobby, and that it was more likely that Linda was a feminist bank teller than that she was a bank teller at all.

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The trick is to duplicate that same process, to let your brain study and learn and make effortless what was once effortful, in something that lacks the discrete nature of a cognitive task like the sentence verification, in something that is so basic that we do it constantly, without giving it much thought or attention: the task of looking and thinking. Daniel Kahneman argues repeatedly that System 1—our Watson system—is hard to train. It likes what it likes, it trusts what it trusts, and that’s that. His solution? Make System 2—Holmes—do the work by taking System 1 forcibly out of the equation. For instance, use a checklist of characteristics when hiring a candidate for a job instead of relying on your impression, an impression that, as you’ll recall, is formed within the first five minutes or less of meeting someone.

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Chapter Three: Stocking the Brain Attic The seminal work on the brain’s default network, resting state, and intrinsic natural activity and attentional disposition was conducted by Marcus Raichle. For a discussion of attention, inattentional blindness, and how our senses can lead us astray, I recommend Christopher Chabris and Daniel Simon’s The Invisible Gorilla. For an in-depth look at the brain’s inbuilt cognitive biases, Daniel Kahneman’s Thinking, Fast and Slow. The correctional model of observation is taken from the work of Daniel Gilbert. Chapter Four: Exploring the Brain Attic For an overview of the nature of creativity, imagination, and insight, I recommend the work of Mihaly Csikszentmihalyi, including his books Creativity: Flow and the Psychology of Discovery and Invention and Flow: The Psychology of Optimal Experience.

Singularity Rising: Surviving and Thriving in a Smarter, Richer, and More Dangerous World
by James D. Miller
Published 14 Jun 2012

Aron, Jonathan Dowson, and Barbara J. Sahakian. 2003. “Cognitive Enhancing Effects of Modafinil in Healthy Volunteers.” Psychopharmacology 165 (3): 260—69. doi:10.1007/s00213-002-1250-8. Tversky, Amos, and Daniel Kahneman. 1982. “Judgments Of and By Representativeness.” In Judgment under Uncertainty: Heuristics and Biases, edited by Daniel Kahneman, Paul Slovic, and Amos Tversky. New York: Cambridge University Press. Tversky, Amos, and Daniel Kahneman. 1983. “Extensional Versus Intuitive Reasoning: The Conjunction Fallacy in Probability Judgment. Psychological Review 90 (4): 293—315. Ulam, Stanislaw. 1958. “John von Neumann: 1903—1957.”

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The community recognizes the danger of cognitive biases, and through the blog Less Wrong, many members of it study how to overcome them. It’s certainly possible, however, that the community hasn’t overcome enough of its innate biases to make our predictions trustworthy. For futurists, one of the most dangerous cognitive biases was uncovered by Daniel Kahneman, winner of a Nobel Prize in economics. Kahneman conducted an experiment in which he told his test subjects to imagine that: Linda is 31 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.342 The subjects were then asked to rank a set of statements by the likelihood of their being true.

Liars and Outliers: How Security Holds Society Together
by Bruce Schneier
Published 14 Feb 2012

better model Rolf Kümmerli, Caroline Colliard, Nicolas Fiechter, Blaise Petitpierre, Flavien Russier, and Laurent Keller (2007), “Human Cooperation in Social Dilemmas: Comparing the Snowdrift Game with the Prisoner's Dilemma,” Proceedings of the Royal Society B: Biological Sciences, 274:2965–70. Prospect Theory Daniel Kahneman and Amos Tversky (1979), “Prospect Theory: An Analysis of Decision under Risk,” Econometrica, 47:263–92. systems of regulation Susan Jane Buck Cox (1985), “No Tragedy on the Commons,” Environmental Ethics, 7:49–62. superrationality Douglas Hofstadter (1985), Metamagical Themas, Bantam Dell Publishing Group.

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Goldstein and Gerd Gigerenzer (2002), “Models of Ecological Rationality: The Recognition Heuristic,” Psychological Review, 109:75–90. There's social proof Herbert C. Kelman (1958), “Compliance, Identification, and Internalization: Three Processes of Attitude Change,” Journal of Conflict Resolution, 2:51–60. attribute substitution Daniel Kahneman and Shane Frederick (2002), “Representativeness Revisited: Attribute Substitution in Intuitive Judgment,” in Thomas Gilovich, Dale Griffin, and Daniel Kahneman, eds., Heuristics and Biases: The Psychology of Intuitive Judgment, Cambridge University Press, 49–81. a lemons market George Akerlof (1970), “The Market for Lemons: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics, 83:488–500.

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He wants to do a stereotypically male thing on Saturday night. She wants to do a stereotypically female thing. The dilemma comes from the fact that each would rather do either of the two things with the other than do the stereotypical thing alone. (6) In behavioral economics,Prospect Theory has tried to capture these complexities. Daniel Kahneman is the only psychologist to ever win a Nobel Prize, and he won it in economics. (7) Many of the criticisms of Hardin's original paper on the Tragedy of the Commons pointed out that, in the real world,systems of regulation were commonly established by users of commons. (8) Douglas Hofstadter calls this “superrationality.”

Drive: The Surprising Truth About What Motivates Us
by Daniel H. Pink
Published 1 Jan 2008

In 2002, the Nobel Foundation awarded its prize in economics to a guy who wasn't even an economist. And they gave him the field's highest honor largely for revealing that we weren't always rational calculators of our economic self-interest and that the parties often didn't bargain to a wealth-maximizing result. Daniel Kahneman, an American psychologist who won the Nobel Prize in economics that year for work he'd done with Israeli Amos Tversky, helped force a change in how we think about what we do. And one of the implications of this new way of thinking is that it calls into question many of the assumptions of Motivation 2.0. Kahneman and others in the field of behavioral economics agreed with my professor that economics was the study of human economic behavior.

Beautiful Data: The Stories Behind Elegant Data Solutions
by Toby Segaran and Jeff Hammerbacher
Published 1 Jul 2009

In addition, this combination of choices does not maximize payoff: if we thought purely opportunistically about gains and losses, we’d pick B and C, for a total expected utility of $1,000 instead of –$1,000 (that is, we’d be up $2,000 compared with A+D). This experiment, first conducted by Daniel Kahneman and Amos Tversky in the 1970s, reveals that we don’t always think probabilistically: instead, we imagine the emotional outcomes associated with each single outcome. In fact, in a number of important ways, we don’t treat data as we assume we do. When Doesn’t Data Drive? The first section pointed out a couple of cognitive biases in the analysis of data.

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Iyengar, S. S. and M. R. Lepper. “When choice is demotivating: can one desire too much of a good thing?” Journal of Personality and Social Psychology, 2000, vol. 79, no. 6, 995–1006. Jeng, M. “A selected history of expectation bias in physics.” American Journal of Physics, 2006. Kahneman, Daniel and Amos Tversky (1979). “Prospect Theory: An Analysis of Decision under Risk,” Econometrica, XLVII (1979), 263–291. Krumme, C. “Telling tales: the effects of narrative creation on decision-making with data,” working paper. Lo, A. W. and D. V. Repin. “The Psychophysiology of Real-Time Financial Risk Processing” Journal of Cognitive Neuroscience, April 1, 2002, vol. 14, no. 3, 323–339.

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Given a positive diagnosis, the chances that you are in fact HIV-positive are 990/9,990, or 9.9%.) Doctors, at least apocryphally, fail in droves. In many situations, priors don’t disappear. When using data to answer a question, we don’t know what evidence to exclude and how to weight what we include. Daniel Kahneman— an indefatigable namer-of-concepts—names this one the “base rate fallacy.” 7. Probabilities Aren’t Intuitive Not only is probability theory difficult to grasp, individual probabilities are fleeting. In the absence of a causal explanation to tie an event to a set of outcomes, individuals rely on past observations to estimate probabilities.

Trend Following: How Great Traders Make Millions in Up or Down Markets
by Michael W. Covel
Published 19 Mar 2007

Opponents hit .364 off Pedro this year after his 105th pitch—even Tony Clark could hit Pedro in the late innings.”26 The late, great Stephen Jay Gould, a numbers man (and lifelong baseball fan), offered some insight into the decision-making process that might have left Martinez in the game: “Everybody knows about hot hands. The only problem is that no such phenomenon exists. The Stanford psychologist Amos Tversky studied every basket made by the Philadelphia 76ers for more than a season. He found, first of all, that probabilities of making a second basket did not rise following a successful shot. Moreover, the number of ‘runs,’ or baskets in succession, was no greater than what a standard random, or coin-tossing, model would predict.

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The Right Kind of Failure. Harvard Management Update. Gigerenzer, Gerd and Peter M. Todd. Simple Heuristics That Make Us Smart. Oxford: Oxford University Press, 1999. 425 426 Trend Following (Updated Edition): Learn to Make Millions in Up or Down Markets Gilovich, Thomas, Robert Valone, and Amos Tversky. The Hot Hand in Basketball: On the Misperception of Random Sequences. Cognitive Psychology, 17 (1985): 295–314. Ginyard, Johan. Position-Sizing Effects on Trader Performance: An Experimental Analysis. Uppsala University, Department of Psychology, 2001. Goldbaum, David. Technical Analysis, Price Trends, and Bubbles.

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For example, seventeenth century speculators in the Netherlands drove up the prices of tulip bulbs to absurd levels. The inevitable crash followed. Since then, from the Great Depression to the dotcom implosion to October and November 2008, people can’t seem to steer clear from manias. They repeatedly make the same mistakes. Daniel Kahneman, a Princeton professor who was the first psychologist to win the Nobel Prize in Economics, attributed market manias to investors’ “illusion of control,” calling the illusion “prospect theory.” He studied the intellectual underpinnings of investing—how traders estimate odds and calculate risks—to prove 195 Chapter 6 • Human Behavior how often we act from the mistaken belief that we know more than we do.

Range: Why Generalists Triumph in a Specialized World
by David Epstein
Published 1 Mar 2019

In a wicked world, relying upon experience from a single domain is not only limiting, it can be disastrous. * * * • • • The trouble with using no more than a single analogy, particularly one from a very similar situation, is that it does not help battle the natural impulse to employ the “inside view,” a term coined by psychologists Daniel Kahneman and Amos Tversky. We take the inside view when we make judgments based narrowly on the details of a particular project that are right in front of us. Kahneman had a personal experience with the dangers of the inside view when he assembled a team to write a high school curriculum on the science of decision making.

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When he studied nonwartime naval commanders who were trying to avoid disasters, like mistaking a commercial flight for an enemy and shooting it down, he saw that they very quickly discerned potential threats. Ninety-five percent of the time, the commanders recognized a common pattern and chose a common course of action that was the first to come to mind. One of Klein’s colleagues, psychologist Daniel Kahneman, studied human decision making from the “heuristics and biases” model of human judgment. His findings could hardly have been more different from Klein’s. When Kahneman probed the judgments of highly trained experts, he often found that experience had not helped at all. Even worse, it frequently bred confidence but not skill.

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Rose framed it more colloquially: “If you are conscientious and neurotic while driving today, it’s a pretty safe bet you will be conscientious and neurotic while driving tomorrow. At the same time . . . you may not be conscientious and neurotic when you are playing Beatles cover songs with your band in the context of the local pub.” Perhaps that is one reason Daniel Kahneman and his colleagues in the military (chapter 1) failed to predict who would be a leader in battle based on who had been a leader in an obstacle course exercise. When I was a college runner, I had teammates whose drive and determination seemed almost boundless on the track, and nearly absent in the classroom, and vice versa.

The Journey of Humanity: The Origins of Wealth and Inequality
by Oded Galor
Published 22 Mar 2022

The fact that these second-generation migrants are affected by their ancestral geographic environments suggests that these attitudes towards gender roles have been transmitted intergenerationally, and that this historical legacy endures even when families migrate to places with different institutions and education systems (although, as noted earlier, views on women entering the workforce tend to converge more rapidly with those of the dominant culture than other cultural traits).[36] Loss Aversion The Nobel Prize laureate Daniel Kahneman and cognitive psychologist Amos Tversky uncovered a common tendency among humans to attach greater weight to a loss than to a gain of equal or comparable size.[37] ‘Loss aversion’, as they term it, is an important determinant of the level of entrepreneurial activity in a population, which is in turn a significant factor in the driving of economic growth in the modern world.

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Forbis, Brian Hayden, Tim Ingold, Stephen M. Perlman, David L. Pokotylo, Peter Rowley-Conwy and David E. Stuart, ‘The Significance of Food Storage among Hunter-Gatherers: Residence Patterns, Population Densities, and Social Inequalities’, Current Anthropology 23, no. 5 (1982): 523–37. Tversky, Amos, and Daniel Kahneman, ‘Loss Aversion in Riskless Choice: A Reference-Dependent Model’, The Quarterly Journal of Economics 106, no. 4 (1991): 1039–61. United Nations, World Population Prospects, 2017. United Nations, Human Development Report, 2018. United States Bureau of the Census, and United States, Congress House, Historical Statistics of the United States, Colonial Times to 1970, no. 93, US Department of Commerce, Bureau of the Census, 1975.

Blitzscaling: The Lightning-Fast Path to Building Massively Valuable Companies
by Reid Hoffman and Chris Yeh
Published 14 Apr 2018

That includes anything from a stock market crash or outlandish expenses to an opportunity you couldn’t predict in a market that didn’t exist when you started out. The fact is, most entrepreneurs are far more likely to raise too little rather than too much money. Nobel Prize–winning economist Daniel Kahneman and his longtime collaborator, the late Amos Tversky, described this general phenomenon when they wrote about the “planning fallacy” in their 1979 paper “Intuitive Prediction: Biases and Corrective Procedures.” The planning fallacy is that you make a plan, which is usually a best-case scenario. Then you assume that the outcome will follow your plan, even when you should know better.

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Thanks also to those who made a cameo on those episodes, including Umber Ahmad, Dominique Ansel, Greg Baldwin, Alexa Christon, Paulette Mae Cole, Chris Costa, Lisa Curtis, Susan Danziger, Angela Duckworth, Kara Goldin, Natasha Hastings, Margaret Heffernan, Drew Houston, Joi Ito, Leila Janah, Daniel Kahneman, Cheryl Kellond, Dara Khosrowshahi, Josh Kopelman, Omid Kordestani, Michelle Lee, Tim Lefler, Kristen Marhaver, Kathryn Minshew, Andrew Ng, Aubrie Pagano, Hadi Partovi, Robert Pasin, Juliana Rotich, Andrés Ruzo, Dick Stockton, Tony Tjan, Yossi Vardi, and Darryl Woodson. The authors of the Silicon Guild provided valuable feedback on earlier drafts, including Peter Sims, Jennifer Aaker, Nancy Duarte, Morten Hansen, Frans Johansson, Charlene Li, Tina Seelig, Chris Shipley, Anne-Marie Slaughter, and Caroline Webb.

Bootstrapped: Liberating Ourselves From the American Dream
by Alissa Quart
Published 14 Mar 2023

Before many of the steel plants started to shut down, said Kemper, these men “sat high, the head of your table, the family member who makes all this fucking money.” Scholars have called this a state of “loss aversion.” Studies by cognitive psychologists, including landmark scholarship in 1992 by Amos Tversky and Daniel Kahneman, have found that losing—money, status, or anything of value—is twice as powerful as the joy resulting from gaining something beneficial. This creates a bias against loss. And that fear of disappearance explains why some choose to avoid losing ground over making gains and why Trump supporters who earned an average of $72,000 a year in 2016—a middle-class income—still had a fear of evaporating social status.

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A society as individualistic and economically punishing as our own can degrade people psychologically, so after I spoke to Glantz, I started to look at other studies that explained some of how these depredations worked. One was a 2020 analysis of US adults ages thirty and over, where J. M. Twenge and A. B. Cooper looked at the correlation between income and happiness over a forty-four-year period and found that the relationship only intensified over time. (A previous well-known 2010 study by Daniel Kahneman and Angus Deaton demonstrated that, for Americans, higher salaries were associated with increases in day-to-day satisfaction, with well-being tapering off at an income of about $75,000.) In another article, “Income Inequality and Depression,” the authors, led by Vikram Patel of the Department of Global Health and Social Medicine at Harvard Medical School, conclude that “nearly two-thirds of all studies and five out of six longitudinal studies reported a statistically significant positive relationship between income inequality and risk of depression.”

Chaos Kings: How Wall Street Traders Make Billions in the New Age of Crisis
by Scott Patterson
Published 5 Jun 2023

After the lecture, the chairman of the conference told the audience there’d be no questions for the speaker. Taleb, walking away from the podium, looked around nervously, half-fearing the organizers might toss him from the building. Then the next speaker took the podium. It was Daniel Kahneman, a Princeton University psychologist who the previous year had won the Nobel Memorial Prize in Economic Sciences for his groundbreaking work, with Amos Tversky, showing a variety of curious biases in human decision-making under uncertainty. Kahneman’s work ran counter to the long-standing assumption in economics, going back to Adam Smith, that humans are rational decision-makers driven by self-interest.

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The maverick French mathematician and inventor of fractal geometry The Mandelbrot lecture is based on a similar lecture he gave at MIT around the same time. According to Taleb, it is the same lecture he delivered at Courant. https://www.youtube.com/watch?v=ock9Gk_aqw4. Then the next speaker took the podium “Daniel Kahneman Changed the Way We Think About Thinking. But What Do Other Thinkers Think of Him?,” Guardian, February 16, 2014, https://www.theguardian.com/science/2014/feb/16/daniel-kahneman-thinking-fast-and-slow-tributes. Taleb had gotten a real-world look at a looming Black Swan Alex Berenson, “Fannie Mae’s Loss Risk Is Larger, Computers Show,” New York Times, August 7, 2003, https://www.nytimes.com/2003/08/07/business/fannie-mae-s-loss-risk-is-larger-computer-models-show.html.

Machine, Platform, Crowd: Harnessing Our Digital Future
by Andrew McAfee and Erik Brynjolfsson
Published 26 Jun 2017

But almost all of us also believe that we’re capable of delivering a great deal more than digital technologies can, even as they continue to profit from Moore’s law—the remarkably steady, remarkably fast growth over time in the amount of computing hardware available for the same dollar of spending—and become exponentially more powerful. Decades of research confirm the idea that we do, in fact, reason in two different ways. This groundbreaking work resulted in a Nobel prize for Daniel Kahneman who, alongside collaborator Amos Tversky, pioneered the field that has come to be called behavioral economics.§ The work of Kahneman and his colleagues showed that we all have two modes of thinking, which he labeled System 1 and System 2.¶ System 1 is fast, automatic, evolutionarily ancient, and requires little effort; it’s closely associated with what we call intuition.

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Every company I talked to had middle and even senior managers who operated as player-coaches, tasked with both doing things and directing others.” We see the same phenomenon. We also see that after at least two decades, the standard division between mind and machine is giving way to something quite different. Second-machine-age companies are combining modern technologies with a better understanding of Daniel Kahneman’s System 1 and System 2 (discussed in Chapter 2), and of human abilities and biases, to change how they make and evaluate decisions, how they generate and refine new ideas, and how they move forward in a highly uncertain world. While new marketplaces are emerging and thriving, we see no evidence in the economic data to indicate that companies are becoming passé, or are going to be wholly replaced by any variety of technology-enabled distributed autonomous organizations.

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. ** The title of their article intentionally echoed Oliver Williamson’s widely cited book Markets and Hierarchies, which built heavily on Coase’s insights. Oliver E. Williamson, Markets and Hierarchies, Analysis and Antitrust Implications: A Study in the Economics of Internal Organization (New York: Free Press, 1975). †† Like Daniel Kahneman, Ostrom was awarded the prize despite not being an economist. ‡‡ Within certain limits of law and morality. §§ Oliver Hart and John Moore, “Property Rights and the Nature of the Firm,” Journal of Political Economy 98, no. 6 (1990): 1119–58. ¶¶ For example, Oliver Hart and Bengt Holmstrom, The Theory of Contracts, MIT Department of Economics Working Paper 418 (March 1986), https://dspace.mit.edu/bitstream/handle/1721.1/64265/theoryofcontract00hart.pdf%3Bjsessionid%3DD2F89D14123801EBB5A616B328AB8CFC?

On the Edge: The Art of Risking Everything
by Nate Silver
Published 12 Aug 2024

Rose McDermott has had what she calls an “existential” interest in national security ever since she can remember; she grew up in Hawaii and her father served on one of the ships attacked at Pearl Harbor. But McDermott, who now works at Brown University, took an academic route, opting for a political science PhD at Stanford where she studied under the legendary cognitive psychologist Amos Tversky. Tversky and his collaborator Daniel Kahneman were the most influential figures in establishing the field of decision science, which brings a mix of psychology and economics to bear on the seeming irrationalities of human behavior, such as why people are often exceedingly risk-averse when faced with the prospect of losing something they already have.[*19] Decision science follows a classically Riverian mindset—spot the flaws in the conventional way of thinking and potentially even exploit them to make a little profit for yourself.[*20] But although McDermott described Tversky as the “smartest person I’ve ever met in my life,” something about his theories didn’t ring true to her upbringing in a security-minded household and her training in evolutionary psychology, essentially the study of why certain behavioral traits become more prevalent in the human gene line.

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Prop bet: A sports bet on anything other than the winner of the game, the margin of victory, or the total number of points—such as which team will kick the first field goal or the length of the national anthem in the Super Bowl. Degens also take pride in making ridiculous prop bets against one another, like whether one tennis player can win a match against a less skilled one using a frying pan rather than a racket. Prospect theory: An empirical tendency first described by Daniel Kahneman and Amos Tversky for people to be risk-averse when faced with the loss of something they already have. For instance, they might prefer a guaranteed $300 to a coin flip where they either win $1,000 or lose $100, even though the coin flip has a higher EV. Provenance: The prestige, origin, and chain of custody of an object; collectibles like NFTs with well-established provenance are more valuable because they’re more irreplaceable and less likely to be fakes.

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These words were music to my ears as someone who spends the better part of every election cycle tearing my hair out (what I have left of it) to get people in the Village to think more probabilistically. But I was particularly interested in how Duke phrased her remark: that this is something players feel in their bones rather than consciously trying to work out the probabilities. In our conversation, Duke invoked the work of her friend, the late Nobel Prize–winning economist Daniel Kahneman. In his book Thinking, Fast and Slow, Kahneman posited a distinction between “fast” System 1 thinking, where we act intuitively with little or no conscious effort, and “slow” System 2 thinking, where we go through a deliberate, structured thought process: System 1 tasks System 2 tasks Reacting when a dog jumps in front of your car Planning a driving route to Grandma’s house Walking down Fifth Avenue while checking your phone Conducting a cost-benefit analysis on closing Fifth Avenue to single-passenger automobile traffic Determining if someone is flirting with you Negotiating a prenuptial agreement Identifying when an object looks out of place in a room you’re familiar with Working with an interior decorator to design a living room on a budget Estimating the number of people in a small group Estimating the attendance in a large sports stadium Given the mathematical complexities of the game, you might expect poker to fall into System 2.

The Penguin and the Leviathan: How Cooperation Triumphs Over Self-Interest
by Yochai Benkler
Published 8 Aug 2011

Framing, quite simply, refers to our interpretation of a situation, relationship, context, or event. Anytime we make a decision to act, we have to first interpret the situation we’re in. Even economists have grudgingly admitted this; behavioral economics describes it as the framing effect. Amos Tversky and Daniel Kahneman, the fathers of behavioral economics, explain that people will make different decisions depending on how a situation is presented. For example, when making a bet, people will risk different amounts depending on whether the bet is described as risking a loss or aiming for a gain (behavioral economists have found that people display what is often called “loss aversion”: they will reject bets framed as potential losses, but accept that same bet when it is framed as potential gains).

The Road to Ruin: The Global Elites' Secret Plan for the Next Financial Crisis
by James Rickards
Published 15 Nov 2016

But that belief does not withstand scrutiny outside the faculty lounge. Human behavior is not rational in the ways economists need it to be for their apparatus to work. Modern human irrationality (really rational if considered in an Ice Age context) has been demonstrated by sociologists Daniel Kahneman, Amos Tversky, Dan Ariely, and others over the past thirty years. People do not save enough. They buy on impulse. They react fearfully or exuberantly at different market stages. As a result, the theory of rational expectations is in shreds. Still, central bankers give the theory credence in their policy deliberations.

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All three tools seem more inexact in their predictive power than current models used by central banks. Yet they offer a far better reflection of reality. It is better to be roughly right than exactly wrong. Behavioral psychology is understood and embraced by economists. The leading theorist in behavioral psychology, Daniel Kahneman, received the Nobel Prize in economics in 2002. The impediment to the use of psychology in economics is not appreciation, it’s application. Finance models such as VaR are still based on rational behavior and efficient markets, long after Kahneman and his colleagues proved that human behavior in markets is irrational and inefficient (as economists define these terms).

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Busch, “Close-Up: Lord Keynes,” Life, September 17, 1945, accessed August 7, 2016, https://books.google.com/books?id=t0kEAAAAMBAJ&q=%22a+cable%22&hl=en#v=snippet&q=%22a%20cable%22&f=false. For example, Kahneman’s experiments show: This example illustrates a cognitive bias Kahneman called “risk aversion.” See Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Straus and Giroux, 2011), 434–36. CHAPTER 1: THIS IS THE END “Nice, nice, very nice”: Kurt Vonnegut, Cat’s Cradle (New York: Dial Press, 2010), 3. Under Larry Fink’s direction, BlackRock emerged: Some descriptions of Larry Fink’s management style and work habits in this material are from Carol J.

Phishing for Phools: The Economics of Manipulation and Deception
by George A. Akerlof , Robert J. Shiller and Stanley B Resor Professor Of Economics Robert J Shiller
Published 21 Sep 2015

See “Predictions of the Year 2000 from The Ladies Home Journal of December 1900,” accessed December 1, 2014, http://yorktownhistory.org/wp-content/archives/homepages/1900_predictions.htm, for confirmation that the issue was for December. 11. Oxford English Dictionary, s.v. “phish,” accessed October 29, 2014, http://www.oed.com/view/Entry/264319?redirectedFrom=phish#eid. 12. It is no coincidence that early research of Daniel Kahneman and Amos Tversky, who were pioneers in the modern field of cognitive psychology, concerned optical illusion. Kahneman has told George that the distortions in thinking that underlie the field of behavioral economics can be seen as being like “optical illusion.” (Private conversation, some twenty-five years ago.) 13.

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But, above all, the examples we shall explore will have grave implications for social policy, including the role of government as a complement rather than a hindrance to free markets—since, just as our computers need protection against malware, so too we need protection against phishing for phools more broadly defined. INTRODUCTION Expect to Be Manipulated: Phishing Equilibrium The psychologists have taught us over the course of more than a century—in voices ranging in style and content from Sigmund Freud to Daniel Kahneman—that people frequently make decisions that are not in their best interest. Put bluntly, they do not do what is really good for them; they do not choose what they really want. Such bad decisions make it possible for them to be phished for phools. This truth is so basic that it is critical to the first story of the Bible, where the serpent beguiles innocent Eve to make a phoolish decision that she will instantly, and forever, regret.1 The fundamental concept of economics is quite different: it is the notion of market equilibrium.2 For our explanation, we adapt the example of the checkout lane at the supermarket.3 When we arrive at the checkout at the supermarket, it usually takes at least a moment to decide which line to choose.

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And for six weeks in May and June 2015, Madeleine Adams was the copy editor; almost everywhere, she added elegance and grace to the manuscript we had given her. The ideas in this book are a collage of what we have learned, and what we have listened to, over the course of our lives as economists. In this regard we owe special thanks to four others. Daniel Kahneman, yes that one, some twenty-five or thirty years ago, told us that the distinctive feature of psychology is that it views people as imperfect machines. The job of the psychologist, he said, was to figure out how and when those machines would be dysfunctional. In contrast, the basic concept of economics is equilibrium.

Human Compatible: Artificial Intelligence and the Problem of Control
by Stuart Russell
Published 7 Oct 2019

For an introduction to non-quantitative decision analysis, see Michael Wellman, “Fundamental concepts of qualitative probabilistic networks,” Artificial Intelligence 44 (1990): 257–303. 21. I will discuss the evidence for human irrationality further in Chapter 9. The standard references include the following: Allais, “Le comportement”; Daniel Ellsberg, Risk, Ambiguity, and Decision (PhD thesis, Harvard University, 1962); Amos Tversky and Daniel Kahneman, “Judgment under uncertainty: Heuristics and biases,” Science 185 (1974): 1124–31. 22. It should be clear that this is a thought experiment that cannot be realized in practice. Choices about different futures are never presented in full detail, and humans never have the luxury of minutely examining and savoring those futures before choosing.

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Thus, Robbie cannot assume that Harriet’s actions reflect accurate knowledge of her own preferences: some may be thoroughly grounded in experience, while others may be based primarily on supposition, prejudice, fear of the unknown, or weakly supported generalizations.42 A suitably tactful Robbie could be very helpful to Harriet in alerting her to such situations. Experience and memory Some psychologists have called into question the very notion that there is one self whose preferences are sovereign in the way that Harsanyi’s principle of preference autonomy suggests. Most prominent among these psychologists is my former Berkeley colleague Daniel Kahneman. Kahneman, who won the 2002 Nobel Prize for his work in behavioral economics, is one of the most influential thinkers on the topic of human preferences. His recent book, Thinking, Fast and Slow,43 recounts in some detail a series of experiments that convinced him that there are two selves—the experiencing self and the remembering self—whose preferences are in conflict.

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David Sirkin et al. (IEEE, 2019). 42. Eliezer Yudkowsky, in Coherent Extrapolated Volition (Singularity Institute, 2004), lumps all these aspects, as well as plain inconsistency, under the heading of muddle—a term that has not, unfortunately, caught on. 43. On the two selves who evaluate experiences: Daniel Kahneman, Thinking, Fast and Slow (Farrar, Straus & Giroux, 2011). 44. Edgeworth’s hedonimeter, an imaginary device for measuring happiness moment to moment: Francis Edgeworth, Mathematical Psychics: An Essay on the Application of Mathematics to the Moral Sciences (Kegan Paul, 1881). 45. A standard text on sequential decisions under uncertainty: Martin Puterman, Markov Decision Processes: Discrete Stochastic Dynamic Programming (Wiley, 1994). 46.

Why Startups Fail: A New Roadmap for Entrepreneurial Success
by Tom Eisenmann
Published 29 Mar 2021

A propensity to “double down,” increasing one’s commitment in the wake of a bad outcome, is also consistent with the core tenet of prospect theory: that individuals tend to be risk averse in the domain of gains (i.e., when they’ve experienced good outcomes and have a lot to lose if a bet goes badly) and risk seeking in the domain of losses, as shown in Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision under Risk,” Econometrica 47, no. 2 (1979): 263–292. Likewise, escalation of commitment is broadly consistent with a threat-rigidity response: a tendency by individuals or organizations, when under duress, to revert to a familiar strategy rather than search for a new one, as described in Barry Staw, Lance Sandelands, and Jane Dutton, “Threat-Rigidity Effects in Organizational Behavior: A Multilevel Analysis,” Administrative Science Quarterly 26, no. 4 (1981): 501–524.

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Under the pressure of bet-the-company decisions, your gut will be wracked by strong emotions—and that can obscure the right move. Sleep on these decisions—maybe for two nights. Then, write up your analysis of options and trade-offs, and share it with team members and investors. I truly believe that with crucial choices, what Nobel Prize–winning economist Daniel Kahneman calls “slow thinking” will boost your odds of survival. The fact that you’ve already committed to an entrepreneurial path, knowing full well that your odds of failure are high, suggests to me that you’ve come to terms with that possibility. You’re likely aware that while failure may be painful, the entrepreneurial path is, for many people, an irresistible draw—a career calling.

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“What I have learned”: Eisenmann and Ma, “Baroo (B).” Shai Agassi founded: “Agassi Turns Environment Friendly Focus to Mass Transport,” Haaretz, Aug. 7, 2014. Letter to a First-Time Founder Y Combinator’s Paul Graham says: Graham, “Startup = Growth.” I truly believe: Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Strauss and Giroux, 2011). So, I wrote: Alumni founders’ responses are presented in Tom Eisenmann, “No Regrets (Mostly): Reflections from HBS MBA ’99 Entrepreneurs,” Launching Technology Ventures course blog, Mar. 28, 2011. Appendix: Early-Stage Startup Survey My multivariate analysis employs: My multinomial logistic regression model exhibits good fit with N = 470; chi square difference for likelihood ratio test of model fit = 198.1, with 92 degrees of freedom and significance level = .000; and Cox & Snell pseudo R-square = .344.

What Patients Say, What Doctors Hear
by Danielle Ofri
Published 1 Feb 2017

When searching for a doctor, most patients still use word-of-mouth recommendations.1 There is a plethora of doctor rating sites, as well as the many “quality measures” that are published online, but most people have trouble making sense of this jumble of information. This is partly because the data are disjointed. But mainly this is because most of us don’t make decisions based on rational facts. Decades of research by psychologists Daniel Kahneman and Amos Tversky has shown that humans do not act in the rational way that logic would suggest.2 Patients may in fact research their prospective doctors’ board certifications or mortality rates or blood-pressure control rates, but they don’t necessarily use these numbers in choosing a doctor.3 They tend to go with a doctor whom they feel they can trust.

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The names of the patients in this book have been changed to protect their identities, with the exception of Morgan Amanda Fritzlen and Tracey Pratt, who consented to have their real names used. Non-patient names are real. CHAPTER 2: FROM BOTH SIDES NOW 1. H. T. Tu and J. R. Lauer, “Word of Mouth and Physician Referrals Still Drive Health Care Provider Choice,” Research Briefs 9 (2008): 1–8. 2. Research of Kahneman and Tversky summarized in Daniel Kahneman, Thinking Fast and Slow (New York: Farrar, Straus and Giroux, 2011). 3. A. Victoor et al., “Determinants of Patient Choice of Healthcare Providers: A Scoping Review,” BMC Health Services Research 12 (2012): 272–88; K. M. Harris et al., “How Do Patients Choose Physicians? Evidence from a National Survey of Enrollees in Employment-Related Health Plans,” Health Services Research 38 (2003): 711–32. 4.

Finance and the Good Society
by Robert J. Shiller
Published 1 Jan 2012

Certainly it is that, but it is unique among entertainment forms in that it cultivates and ampli es to a considerable extent human risk-taking impulses, sometimes with disastrous consequences. The puzzle comes down to why one would be willing to place even one single bet at a casino. Research by psychologists Daniel Kahneman and Amos Tversky has shown that people exhibit a tendency toward loss aversion.1 They are pathologically avoidant of even small losses. If o ered an asymmetrical bet on a coin toss—to win $20 if it comes up heads, to lose $10 if it comes up tails—most people will turn down the bet, even though it has a positive expected return of $5.

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Joseph, Jane E., Xun Liu, Yang Jiang, Donald Lynam, and Thomas H. Kelly. 2008. “Neural Correlates of Emotional Reactivity in Sensation Seeking.” Psychological Science 20(2):215–23. Jung, Jeeman, and Robert J. Shiller. 2005. “A Simple Test of Samuelson’s Dictum for the Stock Market.” Economic Inquiry 43(2):263–92. Kahneman, Daniel, and Amos Tversky. 1979. “Prospect Theory: An Analysis of Decision under Risk.” Econometrica 47(2):263–92. Kamstra, Mark, and Robert J. Shiller. 2010. “Trills Instead of T-Bills: It’s Time to Replace Part of Government Debt with Shares in GDP.” The Economists’ Voice 7(3), Article 5, http://www.bepress.com/ev/vol7/iss3/art5.

Buyology
by Martin Lindstrom
Published 14 Jul 2008

Athletes believe in the supernatural powers of “hot” streaks, too—those times when they just can’t seem to miss a single pitch, shot, goal, or basket. When a player shoots a string of good shots in a game, it’s generally believed he has the “hot hand.” The team then conspires to get him the ball because they believe he’s on some kind of roll. In 1985, two future Nobel Prize–winning economists, Daniel Kahneman and Amos Tversky, unsettled basketball fans across the United States when they disproved this myth, well known to both players and fans. To test whether or not these “hot streaks” actually exist, Kahneman and Tversky examined the statistics for a number of teams from 1980 to 1982. When they analyzed the Boston Celtics’ free-throw 08/08/2009 10:45 38 of 83 file:///D:/000004/Buy__ology.html ratio, they discovered that if a player made his first shot, he made the second shot 75 percent of the time.

The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality
by Brink Lindsey
Published 12 Oct 2017

Smith, and Abigail Wozniak, “Internal Migration in the United States,” Journal of Economic Perspectives 25, no. 3 (Summer 2011): 173–96. 27.Scott Winship, “When Moving Matters: Residential and Economic Mobility Trends in America, 1880–2010,” Manhattan Institute e21 Report no. 2, November 2015, https://www.manhattan-institute.org/html/when-moving-matters-residential-and-economic-mobility-trends-america-1880-2010-8048.html. 28.Matthew Rognlie, “Deciphering the Fall and Rise of the Net Capital Share,” Brookings Papers on Economic Activity (Spring 2015): 1–54, https://scholar.harvard.edu/files/shoag/files/why_has_regional_income_convergence_in_the_us_declined_01.pdf. Chapter 7 1.Mancur Olson, The Logic of Collective Action (Cambridge, MA: Harvard University Press, 1965). 2.On the psychological basis of risk aversion, see Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision under Risk,” Econometrica 47, no. 2 (March 1979): 263–92; on the impact of government policy on the growth of supportive interests, see Beth Leech, Frank Baumgartner, Timothy LaPira, and Nicholas Semanko, “Drawing Lobbyists to Washington: Government Activity and the Demand for Advocacy,” Political Research Quarterly 58, no. 1 (March 2005): 19–30. 3.Jonathan Rauch, Government’s End (New York: Public Affairs, 1999). 4.Joseph Bessette, The Mild Voice of Reason: Deliberative Democracy and American National Government (Chicago: University of Chicago Press, 1994). 5.Frank Baumgartner, Jeffrey Berry, Marie Hojnacki, David Kimball, and Beth Leech, Lobbying and Policy Change: Who Wins, Who Loses and Why (Chicago: University of Chicago Press, 2009). 6.Lee Drutman, “The Solution to Lobbying Is More Lobbying,” Washington Post, April 29, 2015, https://www.washingtonpost.com/blogs/monkey-cage/wp/2015/04/29/the-solution-to-lobbying-is-more-lobbying/. 7.Mark Smith, American Business and Political Power: Public Opinion, Elections and Democracy (Chicago: University of Chicago Press, 2000). 8.Frank Baumgarter and Bryan Jones, Agendas and Instability in American Politics (Chicago: University of Chicago Press, 1993); Bryan Jones and Frank Baumgartner, The Politics of Attention: How Government Prioritizes Problems (Chicago: University of Chicago Press, 2005). 9.Richard Hall and Frank Wayman find that money buys substantial influence over relatively lower-profile activities of members of Congress in committees, but relatively less in votes on the floor.

Safe Haven: Investing for Financial Storms
by Mark Spitznagel
Published 9 Aug 2021

In basing decisions on the geometric average of expected wealth or returns, not on the arithmetic average, Bernoulli was showing us how we should view risk—not how we necessarily do view risk. And this is precisely where economists got it so wrong. In fact, in 1979 behavioral economists Daniel Kahneman and Amos Tversky developed a theory of decision‐making under uncertainty known as prospect theory. This theory implied that people have diminishing marginal utility with increasing gains, like the logarithmic function—as well as with increasing losses. The latter completely contradicts the logarithmic function's increasing marginal utility with increasing losses.

Kill It With Fire: Manage Aging Computer Systems
by Marianne Bellotti
Published 17 Mar 2021

Frederick Brooks, The Mythical Man-Month (Reading, MA: Addison-Wesley, 1995). 9. Joel Spolsky, “Things You Should Never Do, Part I,” Joel on Software, April 6, 2000, https://www.joelonsoftware.com/2000/04/06/things-you-should-never-do-part-i/. 10. Sidney Dekker, Drift into Failure (Abingdon-on-Thames, UK: Routledge, 2018). 11. See the work of Daniel Kahneman and Amos Tversky on the pseudocertainty effect for more detail, as well as their bestseller book Thinking, Fast and Slow (New York: Farrar, Straus and Giroux 2011). 8 Breaking Changes In government, we had a saying, “The only thing the government hates more than change is the way things are.”

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing
by Burton G. Malkiel
Published 10 Jan 2011

And even if investors are irrational in a similar way, efficient-market theory believers assert that smart rational traders will correct any mispricings that might arise from the presence of irrational traders. Psychologists will have none of this economic claptrap. Two in particular—Daniel Kahneman and Amos Tversky—blasted economists’ views about how investors behave and in the process are credited with fathering a whole new economic discipline, called behavioral finance. The two argued quite simply that people are not as rational as economic models assume. Although this argument is obvious to the general public and non-economists, it took over twenty years for it to become widely accepted in academia.

…

Robert Shiller, in his best-selling book Irrational Exuberance, argues that the mania in Internet and high-tech stocks during the late 1990s can be explained only in terms of mass psychology. At universities, so-called behavioral theories of the stock market, stressing crowd psychology, gained favor during the early 2000s at leading economics departments and business schools across the developed world. The psychologist Daniel Kahneman won the Nobel Prize in Economics in 2002 for his seminal contributions to the field of “behavioral finance.” Earlier, Oskar Morgenstern was a leading champion. Morgenstern argued that the search for intrinsic value in stocks is a search for the will-o’-the-wisp. In an exchange economy the value of any asset depends on an actual or prospective transaction.

…

Even in judging athletic ability, an area where self-deception would seem more difficult, at least 60 percent of the male respondents ranked themselves in the top quartile. Even the klutziest deluded themselves about their athletic ability. Only 6 percent of male respondents believed that their athleticism was below average. Daniel Kahneman has argued that this tendency to overconfidence is particularly strong among investors. More than most other groups, investors tend to exaggerate their own skill and deny the role of chance. They overestimate their own knowledge, underestimate the risks involved, and exaggerate their ability to control events.

The Winner-Take-All Society: Why the Few at the Top Get So Much More Than the Rest of Us
by Robert H. Frank, Philip J. Cook
Published 2 May 2011

Consistent with this view, one study found that a sample of clinically depressed patients had remarkably accurate as­ sessments of their various abilities and social skills-this in sharp con­ trast to a group of ostensibly normal subjects, who had significantly inflated self-assessments. 1 3 But the Lake Wobegon bias clearly has cognitive dimensions as well. Thus psychologists Amos Tversky and Daniel Kahneman have shown that when people try to estimate the likelihood of an event, they often rely on how easily they can summon examples of similar events from memory. 14 Yet, although ease of recall does, in fact, rise with the frequency of similar events, it also depends on other factors. Events that are especially salient or vivid are easily recalled even if they happen only infrequently.

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"The Impending Information Implosion, " Thaler, Richard, and H. M. Shefrin. "An Economic Theory of Self-Contro!''' Journal o/Political Economy 89, 2 ( 1981 ) : 392-406. Optimism. New York: Simon & Shuster, 1 979. Tobin, James. "On Limiting the Domain of Inequality." Journal 0/ Law and Economics 20 ( 1 970): 263-277. Tiger, Lione!. Tversky, Amos, and Daniel Kahneman. "Judgment Under Uncertainty: Heuristics and Biases." Science 1 85 ( 1974): 1 124-3 l . United States Tennis Association Yearbook. Lynn, Mass.: H. O. Zimman, 1992, 1993, 1994. U.S. Department of Education. Digest 0/ Education Statistics. Washington, D.C.: U.S. Government Printing Office, 1993.

The Intelligence Trap: Revolutionise Your Thinking and Make Wiser Decisions
by David Robson
Published 7 Mar 2019

‘As a rule, I have found that the greater brain a man has, and the better he is educated, the easier it has been to mystify him,’ he once told Conan Doyle.5 A true recognition of dysrationalia – and its potential for harm – has taken decades to blossom, but the roots of the idea can be found in the now legendary work of two Israeli researchers, Daniel Kahneman and Amos Tversky, who identified many cognitive biases and heuristics (quick-and-easy rules of thumb) that can skew our reasoning. One of their most striking experiments asked participants to spin a ‘wheel of fortune’, which landed on a number between 1 and 100, before considering general knowledge questions – such as estimating the number of African countries that are represented in the UN.

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‘Because these cognitive biases are presented to them as essentially cognitive tasks, they expect to outperform on them as well.’ From my interactions with Stanovich, I get the impression that he is extremely cautious about promoting his findings, meaning he has not achieved the same kind of fame as Daniel Kahneman, say – but colleagues within his field believe that these theories could be truly game-changing. ‘The work he has done is some of the most important research in cognitive psychology – but it’s sometimes underappreciated,’ agreed Gordon Pennycook, a professor at the University of Regina, Canada, who has also specialised in exploring human rationality.

Can Democracy Work?: A Short History of a Radical Idea, From Ancient Athens to Our World
by James Miller
Published 17 Sep 2018

For the defects of public opinion were caused not just by biased newspapers, or blinkered reporters, or a lack of government-sponsored research institutes, or even by the growing number of secrets being kept by the American administrative state—the deepest problems were caused by the way people, all people, selected what they wanted to see and hear, filtering information through unavoidable “stereotypes,” a word that Lippmann introduced into the lexicon of American social science. Building on the work of Graham Wallas, and also aware of Freud’s findings, Lippmann in effect anticipated more recent research about “bounded rationality” (and the unavoidable cognitive errors that arise from what the psychologists Amos Tversky and Daniel Kahneman called “heuristics and biases”). In Public Opinion, published in 1922, Lippmann explored the implications of these limits to human rationality for what Woodrow Wilson had called “government by popular opinion.” Unlike Robert Michels, who focused on the institutional limits of modern democracy, Lippmann analyzed its psychological limits.

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“the reliability of the news is the premise”: Ibid., 4. “all the testimony is uncertain”: Walter Lippmann, Liberty and the News (New York: Harcourt, 1920), 55. “establishment of more or less semi-official institutes”: Ibid., 91. Building on the work of Graham Wallas: Research summarized in Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Straus and Giroux, 2011). “government by popular opinion”: Wilson, “The Modern Democratic State,” in The Papers of Woodrow Wilson, 5:70. What follows suggests that the great majority: See Lippmann, Public Opinion, 36. “approach a condition in which everyone”: Condorcet, “The Sketch” (Esquisse d’un tableau historique des progrès de l’esprit humain, 1794), in Political Writings, ed.

The Elements of Choice: Why the Way We Decide Matters
by Eric J. Johnson
Published 12 Oct 2021

My friends Richard Thaler and Cass Sunstein coined the term choice architecture in Nudge, and this gave much of my research a great descriptive name. There have been many influences during my career, but this acknowledgment focuses on those most related to the book. I want to thank mentors who have helped change the field, because they might not be acknowledged elsewhere. These include J. Edward Russo, Herbert Simon, Hillel Einhorn, and Amos Tversky. Colin Camerer has been a very influential and inspiring friend, as has Robert J. Meyer. This book’s initial ideas resulted from a working group that I organized at the Triennial Invitational Choice Symposium, an event that sounds much more like an art fair than a wonky conference. Here a bunch of academics sit around writing a chapter describing the state of the field.

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The reality is different: those who were randomly given a mug actually value it twice as much as those who were not, on average. A $7 mug will be worth $10 to those given it randomly, but $5 to those who did not receive one. This is the endowment effect in action: people who currently possess an object seem to endow it with additional value. This is shown in the work of two Nobel laureates, Daniel Kahneman and Richard Thaler, along with their co-author, Jack Knetsch. Again, the difference is due to how we assemble our preferences. We don’t know, off the top of our heads, exactly how much we think a mug is worth, so we have to estimate or assemble our value. Gerald Häubl, Anat Kienen, and I redid this classic experiment, but this time we asked people to tell us, by typing into a computer, what they were thinking about, reporting the thoughts that occur naturally.

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I also benefited from a monthlong residency at the Bellagio Center of the Rockefeller Foundation. I like to pace when I write, and it was particularly refreshing to pace down the paths of the estate. I would go back anytime. Early comments on the book idea and on very early drafts came from Bob Cialdini, Cass Sunstein, Chip Heath, and Daniel Kahneman. Their comments were very helpful, and they have all served as inspirations. The last two years of more serious work started with the counsel of Max Brockman, my agent, and the great oversight and editing of Courtney Young at Riverhead Books, who was masterful at helping me navigate the process of turning my wordy wandering prose into a tighter final product.

No Slack: The Financial Lives of Low-Income Americans
by Michael S. Barr
Published 20 Mar 2012

BPEA, no. 1: 177–85 (www.jstor.org/ stable/2534671). Holland, Paul W. 1986. “Statistics and Causal Inference.” Journal of the American Statistical Association 81, no. 396: 945–60 (www.jstor.org/stable/2289064). Internal Revenue Service. 2005. “Statistics of Income” (www.irs.gov/taxstats/index.html). Kahneman, Daniel, and Amos Tversky. 1979. “Prospect Theory: An Analysis of Decision under Risk.” Econometrica 47:263–291 (www.jstor.org/stable/1914185). Laibson, David. 1997. “Golden Eggs and Hyperbolic Discounting.” Quarterly Journal of Economics 112:443–77 (www.jstor.org/stable/2951242). ———. 1998. “Life-Cycle Consumption and Hyperbolic Discount Functions.”

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In Insufficient Funds: Savings, Assets, Credit, and Banking among Low-Income Households, edited by Rebecca M. Blank and Michael S. Barr, 121–45. New York: Russell Sage Foundation. Schultz, Ellen. 1995. “Helpful or Confusing? Fund Choices Multiply for Many Retirement Plans.” Wall Street Journal, December 22. Shafir, Eldar, Itamar Simonson, and Amos Tversky. 1993. “Reason-Based Choice.” Cognition 49:11–36 (doi:10.1016/0010-0277(93)90034-S). Sherraden, Michael, and Michael S. Barr. 2005. “Institutions and Inclusion in Savings Policy.” In Building Assets, Building Credit: Creating Wealth in Low-Income Communities, edited by Nicolas P. Retsinas and Eric S.

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Federal Reserve Bulletin 95 (February): A1–A56. Buehler, Roger, Dale Griffin, and Michael Ross. 2002. “Inside the Planning Fallacy: The Causes and Consequences of Optimistic Time Predictions.” In Heuristics and Biases: The Psychology of Intuitive Judgment, edited by Thomas Gilovich, Dale W. Griffin, and Daniel Kahneman, 250–70. Cambridge University Press. Cain, Daylian M., George Lowenstein, and Don A. Moore. 2005. “The Dirt on Coming Clean: Perverse Effects of Disclosing Conflicts of Interest.” Journal of Legal Studies 34:1–25 (doi:10.1086/426699). Edin, Kathryn, and Laura Lein. 1997. Making Ends Meet: How Single Mothers Survive Welfare and Low-Wage Work.

Antifragile: Things That Gain From Disorder
by Nassim Nicholas Taleb
Published 27 Nov 2012

But note here the mental bias that causes people to believe in the “power of” some technology and its ability to run the world. Another mental bias causing the overhyping of technology comes from the fact that we notice change, not statics. The classic example, discovered by the psychologists Daniel Kahneman and Amos Tversky, applies to wealth. (The pair developed the idea that our brains like minimal effort and get trapped that way, and they pioneered a tradition of cataloging and mapping human biases with respect to perception of random outcomes and decision making under uncertainty). If you announce to someone “you lost $10,000,” he will be much more upset than if you tell him “your portfolio value, which was $785,000, is now $775,000.”

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Kahneman, D., 2011, Thinking, Fast and Slow. New York: Farrar, Straus and Giroux. Kahneman, D., 1982, “On the Study of Statistical Intuitions.” In D. Kahneman, P. Slovic, and A. Tversky, eds., Judgment Under Uncertainty: Heuristics and Biases. Cambridge: Cambridge University Press. Kahneman, D., and Amos Tversky, 1979, “Prospect Theory: An Analysis of Decision Under Risk.” Econometrica 46(2): 171–185. Kaiser, Jocelyn, 2003, “Hormesis: Sipping from a Poisoned Chalice.” Science 302 (5644): 376–379. Kantorovich, Aharon, 1993, Scientific Discovery: Logic and Tinkering. State University of New York Press.

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“As little as feasible from the last twenty years, except history books that are not about the last fifty years,” I blurted out, with irritation as I hate such questions as “what’s the best book you’ve ever read,” or “what are the ten best books,”—my “ten best books ever” change at the end of every summer. Also, I have been hyping Daniel Kahneman’s recent book, because it is largely an exposition of his research of thirty-five and forty years ago, with filtering and modernization. My recommendation seemed impractical, but, after a while, the student developed a culture in original texts such as Adam Smith, Karl Marx, and Hayek, texts he believes he will cite at the age of eighty.

The Man From the Future: The Visionary Life of John Von Neumann
by Ananyo Bhattacharya
Published 6 Oct 2021

In Nepal, for instance, she found that cattle belonging to farmers who had failed to follow rules for water usage were interned in a ‘cow jail’ until a fine was paid to secure their release.77 Questioning some of game theory’s fundamental precepts, as Ostrom did, has produced rich insights. Another economics Nobel laureate, psychologist Daniel Kahneman, challenged game theory’s assumption that humans are entirely rational and had preferences and tastes that never changed. An admirer of von Neumann, ‘one of the giant intellectual figures of the twentieth century’, Kahneman and his close collaborator, Amos Tversky, studied how real people actually make decisions and devised their own ‘prospect theory’ to explain findings that ran counter to some of utility theory’s predictions.78 Jean Tirole, the 2014 Nobel winner, used game theory to analyse industries dominated by a few powerful companies – an increasingly pertinent topic in the Internet economy.

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A description of ‘rational behaviour’ then boils down to ‘a complete set of rules’ that tells a participant how to play in every situation that may arise in the game to achieve this aim.49 This simplifies the mathematics enormously because, thanks to utility theory, everything a player strives for is summarized by a single number. Von Neumann had achieved the supposedly impossible – a rigorous way to assign numbers to nebulous human desires and predilections. ‘To this day the most important theory in the social sciences’ was how Nobel laureate Daniel Kahneman described von Neumann’s accomplishment in 2011, more than sixty years after Theory of Games first appeared.50 The influence of utility theory and the notion of the rational calculating individual that is at its heart would quickly reach far beyond the ivory tower. Armed with utility theory, von Neumann begins his analysis of two-player games.

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A utility score on one scale can be converted to a score on the other in the same way that a temperature measured in degrees Celsius can be converted into degrees Fahrenheit. 49. John von Neumann and Oskar Morgenstern, 1944, Theory of Games and Economic Behavior. Princeton University Press, Princeton. 50. Daniel Kahneman, 2011, Thinking, Fast and Slow, Farrar, Straus and Giroux, New York. 51. German logician Ernst Zermelo proved in 1912 that from a winning position either black or white can force a win. Unlike von Neumann, he allowed for games with infinitely many moves by ignoring the standard stopping rules of chess and did not use the method of backward induction for his proof.

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Eleventh Edition)
by Burton G. Malkiel
Published 5 Jan 2015

And even if investors are irrational in a similar way, efficient-market theory believers assert that smart rational traders will correct any mispricings that might arise from the presence of irrational traders. Psychologists will have none of this economic claptrap. Two in particular—Daniel Kahneman and Amos Tversky—blasted economists’ views about how investors behave and in the process are credited with fathering a whole new economic discipline, called behavioral finance. The two argued quite simply that people are not as rational as economic models assume. Although this argument is obvious to the general public and non-economists, it took over twenty years for it to become widely accepted in academia.

…

The Nobel laureate Robert Shiller, in his book Irrational Exuberance, argues that the mania in Internet and high-tech stocks during the late 1990s can be explained only in terms of mass psychology. At universities, so-called behavioral theories of the stock market, stressing crowd psychology, gained favor during the early 2000s at leading economics departments and business schools across the developed world. The psychologist Daniel Kahneman won the Nobel Prize in Economics in 2002 for his seminal contributions to the field of “behavioral finance.” Earlier, Oskar Morgenstern was a leading champion. Morgenstern argued that the search for intrinsic value in stocks is a search for the will-o’-the-wisp. In an exchange economy the value of any asset depends on an actual or prospective transaction.

…

Even in judging athletic ability, an area where self-deception would seem more difficult, at least 60 percent of the male respondents ranked themselves in the top quartile. Even the klutziest deluded themselves about their athletic ability. Only 6 percent of male respondents believed that their athleticism was below average. Daniel Kahneman has argued that this tendency to overconfidence is particularly strong among investors. More than most other groups, investors tend to exaggerate their own skill and deny the role of chance. They overestimate their own knowledge, underestimate the risks involved, and exaggerate their ability to control events.

Evil by Design: Interaction Design to Lead Us Into Temptation
by Chris Nodder
Published 4 Jun 2013

Scarcity and loss aversion Dollar bill experiment: Baba Shiv, George Loewenstein, Antoine Bechara, Hanna Damasio, and Antonio R. Damasio. “Investment behavior and the negative side of emotion.” Psychological Science 16.6 (2005): 435–439. It’s possible to “lose” (earn less than $20 after 20 rounds) only 13 percent of the time if you always gamble. Loss twice as “powerful” as gain: Daniel Kahneman and Amos Tversky. “Prospect Theory: An Analysis of Decision under Risk.” Econometrica: Journal of the Econometric Society 47 (1979): 263–291. The Tom Sawyer effect Tom Sawyer quotes: Mark Twain (Samuel Clemens). The Adventures of Tom Sawyer. The American Publishing Company, 1884. Instill doubt to prevent cancellations Statistics on BSE: Wikipedia en.wikipedia.org/wiki/Bovine_spongiform_encephalopathy.

What's Wrong With Economics: A Primer for the Perplexed
by Robert Skidelsky
Published 3 Mar 2020

Behavioural economics claims to have uncovered empirically systemic, and therefore predictable, deviations from rationality: situations where individuals consistently over- or underestimate benefits or costs. They behave like robots with restricted information. Behavioural economics came of age in 2002 when the psychologist Daniel Kahneman (b.1934) got a Nobel prize for the work he had done with Amos Tversky (1937–1996). It flourishes as a subset of economics only because the standard behavioural assumptions of economists have been so thoroughly unrealistic. Thinking fast and slow Kahneman and Tversky claimed that we make choices according to two mental systems, the first intuitive, the second calculating, which they label fast and slow thinking.

Deep Thinking: Where Machine Intelligence Ends and Human Creativity Begins
by Garry Kasparov
Published 1 May 2017

You can see why computers have a certain advantage in games where streaks of lucky or unlucky cards or dice rolls can influence the decision making of humans. Machines don’t look for patterns in randomness, or least if they’re programmed to, they don’t find any the way our minds often do. The fascinating work of researchers like Daniel Kahneman, Amos Tversky, and Dan Ariely has demonstrated how terrible human beings can be at thinking logically. For all the immense power of the human mind, it is very easy to fool. I’m a firm believer in the power of human intuition and how we must cultivate it by relying on it, but I cannot deny that my faith has been shaken by reading books like Kahneman’s Thinking, Fast and Slow and Ariely’s Predictably Irrational.

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Becoming aware of these fallacies and cognitive blind spots won’t prevent them entirely, but it’s a big step toward combating them. During my annual visit to Oxford in 2015, I gave a seminar on decision making to a group of students at the Saïd Business School. For one segment, I performed an experiment based on those described by Daniel Kahneman to test what cognitive psychologists call the “anchoring effect” in our decision making. Would it work on a group of MBA students even though they knew I was trying to trick them? I broke them into seven groups of five or six students each, and each group got a slightly different version of a handout containing six questions.

Rage Inside the Machine: The Prejudice of Algorithms, and How to Stop the Internet Making Bigots of Us All
by Robert Elliott Smith
Published 26 Jun 2019

, but on the way I passed a group of people talking in a circle of metal chairs in the main hall. They were discussing the ‘Linda Problem’. Dammit! The ‘Kill Decision’ session, sadly, would have to wait, as the ‘Linda Problem’ was one of my personal bug bears, and I couldn’t resist taking a chair. The ‘Linda Problem’ was introduced in 1983 by psychologists Daniel Kahneman and Amos Tversky,1 at the headwaters of the field of behavioural economics, which would eventually result in their Nobel Prize in Economics. The problem goes like this: 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 anti-nuclear demonstrations.

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London: Hutchinson. 8Vacca is Latin for cow. 9Erin Wamsley, Karen Perry, Ina Djonlagic, Laura Babkes Reaven and Robert Stickgold, 2010, Cognitive Replay of Visuomotor Learning at Sleep Onset: Temporal Dynamics and Relationship to Task Performance. Sleep, 33: 59–68, www.researchgate.net/publication/41396065_Cognitive_Replay_of_Visuomotor_Learning_at_Sleep_Onset_Temporal_Dynamics_and_Relationship_to_Task_Performance Chapter 12 1Amos Tversky and Daniel Kahneman, 1983, Extension versus intuitive reasoning: The conjunction fallacy in probability judgment. Psychological Review, 90 (4): 293–315. 2Stuart Kauffman, 2010, Reinventing the Sacred: A New View of Science, Reason, and Religion. New York: Basic Books. 3Neil Stevenson, 1995, The Diamond Age: Or, a Young Lady’s Illustrated Primer.

The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution
by Gregory Zuckerman
Published 5 Nov 2019

Simons and his colleagues sensed the professors were wrong. They believed investors are prone to cognitive biases, the kinds that lead to panics, bubbles, booms, and busts. Simons didn’t realize it, but a new strain of economics was emerging that would validate his instincts. In the 1970s, Israeli psychologists Amos Tversky and Daniel Kahneman had explored how individuals make decisions, demonstrating how prone most are to act irrationally. Later, economist Richard Thaler used psychological insights to explain anomalies in investor behavior, spurring the growth of the field of behavioral economics, which explored the cognitive biases of individuals and investors.

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When Simons eventually returned to work, his friends sensed he needed a distraction. Simons refocused on his team’s disappointing efforts to master stock trading, his last chance to build his firm into a power. For a while, it seemed Simons was wasting his time. CHAPTER NINE No one ever made a decision because of a number. They need a story. Daniel Kahneman, economist Jim Simons seemed to have discovered the perfect way to trade commodities, currencies, and bonds: predictive mathematical models. Yet, Simons knew, if he wanted Renaissance Technologies to amount to much of anything, he’d have to get his computers to make money in stocks. It wasn’t clear why Simons thought he had a chance of success.

The Stuff of Thought: Language as a Window Into Human Nature
by Steven Pinker
Published 10 Sep 2007

The preceding chapter teemed with examples: the choice of construction can determine whether listeners think of an event as causing water to move or causing a glass to become full, whether they think of it as merely having happened or as having been caused to happen, and so on. The ability of words to frame an event has long been used in rhetoric and persuasion (pro-choice and pro-life, redistribution versus confiscation, invading versus liberating), and its effects are easy to document. The psychologists Amos Tversky and Daniel Kahneman, for example, showed that doctors will opt for a cautious public-health program (as opposed to a risky one) when it is framed as saving the lives of 200 people out of 600 who are vulnerable, but will eschew the same program when it is framed as resulting in the deaths of 400 people out of the 600.68 Naturally it is fascinating to see how languages provide the means to frame events, and that is a major goal of this book.

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One of the reasons I explained verb constructions in chapter 2 was that they show that even our most quotidian acts can be framed in different ways, such as the difference between spraying paint on the wall (cause the paint to go) and spraying the wall with paint (cause the wall to change). Within cognitive psychology the most famous example of the effects of framing (briefly mentioned in chapter 3) comes from an experiment by Amos Tversky and Daniel Kahneman, who posed the following problem to a sample of doctors:17 “A new strain of flu is expected to kill 600 people. Two programs to combat the disease have been proposed.” Some of the doctors were then presented with the following dilemma:If program A is adopted, 200 people will be saved.

EuroTragedy: A Drama in Nine Acts
by Ashoka Mody
Published 7 May 2018

Pompidou did not share de Gaulle’s disdain for Europe. And so Pompidou wondered if “more Europe” could solve France’s problems and help it catch up. True, the European integration process had reached a successful end. But the narrative of more integration as a solution for European problems was still alive. Psychologists Amos Tversky and Daniel Kahneman coined the phrase “availability heuristic” to explain that human beings instinctively believe the world will continue to work in the future as it has in the recent past.65 Europe’s infrastructure seemed “available” to take another leap. The Hague 1969: The Third Leap Georges Pompidou was elected president of France in June 1969.

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Reprinted in The European Union: Readings on the Theory and Practice of European Integration, edited by Brent Nelsen and Alexander Stubb, Basingstoke: Macmillan. Schelling, Thomas. 1988. “The Mind as a Consuming Organ.” In Decision Making: Descriptive, Normative, and Prescriptive Interactions, edited by David E. Bell, Howard Raiffa, and Amos Tversky. Cambridge: Cambridge University Press. Schiller, Karl. 1971. “Statement by the Governor of the Bank for Germany.” Summary Proceedings of the Twenty-​Sixth Annual Meetings, September 27–​October 1, 1971. Washington, D.C.: International Monetary Fund. Schivardi, Fabiano, Enrico Sette, and Guido Tabellini. 2017.

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Dyson and Featherstone 1999, 109. 135. Dyson and Featherstone 1999, 107. 136. Dyson and Featherstone 1999, 108–​109. 137. Dyson and Featherstone 1999, 110. 138. Marsh 2009, 61–​63 139. Campbell 2012, 337. 140. Gerth and Mills 1961, 280. 141. Janis 1972, 9–​10; see also psychologist and Nobel laureate Daniel Kahneman’s interview in Schrage 2003. 142. Sunstein and Hastie 2017, locations 217–​222. 143. Akerlof 2017; see also Janis 1972. 144. Krugman 1995, 36. 145. Rutherford 1971. 146. Schiller 1971, 195. 147. That theme persisted in German economic advocacy. On November 11, 1988, Helmut Schlesinger (1988, 1), then vice president of the Bundesbank, said that whenever there was a conflict between the fixed exchange rate and domestic policy goals, governments “usually decide in favor of their national priorities.”

Admissions: A Life in Brain Surgery
by Henry Marsh
Published 3 May 2017

And even if the patient ‘does well’ and there are no complications after the operation, it can still be a mistake – it may well have been that the patient did not really need the operation in the first place and the surgeon, keen to operate, overestimated the risks of not operating. Over-treatment – unnecessary investigations and operations – is a growing problem in modern medicine. It is wrong, even if the patient comes to no obvious harm. Critical to this is to understand that other people are better at seeing our mistakes than we are. As the psychologists Daniel Kahneman and Amos Tversky have shown, our brains are hardwired to fail to judge probabilities consistently. We are subject to many ‘cognitive biases’, as psychologists call them, which distort our judgement. We are too biased in our own favour and, under pressure, as doctors often are, we make decisions too quickly.

David and Goliath: Underdogs, Misfits, and the Art of Battling Giants
by Malcolm Gladwell
Published 30 Sep 2013

It turns out he was a really good trader, and it turns out that learning how to deal with the possibility of failure is really good preparation for a career in the business world. Today he is the president of Goldman Sachs. 1 Actually, there’s an even shorter test. One of the most brilliant modern psychologists was a man named Amos Tversky. Tversky was so smart that his fellow psychologists devised the “Tversky Intelligence Test”: The faster you realized Tversky was smarter than you, the smarter you were. Adam Alter told me about the Tversky test. He would score very highly on it. 2 To make sure he was measuring intelligence and not something else, Frederick also correlated CRT scores with other factors.

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For more discussion of class size, see Eric Hanushek, The Evidence on Class Size (University of Rochester Press, 1998); Eric Hanushek and Alfred Lindseth, Schoolhouses, Courthouses and Statehouses: Solving the Funding-Achievement Puzzle in America’s Public Schools (Princeton University Press, 2009), 272; and Ludger Wössmann and Martin R. West, “Class-Size Effects in School Systems Around the World: Evidence from Between-Grade Variation in TIMSS,” European Economic Review (March 26, 2002). For studies of money and happiness, see Daniel Kahneman and Angus Deaton, “High Income Improves Evaluation of Life but Not Emotional Well-Being,” Proceedings of the National Academy of Sciences 107, no. 38 (August 2010): 107. Barry Schwartz and Adam Grant discuss happiness in terms of an inverted-U curve in “Too Much of a Good Thing: The Challenge and Opportunity of the Inverted U,” Perspectives on Psychological Science 6, no. 1 (January 2011): 61–76.

A Little History of Economics
by Niall Kishtainy
Published 15 Jan 2017

Partly you’ll judge it by how sharp and in-focus it looks. This often works fine, but sometimes you suffer from visual illusions: when it’s foggy, for instance, you might think that the tree is farther away than it really is. Daniel Kahneman (b. 1934) is an Israeli psychologist who studied the psychology of visual perception and later turned to economics. With a fellow psychologist, Amos Tversky (1937–96), he discovered that when people accept a job or buy a cup of coffee, a mental fog stops them from perceiving things logically. Economists have long believed that people are rational, that they accurately weigh the costs and benefits of the options facing them before acting.

AIQ: How People and Machines Are Smarter Together
by Nick Polson and James Scott
Published 14 May 2018

McGrayne, The Theory That Would Not Die, 202. 12.  PBS Nova documentary, “Submarines, Secrets, and Spies.” 13.  McGrayne, The Theory That Would Not Die, 202. 14.  David M. Eddy, “Probabilistic Reasoning in Clinical Medicine: Problems and Opportunities,” in Judgment Under Uncertainty: Heuristics and Biases, ed. Daniel Kahneman, Paul Slovic, and Amos Tversky (Cambridge: Cambridge University Press, 1982), 249–67. 15.  It’s actually 99 false positives, but we’re rounding off to 100 to keep the numbers easier to work with. If you correct for our modest round-off error, the actual posterior probability P(cancer | positive test) is really 7.5%, not 7.4%. 16.  

The Mind Is Flat: The Illusion of Mental Depth and the Improvised Mind
by Nick Chater
Published 28 Mar 2018

It would be ridiculous to choose mostly apples in the first case (indicating that I prefer apples); and mostly to reject apples in the second case (indicating that I prefer oranges). Consistently deciding to choose, but also to reject, the very same thing seems to make a nonsense of the very idea of preference. Yet remarkably, psychologists Eldar Shafir and Amos Tversky found that this paradoxical pattern does indeed occur. They asked people to decide between extreme options (with both very good and very bad features) and neutral options (where all the features were middling).7 In one study, for example, people imagined making custody decisions between a ‘parent-of-extremes’ (good  : very close relationship with the child, extremely active social life; above-average income; bad  : lots of work-related travel, minor health problems) and a ‘typical parent’ (reasonable rapport with the child, relatively stable social life, and average income, working hours and health).

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The nature of consciousness and of meaning are both fascinating and profound puzzles, but they are very distinct puzzles. 9 For example, dual process theories of reasoning, decision-making and social cognition take this viewpoint (see, for example, J. S. B. Evans and K. E. Frankish, In Two Minds: Dual Processes and Beyond (Oxford: Oxford University Press, 2009); S. A. Sloman (1996), ‘The empirical case for two systems of reasoning’, Psychological Bulletin, 119(1): 3–22. The Nobel Prize-winning psychologist Daniel Kahneman is often seen as exemplifying this viewpoint (e.g. D. Kahneman, Thinking, Fast and Slow (London: Penguin, 2011), although his perspective is rather more subtle. 10 For example, P. Dayan, ‘The role of value systems in decision making’, in C. Engel and W. Singer (eds), Better Than Conscious? Decision Making, the Human Mind, and Implications for Institutions (Cambridge, MA: MIT Press, 2008), pp. 51–70. 11 There is a small industry in psychology attempting to demonstrate the existence of ‘unconscious’ influences on our actions (see, for example, the excellent review by B.

Naked Economics: Undressing the Dismal Science (Fully Revised and Updated)
by Charles Wheelan
Published 18 Apr 2010

Press release from The Royal Swedish Academy of Sciences, October 9, 2002. 14. Jonathan Gruber, “Smoking’s ‘Internalities,’” Regulation, vol. 25, no. 4 (Winter 2002/2003). 15. Annamaria Lusardi, “The Importance of Financial Literacy,” NBER Reporter: Research Summary, no. 2 (2009). 16. Thomas Gilovich, Robert Vallone, and Amos Tversky, “The Hot Hand in Basketball: On the Misperception of Random Sequences,” Cognitive Psychology 17 (1985). CHAPTER 2. INCENTIVES MATTER 1. Costa Rican Embassy, Washington, D.C. 2. Ian Fisher, “Victims of War: The Jungle Gorillas, and Tourism,” New York Times, March 31, 1999. 3. Daniel Yergin and Joseph Stanislaw, The Commanding Heights (New York: Simon & Schuster, 1998), pp. 216–17. 4.

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For example, if humans lack the self-discipline to do things that they know will make themselves better off in the long run (e.g., lose weight, stop smoking, or save for retirement), then society could conceivably make them better off by helping (or coercing) them to do things they otherwise would not or could not do—the public policy equivalent of taking the cashew bowl away. The field of behavioral economics has evolved as a marriage between psychology and economics that offers sophisticated insight into how humans really make decisions. Daniel Kahneman, a professor in both psychology and public affairs at Princeton, was awarded the Nobel Prize in Economics in 2002 for his studies of decision making under uncertainty, and, in particular, “how human decisions may systematically depart from those predicted by standard economic theory.”13 Kahneman and others have advanced the concept of “bounded rationality,” which suggests that most of us make decisions using intuition or rules of thumb, kind of like looking at the sky to determine if it will rain, rather than spending hours poring over weather forecasts.

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Miriam Jordan, “Leprosy Remains a Foe in Country Winning the Fight Against AIDS,” Wall Street Journal, August 20, 2001. 4. Jane Spencer, “Why Beijing Is Trying to Tally the Hidden Costs of Pollution as China’s Economy Booms,” Wall Street Journal, October 2, 2006. 5. David Leonhardt, “If Richer Isn’t Happier, What Is?” New York Times, May 19, 2001. 6. Daniel Kahneman, Alan B. Krueger, David Schkade, Norbert Schwarz, and Arthur Stone, “Toward National Well-Being Accounts,” American Economic Review, vol. 94, no. 2 (May 2004). 7. “Economics Discovers Its Feelings,” The Economist, December 23, 2006. 8. Alexander Stille, “A Happiness Index with a Long Reach: Beyond GNP to Subtler Measures,” New York Times, May 20, 2000, p.

User Friendly: How the Hidden Rules of Design Are Changing the Way We Live, Work & Play
by Cliff Kuang and Robert Fabricant
Published 7 Nov 2019

What both user-friendliness and behavioral economics shared was an overriding sense that our minds could never be perfected, and that our imperfections made us who we are. This embrace of human limitation was nursemaid to the idea that machines had to be bent around humans. Don Norman’s early papers are larded with references to the pathbreaking work of Amos Tversky and Daniel Kahneman, in which they laid the foundations of behavioral economics. Meanwhile, modern neuroscience was also beginning to discover that our brain wasn’t built like a clock either, with neatly functioning units. Rather, it was composed of many separate evolutionary adaptations kludged together.

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Marc Levy, “3 Mile Island Owner Threatens to Close Ill-Fated Plant,” AP News, May 30, 2017, www.apnews.com/266b9aff54a14ab4a6bea903ac7ae603. 23. Gray and Rosen, Warning, 260. 24. Mitchell M. Waldrop, The Dream Machine: J.C.R. Licklider and the Revolution That Made Computing Personal (New York: Viking, 2001), 54–57. 25. Or, as the behavioral economist Daniel Kahneman writes, “The absence of definite information concerning the outcomes of actions one has not taken is probably the single most important factor that keeps regret in life within tolerable bounds. We can never be absolutely sure that we would have been happier had we chosen another profession or another spouse … Thus, we are often protected from painful knowledge concerning the quality of our decisions.”

The Bogleheads' Guide to Investing
by Taylor Larimore , Michael Leboeuf and Mel Lindauer
Published 1 Jan 2006

Although the customers or investors may be able to give you a sound, logical reason why they buy or invest in a certain way, more often than not, it's not the real reason. Moreover, many times they aren't even aware of the real reason. While many economists were busily assuming away the real world, a couple of psychologists working in Israel pioneered a field that became known as behavioral economics. In the late 1960s, Amos Tversky and Daniel Kahneman were at Hebrew University in Jerusalem performing psychological experiments to determine how people go about making economic choices. It didn't take Tversky and Kahneman long to realize that people don't always make rational choices in their own best interest. From their experiments they began to organize and classify the rules of thumb people used to make quick, economic decisions and named them judgmental heuristics.

Incognito: The Secret Lives of the Brain
by David Eagleman
Published 29 May 2011

Your job is to hold on to them tightly, keeping them in check so you can continue down the middle of the road. The emotional and rational networks battle not only over immediate moral decisions, but in another familiar situation as well: how we behave in time. WHY THE DEVIL CAN SELL YOU FAME NOW FOR YOUR SOUL LATER Some years ago, the psychologists Daniel Kahneman and Amos Tversky posed a deceptively simple question: If I were to offer you $100 right now or $110 a week from now, which would you choose? Most subjects chose to take $100 right then. It just didn’t seem worthwhile to wait an entire week for another $10. Then the researchers changed the question slightly: If I were to offer you $100 fifty-two weeks from now, or $110 fifty-three weeks from now, which would you choose?

Late Bloomers: The Power of Patience in a World Obsessed With Early Achievement
by Rich Karlgaard
Published 15 Apr 2019

“it allows them to give themselves objective”: Bernstein, “ ‘Self Talk.’ ” “Persuasive boosts in perceived”: Bandura, “Self-Efficacy: Toward a Unifying Theory of Behavioral Change”; Bandura, “Self-Efficacy Mechanism in Human Agency.” according to Bandura: Ramachandran, Encyclopedia of Human Behavior. “framing”: Amy C. Edmondson, “Framing for Learning: Lessons in Successful Technology Implementation,” California Management Review 45, no. 2 (2003): 34–54. See also Amos Tversky and Daniel Kahneman, “The Framing of Decisions and the Psychology of Choice,” Science 211, no. 4481 (1981): 453–58. we can use cognitive frames to shape: Robert M. Entman, “Framing: Toward Clarification of a Fractured Paradigm,” Journal of Communication 43, no. 4 (1993): 51–58; Robert D. Benford and David A.

The Future of the Professions: How Technology Will Transform the Work of Human Experts
by Richard Susskind and Daniel Susskind
Published 24 Aug 2015

See Lieberman, The Tyranny of the Experts, 275. 79 Anthony Kenny, What I Believe (2006), 123. 80 <http://www.kpmg.com>. 81 Our thinking on asymmetry of knowledge aligns to some extent with that of Durkheim, Parsons, and Abbott. 82 Herbert Hart, The Concept of Law (1994), 197. Original emphasis. 83 On the distinction between ‘knowing that’ and ‘knowing how’, see Gilbert Ryle, The Concept of Mind (1949), 28–32. 84 On tacit knowledge, see Michael Polanyi, ‘The Logic of Tacit Inference’, Philosophy, 41: 155 (1966), 1–18. 85 See e.g. Amos Tversky and Daniel Kahneman, ‘Judgment under Uncertainty: Heuristics and Biases’, Science, 185: 4157 (1974), 1124–31. They explore the problems with some of these rules of thumb. 86 Note the correspondence here with philosophical and psychological concepts of practical reason and practical reasoning. See Joseph Raz, Practical Reason and Norms (1999). 87 We are alive to a sophisticated challenge to this conception of knowledge, namely, a concern over what might be called the objectification of knowledge.

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Trefis Team, ‘eBay: The Year 2013 in Review’, 26 Dec. 2013 <http://www.forbes.com/sites/greatspeculations/2013/12/26/ebay-the-year-2013-in-review/> (accessed 24 March 2015). Tuck, Richard, Free Riding (Cambridge, Mass.: Harvard University Press, 2008). Turing, Alan, ‘Computing Machinery and Intelligence’, Mind, 59: 236 (1950), 433–60. Turkle, Sherry, Alone Together (New York: Basic Books, 2011). Tversky, Amos, and Daniel Kahneman, ‘Judgment under Uncertainty: Heuristics and Biases’, Science, 185: 4157 (1974), 1124–31. Twilley, Nicola, ‘Artificial Intelligence Goes to the Arcade’, New Yorker, 25 Feb. 2015. UK Architectural Education Review Group, ‘Pathways and Gateways: The Structure and Regulation of Architectural Education’, Apr. 2013 <http://people.bath.ac.uk/absaw/files/> (accessed 8 March 2015).

The Book of Why: The New Science of Cause and Effect
by Judea Pearl and Dana Mackenzie
Published 1 Mar 2018

If we take into account that the probability of striking a match is much lower than that of having oxygen, we find quantitatively that for Match, both PN and PS are high, while for Oxygen, PN is high but PS is low. Is this why, intuitively, we blame the match and not the oxygen? Quite possibly, but it may be only part of the answer. In 1982, psychologists Daniel Kahneman and Amos Tversky investigated how people choose an “if only” culprit to “undo” an undesired outcome and found consistent patterns in their choices. One was that people are more likely to imagine undoing a rare event than a common one. For example, if we are undoing a missed appointment, we are more likely to say, “If only the train had left on schedule,” than “If only the train had left early.”

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“He’s gotten overconfident,” they complain, or “the other players have figured out his weaknesses.” They may be right, but the sophomore slump does not need a causal explanation. It will happen more often than not by the laws of chance alone. The modern statistical explanation is quite simple. As Daniel Kahneman summarizes it in his book Thinking, Fast and Slow, “Success = talent + luck. Great success = a little more talent + a lot of luck.” A player who wins Rookie of the Year is probably more talented than average, but he also (probably) had a lot of luck. Next season, he is not likely to be so lucky, and his batting average will be lower.

All About Asset Allocation, Second Edition
by Richard Ferri
Published 11 Jul 2010

A fledgling field of study in the early 1960s, behavioral finance has grown to be an important area of research at How Behavior Affects Asset Allocation Decisions 273 several influential institutions. Professors recognized as experts in the field include Daniel Kahneman (Princeton), Meir Statman (Santa Clara), Richard Thaler (University of Chicago), Robert J. Shiller (Yale), and Amos Tversky. Tversky is frequently cited as the forefather of the field. He died in 1996. The following list touches on a few observations made by behavioral finance researchers. Unfortunately, the list only scratches the surface. Much more information about this fascinating field is available on the Internet and in your local library: ● ● ● ● ● ● ● ● ● People tend to be more optimistic about stocks after the market goes up and more pessimistic after it goes down.

Value Investing: From Graham to Buffett and Beyond
by Bruce C. N. Greenwald , Judd Kahn , Paul D. Sonkin and Michael van Biema
Published 26 Jan 2004

O'Shaughnessy, What Works on Wall Street: A Guide to the BestPerforming Investment Strategies of All Time (New York: McGraw-Hill, 1994), p. 193. and the Fama and Lakonishok articles referred to in Chapter One. On cognitive biases, the starting point is the collection of papers: Daniel Kahneman, Paul Slovic, and Amos Tversky, editors, Judgment under Uncertainty (New York: Cambridge University Press, 1982). The consequences for investments form the relatively new field of behavioral finance. Books and articles to consult: Andrei Shleifer, Inefficient Markets: An Introduction to Behavioral Finance (Oxford: Oxford University Press, 2000).

The Big Nine: How the Tech Titans and Their Thinking Machines Could Warp Humanity
by Amy Webb
Published 5 Mar 2019

This is particularly dangerous when it comes to AI, because students, professors, researchers, employees, and managers are making millions of decisions every day, from seemingly insignificant (what database to use) to profound (who gets killed if an autonomous vehicle needs to crash). Artificial intelligence might be inspired by our human brains, but humans and AI make decisions and choices differently. Princeton professor Daniel Kahneman and Hebrew University of Jerusalem professor Amos Tversky spent years studying the human mind and how we make decisions, ultimately discovering that we have two systems of thinking: one that uses logic to analyze problems, and one that is automatic, fast, and nearly imperceptible to us. Kahneman describes this dual system in his award-winning book Thinking, Fast and Slow.

Messing With the Enemy: Surviving in a Social Media World of Hackers, Terrorists, Russians, and Fake News
by Clint Watts
Published 28 May 2018

I needed to find foxes to get insights, and to do it, I decided to employ social engineering, the same techniques I’d used in West Point prank calls. I needed to trick respondents to reveal their true tendencies as either a fox or a hedgehog. Once I found the foxes in the pack, I’d investigate their responses as the outliers in a sea of predictions. Daniel Kahneman and Amos Tversky, two Israeli American behavioral psychologists, provided the social engineering tricks I needed to separate the foxes from the hedgehogs. Over many years of research, they identified a series of heuristics—mental rules people use to make decisions—and noted the circumstances where biases emerged that led to incorrect judgments.

Mindf*ck: Cambridge Analytica and the Plot to Break America
by Christopher Wylie
Published 8 Oct 2019

Rather, they are systematic errors, meaning they create patterns in common forms of irrational thinking. In fact, thousands of cognitive biases have been identified in the field of psychology. Some biases are so common and seemingly intuitive that it can be hard for people to even recognize that they are actually irrational. For example, the psychologists Amos Tversky and Daniel Kahneman conducted a study that asked participants a very simple question: “Suppose you sample a word at random from an English text. Is it more likely that the word starts with a k, or that k is the third letter?” Most people responded with the former, that words that start with k (e.g., kitchen, kite, or kilometer) are more likely.

Reaper Force: The Inside Story of Britain’s Drone Wars
by Dr Peter Lee
Published 14 Jul 2019

They might just have been using the wrong part of their brain: the part that increases their chances of Missing the Gorilla. There are several possible reasons as to why the brain fails to see things clearly in these extreme, high-pressure situations. One of the most influential of these explanations was developed by Daniel Kahneman and Amos Tversky, who wanted to understand the psychology of making choices and decisions. They identified two different ways of thinking: intuition (e.g. your instant impression of a politician you see on television) and reasoning (e.g. adding up your change in a shop). This approach to understanding how way the brain works was later described as System 1 and System 2.21 Most people rely on intuition a lot more than they realise.

The Wisdom of Crowds
by James Surowiecki
Published 1 Jan 2004

Karim Jamal and Shyam Sunder, “Bayesian Equilibrium in Double Auctions Populated by Biased Heuristic Traders,” Journal of Economic Behavior and Organization 31 (1996): 273–91. See also Richard H. Thaler, “The End of Behavioral Finance,” Financial Analysts’ Journal (November–December 1999): 12–17; and Daniel Kahneman, Paul Slovic, and Amos Tversky, Judgement Under Uncertainty: Heuristics and Biases (New York: Cambridge University Press, 1982), which is the jumping-off point for much of the work in behavioral finance. See George Akerlof’s Nobel lecture, “Behavioral Macroeconomics and Macroeconomic Behavior” (December 8, 2001), for a discussion of people’s problems saving.

The Fissured Workplace
by David Weil
Published 17 Feb 2014

American Economic Review 87, no. 5: 993–1008. Kahneman, Daniel. 2011. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux. Kahneman, Daniel, Jack Knetsch, and Richard Thaler. 1986. “Fairness as a Constraint on Profit Seeking: Entitlements in the Market.” American Economic Review 76, no. 4: 728–741. Kahneman, Daniel, and Amos Tversky. 1984. “Choices, Values, and Frames.” American Psychologist 34, no.4: 341-350. Kalleberg, Arne. 2011. Good Jobs / Bad Jobs: The Rise of Polarized and Precarious Employment Systems in the United States, 1970s to 2000s. New York: Russell Sage Foundation. Kalleberg, Arne, and Peter Marsden. 2005.

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Relationships are an intrinsic part of the workplace, and fairness perceptions are therefore basic to how decisions are made within it. The factors driving wage setting arise not just from an employer’s consideration of the additional output a worker might provide if given a higher wage, but on the worker’s perceptions of the fairness of that wage. For example, Daniel Kahneman, one of the pioneers of behavioral economics, showed that people’s perception of the fairness of a wage cut depends on why they feel it was done: cuts driven by increases in unemployment (and therefore more people looking for work) are viewed as unfair; a company that cuts wages because it is on the brink of bankruptcy is judged more favorably.

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Thornton, Dorothy, Neil Gunningham, and Robert Kagan. 2005. “General Deterrence and Corporate Environmental Behavior.” Law and Policy 27, no. 2: 262–288. Torgler, Benno. 2006. “The Importance of Faith: Tax Morale and Religiosity,” Journal of Economic Behavior and Organization 61, no. 1: 81–109. Tversky, Amos, and Daniel Kahneman. 1974. “Judgment under Uncertainty: Heuristics and Biases.” Science 185, no. 4157: 1125–1131. U.S. Department of Commerce, Bureau of Economic Analysis. 2011. National Income and Product Accounts. http://www.bea.gov/national/index.htm#gdp. U.S. Department of Labor. 1998a. “Full Hot Goods Compliance Program Agreement.”

What's Next?: Unconventional Wisdom on the Future of the World Economy
by David Hale and Lyric Hughes Hale
Published 23 May 2011

Evidence suggests that most institutional investors were initially highly skeptical of the rebound, but then many decided to buy into the market, not wanting to miss an upturn—thus creating a positive feedback loop. Why Neuroeconomics Disproves the Theory of Rationality Since the 1970s, with the pioneering work of Daniel Kahneman and Amos Tversky, we have understood how heuristics distort our ability to make rational decisions. Kahneman and Tversky investigated the apparent anomalies in human behavior that lead to asymmetries in the choices we make. In particular, they investigated how the framing of an identical issue can lead to either risk-averse or risk-seeking behavior.

The Four Pillars of Investing: Lessons for Building a Winning Portfolio
by William J. Bernstein
Published 26 Apr 2002

The two-point percentage is about 50%, meaning that your chance of winning is only 25%, since making the goal only serves to throw the game into overtime. A three-point shot wins the game and has a better success rate—about 33%. At about the same time in the early 1970s that Thaler and his friend were deciding whether or not to brave the snowstorm, two Israeli psychologists, Daniel Kahneman and Amos Tversky, were studying the imperfections in the human decision-making process in a far sunnier clime. They published a landmark paper in the prestigious journal Science, in which they outlined the basic errors made by humans in estimating probabilities. A typical riddle: “Steve is very shy and withdrawn, invariably helpful, but with little interest in people, or in the world of reality . . .”

Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist
by Kate Raworth
Published 22 Mar 2017

From calculating to approximating Homo sapiens clearly can’t match the infallibility of rational economic man. That much has been agreed upon since the 1950s when Herbert Simon broke rank with his fellow economists and started to study how people actually behaved, finding their rationality to be severely ‘bounded’. His findings, augmented by those of psychologists Daniel Kahneman and Amos Tversky in the 1970s, gave birth to the field now known as behavioural economics, which studies the many kinds of ‘cognitive bias’ that systematically cause humans to deviate from the ideal model of rationality. Examples abound. We (the WEIRD ones, at least) typically exhibit: availability bias – making decisions on the basis of more recent and more accessible information; loss aversion – the strong preference to avoid a loss rather than to make an equivalent gain; selective cognition – taking on board facts and arguments that fit with our existing frames; and risk bias – underestimating the likelihood of extreme events, while overestimating our ability to cope with them.

Exponential: How Accelerating Technology Is Leaving Us Behind and What to Do About It
by Azeem Azhar
Published 6 Sep 2021

A growth rate of around 40 per cent – roughly what Moore’s Law describes – would see around a 32,000-fold increase in that time. One peer-reviewed summary from 1975 summarises the issue: underestimation of exponential growth is a ‘general effect which [is] not reduced by daily experience with growing processes’.13 This blind spot has a close relative – the ‘anchoring bias’. The Nobel Prize-winning economists Daniel Kahneman and Amos Tversky have explored how people make decisions amid uncertainty. They found that, when presented with a numerical challenge, people tend to fix upon some readily available number and adjust their responses around it. It’s a trick salespeople use: by starting at a particular price, they anchor our expectations about what the real value of something might be.

Deep Medicine: How Artificial Intelligence Can Make Healthcare Human Again
by Eric Topol
Published 1 Jan 2019

In Superforecasting, Philip Tetlock observes, “If you don’t get feedback, your confidence grows much faster than your accuracy.”9 The lack of emphasis on diagnostic skills during and after medical school, however, seems to be overshadowed by the lack of appreciation of deep cognitive biases and distortions that can lead to diagnostic failure. They’re not even part of teaching diagnosis today in medical school. In The Undoing Project: A Friendship That Changed Our Minds, Michael Lewis wrote about Donald Redelmeier, a Canadian physician who as a teenager was inspired by Amos Tversky and Danny Kahneman.10 At Sunnybrook Hospital’s trauma center, he asked his fellow physicians to slow down, tame System 1 thinking, and try to avoid mental errors in judgment. “You need to be so careful when there is one simple diagnosis that instantly pops into your mind that beautifully explains everything all at once.

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chapter three MEDICAL DIAGNOSIS To be a good diagnostician, a physician needs to acquire a large set of labels for diseases, each of which binds an idea of the illness and its symptoms, possible antecedents and causes, possible developments and consequences, and possible interventions to cure or mitigate the illness. —DANIEL KAHNEMAN Computing science will probably exert its major effects by augmenting and, in some cases, largely replacing the intellectual functions of the physician. —WILLIAM B. SCHWARTZ, 1970 IT WAS THE BEGINNING OF MY THIRD YEAR OF MEDICAL SCHOOL. I was in the Introduction to Clinical Medicine clerkship at Strong Memorial Hospital in Rochester, New York.

Transaction Man: The Rise of the Deal and the Decline of the American Dream
by Nicholas Lemann
Published 9 Sep 2019

The other was behavioral economics, which focused on the many ways the human mind was naturally prone to misperceive reality and how that would affect people’s interactions with economic markets. Both ideas, by positing that markets behaved imperfectly, were opening the door to a role for government in improving the way markets functioned, and this was a highly offensive idea to Jensen. The fathers of behavioral economics were two psychologists, Daniel Kahneman and Amos Tversky; their main link to economics was Richard Thaler, whose first job was as a junior faculty member at Rochester’s business school. Naturally, Jensen and Thaler quarreled constantly. Thaler eventually left for the University of Chicago’s business school, where he began to quarrel constantly with Eugene Fama.

Statistics hacks
by Bruce Frey
Published 9 May 2006

Most people, however, even though they are rational, intelligent decision makers, will be drawn toward sentences that are conjunctions (i.e., that list two separate "facts"), as if the listing of the "facts" together makes them more likely to be true. Even if, and maybe especially if, the second "fact" by itself seems unlikely. Conjunction Junction, What's Your Function? Why do our minds tend to work this way? In the 1970s, Nobel Prize winner Daniel Kahneman and his colleague Amos Tversky presented college students with several problems in which one option was highly representative of a given personality description, one option was incongruent with the description, and one option included both the highly similar and the incongruent options. Perhaps the most well-known problem that demonstrates the conjunction fallacy is the now-famous (at least in cognitive psychology circles) Linda Problem: Linda is 31 years old, single, outspoken, and very bright.

The Theory That Would Not Die: How Bayes' Rule Cracked the Enigma Code, Hunted Down Russian Submarines, and Emerged Triumphant From Two Centuries of Controversy
by Sharon Bertsch McGrayne
Published 16 May 2011

Harsanyi often used Bayes to study competitive situations where people have incomplete or uncertain information about each other or about the rules. Harsanyi also showed that Nash’s equilibrium for games with incomplete or imperfect information was a form of Bayes’ rule. In 2002 Bayes won perhaps not an entire Nobel Prize but certainly part of one. Psychologists Amos Tversky, who died before the prize was awarded, and Daniel Kahneman showed that people do not make decisions according to rational Bayesian procedures. People answer survey questions depending on their phrasing, and physicians choose surgery or radiation for cancer patients depending on whether the treatments are described in terms of mortality or survival rates.

A People's History of Poverty in America
by Stephen Pimpare
Published 11 Nov 2008

Bremner, From the Depths: The Discovery of Poverty in the United States (New York: NYU Press, 1956 [1972]), 13. 26 Victoria Byerly, Hard Times Cotton Mill Girls: Personal Histories of Womanhood and Poverty in the South (Ithaca, NY: ILR Press, 1986), 6. 27 Richard Layard, Happiness: Lessons from a New Science (New York: Penguin, 2005), 48. 28 Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision Under Risk,” Econometrica 47, no. 2 (March 1979): 263–92. 29 Amartya Sen, Development as Freedom (New York: Anchor, 1999), 89. Emphasis in original. 30 Still, if 40 percent of all Americans were poor in 1900, that represents some 30,397,830 souls; but a 13.8 percent poverty rate in 1995 means that 36,317,184 people were poor.

Click Here to Kill Everybody: Security and Survival in a Hyper-Connected World
by Bruce Schneier
Published 3 Sep 2018

Maria Lamagna (26 Sep 2017), “After breach, Equifax CEO leaves with $18 million pension, and possibly more,” Market-Watch, https://www.marketwatch.com/story/equifax-ceo-leaves-with-18-million-pension-and-maybe-more-2017-09-26. 124His failed bet cost the company: Catalin Cimpanu (11 Nov 2017), “Hack cost Equifax only $87.5 million—for now,” Bleeping Computer, https://www.bleepingcomputer.com/news/business/hack-cost-equifax-only-87-5-million-for-now. 124The Deepwater Horizon disaster cost BP: Nathan Bomey (14 Jul 2016), “BP’s Deepwater Horizon costs total $62B,” USA Today, https://www.usatoday.com/story/money/2016/07/14/bp-deepwater-horizon-costs/87087056. 124We are biased towards preferring: Daniel Kahneman and Amos Tversky (Mar 1979), “Prospect theory: An analysis of decision under risk,” Econometrica 47, no. 2, https://www.princeton.edu/~kahneman/docs/Publications/prospect_theory.pdf. 125This doesn’t mean that no one ever: Bruce Schneier (Jul/Aug 2008), “How the human brain buys security,” IEEE Security & Privacy, https://www.schneier.com/essays/archives/2008/07/how_the_human_brain.html. 125Equifax learned about its 2017 hack in July: Dan Goodin (2 Oct 2017), “A series of delays and major errors led to massive Equifax breach,” Ars Technica, https://arstechnica.com/information-technology/2017/10/a-series-of-delays-and-major-errors-led-to-massive-equifax-breach. 125When Yahoo was hacked in 2014: Jamie Condliffe (15 Dec 2016), “A history of Yahoo hacks,” MIT Technology Review, https://www.technologyreview.com/s/603157/a-history-of-yahoo-hacks. 125Uber, for a year: Andy Greenberg (21 Nov 2017), “Hack brief: Uber paid off hackers to hide a 57-million user data breach,” Wired, https://www.wired.com/story/uber-paid-off-hackers-to-hide-a-57-million-user-data-breach. 125One study found that stock prices: Russell Lange and Eric W.

The Missing Billionaires: A Guide to Better Financial Decisions
by Victor Haghani and James White
Published 27 Aug 2023

Swensen is likely correct that few market participants today know how to calibrate their own utility function, but this is an issue of education rather than possibility. Reasonable calibration procedures are both possible and straightforward, and we explore them in detail in Chapter 12. Prospect Theory and “Loss Aversion” Prospect theory was developed by psychologists Daniel Kahneman and Amos Tversky to explain how people behave when facing risky decisions. They observed that behavior systematically disagrees with the predictions of classical economics driven by maximizing Expected Utility. In particular, they observed, over and over again, three noteworthy patterns of behavior: People weigh the pain of small losses a lot more than the pleasure of small gains.

Culture and Prosperity: The Truth About Markets - Why Some Nations Are Rich but Most Remain Poor
by John Kay
Published 24 May 2004

On arriving at the theater, you find that you have lost the ticket. Would you buy a new ticket? You have decided to see a play for which tickets cost $50 and on your way to the theater lose a $50 note. Do you still buy a ticket to the play? This is one of a set of pairs of questions posed in the 1970s by two Israeli psychologists, Dan Kahnemann and Amos Tversky, who created the subject now called behavioral economics. Kahneman and Tversky found that practically all their subjects would still go to the play if they had lost $50, but less than half would still go if they had lost the $50 ticket. Kahneman and Tversky did not simply challenge the standard economic assumption of rationality, but began to identify patterns of "irrationality."

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Fogel USA 1993 Quantitative economic history Milton Friedman USA 1976 Macroeconomics Ragnar Frisch Norway 1969 Economic dynamics CWJ Granger UK 2003 Time series analysis Trygve Haavelmo Norway 1989 Econometrics John C. Harsanyi USA 1994 Game theory Friedrich von Hayek Austria/ UK 1974 Economic systems James J. Heckman USA 2000 Econometrics John R. Hicks UK 1972 General equilibrium theory Daniel Kahneman USA 2002 Behavioral economics Leonid Vitaliyevich Kantorovich USSR 1975 Optimization modeling Lawrence R. Klein USA 1980 Econometrics Tjalling C. Koopmans USA Simon Kuznets USA 1975 Optimization modeling 1971 Empirical studies of economic growth Wassily Leontief USA 1973 Input-output analysis Appendix { 359} Name Country Year Subject Arthur Lewis UK 1979 Development economics Robert E.

The Personal MBA: A World-Class Business Education in a Single Volume
by Josh Kaufman
Published 2 Feb 2011

The best way to help your customers Visualize is to expose them to as much sensory information as possible—the information their mind uses to conclude, “I want this.” SHARE THIS CONCEPT: http://book.personalmba.com/visualization/ Framing Everything we hear is an opinion, not a fact. Everything we see is a perspective, not the truth. —MARCUS AURELIUS, ROMAN EMPEROR AND PHILOSOPHER In a famous experiment conducted by psychologists Amos Tversky and Daniel Kahneman, participants were asked to make a decision about administering medical treatment to a sick population of six hundred people. Participants in the study were given two options: Treatment A would save two hundred lives. Treatment B had a 33 percent chance of saving all six hundred people and a 66 percent possibility of saving no one.

Alex's Adventures in Numberland
by Alex Bellos
Published 3 Apr 2011

‘Whenever they are not brutalized, but delicately handled by the higher methods, and are warily interpreted, their power of dealing with complicated phenomena is extraordinary.’ In 2002 the Nobel Prize in Economics was not won by an economist. It was won by the psychologist Daniel Kahneman, who had spent his career (much of it together with his colleague Amos Tversky) stdying the cognitive factors behind decision-making. Kahneman has said that understanding regression to the mean led to his most satisfying ‘Eureka moment’. It was in the mid 1960s and Kahneman was giving a lecture to Israeli air-force flight instructors.

The Billionaire Raj: A Journey Through India's New Gilded Age
by James Crabtree
Published 2 Jul 2018

Meanwhile the total debts of each tycoon, much of it taken on by creatively shifting funds around, had reached alarming levels. “We called this the layering of debt,” Gupta said. “And that was why it was called ‘House of Debt,’ because you had these industrial houses with debt everywhere, and no equity, ready to fall down.” The more charitable explanation was what economists Daniel Kahneman and Amos Tversky call the “planning fallacy,” a psychological bias in which those setting up projects use “forecasts that are unrealistically close to best-case scenarios.”9 In India, this meant that new steel mills were built on the assumption that steel demand would rise forever. In the same vein, power stations were planned on the basis that coal imports would always be cheaply available, hence why so many were built on India’s western coast, thousands of kilometers away from the country’s main coal supplies in the east.

Investing Amid Low Expected Returns: Making the Most When Markets Offer the Least
by Antti Ilmanen
Published 24 Feb 2022

Jurek, Jakub (2014), “Crash-neutral currency carry trades,” Journal of Financial Economics 113, 325–347. Kahn, Ronald N.; Matthew H. Scanlan; and Laurence B. Siegel (2006), “Five myths about fees,” Journal of Portfolio Management 32(3,) 56–64. Kahneman, Daniel (2011), Thinking, Fast and Slow, Farrar, Straus and Giroux. Kahneman, Daniel; and Amos Tversky (1979), “Prospect theory: An analysis of decision under risk,” Econometrica 47(2), 263–291. Kahneman, Daniel; and Dan Lovallo (1993), “Timid choices and bold forecasts: A cognitive perspective on risk taking,” Management Science 39(1), 17–31. Kaminski, Kathryn (2011), “In search of crisis alpha: A short guide to investing in managed futures,” CME Group white paper.

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This section diagnoses the problem – discussing both the causes and consequences of impatience – and then suggests some practical remedies against impatience. Causes of Impatience Many investors are aware of the academic argument that we may need decades of data to statistically distinguish luck from skill. And yet, and yet, it seems humanly impossible to wait for evidence to accrue. Guided by what Nobel Prize winner Daniel Kahneman has mischievously called “the law of small numbers,” investors tend to expect any long-run edge to manifest itself within a short period. When outcomes fail to live up to the anticipated (but unrealistic) consistency, investors too often assume that the edge has vanished, and may then impatiently deallocate.

Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals
by David Aronson
Published 1 Nov 2006

The bad news is that human intelligence is maladapted to making accurate judgments in situations characterized by uncertainty. Under conditions of uncertainty, intuitive judgments and informally acquired knowledge are often wrong. Because financial market behavior is highly uncertain, erroneous knowledge in this domain is to be expected. The pioneering research of Daniel Kahneman, Paul Slovic, and Amos Tversky showed that illusory knowledge19 originates in two ways. First, people are plagued by various cognitive biases and illusions that distort what we experience and how we learn from that experience. Second, to compensate for the mind’s limited abilities to process information, human intelligence has evolved various mental shortcuts called judgment heuristics.

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THE INTUITIVE JUDGMENT AND THE ROLE OF HEURISTICS “To simplify, there are basically two types of thought processes: automatic and controlled.”137 “Intuition is automatic. It is our capacity for direct knowledge, for immediate insight without observation or reason.”138 It is perception-like, rapid, and effortless, notes Princeton University psychologist Daniel Kahneman. In contrast, “deliberate or controlled thinking is reasoning-like, critical, and analytic.”139 The prototype of controlled thought is scientific reasoning. The prototype of intuition is the brilliant medical diagnostician who always seems to sniff the underlying disease. Subjective technicians rely primarily on intuition, and they do so to their detriment.

The Future of the Internet: And How to Stop It
by Jonathan Zittrain
Published 27 May 2009

Supp. 135, 139—40 (S.D.N.Y. 1991) (discussing the nature of CompuServe’s involvement in running the forums). 18. See ADVANCES IN BEHAVIORAL ECONOMICS (Colin F. Camerer, George Loewenstein & Matthew Rabin eds., 2003); Christine Jolls, Cass R. Sunstein & Richard Thaler, A Behavioral Approach to Law and Economics, 50 STAN. L. REV. 1471 (1998); Daniel Kahne-man & Amos Tversky, Prospect Theory: An Analysis of Decision Under Risk, 47 ECONO-METRICA 263 (1979). 19. See Cass R. Sunstein, INFOTOPIA 80 (2006). 20. Tim Wu, Wireless Carterfone, 1 INT’L. J. COMM. 389, 404—15 (2007), available at http://ijoc.org/ojs/index.php/ijoc/article/view/152/96. 21. See id. at 419. 22.

Being Wrong: Adventures in the Margin of Error
by Kathryn Schulz
Published 7 Jun 2010

Keeler’s The Problem of Error from Plato to Kant: A Historical and Critical Study (Apud Aedes Pontificiae Universitatis Gregorianae, 1934), 150: “We proceed wrongly in examining false judgments without first having first determined what knowledge is, for it is impossible to understand the former until the latter has been accurately defined.” “Mistakes may be defined.” James Reason, Human Error (Cambridge University Press, 1990), 9. Notwithstanding some dense prose, Reason does a deft and interesting job of ferreting out the practical applications of the insights of cognitive scientists (most famously Amos Tversky and Daniel Kahneman) about predictable failures of human cognition—so-called “cognitive illusions.” And he does so while recognizing that, even as such illusions make us err, they also make us swift and often reliable thinkers. See especially Chapter Five, “A Design for a Fallible Machine.” Iris Murdoch.

A Generation of Sociopaths: How the Baby Boomers Betrayed America
by Bruce Cannon Gibney
Published 7 Mar 2017

Regardless of the school, every variety of neoliberalism depends upon key and problematic assumptions: that individuals are rational, prudent, and informed, and that they therefore can be relied upon to meet their own needs. Most economic theories rely on these assumptions, but few to the degree that neoliberalism does. However, a large body of work, especially by Amos Tversky and Daniel Kahneman, shows that humans are not wholly rational agents, that we are susceptible to numerous cognitive biases that drive our thinking away from the rational idea. These biases lurk in normal people, but sociopaths operate at even greater remove from the rational ideal, prey to needs for immediate gratification, fond of risk, and unable to plan for the future.

Extreme Money: Masters of the Universe and the Cult of Risk
by Satyajit Das
Published 14 Oct 2011

Former risk manager Barry Schacter offered an alternative definition of VAR: “a number invented by purveyors of panaceas for pecuniary peril intended to mislead senior management and regulators into false confidence that market risk is adequately understood and controlled.”22 Everything Is Just Noise The new theories required that everyone has rational expectations, that is, the population is correct on average even if no individual person is. Behavioral economist Amos Tversky summed it up: “When we talk about individuals, especially policy makers, they all make errors in their decisions. But in aggregate, they all get it right?”23 Exceptions and anomalies increasingly undermined the theory of efficient markets. There was the turn-of-the-year effect, where stocks seemed to rise in January each year.

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There was the turn-of-the-year effect, where stocks seemed to rise in January each year. Small-size firms outperformed large stocks—the small-firm effect. In the loser effect, stocks that had fallen significantly outperformed stocks that performed well in previous periods. There was little relationship between beta (risk) and return. Behavioural economists, such as Tversky, Daniel Kahneman and Richard Thaler, argued that efficient financial markets were rife with cognitive biases and errors in reasoning and information processing, including overconfidence, overreaction, representative bias, information bias, and the use of linear reasoning. Cliff Asness, a student of Fama and founder of hedge fund AQR Capital Management, exploited these anomalies.

The Secret of Our Success: How Culture Is Driving Human Evolution, Domesticating Our Species, and Making Us Smarter
by Joseph Henrich
Published 27 Oct 2015

I read books on cognitive psychology, decision-making, experimental economics, biology, and evolutionary psychology. Then I moved to journal articles. I read every article ever written on an economics experiment called the Ultimatum Game, which I’d used during my second and third summers with the Matsigenka. I also read a lot by the psychologists Daniel Kahneman and Amos Tversky, as well as by a political scientist named Elinor Ostrom. Kahneman and Ostrom would, years later, both receive Nobel Prizes in economics. Of course, along the way, I never stopped reading anthropological ethnographies (this was my “fun” reading). In many ways, that year was the first year of research on this book, and by the end of it, I had developed a murky vision for what I wanted to do.

Behave: The Biology of Humans at Our Best and Worst
by Robert M. Sapolsky
Published 1 May 2017

Just an innocuous string of words. Words unconsciously shift thoughts and feelings. One person’s “terrorist” is another’s “freedom fighter”; politicians jockey to commandeer “family values,” and somehow you can’t favor both “choice” and “life.”*30 There are more examples. In Nobel Prize–winning research, Daniel Kahneman and Amos Tversky famously showed word framing altering decision making. Subjects decide whether to administer a hypothetical drug. If they’re told, “The drug has a 95 percent survival rate,” people, including doctors, are more likely to approve it than when told, “The drug has a 5 percent death rate.”*31 Embed “rude” or “aggressive” (versus “considerate” or “polite”) in word strings, and subjects interrupt people more immediately afterward.

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For example, while people might accurately assess the risk of a behavior, they tend toward distortive optimism when assessing risk to themselves—“Nah, that couldn’t happen to me.” Irrational optimism can be great; it’s why only about 15 percent instead of 99 percent of humans get clinically depressed. But as emphasized by the Nobel Prize–winning psychologist Daniel Kahneman, irrational optimism in warfare is disastrous. This can range from the theologically optimistic conviction that God is on your side to the tendency of military strategists to overestimate their side’s capabilities and underestimate those of the opposition—“piece of cake, full steam ahead” becomes the logical conclusion.42 A final domain of irrationality that must be recognized concerns chapter 15’s “sacred values,” where purely symbolic acts can count for more than hard-nosed material concessions.

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This might also be a way to frame the explanation for why, in that cross-cultural study of small-scale societies discussed above, those with the most market integration had the most prosocial game play—what markets and cash economies do is shift a world of reciprocal altruism from the realm of social intuition to social calculation. * These themes bear a strong resemblance to those of the economics Nobel laureate Daniel Kahneman, in his best seller, Thinking, Fast and Slow—rather than framing things in a moral arena, his analysis is of the differing strengths and weaknesses of fast intuitive thinking and slow analytical thinking in the realm of economics. * Although the neuroscientist Sam Harris, in his book Lying, argues that all lying—even white lies, lies to spare someone’s feelings, lies accomplishing the proverbial heroics of, say, hiding a runaway slave—are wrong

Enlightenment Now: The Case for Reason, Science, Humanism, and Progress
by Steven Pinker
Published 13 Feb 2018

The peace researcher John Galtung pointed out that if a newspaper came out once every fifty years, it would not report half a century of celebrity gossip and political scandals. It would report momentous global changes such as the increase in life expectancy.10 The nature of news is likely to distort people’s view of the world because of a mental bug that the psychologists Amos Tversky and Daniel Kahneman called the Availability heuristic: people estimate the probability of an event or the frequency of a kind of thing by the ease with which instances come to mind.11 In many walks of life this is a serviceable rule of thumb. Frequent events leave stronger memory traces, so stronger memories generally indicate more-frequent events: you really are on solid ground in guessing that pigeons are more common in cities than orioles, even though you’re drawing on your memory of encountering them rather than on a bird census.

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As soon as they do, they have committed themselves to reason—and the listeners they are trying to convince can hold their feet to the fire of coherence and accuracy. * * * By now many people have become aware of the research in cognitive psychology on human irrationality, explained in bestsellers like Daniel Kahneman’s Thinking Fast and Slow and Dan Ariely’s Predictably Irrational. I’ve alluded to these cognitive infirmities in earlier chapters: the way we estimate probability from available anecdotes, project stereotypes onto individuals, seek confirming and ignore disconfirming evidence, dread harms and losses, and reason from teleology and voodoo resemblance rather than mechanical cause and effect.5 But as important as these discoveries are, it’s a mistake to see them as refuting some Enlightenment tenet that humans are rational actors, or as licensing the fatalistic conclusion that we might as well give up on reasoned persuasion and fight demagoguery with demagoguery.

Human Diversity: The Biology of Gender, Race, and Class
by Charles Murray
Published 28 Jan 2020

Of the 39 articles that presented either survey data or quantitative experimental results, 33 were on topics for which polygenic scores would be directly relevant. In almost half (18 of the 39), the major topic of the article directly involved sex, ethnicity, or class.[31] Economics and political science. The role of psychological factors in economics goes back to Adam Smith’s Theory of Moral Sentiments. The work of Daniel Kahneman, Amos Tversky, and Paul Slovic on decision making under conditions of uncertainty and, more recently, the work of Cass Sunstein and Richard Thaler on “nudge” theory, are both rich fields of study that will be informed by genomic data.32 They are only part of the growing field of behavioral economics.

The WEIRDest People in the World: How the West Became Psychologically Peculiar and Particularly Prosperous
by Joseph Henrich
Published 7 Sep 2020

Steve, whose research was (I suspect) often inspired by interactions with his Japanese wife, had been comparing how Canadians and Japanese think about themselves in relation to others and how that affects their motivations, decision-making, and sense of self. Independently, all three of us had noticed—within our separate domains of expertise—that Western populations were often unusual when compared to two or more other populations. Over Chinese takeout, in a basement food court where the famed psychologists Daniel Kahneman and Amos Tversky had purportedly hatched their plans to examine rational decision-making, we decided to compile all the cross-cultural studies that we could locate on important aspects of human psychology. After carefully reviewing all the research that we could locate, we arrived at three striking conclusions: Massively biased samples: Most of what was known experimentally about human psychology and behavior was based on studies with undergraduates from Western societies.

Empire of Things: How We Became a World of Consumers, From the Fifteenth Century to the Twenty-First
by Frank Trentmann
Published 1 Dec 2015

See also: Michel de Certeau, The Practice of Everyday Life (Berkeley, CA, 1974/1984). For different academic approaches, see: Daniel Miller, ed., Acknowledging Consumption: A Review of New Studies (London, 1995); Martyn J. Lee, The Consumer Society Reader (Malden, MA, 1999); and Juliet B. Schor & Douglas B. Holt, eds., The Consumer Society Reader (New York, 2000). 11. Daniel Kahneman & Amos Tversky, eds., Choices, Values, and Frames (Cambridge, 2000). 12. John Kenneth Galbraith, The Affluent Society (New York, 1958), 203. 13. The Works of Aurelius Augustine, Vol. II : The City of God (Edinburgh, 1871), 518. 14. ‘History and Literature’, repr. in T. Roosevelt, History as Literature and Other Essays (New York, 1913), 27.

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It is useful asking people how happy they feel overall, but everyday life is a mix of more or less pleasant activities. We can learn a lot from asking in addition how satisfying or annoying they find particular activities on a given day and then checking how much time they devoted to each. This, put crudely, is the day-reconstruction method developed by the Nobel Prize-winning psychologist Daniel Kahneman. It has been the basis of an innovative inquiry into time use and well-being in France and the United States led by Kahneman, his Princeton colleague Alan Krueger and four other experts. The team interviewed eight hundred women in middle America (Columbus, Ohio) and a similar sample in the middle of France (Rennes) in 2005.42 The result is a ‘U-index’, a misery index which measures the percentage of time spent in an unpleasant state.

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According to the US Panel Study of Income Dynamics, 9% of all employees were downshifters who opted for lower earnings at some stage during the period 1983 to 1992; R. E. Dwyer, ‘Downward Earnings Mobility after Voluntary Employer Exits’, in: Work and Occupations 31, no. 1, 2004: 111–39. 39. Daniel Kahneman, Ed Diener & Norbert Schwarz, eds., Well-Being: The Foundations of Hedonic Psychology (New York, 1999); Richard Layard, Happiness: Lessons from a New Science (New York, 2005); and Luigino Bruni & Pier Luigi Porta, eds., Economics and Happiness: Framing the Analysis (New York, 2006). Of course, happiness extends beyond behavioural economics: for other approaches see: Dieter Thomä, Christoph Henning & Olivia Mitscherlich-Schönherr, eds., Glück: Ein interdisziplinäres Handbuch (Stuttgart, 2011). 40.

The Blank Slate: The Modern Denial of Human Nature
by Steven Pinker
Published 1 Jan 2002

Murray’s libertarianism leads him to oppose government programs that are more activist than that, but he and Herrnstein noted that a hereditarian left is a niche waiting to be filled. An important challenge to conservative political theory has come from behavioral economists such as Richard Thaler and George Akerlof, who were influenced by the evolutionary cognitive psychology of Herbert Simon, Amos Tversky, Daniel Kahneman, Gerd Gigerenzer, and Paul Slovic.54 These psychologists have argued that human thinking and decision making are biological adaptations rather than engines of pure rationality. These mental systems work with limited amounts of information, have to reach decisions in a finite amount of time, and ultimately serve evolutionary goals such as status and security.

How the Mind Works
by Steven Pinker
Published 1 Jan 1997

The founders of probability theory, like the founders of logic, assumed that they were just formalizing common sense. But then why do people often seem to be “probability-blind,” in the words of Massimo Piattelli-Palmarini? Many mathematicians and scientists have bemoaned the innumeracy of ordinary people when they reason about risk. The psychologists Amos Tversky and Daniel Kahneman have amassed ingenious demonstrations of how people’s intuitive grasp of chance appears to flout the elementary canons of probability theory. Here are some famous examples. • People gamble and buy state lottery tickets, sometimes called “the stupidity tax.” But since the house must profit, the players, on average, must lose

Networks, Crowds, and Markets: Reasoning About a Highly Connected World
by David Easley and Jon Kleinberg
Published 15 Nov 2010

In Proc. 8th ACM SIGKDD International Conference on Knowledge Discovery and Data Mining, pages 133–142, 2002. [225] Ramesh Johari and Sunil Kumar. The interaction of positive externalities and congestion effects, 2006. Working paper. [226] Steve Jurvetson. What exactly is viral marketing? Red Herring, 78:110–112, 2000. [227] Daniel Kahneman and Amos Tversky. On the psychology of prediction. Psychological Review, 80(4):237–251, 1973. [228] Sham M. Kakade, Michael J. Kearns, Luis E. Ortiz, Robin Pemantle, and Siddharth Suri. Economic properties of social networks. In Proc. 17th Advances in Neural Information Processing Systems, 2004. [229] Denise B.

The Better Angels of Our Nature: Why Violence Has Declined
by Steven Pinker
Published 24 Sep 2012

So the death count of a war in 1600, for instance, would have to be multiplied by 4.5 for us to compare its destructiveness to those in the middle of the 20th century.9 The second illusion is historical myopia: the closer an era is to our vantage point in the present, the more details we can make out. Historical myopia can afflict both common sense and professional history. The cognitive psychologists Amos Tversky and Daniel Kahneman have shown that people intuitively estimate relative frequency using a shortcut called the availability heuristic: the easier it is to recall examples of an event, the more probable people think it is.10 People, for example, overestimate the likelihoods of the kinds of accidents that make headlines, such as plane crashes, shark attacks, and terrorist bombings, and they underestimate those that pile up unremarked, like electrocutions, falls, and drownings.11 When we are judging the density of killings in different centuries, anyone who doesn’t consult the numbers is apt to overweight the conflicts that are most recent, most studied, or most sermonized.