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Thinking Fast and Slow Part IV: Choices

04/14/2013

This part takes a historical look at economic theory’s view of decision making. Kahneman first looks at Bernoulli’s theory of utility, which had been widely (universally?) accepted for decades but is seriously flawed because it doesn’t take into account reference points. For example, two people, each with $100,000 may have very different happiness levels if one started with $1,000 and the other started with a million. So Kahneman and Tversky invented prospect theory, which takes the reference point into account.

The endowment effect causes people to value things more once they feel ownership of them. Even if previously judged equal in value, owned things are “endowed” with more value. This, in part explains loss aversion. Bad events, including losses, loom larger in our minds than positive events. This is potentially due to our evolutionary history, in which losing resources might mean starvation/death, whereas more resources were simply pleasant bonuses (you don’t get an extra life for having twice the food).

We strangely overvalue certainty. We’ll use a lot of resources to diminish risk to nothing, or increase gains to certainty, against what an agent seeking the highest utility would follow. Salient possibilities are also overweighted in probability and attention. Framing in ways that provoke certain emotional reactions can totally skew decision making. The same mathematical outcomes can be chosen differently depending on the framing (save 10% or kill 90%).

Kindle Notes:

The brains of humans and other animals contain a mechanism that is designed to give priority to bad news (5077).

The psychologist Paul Rozin, an expert on disgust, observed that a single cockroach will completely wreck the appeal of a bowl of cherries, but a cherry will do nothing at all for a bowl of cockroaches. As he points out, the negative trumps the positive in many ways, and loss aversion is one of many manifestations of a broad negativity dominance. Other scholars, in a paper titled “Bad Is Stronger Than Good,” summarized the evidence as follows: “Bad emotions, bad parents, and bad feedback have more impact than good ones, and bad information is processed more thoroughly than good (5088).

Gottman estimated that a stable relationship requires that good interactions outnumber bad interactions by at least 5 to 1 (5095).

My experience illustrates how terrorism works and why it is so effective: it induces an availability cascade. An extremely vivid image of death and damage, constantly reinforced by media attention and frequent conversations, becomes highly accessible, especially if it is associated with a specific situation such as the sight of a bus. The emotional arousal is associative, automatic, and uncontrolled, and it produces an impulse for protective action. System 2 may “know” that the probability is low, but this knowledge does not eliminate the self-generated discomfort and the wish to avoid it. System 1 cannot be turned off (5445).

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