Thinking, Fast and Slow

by Daniel Kahneman

  merchants, employers, and landlords: Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler, “Fairness as a Constraint on Profit Seeking: Entitlements in the Market,” The American Economic Review 76 (1986): 728–41.

  fairness concerns are economically significant: Ernst Fehr, Lorenz Goette, and Christian Zehnder, “A Behavioral Account of the Labor Market: The Role of Fairness Concerns,” Annual Review of Economics 1 (2009): 355–84. Eric T. Anderson and Duncan I. Simester, “Price Stickiness and Customer Antagonism,” Quarterly Journal of Economics 125 (2010): 729–65.

  altruistic punishment is accompanied: Dominique de Quervain et al., “The Neural Basis of Altruistic Punishment,” Science 305 (2004): 1254–58.

  actual losses and foregone gains: David Cohen and Jack L. Knetsch, “Judicial Choice and Disparities Between Measures of Economic Value,” Osgoode Hall Law Review 30 (1992): 737–70. Russell Korobkin, “The Endowment Effect and Legal Analysis,” Northwestern University Law Review 97 (2003): 1227–93.

  asymmetrical effects on individual well-being: Zamir, “Law and Psychology.”

  29: The Fourfold Pattern

  and other disasters: Including exposure to a “Dutch book,” which is a set of gambles that your incorrect preferences commit you to accept an { to>

  puzzle that Allais constructed: Readers who are familiar with the Allais paradoxes will recognize that this version is new. It is both much simpler and actually a stronger violation than the original paradox. The left-hand option is preferred in the first problem. The second problem is obtained by adding a more valuable prospect to the left than to the right, but the right-hand option is now preferred.

  sorely disappointed: As the distinguished economist Kenneth Arrow recently described the event, the participants in the meeting paid little attention to what he called “Allais’s little experiment.” Personal conversation, March 16, 2011.

  estimates for gains: The table shows decision weights for gains. Estimates for losses were very similar.

  estimated from choices: Ming Hsu, Ian Krajbich, Chen Zhao, and Colin F. Camerer, “Neural Response to Reward Anticipation under Risk Is Nonlinear in Probabilities,” Journal of Neuroscience 29 (2009): 2231–37.

  parents of small children: W. Kip Viscusi, Wesley A. Magat, and Joel Huber, “An Investigation of the Rationality of Consumer Valuations of Multiple Health Risks,” RAND Journal of Economics 18 (1987): 465–79.

  psychology of worry: In a rational model with diminishing marginal utility, people should pay at least two-thirds as much to reduce the frequency of accidents from 15 to 5 units as they are willing to pay to eliminate the risk. Observed preferences violated this prediction.

  not made much of it: C. Arthur Williams, “Attitudes Toward Speculative Risks as an Indicator of Attitudes Toward Pure Risks,” Journal of Risk and Insurance 33 (1966): 577–86. Howard Raiffa, Decision Analysis: Introductory Lectures on Choices under Uncertainty (Reading, MA: Addison-Wesley, 1968).

  shadow of civil trials: Chris Guthrie, “Prospect Theory, Risk Preference, and the Law,” Northwestern University Law Review 97 (2003): 1115–63. Jeffrey J. Rachlinski, “Gains, Losses and the Psychology of Litigation,” Southern California Law Review 70 (1996): 113–85. Samuel R. Gross and Kent D. Syverud, “Getting to No: A Study of Settlement Negotiations and the Selection of Cases for Trial,” Michigan Law Review 90 (1991): 319–93.

  the frivolous claim: Chris Guthrie, “Framing Frivolous Litigation: A Psychological Theory,” University of Chicago Law Review 67 (2000): 163–216.

  30: Rare Events

  wish to avoid it: George F. Loewenstein, Elke U. Weber, Christopher K. Hsee, and Ned Welch, “Risk as Feelings,” Psychological Bulletin 127 (2001): 267–86.

  vividness in decision making: Ibid. Cass R. Sunstein, “Probability Neglect: Emotions, Worst Cases, and Law,” Yale Law Journal 112 (2002): 61–107. See notes to chapter 13: Damasio, Descartes’ Error. Slovic, Finucane, Peters, and MacGregor, “The {r, n>: C. A Affect Heuristic.”

  Amos’s student: Craig R. Fox, “Strength of Evidence, Judged Probability, and Choice Under Uncertainty,” Cognitive Psychology 38 (1999): 167–89.

  focal event and its: Judgments of the probabilities of an event and its complement do not always add up to 100%. When people are asked about a topic they know very little about (“What is your probability that the temperature in Bangkok will exceed 100° tomorrow at noon?”), the judged probabilities of the event and its complement add up to less than 100%.

  receiving a dozen roses: In cumulative prospect theory, decision weights for gains and losses are not assumed to be equal, as they were in the original version of prospect theory that I describe.

  superficial processing: The question about the two urns was invented by Dale T. Miller, William Turnbull, and Cathy McFarland, “When a Coincidence Is Suspicious: The Role of Mental Simulation,” Journal of Personality and Social Psychology 57 (1989): 581–89. Seymour Epstein and his colleagues argued for an interpretation of it in terms of two systems: Lee A. Kirkpatrick and Seymour Epstein, “Cognitive-Experiential Self-Theory and Subjective Probability: Evidence for Two Conceptual Systems,” Journal of Personality and Social Psychology 63 (1992): 534–44.

  judged it as more dangerous: Kimihiko Yamagishi, “When a 12.86% Mortality Is More Dangerous Than 24.14%: Implications for Risk Communication,” Applied Cognitive Psychology 11 (1997): 495–506.

  forensic psychologists: Slovic, Monahan, and MacGregor, “Violence Risk Assessment and Risk Communication.”

  “1 of 1,000 capital cases”: Jonathan J. Koehler, “When Are People Persuaded by DNA Match Statistics?” Law and Human Behavior 25 (2001): 493–513.

  studies of choice from experience: Ralph Hertwig, Greg Barron, Elke U. Weber, and Ido Erev, “Decisions from Experience and the Effect of Rare Events in Risky Choice,” Psychological Science 15 (2004): 534–39. Ralph Hertwig and Ido Erev, “The Description-Experience Gap in Risky Choice,” Trends in Cognitive Sciences 13 (2009): 517–23.

  not yet settled: Liat Hadar and Craig R. Fox, “Information Asymmetry in Decision from Description Versus Decision from Experience,” Judgment and Decision Making 4 (2009): 317–25.

  “chances of rare events”: Hertwig and Erev, “The Description-Experience Gap.”

  31: Risk Policies

  inferior option BC: The calculation is straightforward. Each of the two combinations consists of a sure thing and a gamble. Add the sure thing to both options of the gamble and you will find AD and BC.

  the equivalent of “locking in”: Thomas Langer and Martin Weber, “Myopic Prospect Theory vs. Myopic Loss Aversion: How General Is the Phenomenon?” Journal of E {>Joenon?&conomic Behavior & Organization 56 (2005): 25–38.

  32: Keeping Score

  drive into a blizzard: The intuition was confirmed in a field experiment in which a random selection of students who purchased season tickets to the university theater received their tickets at a much reduced price. A follow-up of attendance revealed that students who had paid the full price for their tickets were more likely to attend, especially during the first half of the season. Missing a show one has paid for involves the unpleasant experience of closing an account in the red. Arkes and Blumer, “The Psychology of Sunk Costs.”

  the disposition effect: Hersh Shefrin and Meir Statman, “The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence,” Journal of Finance 40 (1985): 777–90. Terrance Odean, “Are Investors Reluctant to Realize Their Losses?” Journal of Finance 53 (1998): 1775–98.

  less susceptible: Ravi Dhar and Ning Zhu, “Up Close and Personal: Investor Sophistication and the Disposition Effect,” Management Science 52 (2006): 726–40.

  fallacy can be overcome: Darrin R. Lehman, Richard O. Lempert, and Richard E. Nisbett, “The Effects of Graduate Training on Reasoning: Formal Discipline and Thinking about Everyday-Life Events,” American Psychologist 43 (1988): 431–42.

  “a sinking feeling”: Marcel Zeelenberg and Rik Pieters, “A Theory
of Regret Regulation 1.0,” Journal of Consumer Psychology 17 (2007): 3–18.

  regret to normality: Kahneman and Miller, “Norm Theory.”

  habitually taking unreasonable risks: The hitchhiker question was inspired by a famous example discussed by the legal philosophers Hart and Honoré: “A woman married to a man who suffers from an ulcerated condition of the stomach might identify eating parsnips as the cause of his indigestion. The doctor might identify the ulcerated condition as the cause and the meal as a mere occasion.” Unusual events call for causal explanations and also evoke counterfactual thoughts, and the two are closely related. The same event can be compared to either a personal norm or the norm of other people, leading to different counterfactuals, different causal attributions, and different emotions (regret or blame): Herbert L. A. Hart and Tony Honoré, Causation in the Law (New York: Oxford University Press, 1985), 33.

  remarkably uniform: Daniel Kahneman and Amos Tversky, “The Simulation Heuristic,” in Judgment Under Uncertainty: Heuristics and Biases, ed. Daniel Kahneman, Paul Slovic, and Amos Tversky (New York: Cambridge University Press, 1982), 160–73.

  applies to blame: Janet Landman, “Regret and Elation Following Action and Inaction: Affective Responses to Positive Versus Negative Outcomes,” Personality and Social Psychology Bulletin 13 (1987): 524–36. Faith Gleicher et al., “The Role of Counterfactual Thinking in Judgment of Affect,” Personality and Social Psychology Bulletin 16 (1990): 284–95.

  actions that deviate from the default: Dale T. Miller and Brian R. Taylor, “Counterfactual Thought, Regret, and Superstition: How to Avoid Kicking Yourself,” in What Might Have Been: The Social Psychology of Counterfactual Thinking, ed. Neal J. Roese and James M. Olson (Hillsdale, NJ: Erlbaum, 1995), 305–31.

  produce blame and regret: Marcel Zeelenberg, Kees van den Bos, Eric van Dijk, and Rik Pieters, “The Inaction Effect in the Psychology of Regret,” Journal of Personality and Social Psychology 82 (2002): 314–27.

  brand names over generics: Itamar Simonson, “The Influence of Anticipating Regret and Responsibility on Purchase Decisions,” Journal of Consumer Research 19 (1992): 105–18.

  clean up their portfolios: Lilian Ng and Qinghai Wang, “Institutional Trading and the Turn-of-the-Year Effect,” Journal of Financial Economics 74 (2004): 343–66.

  loss averse for aspects of your life: Tversky and Kahneman, “Loss Aversion in Riskless Choice.” Eric J. Johnson, Simon Gächter, and Andreas Herrmann, “Exploring the Nature of Loss Aversion,” Centre for Decision Research and Experimental Economics, University of Nottingham, Discussion Paper Series, 2006. Edward J. McCaffery, Daniel Kahneman, and Matthew L. Spitzer, “Framing the Jury: Cognitive Perspectives on Pain and Suffering,” Virginia Law Review 81 (1995): 1341–420.

  classic on consumer behavior: Richard H. Thaler, “Toward a Positive Theory of Consumer Choice,” Journal of Economic Behavior and Organization 39 (1980): 36–90.

  taboo tradeoff: Philip E. Tetlock et al., “The Psychology of the Unthinkable: Taboo Trade-Offs, Forbidden Base Rates, and Heretical Counterfactuals,” Journal of Personality and Social Psychology 78 (2000): 853–70.

  where the precautionary principle: Cass R. Sunstein, The Laws of Fear: Beyond the Precautionary Principle (New York: Cambridge University Press, 2005).

  “psychological immune system”: Daniel T. Gilbert et al., “Looking Forward to Looking Backward: The Misprediction of Regret,” Psychological Science 15 (2004): 346–50.

  33: Reversals

  in the man’s regular store: Dale T. Miller and Cathy McFarland, “Counterfactual Thinking and Victim Compensation: A Test of Norm Theory,” Personality and Social Psychology Bulletin 12 (1986): 513–19.

  reversals of judgment and choice: The first step toward the current interpretation was taken by Max H. Bazerman, George F. Loewenstein, and Sally B. White, “Reversals of Preference in Allocation Decisions: Judging Alternatives Versus Judging Among Alternatives,” Administrative Science Quarterly 37 (1992): 220–40. Christopher Hsee introduced the terminology of joint and separate evaluation, and formulated the important evaluability hypothesis, which explains reversals by the idea that some attributes {e a#822become evaluable only in joint evaluation: “Attribute Evaluability: Its Implications for Joint-Separate Evaluation Reversals and Beyond,” in Kahneman and Tversky, Choices, Values, and Frames.

  conversation between psychologists and economists: Sarah Lichtenstein and Paul Slovic, “Reversals of Preference Between Bids and Choices in Gambling Decisions,” Journal of Experimental Psychology 89 (1971): 46–55. A similar result was obtained independently by Harold R. Lindman, “Inconsistent Preferences Among Gambles,” Journal of Experimental Psychology 89 (1971): 390–97.

  bewildered participant: For a transcript of the famous interview, see Sarah Lichtenstein and Paul Slovic, eds., The Construction of Preference (New York: Cambridge University Press, 2006).

  the prestigious American Economic Review: David M. Grether and Charles R. Plott, “Economic Theory of Choice and the Preference Reversals Phenomenon,” American Economic Review 69 (1979): 623–28.

  “context in which the choices are made”: Lichtenstein and Slovic, The Construction of Preference, 96.

  one embarrassing finding: Kuhn famously argued that the same is true of physical sciences as well: Thomas S. Kuhn, “The Function of Measurement in Modern Physical Science,” Isis 52 (1961): 161–93.

  liking of dolphins: There is evidence that questions about the emotional appeal of species and the willingness to contribute to their protection yield the same rankings: Daniel Kahneman and Ilana Ritov, “Determinants of Stated Willingness to Pay for Public Goods: A Study in the Headline Method,” Journal of Risk and Uncertainty 9 (1994): 5–38.

  superior on this attribute: Hsee, “Attribute Evaluability.”

  “requisite record-keeping”: Cass R. Sunstein, Daniel Kahneman, David Schkade, and Ilana Ritov, “Predictably Incoherent Judgments,” Stanford Law Review 54 (2002): 1190.

  34: Frames and Reality

  unjustified influences of formulation: Amos Tversky and Daniel Kahneman, “The Framing of Decisions and the Psychology of Choice,” Science 211 (1981): 453–58.

  paid with cash or on credit: Thaler, “Toward a Positive Theory of Consumer Choice.”

  10% mortality is frightening: Barbara McNeil, Stephen G. Pauker, Harold C. Sox Jr., and Amos Tversky, “On the Elicitation of Preferences for Alternative Therapies,” New England Journal of Medicine 306 (1982): 1259–62.

  “Asian disease problem”: Some people have commented that the “Asian” label is unnecessary and pejorative. We probably would not use it today, but the example was written in the 1970s, when sensitivity to group labels was less developed than it is today. The word was added to make the example more concrete by reminding respondents of the Asian flu epidem {an s less ic of 1957.

  Choice and Consequence: Thomas Schelling, Choice and Consequence (Cambridge, MA: Harvard University Press, 1985).

  misleading frame: Richard P. Larrick and Jack B. Soll, “The MPG Illusion,” Science 320 (2008): 1593–94.

  rate of organ donation in European countries: Eric J. Johnson and Daniel Goldstein, “Do Defaults Save Lives?” Science 302 (2003): 1338–39.

  35: Two Selves

  “wantability”: Irving Fisher, “Is ‘Utility’ the Most Suitable Term for the Concept It Is Used to Denote?” American Economic Review 8 (1918): 335.

  at any moment: Francis Edgeworth, Mathematical Psychics (New York: Kelley, 1881).

  under which his theory holds: Daniel Kahneman, Peter P. Wakker, and Rakesh Sarin, “Back to Bentham? Explorations of Experienced Utility,” Quarterly Journal of Economics 112 (1997): 375–405. Daniel Kahneman, “Experienced Utility and Objective Happiness: A Moment-Based Approach” and “Evaluation by Moments: Past and Future,” in Kahneman and Tversky, Choices, Values, and Frames, 673–92, 693–708.

  a physician and researcher: Donald A. Redelmeier and Daniel Kahneman, “Patients’ Memories of Painful Medical T
reatments: Real-time and Retrospective Evaluations of Two Minimally Invasive Procedures,” Pain 66 (1996): 3–8.

  free to choose: Daniel Kahneman, Barbara L. Frederickson, Charles A. Schreiber, and Donald A. Redelmeier, “When More Pain Is Preferred to Less: Adding a Better End,” Psychological Science 4 (1993): 401–405.

  duration of the shock: Orval H. Mowrer and L. N. Solomon, “Contiguity vs. Drive-Reduction in Conditioned Fear: The Proximity and Abruptness of Drive Reduction,” American Journal of Psychology 67 (1954): 15–25.

  burst of stimulation: Peter Shizgal, “On the Neural Computation of Utility: Implications from Studies of Brain Stimulation Reward,” in Well-Being: The Foundations of Hedonic Psychology, ed. Daniel Kahneman, Edward Diener, and Norbert Schwarz (New York: Russell Sage Foundation, 1999), 500–24.

  36: Life as a Story

  had a lover: Paul Rozin and Jennifer Stellar, “Posthumous Events Affect Rated Quality and Happiness of Lives,” Judgment and Decision Making 4 (2009): 273–79.

  entire lives as well as brief episodes: Ed Diener, Derrick Wirtz, and Shigehiro Oishi, “End Effects of Rated Life Quality: The James Dean Effect,” Psychological Science 12 (2001): 124–28. The same series of experiments also tested for the peak-end rule in an unhappy life and found similar results: Jen was not judged twice as unhappy if she lived miserably for 60 years rather than 30, but { thk-e she was regarded as considerably happier if 5 mildly miserable years were added just before her death.

  37: Experienced Well-Being

  life as a whole these days: Another question that has been used frequently is, “Taken all together, how would you say things are these days? Would you say that you are very happy, pretty happy, or not too happy?” This question is included in the General Social Survey in the United States, and its correlations with other variables suggest a mix of satisfaction and experienced happiness. A pure measure of life evaluation used in the Gallup surveys is the Cantril Self-Anchoring Striving Scale, in which the respondent rates his or her current life on a ladder scale in which 0 is “the worst possible life for you” and 10 is “the best possible life for you.” The language suggests that people should anchor on what they consider possible for them, but the evidence shows that people all over the world have a common standard for what a good life is, which accounts for the extraordinarily high correlation (r = .84) between the GDP of countries and the average ladder score of their citizens. Angus Deaton, “Income, Health, and Well-Being Around the World: Evidence from the Gallup World Poll,” Journal of Economic Perspectives 22 (2008): 53–72.