by Jerry Melchor
Read these two scenarios and note how you would answer the questions:
1) The Linda experiment: 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 antinuclear demonstrations. Which alternative is more probable? Linda is a bank teller. Linda is a bank teller and is active in the feminist movement.
2) The bat and ball question: A bat and ball cost $1.10. The bat costs one dollar more than the ball. How much does the ball cost?
Both of these experiments highlight most people’s inability to reign in their intuition. In Thinking, Fast and Slow, an amazingly readable book from one of the founding fathers of Behavioral Psychology, Daniel Kahneman tries to explain the roots of the imbalance between System 1 (intuition) and System 2 (logic).
System 1 is fast and emotional—the proverbial fight or flight response. System 2 requires effort, and should keep System 1 in check, but in fact does not because it is lazy and allows System 1 to get its way most of the time.
System 1 tends to use “default rules” that Kahneman and his late collaborator, Amos Tversky, termed heuristics and are the reason for System 1’s speed. The technical definition of heuristic is a simple procedure that helps find adequate, though often imperfect, answers to difficult questions. System 1 uses these rules to simplify things: what you see is all there is.
These include anchoring (setting a base rate or base line improperly and using it to answer a question), framing (how a question is asked can lead to a specific answer), hindsight, availability (the easier it is to recall an unlikely event, the greater the chances people will think that it happens more often than it really does), the planning fallacy, or sunk cost fallacy (i.e. optimism prevents one from really evaluating the final costs of renovating a kitchen). All of this results in the overconfidence of our intuition. In fact, Malcolm Gladwell’s book Blink is based on intuition and the ability of System 1.
Findings by Kahneman (and Tversky) led to the introduction of the field of Behavioral Psychology and ultimately the 2002 Nobel Prize in Economics for Kahneman, the only psychologist to receive the award so far. What Kahneman and Tversky realized is that we underestimate the effect of small numbers on conclusions; properly powering up experiments is needed and often neglected. We underestimate the contribution of chance in our lives (see Michael Lewis’ commencement speech to Princeton undergrads).
More importantly, Kahneman and Tversky posited that people do not behave according to what economists call the standard model (rational decision makers or “econs”), but behave according to prospective theory. We are loss-averse: compared to the risk of obtaining a sure gain, we want more of a return for the same risk if it involves a possible loss; and risk-averse: putters are more aggressive on par putts than birdie putts, even though both count for one stroke. People like to complete narratives with the available information for coherence, but this could lead to filling in some blanks incorrectly. Additionally, humans are prone to ego depletion. We only have a set number of decisions that we can properly make in a day—so make them count! This contributes to the formation of routines, so that harder decisions throughout the day can be given proper effort. The book ends with Kahneman’s recent research on happiness, and the difference between the remembering self and the experiencing self. There is an entertaining TED talk from Kahneman explaining this idea, and it is worth the 15 minutes1.
I have been on a non-fiction/Behavioral Economics kick lately. Compared to Malcolm Gladwell’s Blink (and his two other books), this book is more technically grounded, supported by experimental data, and less anecdotal. This sort of writing has been popular of late, and has spurred other writers to explore the field of Behavioral Psychology, resulting in many books that I consider good reads, from Michael Lewis (The Big Short: Inside the Doomsday Machine, Moneyball: The Art of Winning an Unfair Game, plus all his Vanity Fair articles), Charles Duhigg (Power of Habit: Why We Do What We Do in Life and Business), Jonah Lehrer (How We Decide), Joshua Foer (Moonwalking with Einstein: The Art and Science of Remembering Everything) and Nicholas Nassim Taleb (The Black Swan, which tended to be a little too technical). Yes, some chapters in Thinking, Fast and Slow are more technical than others, but the experiments are elegantly designed and well explained.
I cannot stress enough that Thinking, Fast and Slow is the best of the lot and should be in the library of anyone interested in how the mind works. Definitely worth reading! It is insightful and intellectual, well-written, and an enjoyable read—a desert island book for me.
In case you are interested:
Answer to problem 1: Kahneman and Tversky found that 89% of the undergraduates in their sample violated the logic of probability.
Answer to problem 2: A number came to your mind. The number of course, is 10: 10¢, while the correct answer is 5¢.
Reference:
1. www.ted.com/talks/daniel_kahneman_the_riddle_of_experience_vs_memory
May 2013