Bias, Blindness and How We Truly Think: Daniel Kahneman
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Optimistic Bias
The evidence suggests that an optimistic bias plays a role — sometimes the dominant role — whenever people or institutions voluntarily take on significant risks
Risk Takers
The economists Ulrike Malmendier and Geoffrey Tate identified optimistic chief executive officers by the amount of company stock that they owned personally and observed that highly optimistic leaders took excessive risks.
Competition Neglect
Colin Camerer, who coined the concept of competition neglect, illustrated it with a quote from a chairman of Disney Studios. Asked why so many big-budget movies are released on the same holidays, he said, “Hubris. Hubris. If you only think about your own business, you think, ‘I’ve got a good story department, I’ve got a good marketing department’ … and you don’t think that everybody else is thinking the same way.” The competition isn’t part of the decision. In other words, a difficult question has been replaced by an easier one.
Medical Certainty
Overconfidence also appears to be endemic in medicine. A study of patients who died in the intensive-care unit compared autopsy results with the diagnoses that physicians had provided while the patients were still alive. Physicians also reported their confidence. The result: “Clinicians who were ‘completely certain’ of the diagnosis ante-mortem were wrong 40 percent of the time.” Here again, experts’ overconfidence is encouraged by their clients. As the researchers noted, “Generally, it is considered a weakness and a sign of vulnerability for clinicians to appear unsure.”
Taking the Gamble
Now ask yourself this question: Which would you prefer to receive as a gift, this gamble or $80 for sure? Almost everyone prefers the sure thing. If people valued uncertain prospects by their expected value, they would prefer the gamble, because $82 is more than $80. Bernoulli pointed out that people do not in fact evaluate gambles in this way.
Bernoulli’s Moral Expectation
Bernoulli’s essay is a marvel of concise brilliance. He applied his new concept of expected utility (which he called “moral expectation”) to compute how much a merchant in St. Petersburgwould be willing to pay to insure a shipment of spice from Amsterdam if “he is well aware of the fact that at this time of year of one hundred ships which sail from Amsterdam to Petersburg, five are usually lost.” His utility function explained why poor people buy insurance and why richer people sell it to them.
Theory-Induced Blindness
Here again, the theory fails because it does not account for Anthony and Betty’s different reference points. Anthony may think, “If I choose the sure thing, my wealth will double. This is very attractive. Or, I can take a gamble with equal chances to quadruple my wealth or to gain nothing.”
Bad Is Stronger
The brains of humans contain a mechanism that is designed to give priority to bad news. No comparably rapid mechanism for recognizing good news has been detected. Threats are privileged above opportunities, as they should be. Loss aversion is one of many manifestations of a broad negativity dominance in people.
Losers Try Harder
In human affairs, the same simple rule explains much of what happens when institutions attempt to reform themselves, in “reorganizations” and “restructuring” of companies and in efforts to rationalize a bureaucracy, simplify the tax code or reduce medical costs. As initially conceived, plans for reform almost always produce many winners and some losers while achieving an overall improvement.
Rules of Fairness
Different rules governed what a company could do to improve its profits or to avoid reduced profits. When a company faced lower production costs, the rules of fairness did not require it to share the bonanza with either its customers or its workers. Of course, our respondents liked a company better, and described it as more fair, if it was generous when its profits increased, but they did not brand as unfair a company that did not share.
Memorable Stories
If the lover had come too late, however, “La Traviata” would have been a different story. A story is about significant events and memorable moments, not about time passing. This is how the remembering self works: It composes stories and keeps them for future reference.
Duration Doesn’t Matter
Diener and his students initially thought that the results represented the folly of the young people who participated in their experiments, but the pattern did not change when parents and older friends answered the same questions. In intuitive evaluations of lives, peaks and ends matter, but duration does not.
Benefits of Vacation
Diener’s team provided evidence that it is the remembering self that chooses vacations. They asked students to record daily evaluations of their experiences during spring break. The students also provided a global rating of the vacation at its end. Finally, they indicated whether or not they intended to repeat the vacation.
