Thinking Fast and Slow 31: Risk Policies

Following the schedule of our Reading Calendar

As if in a rollercoaster, we are back to a pseudo-bias in which stupid humans are not able to think as probability experts think they should.

It is clear that Carlos and I share the view of rationality that Kahneman presents here:

it helps us see the logical consistency of Human Preferences for what it is -a hopeless mirage.

However, I don’t think that the example presented in the first pages is a proof of such a consideration.

In the example, first we have to choose between a sure gain a a certain probability to win some more. Without trying any calculation most people will settle for the sure gain. However, if we are presented with two choices that both imply probabilities then we’ll make the calculation.

I don’t think that’s a problem, really. There is another way of reading the two situations. In the first situation we are faced with a real decision, and in the real world going for something sure is after all, not a bad heuristics. However, in the second situation it is clear from the framing of the problem, that the experimenter wants us to make probabilistic calculations, so we do it.

If the main point here would be that we humans are not rational in the sense described by Morgensten and von Neumann, I’d agree completely, but here Kahneman seems to argue that because we are not computing probabilities all the time we are doomed to failure and we are irrational.

The main problem described in this chapter -Samuelson’s problem- is boring as hell and it is another elaboration on how far humans are from being perfect statisticians.

The last part of the chapter, on risk policies makes sense -have a risk policy and apply it routinely whenever a relevan problem arises- but the description is too broad to be actionable.

Besides, nothing new has been presented. This chapter is  mostly prescindible.

 

 

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4 thoughts on “Thinking Fast and Slow 31: Risk Policies

  1. It seems to me that this is not a pseudo bias, it is a very real one. Every time you sign for extended insurance when buying an appliance you are loosing money because of unjustified loss aversion.
    Just as it is absurd to apply expected value for a one-in-life events, it is also absurd not to apply it for repeated events.
    It seams to me that “Risk Policy” is one of the important things to get out of the book. Of course, the best of the bests is the “Premortem” that alone justifies the book.

  2. Yes, you are right. The bias is real. I didn’t express myself clearly. I meant that the experiment used to present the bias is not relevant.
    And yes risk policies is a very relevant thing. I wish he would give more details about it

  3. That’s true. In general this experiments always rise the doubt if they really represent reality since they are carried out in such artificial environments.
    Moreover, there is a communication problem. It is very boring to read about them and they do not create lasting impressions in the reader. The message that they convey, if it reaches the reader at all, does not remain much in his mind. In a book like this it would be much useful to talk about colourful stories of how some one loses money by buying extended guarantees and other examples.

    I think that I remember more from The black Swan five years after reading it than from thinking slow and slower after a couple of days.

  4. Yes, very right. Taleb tells stories, and stories stay in our minds.
    I do remember some ideas of Thinking Fast and Slow, the first 60 pages or so made a great impression in my mind years ago when I first read it. I still can view other people actions and my own in terms of system 1 and system 2. I do try to fight the confirmation or the halo bias when it shows up, and so on.
    I think that what ruins the book is always scientific approach and systematicity. Everything said has to be backed by experiments and the same problem has to be presented from different perspectives so one can see how some academic discussions with no daily life implications are connected with such and such bias.
    Taleb is very different, thanks God.

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