Daniel Kahneman’s masterpiece : “Thinking, Fast and Slow” is just extraordinarily fascinating ! The author is a professor of psychology and Nobel Prize winner in Economic Sciences. Writing this, I’ve realized that I don’t usually read Nobel laureates’ books these days. But, this is not because I don’t like them but just because there are far more books written by non-Nobel laureates. Ah ha … This is a point about the “base-rate” that this book discusses and the importance of which is something I’ve learnt from this book.
Reading this book, I can’t help remembering Malcolm Gladwell’s popular book “Blink” which I’ve a while ago and Kahneman also mentions in this book (p. 235-6). “Blink” emphasizes on how important intuition is (sometimes can be more correct than detailed analysis !). This book of Kahneman’s probably tells us more about when intuition is wrong. Apart from the psychological processes and reasoning, in my opinion (as the author doesn’t really say), wrong intuitions are sometimes just related to intuition’s ineptness to do tricky probability calculations or some convoluted arithmetics.
It’s an extremely interesting book with a lot of useful insights that one might even use in real life. Some very practical examples include: p. 85, the dominant opinion in a meeting can have easily come from the 1st assertive speaker; or p. 372, the author shows us that gallons-per-mile, not mpg, should be the unit to use if you want to have the correct intuition for how much gasoline you’re going to save.
This book discusses a lot of topics and I guess the easiest way to summarize is to list the 3 main themes that the author has stated in the final chapter of conclusion, ie. System 1 (the intuition) vs System 2 (the analyzer), Econs (the rational) vs Humans (not always rational) and the Remembering Self (sensitive to the experience at the peak and at the end) vs Experiencing Self (the real experience).
In everyday’s life, most things (such as stock market and political elections) are determined by “randomness”. For example, the correlation between CFO’s estimates and the true value of the stock market (in short-term) is about zero. The worst news is that they don’t realize that their forecasts are worthless (p. 261).
“Regression to the mean” in Chapter 17 etc. is extremely interesting. After an extremely good performance, the next one is likely to be not as good (irrespective of whether or not a reward is given); whereas after an extremely bad performance, the next one is likely to be better (irrespective of whether punishment is made). Because extreme performances are just large fluctuations from the mean and performances closer to the mean are more often.
The author’s most famous theory is probably the “Prospect Theory” that he and Amos Tversky developed. They modified the classical ‘Expected Utility Theory” which assumes people are always rational. Major additions include the reference point and loss aversion. The loss is stronger than the gain for the same effect. Eg. when you ask people to choose between
- (1) sure loss of $50, and
- (2) 55% of losing $100 and 45% of losing nothing,
far more people would choose (2); whereas when asked to choose between
- (1) sure gain of $50, and
- (2) 55% of gaining $100 and 45% of getting nothing,
most people would likely choose (1). Facing loss, people would like to seek risk even if that choice has worse expectation value ! … I’ve made up the numbers in the above examples without surveying … but the book/author did.
The discussion of loss aversion has also reminded me of, for example, Hong Kong people’s behavior in terms of “New Territories Small House Policy” (丁屋) # ! Sometimes, I wonder why there haven’t been more people in HK who would stand up to fight against this “unfair” policy; whereas when discussing about abolishing this privilege, the oppositions from those who have been enjoying this privilege have been much much stronger !!! … Hmm. if I want to provoke HK people to stand up to fight to abolish this, I may need to somehow frame it as a severe LOSS of privilege for normal HK people compared to the guys who are benefit from this privilege.
On the other hand, the author tells us that “Prospect Theory” can’t cope with disappointment and regret. But theories including emotions of regret and disappointment make few striking predictions to make the added complications worthwhile (p. 288).
Some other things I’ve learnt include:
- Chicago School (favoring the rational-agent model/expected utility theory) seems to be against behavioral economists.
- Chapter 9: when our intuition can’t find the answer for a question, our intuition/System 1 would substitute it with a related/easier question and answer this easier question.
- p. 126, due to anchoring effect, if a supermarket has put up a sign like “limit of 12 per person”, shoppers would buy more, compared to the day if the supermarket has set no limit per person.
- p. 131, due to the availability bias, people remember their own efforts much more clearly than those of others, therefore you feel that you have done more than your share.
- p. 315-6, If you don’t ignore a very rare event, you will certainly overweight it. p. 333, thinking about a rare event, you try to make it true in your mind. When there is no overweighting, there will be neglect.
- p. 336, Humans by nature are narrow framers whereas a rational agent would engage in broad framing.
- p. 345, investing additional resources in a losing account when better investments are available is known as sunk-cost fallacy. We should just cut our loss and walk away.
Some other interesting or hilarious or notable words include:
- p. 118 (the law of small numbers), eg., small schools may be both the best schools or the worst schools, simply because small samples are more likely to produce extreme results.
- p. 226 (from Robyn Dawes), marital stability = frequency of lovemaking – frequency of quarrels !
- Chapter 23, adopting “outside view” would help us from being overconfident and too much drawn to our own “inside view” and prevent or mitigate the planning fallacy.
- p. 314, people are not perfectly rational … surprise, surprise !
- p. 370, “our moral intuitions are about descriptions, not about substance”. Hahaha !
There are just too many interesting stuff than I can write down concisely.
On p.461, the 2nd last line of the notes for p. 154: “4 x .031 = 12.4”, the “12.4” should either be “12.4%” or “0.124”; on p. 335, AD on the 17th line and BC on the 20th line seem swapped ?!
#Extracted (Mar. 11, 2012) from “http://en.wikipedia.org/wiki/Small_House_Policy”: “This “Policy” allows an indigenous male villager who is 18 years old and is descended through the male line from a resident in 1898 of a recognized village in the New Territories, an entitlement to one concessionary grant during his lifetime to build one small house.”