Bias, Blindness and How We Truly Think (I)
Optimistic Bias
Bloomberg OP-EDS, by Daniel Kahneman
Most of us view the world as more benign than it really is, our own attributes as more favorable than they truly are, and the goals we adopt as more achievable than they are likely to be. We also tend to exaggerate our ability to forecast the future, which fosters overconfidence…
Because optimistic bias is both a blessing and a risk, you should be both happy and wary if you are temperamentally optimistic…
Optimistic people play a disproportionate role in shaping our lives. Their decisions make a difference; they are inventors, entrepreneurs, political and military leaders — not average people. They got to where they are by seeking challenges and taking risks. They are talented and they have been lucky, almost certainly luckier than they acknowledge…
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 In other words, a difficult question has been replaced by an easier one…
As Nassim Taleb, the author of “The Black Swan,” has argued, inadequate appreciation of the uncertainty of the environment inevitably leads economic agents to take risks they should avoid. However, optimism is highly valued; people and companies reward the providers of misleading information more than they reward truth tellers. An unbiased appreciation of uncertainty is a cornerstone of rationality — but it isn’t what organizations want…
Source: Bloomberg OP-EDS (part1)
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Bias, Blindness and How We Truly Think (II)
Daniel Bernoulli
Bloomberg OP-EDS, by Daniel Kahneman
In 1738, the Swiss scientist Daniel Bernoulli argued that a gift of 10 ducats has the same utility to someone who already has 100 ducats as a gift of 20 ducats to someone whose current wealth is 200 ducats….
- a 30 percent raise may evoke a fairly similar psychological response for the rich and for the poor, which an increase of $100 will not do.
- people’s choices are based not on dollar values but on the psychological values of outcomes, their utilities.
- a decision maker with diminishing marginal utility for wealth will be risk-averse
Bernoulli’s theory assumes that the utility of their wealth is what makes people more or less happy.
Theory-Induced Blindness
Bernoulli is wrong:
Because Bernoulli’s model lacks the idea of a reference point, expected utility theory does not account for the obvious fact that the outcome that is good… [(gains) for one…] and is bad … [(losses) for another]…. His model… can’t explain risk-seeking behavior… that is often observed in entrepreneurs and in generals when all their options are bad…
Examples:
- Today, Jack and Jill each have wealth of $5 million. Yesterday, Jack had $1 million, and Jill had $9 million. Are they equally happy? (Do they have the same utility?)
- Anthony, whose current wealth is $1 million, and Betty, whose current wealth is $4 million, are both offered a choice between a gamble and a sure thing: equal chances to end up with $1 million or $4 million or end up with $2 million for sure.
Source: Bloomberg OP-EDS (part2)
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Bias, Blindness and How We Truly Think (III)
Bad Is Stronger Than Good
Bloomberg OP-EDS, by Daniel Kahneman
Bad emotions, bad parents and bad feedback have more impact than good ones, and bad information is processed more thoroughly than good. The self is more motivated to avoid bad self-definitions than to pursue good ones. Bad impressions and bad stereotypes are quicker to form and more resistant to disconfirmation than good ones…
Loss aversion refers to the relative strength of two motives: We are driven more strongly to avoid losses than to achieve gains. A reference point is sometimes the status quo, but it can also be a goal in the future: not achieving a goal is a loss; exceeding it is a gain….
More recent research has also shown that fairness concerns are economically significant. Employers who violate rules of fairness are punished by reduced productivity, and merchants who follow unfair pricing policies can expect to lose sales.
Source: Bloomberg OP-EDS (part3)
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Bias, Blindness and How We Truly Think (IV)
The remembering self and the experiencing self
Bloomberg OP-EDS, by Daniel Kahneman
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…
- We all care intensely for the narrative of our own life and very much want it to be a good story, with a decent hero…
- In intuitive evaluations of lives, peaks and ends matter, but duration does not…
I am my remembering self, and the experiencing self, who does my living, is like a stranger to me…
Source: Bloomberg OP-EDS (part4)
(Daniel Kahneman, a professor of psychology emeritus at Princeton University and professor of psychology and public affairs emeritus at Princeton’s Woodrow Wilson School of Public and International Affairs, received the Nobel Memorial Prize in Economic Sciences for his work with Amos Tverksy on decision making. This is a four-part series of condensed excerpts from his new book, “Thinking Fast and Slow,” just published by Farrar, Straus and Giroux. The opinions expressed are his own.)
