Thinking Fast and Slow: 33 Reversals

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In this chapter we are presented with a different type of bias: how we humans make a different decision depending on whether we can compare two different outcomes or not. When we are presented with two different situations to evaluate, the way we decide is highly influenced by the way the information is presented. In tone of the first experiments described people will choose a safer bet to a riskier one if presented together even if the riskier bet can give you more money. However if they are presented separated and one has to state what is the minimum amount of money that would desire to put on the safer, people tend to put a lot more money in the riskier bet.

Of course, such results are devastating for the  Morgenstern/von Neuman model which suppose that choices human make are “rational” and consistent, but it should worry us too that systematic inconsistency in the way we make decisions, as it is presented in several experiments related to trials and juries.

And we can forget very basic facts. In another experiment, if people are asked to give a donation to save dolphins from pollution or to save farmworkers from skin cancer, alone, people tend to give more people for the dolphins cause. The emotional impact of an endagered dolphin is greater than a farmer getting skin cancer; after all, they are supposed to work under the sun… However, when they are presented together people give more money to farmers. After all, they are human, and dolphins are not.

The main reason for such a discrepancy is the fact that when we have to choose among several choices it is more likely that system 2 activates.  So this chapter give us an interesting heuristics: when suspecting that one is under a rushed evaluation from system 1, consider other choices and force system 2 to show up. I think I’ll start right now to use it.

 

Thinking, Fast and Slow. 32 Keeping Score

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Money is important but not per se but because of its role as a proxy for feelings of accomplishment. Behavior in real humans is not dictated by rational calculations of gains and loses but for the pursue of emotional satisfaction. And emotions have their particularities and are sometimes coincident with the mythical rational man and sometimes not.

In this chapter we read about some psychological traits that are everywhere and which are very relevant in everyday life and that are quite well known. We are talking about the “sunken cost” effect that prevents you from stop loosing time and money in bad projects. We have the “disposition effect” that forces you to sell good performing investments and retain the losers. We have an asymmetry about the regret we feel when our actions had bad consequences in opposition to how we feel when our omissions had bad consequences. We don’t feel so much pain when we are bad after following the norm compared to what we feel when we are bad after braking the norm.

That’s how we are and if it is difficult to overcome this feelings oneself, to try to fight them in the people around when discussing joint actions that affect you is impossible. And that brings us to the interesting discussion that closes the chapter. These all are biases that decrease our overall practical and financial success. Sometimes they can seriously damage our health and life expectancy (we are over medicated and over treated because of this biases). However, it may be simply impossible to fight them. We hate losing money in a transaction in the same way that we like sugar. It is something physiological. You can’t help it. Maybe you just have to accept it and try to optimize your emotional well-being even knowing that you are harming your portfolio, wealth and health.

And that reminds me that I have always defended it as the most important argument in favor of having kids: it is what everybody does. If when you are old you discover that you made a mistake doing what everybody does, you are going to overcome it and be quite happy nevertheless. However, if your mistake was going against the norm, you are going to suffer strongly.

Thinking Fast and Slow 31: Risk Policies

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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.

 

 

Thinking, Fast and Slow. 30. Rare Events

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Well, here we are again dealing again with a real bias. And by that I mean a psychological characteristic of humans that provokes decisions that can be harming to themselves. We are talking here about the tendency to overestimate and overweight very unlikely events.

This is a natural tendency difficult to overcome even when we are perfectly conscious of its presence and of the absurdity of our behavior. Kahneman explains his experience with buses in Israel but I am sure that everyone of us can come up with similar stories in their private lives.

The central point of the chapter is that this probability insensibility (by overestimating or neglecting) is the result of the general biases of our system 1: cognitive ease, availability bias and confirmatory bias. Particularly, the most important point is the vividness that we attribute to the image of the rare event than we are judging. Events that can be clearly and vividly presented generate a response of our system 1 that contributes to the overweighting of that event. That is the case, for example, of the “denominator neglect”, because system 1 understands cases and individuals much better that percentages and statistics.

This knowledge creates tools for manipulation and deceptiveness. The way how a case is presented has a big influence in generating or not an overreaction to a rare event.

Its interesting the different response of subject studies to what is called here “choice from experience” and “choice from description”. Once again it goes to the question, that we have commented previously, of how much of this problems and biases are real problems in decision making or are artefacts that appear only when a verbal interpretation of the choices mediates in the decision process.

Thinking Fast and Slow 29 The Fourfold Pattern

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Here Kahneman studies how we combine expected probabilities of an event and how we value it in order to assign weights to different outcomes. That way, we assess how desirable it is for a person and what is its likelihood to happen.

Two main biases are presented here: the possibility effect and the certainty effect. The fact that we can change something from impossible to happen, to have certain probability to happen has a disproportionate effect on us. That’s the reason we buy lottery tickets: it rises a 0% probability to gain something to a very low probability. It is also the reason why we fear very small risks: the operation is quite safe, but there is a 1% risk that something bad happens.

In the certainty effect we know that something is going to happen, not that it has a 95% or a 99% to happen that it is going to happen for sure. This also has disproportionate effects on us.

So, Kahneman’s point here is that there is a relevant difference between the real probability of an outcome and how people calculate such probabilities. This clashes with Morgernstern and von Neumann theory of rational choice, that expects humans to be natural calculators of real mathematical probabilities.

To solve such a problem, within the prospect theory model, Kahneman and Tverksy proposed what is known as The Fourthfold pattern. Such schema predicts feeling and behavior of real humans considering the four combination of two variables: Probability (high or low) and expected value (gains or loses). In this model, emotions play a very substantial role, powered by risk aversion.

fourthfoldPatern

This chapter has the same problem we discussed when talking about Mr W. speciality or Linda the accountant. Yes, people have a different impression of risk and probability that the one that is taught in mathematics. So what? Consider the possibility effect: I am myopic and I need glasses. Surgery could solve that, but let’s say that there is a very small risk (less than %1) of losing my sight and becoming blind. I don’t care what a mathematician might say, I’m not going to take that risk, I prefer wearing glasses. If that makes me irational, so be it.

Kahneman is sympathetic with people like me, and admit that “The decisions described by the fourfold pattern are not obviously unreasonable” but says that in the long run, they are much costly.

The general discussion of gambling as a way to study how we make decisions, reminded me of Taleb and his critiques in Antifragile on how casinos are a very very bad model for studying risk. In real life, there is no way to ponder the probabilities of a certain event to happen, so at best, casino-based models are useless for any real risk assesment.

Thinking, Fast and Slow. 28. Bad Events

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Evolution has endowed us with a bigger sensitivity to bad things than to to good ones. That makes perfect sense since avoiding dangers efficiently contributes more to the survival of an individual than taking advantage of opportunities. What is good and what is bad is sometimes hardwired in our nervous system but sometimes is relative to a perceived reference point.

Loss aversion is a particular case of this universal asymmetric sensitivity. We value much more a loss than an equivalent gain. At first sight, this is shared wisdom and should surprise no one. The chapter tries to convey the idea that implications of this phenomenon go much deeper than what can be seen at first sight and offers us several examples.

Two appear to me as the most relevant.

First, it explains the universal resistance to reform, no matter how evident its gains may seem and how deficient the current situation may be. Those few that are going to loose with the change are going to fight much more that those who may end up gaining with it.

Second, it introduces the idea that economic action has to take into account perceived fairness.

This second point came as a revolution in the rational human based economic theory but I suspect that this ideas have been used in marketing and business for centuries. Everybody knows that if you want that those who can pay more to pay more, instead of raising the price for those who have a job, you have to raise the price for everybody and then make discounts for unemployed. The result is the same and you will be loved instead of despised.