Daniel Kahneman / Amos Tversky

198 results back to index


pages: 348 words: 83,490

More Than You Know: Finding Financial Wisdom in Unconventional Places (Updated and Expanded) by Michael J. Mauboussin

Alan Greenspan, Albert Einstein, Andrei Shleifer, Atul Gawande, availability heuristic, beat the dealer, behavioural economics, Benoit Mandelbrot, Black Swan, Brownian motion, butter production in bangladesh, buy and hold, capital asset pricing model, Clayton Christensen, clockwork universe, complexity theory, corporate governance, creative destruction, Daniel Kahneman / Amos Tversky, deliberate practice, demographic transition, discounted cash flows, disruptive innovation, diversification, diversified portfolio, dogs of the Dow, Drosophila, Edward Thorp, en.wikipedia.org, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, fixed income, framing effect, functional fixedness, hindsight bias, hiring and firing, Howard Rheingold, index fund, information asymmetry, intangible asset, invisible hand, Isaac Newton, Jeff Bezos, John Bogle, Kenneth Arrow, Laplace demon, Long Term Capital Management, loss aversion, mandelbrot fractal, margin call, market bubble, Menlo Park, mental accounting, Milgram experiment, Murray Gell-Mann, Nash equilibrium, new economy, Paul Samuelson, Performance of Mutual Funds in the Period, Pierre-Simon Laplace, power law, quantitative trading / quantitative finance, random walk, Reminiscences of a Stock Operator, Richard Florida, Richard Thaler, Robert Shiller, shareholder value, statistical model, Steven Pinker, stocks for the long run, Stuart Kauffman, survivorship bias, systems thinking, The Wisdom of Crowds, transaction costs, traveling salesman, value at risk, wealth creators, women in the workforce, zero-sum game

Phillips, “Calibration of Probabilities,” in Judgment Under Uncertainty: Heuristics and Biases, ed. Daniel Kahneman, Paul Slovic, and Amos Tversky (Cambridge: Cambridge University Press, 1982), 306-34. 8 Peter Schwartz, Inevitable Surprises: Thinking Ahead in a Time of Turbulence (New York: Gotham Books, 2003). 9 Roger Lowenstein, When Genius Failed: The Rise and Fall of Long-Term Capital Management (New York: Random House, 2000); Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable (New York: Random House, 2007). 10 Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision Under Risk,” Econometrica 47 (1979): 263-91. 11 Nassim Nicholas Taleb, Fooled By Randomness: The Hidden Role of Chance in Markets and in Life (New York: Texere, 2001), 89-90.

Thomas Gilovich, Dale Griffin, and Daniel Kahneman (Cambridge: Cambridge University Press, 2002), 716-29. 6 Gawande, Complications, 44. 7 Katie Haffner, “In an Ancient Game, Computing’s Future,” The New York Times, August 1, 2002. 8 James Surowiecki, The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations (New York: Doubleday, 2004). 9 Joe Nocera, “On Oil Supply, Opinions Aren’t Scarce,” The New York Times, September 10, 2005. 10 Philip E. Tetlock, Expert Political Judgment: How Good Is It? How Can We Know? (Princeton, N.J.: Princeton University Press, 2005), 68. 11 Ibid., 73-75. 7. The Hot Hand in Investing 1 Thomas Gilovich, Robert Valone, and Amos Tversky, “The Hot Hand in Basketball: On the Misperception of Random Sequences,” Cognitive Psychology 17 (1985): 295-314. 2 Amos Tversky and Daniel Kahneman, “Belief in the Law of Small Numbers,” Psychological Bulletin 76 (1971): 105-10. For an illustration, see Chris Wetzel, Randomness Web site, http://www.rhodes.edu/psych/faculty/wetzel/courses/wetzelsyllabus223.htm. 3 Adapted from Stephen Jay Gould, “The Streak of Streaks,” New York Review of Books, August 18, 1988, available from http://www.nybooks.com/articles/4337, accessed 25 May 2005. 4 Stephen Jay Gould, Triumph and Tragedy in Mudville (New York: W.

Jensen, and Richard Roll, “The Adjustment of Stock Prices to New Information,” International Economic Review 10, no. 1 (February 1969); 1-21. 9 Stefano DellaVigna and Joshua Pollet, “Attention, Demographics, and the Stock Market,” Working Paper, November 23, 2003, http://fisher.osu.edu/fin/dice/seminars/pollet.pdf. 10 See chapter 1. 11 http://www2.cio.com/techpoll/index.cfm. 12 Amos Tversky and Daniel Kahneman, “Extensional Versus Intuitive Reasoning: The Conjunction Fallacy in Probability Judgment,” in Heuristics and Biases: The Psychology of Intuitive Judgment, ed. Thomas Gilovich, Dale Griffin, and Daniel Kahneman (Cambridge: Cambridge University Press, 2002), 19-48. 13 Sanford J. Grossman and Joseph E. Stiglitz, “On the Impossibility of Informationally Efficient Markets,” American Economic Review 70 (1980): 393-408. 18.


pages: 336 words: 113,519

The Undoing Project: A Friendship That Changed Our Minds by Michael Lewis

Albert Einstein, availability heuristic, behavioural economics, Cass Sunstein, choice architecture, complexity theory, Daniel Kahneman / Amos Tversky, Donald Trump, Douglas Hofstadter, endowment effect, feminist movement, framing effect, hindsight bias, John von Neumann, Kenneth Arrow, Linda problem, loss aversion, medical residency, Menlo Park, Murray Gell-Mann, Nate Silver, New Journalism, Paul Samuelson, peak-end rule, Richard Thaler, Saturday Night Live, Skinner box, Stanford marshmallow experiment, statistical model, systematic bias, the new new thing, Thomas Bayes, Walter Mischel, Yom Kippur War

Kahneman, Daniel. “The Psychology of Possible Worlds.” Katz-Newcomb Lecture, April 1979. Kahneman, Daniel, and Amos Tversky. “The Simulation Heuristic.” In Judgment under Uncertainty: Heuristics and Biases, edited by Daniel Kahneman, Paul Slovic, and Amos Tversky, 3–22. Cambridge: Cambridge University Press, 1982. LeCompte, Tom. “The Disorient Express.” Air & Space, September 2008, 38–43. http://www.airspacemag.com/military-aviation/the-disorient-express-474780/. Tversky, Amos, and Daniel Kahneman. “The Framing of Decisions and the Psychology of Choice.” Science 211, no. 4481 (1981): 453–58. CHAPTER 12: THIS CLOUD OF POSSIBILITY Cohen, L.

Science 176 (1972): 1191–1202. http://www.warnernorth.net/hurricanes.pdf. Kahneman, Daniel, and Amos Tversky. “On the Psychology of Prediction.” Psychological Review 80, no. 4 (1973): 237–51. Meehl, Paul E. “Why I Do Not Attend Case Conferences.” In Psychodiagnosis: Selected Papers, edited by Paul E. Meehl, 225–302. Minneapolis: University of Minnesota Press, 1973. CHAPTER 8: GOING VIRAL Redelmeier, Donald A., Joel Katz, and Daniel Kahneman. “Memories of Colonoscopy: A Randomized Trial,” Pain 104, nos. 1–2 (2003): 187–94. Redelmeier, Donald A., and Amos Tversky. “Discrepancy between Medical Decisions for Individual Patients and for Groups.”

But—they went on to say—the author of Moneyball did not seem to realize the deeper reason for the inefficiencies in the market for baseball players: They sprang directly from the inner workings of the human mind. The ways in which some baseball expert might misjudge baseball players—the ways in which any expert’s judgments might be warped by the expert’s own mind—had been described, years ago, by a pair of Israeli psychologists, Daniel Kahneman and Amos Tversky. My book wasn’t original. It was simply an illustration of ideas that had been floating around for decades and had yet to be fully appreciated by, among others, me. That was an understatement. Until that moment I don’t believe I’d ever heard of either Kahneman or Tversky, even though one of them had somehow managed to win a Nobel Prize in economics.


pages: 519 words: 104,396

Priceless: The Myth of Fair Value (And How to Take Advantage of It) by William Poundstone

availability heuristic, behavioural economics, book value, Cass Sunstein, collective bargaining, Daniel Kahneman / Amos Tversky, delayed gratification, Donald Trump, Dr. Strangelove, East Village, en.wikipedia.org, endowment effect, equal pay for equal work, experimental economics, experimental subject, feminist movement, game design, German hyperinflation, Henri Poincaré, high net worth, index card, invisible hand, John von Neumann, Kenneth Arrow, laissez-faire capitalism, Landlord’s Game, Linda problem, loss aversion, market bubble, McDonald's hot coffee lawsuit, mental accounting, meta-analysis, Nash equilibrium, new economy, no-fly zone, Paul Samuelson, payday loans, Philip Mirowski, Potemkin village, power law, price anchoring, price discrimination, psychological pricing, Ralph Waldo Emerson, RAND corporation, random walk, RFID, Richard Thaler, risk tolerance, Robert Shiller, rolodex, social intelligence, starchitect, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, three-martini lunch, ultimatum game, working poor

Journal of Risk and Uncertainty 16, 49–86. ———, and Eldar Shafir. “Amos Tversky (1937–1996).” American Psychologist 53, 793–94. ———, Paul Slovic, and Amos Tversky (1982). Judgment Under Uncertainty: Heuristics and Biases. Cambridge: Cambridge University Press. ———, and Amos Tversky (1973). “On the Psychology of Prediction.” Psychological Review 80, 237–51. ———, and Amos Tversky (1979). “Prospect Theory: An Analysis of Decision Under Risk.” Econometrica 47, 263–92. ———, and Amos Tversky (1984). “Choices, Values and Frames.” American Psychologist 39, 341–50. ———, and Amos Tversky (1996). “On the Reality of Cognitive Illusions.”

In their experiments, subjects were unable to set prices consistent with what they wanted or the choices they made. Psychologists have been working out the consequences ever since. In the new view, internal prices are “constructed” as needed from hints in the environment. One demonstration of how that works is the “United Nations” experiment of Amos Tversky and Daniel Kahneman. Tversky and Kahneman are a legendary team of Israeli American psychologists. Kahneman, now in his mid-seventies, is a very active senior scholar at Princeton’s Woodrow Wilson School. Tversky, the younger man by three years, died of melanoma in 1996, at the age of fifty-nine. In 2002, Kahneman shared the Nobel Prize in Economic Sciences with American economist Vernon Smith.

Today the Oregon Research Institute (ORI) is revered as a cradle of behavioral decision theory. ORI was the longtime professional home of Sarah Lichtenstein and Paul Slovic, the first to demonstrate clearly just how clueless people are about prices and decisions based on them. For one productive year, ORI was also home to Amos Tversky and Daniel Kahneman, perhaps the most influential psychologists of their age. Before getting to this illustrious group, it’s necessary to say something about their predecessors, and about the peculiar science of psychophysics. Well into the twentieth century, psychologists had a case of physics envy. There was agonizing over whether psychology was a science at all.


pages: 654 words: 191,864

Thinking, Fast and Slow by Daniel Kahneman

Albert Einstein, Atul Gawande, availability heuristic, Bayesian statistics, behavioural economics, Black Swan, book value, Cass Sunstein, Checklist Manifesto, choice architecture, classic study, cognitive bias, cognitive load, complexity theory, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, delayed gratification, demand response, endowment effect, experimental economics, experimental subject, Exxon Valdez, feminist movement, framing effect, hedonic treadmill, hindsight bias, index card, information asymmetry, job satisfaction, John Bogle, John von Neumann, Kenneth Arrow, libertarian paternalism, Linda problem, loss aversion, medical residency, mental accounting, meta-analysis, nudge unit, pattern recognition, Paul Samuelson, peak-end rule, precautionary principle, pre–internet, price anchoring, quantitative trading / quantitative finance, random walk, Richard Thaler, risk tolerance, Robert Metcalfe, Ronald Reagan, Shai Danziger, sunk-cost fallacy, Supply of New York City Cabdrivers, systematic bias, TED Talk, The Chicago School, The Wisdom of Crowds, Thomas Bayes, transaction costs, union organizing, Walter Mischel, Yom Kippur War

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.

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.

Petersburg paradox Strack, Fritz strangers, assessment of Strangers to Ourselves (Wilson) Streep, Meryl strength, assessments of structured settlements Stumbling to Happiness (Gilbert) substitution; and mood heuristic for happiness; and 3-D heuristic success, uot sum-like variables sunk-cost fallacy Sunstein, Cass Super Bowl supply and demand surgeons Surowiecki, James surprise survey and gift experiments survival-mortality experiment symbols System 1; characteristics of; conflict between System 2 and System 2; conflict between System 1 and; laziness of Taleb, Nassim talent task sets task switching Tate, Geoffrey taxes; child exemptions and temperament temptation Tenet, George terrorism Tetlock, Philip Thaler, Richard theory-induced blindness therapists thinking like a trader Thomas, Lewis threats; possibility effect and 3-D heuristic tickets; buying and selling of; sunk cost in time; use of time pressure Todorov, Alex token experiment Tom W problem “Trading Is Hazardous to Your Wealth” (Barber and Odean) transactions and trades Traviata, La (Verdi) Truman, Harry trustworthiness, assessments of truth, illusions of Tversky, Amos understanding, illusion of unique cases University College London University of California at Berkeley University of Chicago University of Michigan University of Minnesota University of Oregon unlikely events, see rare events unknown unknowns utility; decision; experienced; indifference map and; injection puzzle and; meanings of utility theory; certainty effect and; decision weights and probabilities in vacations vaccines validity: of clinical vs. statistical predictions; evaluating; illusion of Vallone, Robert value; see also utility Vancouver Island Venn diagrams venture capitalists victim compensation vividness; of outcomes; of probabilities vocabulary: of girls vs. boys; simple vs. pretentious Vohs, Kathleen vomit, effect of word Von Neumann, John voting Wainer, Howard walking wars Washington Post, The wealth, see money and wealth weather Weber, Ernste> weight and piano playing, measuring Weiner, Howard well-being; climate and; defining; disposition for; duration weighting and; see also happiness West, Richard what you see is all there is (WYSIATI); confidence and; curriculum team and; Julie problem and; optimistic bias and; premortem and; professorial candidate problem and; soldiers’ performance and; Tom W problem and wheel of fortune “wicked” environments Wilson, Timothy Wimbledon tournament wine Winter Olympics Wisdom of Crowds, The (Surowiecki) witnesses’ evidence Woods, Tiger words: complex vs. simple; emotionally-loaded World Cup World War II worry WYSIATI, see what you see is all there is X-rays Xu, Jing Yale exam problem Yom Kippur War Zajonc, Robert Zamir, Eyal Zeller, Kathryn Zweig, Jason Zwerling, Harris Farrar, Straus and Giroux 18 West 18th Street, New York 10011 Copyright © 2011 by Daniel Kahneman All rights reserved Grateful acknowledgment is made for permission to reprint the following previously published material: “Judgment Under Uncertainty: Heuristics and Biases” from Science, New Series, Vol. 185, No. 4157, copyright © 1974 by Amos Tversky and Dan"0%" te>X-rays Science. “Choices, Values, and Frames” from The American Psychologist, copyright © 1983 by Daniel Kahneman and Amos Tversky. Reprinted by permission of the American Psychological Association. Grateful acknowledgment is made for permission to reprint the following images: Image courtesy of Paul Ekman Group, LLC.


pages: 256 words: 60,620

Think Twice: Harnessing the Power of Counterintuition by Michael J. Mauboussin

affirmative action, Alan Greenspan, asset allocation, Atul Gawande, availability heuristic, Benoit Mandelbrot, Bernie Madoff, Black Swan, butter production in bangladesh, Cass Sunstein, choice architecture, Clayton Christensen, cognitive dissonance, collateralized debt obligation, Daniel Kahneman / Amos Tversky, deliberate practice, disruptive innovation, Edward Thorp, experimental economics, financial engineering, financial innovation, framing effect, fundamental attribution error, Geoffrey West, Santa Fe Institute, George Akerlof, hindsight bias, hiring and firing, information asymmetry, libertarian paternalism, Long Term Capital Management, loose coupling, loss aversion, mandelbrot fractal, Menlo Park, meta-analysis, money market fund, Murray Gell-Mann, Netflix Prize, pattern recognition, Performance of Mutual Funds in the Period, Philip Mirowski, placebo effect, Ponzi scheme, power law, prediction markets, presumed consent, Richard Thaler, Robert Shiller, statistical model, Steven Pinker, systems thinking, the long tail, The Wisdom of Crowds, ultimatum game, vertical integration

For great examples of the failure of outside thinking in sports, see Michael Lewis, Moneyball: The Art of Winning an Unfair Game (New York: W.W. Norton & Company, 2003); and David Romer, “Do Firms Maximize? Evidence from Professional Football,” The Journal of Political Economy 114, no. 2 (2006): 340–365. 21. Daniel Kahneman and Amos Tversky, “Intuitive Prediction: Biases and Corrective Procedures,” in Judgment Under Uncertainty: Heuristics and Biases, ed. Daniel Kahneman, Paul Slovic, and Amos Tversky (Cambridge: Cambridge University Press, 1982), 414–421. For a simplified version, see Lovallo and Kahneman, “Delusions of Success.” 22. Stephen Jay Gould, Full House: The Spread of Excellence from Plato to Darwin (New York: Harmony Books, 1996), 45–56. 23.

“Maps of Bounded Rationality: A Perspective on Intuitive Judgment and Choice.” Nobel Prize Lecture, December 8, 2002. Kahneman, Daniel, and Amos Tversky. “Prospect Theory: An Analysis of Decision Making Under Risk.” Econmetrica 47, no. 2 (1979): 263–291. Kahneman, Daniel, and Amos Tversky. “Intuitive Prediction: Biases and Corrective Procedures.” In Judgment Under Uncertainty: Heuristics and Biases, edited by Daniel Kahneman, Paul Slovic, and Amos Tversky, 414–421. Cambridge: Cambridge University Press, 1982. Kahneman, Danny. “A Short Course in Thinking about Thinking.” Edge.org, 2007. Katz, Elihu, and Paul F.

As the story of George Steinbrenner made us aware, luck plays an important role in baseball, especially in the short term. Yet baseball announcers analyze the games play-by-play with little awareness that luck explains most of what’s going on. This same principle applies in business and markets. 2. Carefully consider the sample size. Daniel Kahneman and Amos Tversky established that people extrapolate unfounded conclusions from small sample sizes.24 But thinking clearly about sample size is essential for a few reasons. The more that luck contributes to the outcomes you observe, the larger the sample you will need to distinguish between skill and luck.


pages: 299 words: 92,782

The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing by Michael J. Mauboussin

Amazon Mechanical Turk, Atul Gawande, Benoit Mandelbrot, Black Swan, Boeing 747, Checklist Manifesto, Clayton Christensen, cognitive bias, commoditize, Daniel Kahneman / Amos Tversky, David Brooks, deliberate practice, disruptive innovation, Emanuel Derman, fundamental attribution error, Gary Kildall, Gini coefficient, hindsight bias, hiring and firing, income inequality, Innovator's Dilemma, John Bogle, Long Term Capital Management, loss aversion, Menlo Park, mental accounting, moral hazard, Network effects, power law, prisoner's dilemma, random walk, Richard Thaler, risk-adjusted returns, shareholder value, Simon Singh, six sigma, Steven Pinker, transaction costs, winner-take-all economy, zero-sum game, Zipf's Law

Gary Belsky, “A Checkered Career: Marion Tinsley Hasn't Met a Man or Machine That Can Beat Him at His Game,” Sports Illustrated, December 28, 1992. 3. Jonathan Schaeffer, “Marion Tinsley: Human Perfection at Checkers?” Games of No Chance 26 (1996): 115–118. 4. Shlomo Maital, “Daniel Kahneman, Nobel Laureate 2002: A Brief Comment,” SABE Newsletter 10, no. 2 (Autumn 2002): 2. 5. Daniel Kahneman and Amos Tversky, “On the Psychology of Prediction,” Psychological Review 80, no. 4 (July 1973): 237–251. 6. Stanley Lieberson, “Modeling Social Processes: Some Lessons from Sports,” Sociological Forum 12, no. 1 (March 1997): 11–35. 7. Strictly speaking, sabermetrics is the study of baseball through the use of statistics, and a sabermetrician focuses only on that sport.

For a good summary of the heuristics and biases research, see Max H. Bazerman and Don Moore, Judgment in Managerial Decision Making, 7th ed. (Hoboken, NJ: John Wiley & Sons, 2009), 13–41. 32. Kahneman, Thinking, Fast and Slow, 278–288; and Daniel Kahneman and Amos Tversky, eds., Choices, Values, and Frames (Cambridge, UK: Cambridge University Press, 2000). 33. Eldar Shafir, Peter Diamond, and Amos Tversky, “Money Illusion,” Quarterly Journal of Economics 112, no. 2 (May 1997): 341–374. 34. Hersh Shefrin and Meir Statman, “The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence,” Journal of Finance 40, no. 3 (July 1985): 777–790; and Terrance Odean, “Are Investors Reluctant to Realize Their Losses?”

Ultimately, untangling skill and luck helps with the challenging task of prediction, and better predictions lead to greater success. Skill, Luck, and Prediction Shortly after winning the Nobel Prize in Economics in 2002, Daniel Kahneman, a retired professor of psychology at Princeton, was asked which of his 130-plus academic papers was his all-time favorite.4 He chose “On the Psychology of Prediction,” a paper he cowrote with the late Amos Tversky that was published in Psychological Review in 1973. The paper argues that intuitive judgments are often unreliable because people base predictions on how well an event seems to fit a story.


pages: 317 words: 100,414

Superforecasting: The Art and Science of Prediction by Philip Tetlock, Dan Gardner

Affordable Care Act / Obamacare, Any sufficiently advanced technology is indistinguishable from magic, availability heuristic, behavioural economics, Black Swan, butterfly effect, buy and hold, cloud computing, cognitive load, cuban missile crisis, Daniel Kahneman / Amos Tversky, data science, desegregation, drone strike, Edward Lorenz: Chaos theory, forward guidance, Freestyle chess, fundamental attribution error, germ theory of disease, hindsight bias, How many piano tuners are there in Chicago?, index fund, Jane Jacobs, Jeff Bezos, Kenneth Arrow, Laplace demon, longitudinal study, Mikhail Gorbachev, Mohammed Bouazizi, Nash equilibrium, Nate Silver, Nelson Mandela, obamacare, operational security, pattern recognition, performance metric, Pierre-Simon Laplace, place-making, placebo effect, precautionary principle, prediction markets, quantitative easing, random walk, randomized controlled trial, Richard Feynman, Richard Thaler, Robert Shiller, Ronald Reagan, Saturday Night Live, scientific worldview, Silicon Valley, Skype, statistical model, stem cell, Steve Ballmer, Steve Jobs, Steven Pinker, tacit knowledge, tail risk, the scientific method, The Signal and the Noise by Nate Silver, The Wisdom of Crowds, Thomas Bayes, Watson beat the top human players on Jeopardy!

Spelling out this process makes it sound ponderous, slow, and calculating but it can happen entirely within System 1—making it automatic, fast, and complete within a few tenths of a second. You see the shadow. Snap! You are frightened—and running. That’s the “availability heuristic,” one of many System 1 operations—or heuristics—discovered by Daniel Kahneman, his collaborator Amos Tversky, and other researchers in the fast-growing science of judgment and choice. A defining feature of intuitive judgment is its insensitivity to the quality of the evidence on which the judgment is based. It has to be that way. System 1 can only do its job of delivering strong conclusions at lightning speed if it never pauses to wonder whether the evidence at hand is flawed or inadequate, or if there is better evidence elsewhere.

The choice isn’t either/or, it is how to blend them in evolving situations. That conclusion is not as inspiring as a simple exhortation to take one path or the other, but it has the advantage of being true, as the pioneering researchers behind both perspectives came to understand. While Daniel Kahneman and Amos Tversky were documenting System 1’s failings, another psychologist, Gary Klein, was examining decision making among professionals like the commanders of firefighting teams, and discovering that snap judgments can work astonishingly well. One commander told Klein about going to a routine kitchen fire and ordering his men to stand in the living room and hose down the flames.

When we make estimates, we tend to start with some number and adjust. The number we start with is called the anchor. It’s important because we typically underadjust, which means a bad anchor can easily produce a bad estimate. And it’s astonishingly easy to settle on a bad anchor. In classic experiments, Daniel Kahneman and Amos Tversky showed you could influence people’s judgment merely by exposing them to a number—any number, even one that is obviously meaningless, like one randomly selected by the spin of a wheel.10 So a forecaster who starts by diving into the inside view risks being swayed by a number that may have little or no meaning.


pages: 461 words: 128,421

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox

"Friedman doctrine" OR "shareholder theory", Abraham Wald, activist fund / activist shareholder / activist investor, Alan Greenspan, Albert Einstein, Andrei Shleifer, AOL-Time Warner, asset allocation, asset-backed security, bank run, beat the dealer, behavioural economics, Benoit Mandelbrot, Big Tech, Black Monday: stock market crash in 1987, Black-Scholes formula, book value, Bretton Woods, Brownian motion, business cycle, buy and hold, capital asset pricing model, card file, Carl Icahn, Cass Sunstein, collateralized debt obligation, compensation consultant, complexity theory, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, democratizing finance, Dennis Tito, discovery of the americas, diversification, diversified portfolio, Dr. Strangelove, Edward Glaeser, Edward Thorp, endowment effect, equity risk premium, Eugene Fama: efficient market hypothesis, experimental economics, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, George Akerlof, Glass-Steagall Act, Henri Poincaré, Hyman Minsky, implied volatility, impulse control, index arbitrage, index card, index fund, information asymmetry, invisible hand, Isaac Newton, John Bogle, John Meriwether, John Nash: game theory, John von Neumann, joint-stock company, Joseph Schumpeter, junk bonds, Kenneth Arrow, libertarian paternalism, linear programming, Long Term Capital Management, Louis Bachelier, low interest rates, mandelbrot fractal, market bubble, market design, Michael Milken, Myron Scholes, New Journalism, Nikolai Kondratiev, Paul Lévy, Paul Samuelson, pension reform, performance metric, Ponzi scheme, power law, prediction markets, proprietary trading, prudent man rule, pushing on a string, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, road to serfdom, Robert Bork, Robert Shiller, rolodex, Ronald Reagan, seminal paper, shareholder value, Sharpe ratio, short selling, side project, Silicon Valley, Skinner box, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, statistical model, stocks for the long run, tech worker, The Chicago School, The Myth of the Rational Market, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, Thorstein Veblen, Tobin tax, transaction costs, tulip mania, Two Sigma, Tyler Cowen, value at risk, Vanguard fund, Vilfredo Pareto, volatility smile, Yogi Berra

Most of the information and all of the quotes in the foregoing paragraphs are from Kahneman’s autobiography, Les Prix Nobel 2002 (Stockholm: Nobel Foundation, 2003); also available at www.nobelprize.org. 4. I would repeat some of the questions Tversky asked, but they’re phrased in the arcane language of statistics. Amos Tversky and Daniel Kahneman, “Belief in the Law of Small Numbers,” Psychological Bulletin 2 (1971): 105–10. Reprinted in Daniel Kahneman, Paul Slovic, and Amos Tversky, Judgment Under Uncertainty: Heuristics and Biases (Cambridge, UK: Cambridge University Press, 1982), 23–31. 5. Herbert A. Simon, Models of My Life (New York: Basic Books, 1991), 144. 6. John F. Muth, “Rational Expectations and the Theory of Price Movements,” Econometrica (July 1961): 315–35.

In flight training—or in investing, or in all manner of other endeavors clouded by statistical noise—that’s not the case at all, which is what Daniel Kahneman had suddenly realized.1 Decades later, after he had won a Nobel Prize in Economics for his work, Kahneman described this moment with the flight instructors as “the most satisfying Eureka experience of my career.” It was not an experience that he knew immediately what to do with. His own psychological research focused not on decision making but on technical matters like the dilation of people’s pupils as they memorized long numbers. It wasn’t until one day during the 1968–69 academic year, when Kahneman invited a younger colleague named Amos Tversky to speak to his students, that he began to figure out what to do with his insight.

This post gave Simon a prominent speaking slot at the AEA’s annual meeting, which he used to talk about rationality and its limits. That presumably helped lead to his winning the next year’s Nobel Prize in Economics, “for his pioneering research into the decision-making process within economic organizations.”14 A year later, Daniel Kahneman and Amos Tversky built upon Simon’s ideas and their experiments to launch their first head-on attack on economics and its reliance on von Neumann and Morgenstern’s version of decision making under uncertainty. How do people really assess uncertain prospects? Kahneman and Tversky asked. First, they attach much importance to where things stand now, treating reductions in their current wealth significantly differently from reductions in future gains.


pages: 542 words: 132,010

The Science of Fear: How the Culture of Fear Manipulates Your Brain by Daniel Gardner

Atul Gawande, availability heuristic, behavioural economics, Black Swan, Cass Sunstein, citizen journalism, cognitive bias, cognitive dissonance, Columbine, correlation does not imply causation, Daniel Kahneman / Amos Tversky, David Brooks, Doomsday Clock, feminist movement, haute couture, hindsight bias, illegal immigration, Intergovernmental Panel on Climate Change (IPCC), lateral thinking, Linda problem, mandatory minimum, medical residency, Mikhail Gorbachev, millennium bug, moral panic, mutually assured destruction, nuclear winter, Oklahoma City bombing, placebo effect, precautionary principle, public intellectual, Ralph Nader, RAND corporation, Ronald Reagan, social intelligence, Stephen Hawking, Steven Levy, Steven Pinker, the long tail, the scientific method, Timothy McVeigh, Tunguska event, uranium enrichment, Y2K, young professional

CHAPTER TWO 22: There is only the brain. 25: “Psychologists found that when they asked students to eat a piece of fudge. . . .” Like many of the references to the work of psychologists in this chapter and others that follow, this is drawn from Heuristics and Biases, edited by Thomas Gilovich, Dale Griffin, and Daniel Kahneman. Along with the earlier edition of the same work—edited by Paul Slovic, Amos Tversky, and Daniel Kahneman—it is the definitive text on the subject. 30: “. . . if you give it some careful thought . . . .” The answer is five cents. CHAPTER THREE 35: “Those who heard the higher number, guessed higher.” For the record, both groups were way off.

Congratulations. You have a new customer. The Anchoring Rule, as influential as it is, is only a small part of a much wider scientific breakthrough with vast implications. As always in science, there are many authors and origins of this burgeoning field, but two who stand out are psychologists Daniel Kahneman and Amos Tversky. Four decades ago, Kahneman and Tversky collaborated on research that looked at how people form judgments when they’re uncertain of the facts. That may sound like a modest little backwater of academic work, but it is actually one of the most basic aspects of how people think and act.

The idea of “bounded rationality” is now widely accepted, and its insights are fueling research throughout the social sciences. Even economists are increasingly accepting that Homo sapiens is not Homo economicus, and a dynamic new field called “behavioral economics” is devoted to bringing the insights of psychology to economics. Amos Tversky died in 1996. In 2002, Daniel Kahneman experienced the academic equivalent of a conquering general’s triumphal parade: He was awarded the Prize in Economic Sciences in Memory of Alfred Nobel. He is probably the only winner in the history of the prize who never took so much as a single class in economics. The amazing thing is that the Science article, which sent shock waves out in every direction, is such a modest thing on its face.


Phil Thornton by The Great Economists Ten Economists whose thinking changed the way we live-FT Publishing International (2014)

Alan Greenspan, availability heuristic, behavioural economics, Berlin Wall, bitcoin, Bretton Woods, British Empire, business cycle, business process, call centre, capital controls, Cass Sunstein, choice architecture, cognitive bias, collapse of Lehman Brothers, Corn Laws, creative destruction, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, double helix, endogenous growth, endowment effect, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, fiat currency, financial deregulation, fixed income, Ford Model T, full employment, hindsight bias, income inequality, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Kenneth Arrow, Kenneth Rogoff, Kickstarter, liquidity trap, loss aversion, mass immigration, means of production, mental accounting, Myron Scholes, paradox of thrift, Pareto efficiency, Paul Samuelson, Post-Keynesian economics, price mechanism, pushing on a string, quantitative easing, Richard Thaler, road to serfdom, Ronald Coase, Ronald Reagan, school vouchers, Simon Kuznets, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, Toyota Production System, trade route, transaction costs, unorthodox policies, Vilfredo Pareto, women in the workforce

. • Overconfidence in positive outcomes and in the decisionmakers’ own abilities contribute to financial booms and busts. • People often fail to fully account for the risks they are taking. Chapter 10 • Daniel Kahneman237 Further reading Dan Ariely, Predictably Irrational (HarperCollins, 2009). Daniel Kahneman, Attention and Effort (Prentice-Hall, 1973). Daniel Kahneman, Prospect Theory: an analysis of decision under risk (PN, 1977). Daniel Kahneman, Thinking, Fast and Slow (Penguin, 2012). Daniel Kahneman, Paul Slovic and Amos Tversky (eds), Judgment under Uncertainty: heuristics and biases (Cambridge University Press, 1982). Richard A. Thaler and Cass R. Sunstein, Nudge (Penguin, 2009). Index A Theory of Moral Sentiments (Smith, 1759) 2, 5–6 Adelman, Irma 110 American Economic Association 170 An Inquiry into the Nature and Causes of the Wealth of Nations see The Wealth of Nations anarchism 156 apartheid system in South Africa 199 Ariely, Dan 234 Arrow, Kenneth 191, 213 AT&T 22 austerity versus stimulus debate 43–4, 140–1 Austrian School of Economics 121–2 autarky concept 184 bank bailouts in the financial crisis 162 Bank of England 161 Barro, Robert 43 Barro-Ricardo equivalence 43–4 Becker, Gary (1930– ) 193–216 approach to human behaviour 212–15 building human capital 200–2, 210 early life and influences 195–7 economic perspective on discrimination 196–7, 198–9 Economics of Discrimination (1957) 196–7, 198–9 economics of the family 213–15 family decision making 203–6 key economic theories and writings 197–212 long-term impact 212–15 new home economics 203–6 Nobel Prize (1992) 194, 195–6 on crime and punishment 207–10 on drug addiction 210–12, 215 rational choice model 197, 212– 15, 216 verdict 215–16 Becker–Posner Blog 215 behavioural economics 218–19, 233–6 Bentham, Jeremy 31, 181 Bergmann, Barbara 206 Bergson, Abram 182 Bergson–Samuelson social welfare function 182–3 Bernanke, Ben 77, 159, 162 Bernoulli, Daniel 229 bias in decision making 222–5 in financial decision making 225–32 Bitcoin currency 138 Black, Fischer 187 Blinder, Alan 215 Bloomsbury Group 94 Blunt, Anthony 94 boom and bust cycles see business cycles Bretton Woods agreement 95, 108–9 Brown, Gordon 3, 42 Burgess, Guy 94 Burns, Arthur F. 147 Bush, George H.W. 139 business cycles 57, 65 Hayek’s explanation 123–6 Samuelson’s oscillator model 174–5 Butler, Eamonn 162 Cambridge School of economics 74, 86 Cambridge spy ring 94 capital flow controls 113 capital-intensive goods, effects of increase in wages 33 capitalism exploitation of the working class (Marx) 56–8, 62–3 Index239 ‘fictitious capital’ concept (Marx) 62 seeds of its own downfall (Marx) 56–8, 61–3 capitalist production process (Marx) 54–6 Carlyle, Thomas 33 cartels evil of 10–11 regulation to prevent 21–2 central banks control of economic activity 161 over-expansion of credit 123–4 central state planning, Hayek’s opposition to 134–6, 140 certainty effect 229, 230 ceteris paribus approach to economic analysis 79–80 Chapman, Bruce 19 Chicago School of economic thought 146, 160, 194 China savings and investment imbalance with the US 113 trade imbalance with the US 45 choice architecture 234 Churchill, Winston 98 classical economics 40, 54 Coase, Ronald 73 cognitive biases (Kahneman) 222–5 communism 19, 50 Communist Manifesto (Marx and Engels) 52, 58–61 company bailouts in the financial crisis 162 comparative advantage 35–8, 183–4 complex adaptive systems, science of 138 complex financial products 61–2, 187 computer-games-based money 138 confirmation bias 227 consumer demand marginal rate of substitution 180 revealed preference theory 180–1 consumption smoothing concept 149, 163 Corn Laws, attack by Ricardo 33–5 costs of production, relationship to value 75–7 credit expansion, as a driver of boom and bust cycles 123–4 crime and punishment, views of Becker 207–10 Darling, Alistair 112 Das Kapital (Marx) 52, 53–4, 59–61, 62, 67–8 decision making biases and errors in financial decisions 225–32 heuristics and bias in 222–5 Prospect Theory (Kahneman) 228–32, 234 under risk 228–32 demand side economics 127 depression Keynesian interventionist view 92–3, 94, 105–6 see also Great Depression (1930s) dialectic style of analysis 52, 54 Diamond, Peter 179 diminishing marginal utility 82 discrimination economic perspective of Becker 196–7, 198–9 views of Friedman 157 distribution of economic value (Marx) 54–6 division of labour and productivity 11–14 car production 20–1 in daily life 20–1 divorce rates 205 drug addiction, views of Becker 210–12, 215 Dubner, Stephen 234 Eastern Europe, influence of Hayek 140 Ebenstein, Larry 158 Economics: An Introductory Analysis (Samuelson, 1948) 168, 171–3, 188–9 Economics of Discrimination (Becker, 1957) 196–7, 198–9 Efficient Market theory 111, 112, 187 240Index elasticity of demand 82–4 Elizabeth II, Queen 158 emerging markets, offshoring of jobs to 41 endogenous growth 202 endowment effect 232, 234 Engels, Friedrich 52, 58–61 ethical judgements in economics 182–3 European Central Bank 161 exchange rates, impact of trade on 185–6 expected utility theory (EUT) 228, 229–30, 232 externalities 85 factor price equalisation theorem 186–7 Fama, Eugene 160, 187 family decision making economic perspective 183, 203–6, 213–15 welfare decision making 183 fiat currency 152 ‘fictitious capital’ concept (Marx) 62 financial decision making, biases and errors in 225–32 financial economics, work of Samuelson 187 First World War 95 Folbre, Nancy 206 Ford Model-T car, assembly-line production system 21 Foundations of Economic Analysis (Samuelson, 1947) 168, 169–70 Fox, Charles James 23 Freakonomics (Levitt and Dubner) 234 free-market mechanism of supply and demand 8–9 free market system view of Adam Smith 13–14, 16–18 view of Hayek 131–3 view of Friedman 155–7 free rider problem in public goods 177–8 Free to Choose (Friedman and Friedman, 1980) 158 free trade, influence of Adam Smith 22–3 Freeman, Richard 201 frictional unemployment 155 Friedman, David 156 Friedman, Milton (1912–2006) 94, 110, 145–64, 190–1, 196 advocate of the free market 155–7 belief in individualism 155–7 criticism of Keynesianism 149–50 early life and influences 147–8 economics in action 160–3 fiat currency 152 Free to Choose (1980 ) 158 influence of the Great Depression (1930s) 148 influence on modern economic theory 158–60 limited role of government in the economy 152, 155–7 long-term legacy 157–63 monetarism 151–2 monetarist rule 152 monetary policy 151–2 ‘natural’ rate of unemployment 153–5 new explanation for the Great Depression 150–1 Nobel Prize in economics (1976) 146, 147–8, 154, 161 non-accelerating inflation of unemployment (NAIRU) 153–5 permanent income hypothesis 148–50 role of money supply in the economy 151–2 verdict 163–4 Friedman, Rose (formerly Rose Director) 147, 148, 157, 158, 160 FTSE-listed plcs 86 Funk, Walter 108 Funk Plan 108 Galbraith, J.K. 159 gambler’s fallacy (misconception of chance) 224 General Agreement on Tariffs and Trade (GATT) 40 Index241 general equilibrium theory 8 genetically modified foods 42 geographical effects in economics 84–6 Giffen goods 84 global financial crisis (2007–8) 92, 174 and Keynesianism 111–13 global stimulus package 113 Marxist view 61–3 global free trade influence of Adam Smith 22–3 influence of Ricardo 40–2 global public goods 177–8 global recession (2009) see Great Recession (2009) gold standard, criticism by Keynes 95, 98, 107 government debt and the Great Recession (2009) 43 taxpayer view of (Ricardo) 38–9 government role in the economy anti-central planning view of Hayek 134–6, 140 Keynesian view 92–3, 94, 105–6 view of Adam Smith 9, 10, 16–18 view of Friedman 152, 155–7 Great Crash (1929) 98, 99 Great Depression (1930s) 19, 22–3, 85, 92 explanation of Friedman and Schwartz 150–1 influence on Friedman 148 influence on Keynes 99–100 role of the Federal Reserve 159 Great Recession (2009) 23 and government debt 43 arguments against protectionism 42 austerity versus stimulus debate 43–4, 140–1 Greece, sovereign debt crisis 113–14 Greenspan, Alan 111–12, 235 Grossman, Michael 212 Hansen, Lars Peter 160 Hayek, Friedrich (1899–1992) 110, 111, 119–42 business cycle theory 123–6 clash with Keynes 120, 126–31 collapse of the Soviet Union 140 early life and influences 120 emphasis on individual freedom 134–6, 140 explanation for boom and bust cycles 123–6 First World War 121 focus on supply side economics 127 influence in Eastern Europe 140 influence on George H.W.

For instance, workers negotiating a pay rise will probably start bargaining against the first offer made by their employer rather than their goal. Each of these heuristics led to a range of biases that emerged from the misapplication of these decision-making short cuts. Kahneman identified six biases that emerged from the representativeness heuristic: base-rate neglect; insensitivity to 1. Amos Tversky and Daniel Kahneman, ‘Judgment under Uncertainty: heuristics and biases’, Science, New Series, Vol. 185(4157) (27 September 1974), pp. 1124–1131. 224 The Great Economists sample size; misconceptions of chance; insensitivity to predictability; the illusion of validity; and misconceptions of regression.

They published the results in 1979 in Prospect Theory: an analysis of decisions under risk, the most cited paper ever to appear in Econometrica, the prestigious academic journal of economics.3 The results showed that people were not consistent in applying the same methodology to the alternatives. In one particular set, they offered these choices: Prospect A: a 33% chance of winning $2,500; a 66% chance of $2,400; and a 1% chance of zero versus Prospect B: a certain win of $2,400 2. https://chronicle.com/article/The-Anatomy-of-Influence/129688/ 3. Daniel Kahneman and Amos Tversky, Econometrica, Vol. 47(2) (March 1979), pp. 263–92. Chapter 10 • Daniel Kahneman229 and Prospect C: a 33% chance of $2,500; and a 67% chance of zero versus Prospect D: a 34% chance of $2,400; and a 66% chance of zero Someone who picks A is a risk-seeker and according to the EUT should then also pick C as both have longer odds for a higher win.


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The Drunkard's Walk: How Randomness Rules Our Lives by Leonard Mlodinow

Albert Einstein, Alfred Russel Wallace, Antoine Gombaud: Chevalier de Méré, Atul Gawande, behavioural economics, Brownian motion, butterfly effect, correlation coefficient, Daniel Kahneman / Amos Tversky, data science, Donald Trump, feminist movement, forensic accounting, Gary Kildall, Gerolamo Cardano, Henri Poincaré, index fund, Isaac Newton, law of one price, Monty Hall problem, pattern recognition, Paul Erdős, Pepto Bismol, probability theory / Blaise Pascal / Pierre de Fermat, RAND corporation, random walk, Richard Feynman, Ronald Reagan, Stephen Hawking, Steve Jobs, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, V2 rocket, Watson beat the top human players on Jeopardy!

A compelling and mathematically detailed analysis of coin-toss models in sports appears in chapter 2 of a book in progress by Charles M. Grinstead, William P. Peterson, and J. Laurie Snell, tentatively titled Fat Chance; www.math.dartmouth.edu/-prob/prob/NEW/bestofchance.pdf. Chapter 2: The Laws of Truths and Half-Truths 1. Daniel Kahneman, Paul Slovic, and Amos Tversky, eds., Judgment under Uncertainty: Heuristics and Biases (Cambridge: Cambridge University Press, 1982), pp. 90–98. 2. Amos Tversky and Daniel Kahneman, “Extensional versus Intuitive Reasoning: The Conjunction Fallacy in Probability Judgment,” Psychological Review 90, no. 4 (October 1983): 293–315. 3. Craig R. Fox and Richard Birke, “Forecasting Trial Outcomes: Lawyers Assign Higher Probabilities to Possibilities That Are Described in Greater Detail,” Law and Human Behavior 26, no. 2 (April 2002): 159–73. 4.

IN 2002 THE NOBEL COMMITTEE awarded the Nobel Prize in Economics to a scientist named Daniel Kahneman. Economists do all sorts of things these days—they explain why teachers are paid so little, why football teams are worth so much, and why bodily functions help set a limit on the size of hog farms (a hog excretes three to five times as much as a human, so a farm with thousands of hogs on it often produces more waste than the neighboring cities).5 Despite all the great research generated by economists, the 2002 Nobel Prize was notable because Kahneman is not an economist. He is a psychologist, and for decades, with the late Amos Tversky, Kahneman studied and clarified the kinds of misperceptions of randomness that fuel many of the common fallacies I will talk about in this book.

And so we begin our tour with some of the basic laws of probability and the challenges involved in uncovering, understanding, and applying them. One of the classic explorations of people’s intuition about those laws was an experiment conducted by the pair who did so much to elucidate our misconceptions, Daniel Kahneman and Amos Tversky.1 Feel free to take part—and learn something about your own probabilistic intuition. Imagine a woman named Linda, thirty-one years old, single, outspoken, and very bright. In college she majored in philosophy. While a student she was deeply concerned with discrimination and social justice and participated in antinuclear demonstrations.


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Smarter Faster Better: The Secrets of Being Productive in Life and Business by Charles Duhigg

Air France Flight 447, Asperger Syndrome, Atul Gawande, behavioural economics, Black Swan, cognitive dissonance, Daniel Kahneman / Amos Tversky, data science, David Brooks, digital map, epigenetics, Erik Brynjolfsson, framing effect, high-speed rail, hiring and firing, index card, John von Neumann, knowledge worker, Lean Startup, Malcom McLean invented shipping containers, meta-analysis, new economy, power law, Saturday Night Live, Silicon Valley, Silicon Valley startup, statistical model, Steve Jobs, the scientific method, the strength of weak ties, theory of mind, Toyota Production System, William Langewiesche, Yom Kippur War

bought lottery tickets Amos Tversky and Daniel Kahneman, “Availability: A Heuristic for Judging Frequency and Probability,” Cognitive Psychology 5, no. 2 (1973): 207–32; Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision Under Risk,” Econometrica: Journal of the Econometric Society 47, no. 2 (1979): 263–91; Amos Tversky and Daniel Kahneman, “Judgment Under Uncertainty: Heuristics and Biases,” Science 185, no. 4157 (1974): 1124–31; Amos Tversky and Daniel Kahneman, “The Framing of Decisions and the Psychology of Choice,” Science 211, no. 4481 (1981): 453–58; Daniel Kahneman and Amos Tversky, “Choices, Values, and Frames,” American Psychologist 39, no. 4 (1984): 341; Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Straus and Giroux, 2011); Daniel Kahneman and Amos Tversky, “On the Psychology of Prediction,” Psychological Review 80, no. 4 (1973): 237.

bought lottery tickets Amos Tversky and Daniel Kahneman, “Availability: A Heuristic for Judging Frequency and Probability,” Cognitive Psychology 5, no. 2 (1973): 207–32; Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision Under Risk,” Econometrica: Journal of the Econometric Society 47, no. 2 (1979): 263–91; Amos Tversky and Daniel Kahneman, “Judgment Under Uncertainty: Heuristics and Biases,” Science 185, no. 4157 (1974): 1124–31; Amos Tversky and Daniel Kahneman, “The Framing of Decisions and the Psychology of Choice,” Science 211, no. 4481 (1981): 453–58; Daniel Kahneman and Amos Tversky, “Choices, Values, and Frames,” American Psychologist 39, no. 4 (1984): 341; Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Straus and Giroux, 2011); Daniel Kahneman and Amos Tversky, “On the Psychology of Prediction,” Psychological Review 80, no. 4 (1973): 237. how genes evolve Qiong Wang et al., “Naive Bayesian Classifier for Rapid Assignment of rRNA Sequences into the New Bacterial Taxonomy,” Applied and Environmental Microbiology 73, no. 16 (2007): 5261–67; Jun S. Liu, “The Collapsed Gibbs Sampler in Bayesian Computations with Applications to a Gene Regulation Problem,” Journal of the American Statistical Association 89, no. 427 (1994): 958–66.

Thiel, “Cancer Patients’ Decision Making and Trial-Entry Preferences: The Effects of ‘Framing’ Information About Short-Term Toxicity and Long-Term Survival,” Medical Decision Making 15, no. 1 (1995): 4–12; David E. Bell, Howard Raiffa, and Amos Tversky, Decision Making: Descriptive, Normative, and Prescriptive Interactions (Cambridge: Cambridge University Press, 1988); Amos Tversky and Daniel Kahneman, “Rational Choice and the Framing of Decisions,” The Journal of Business 59, no. 4, part 2 (1986): S251–78. “inside their heads” In response to a fact-checking email, Johnson wrote: “The idea is that we think of a subset of the relevant information.”


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The Art of Execution: How the World's Best Investors Get It Wrong and Still Make Millions by Lee Freeman-Shor

Alan Greenspan, behavioural economics, Black Swan, buy and hold, Carl Icahn, cognitive bias, collapse of Lehman Brothers, credit crunch, Daniel Kahneman / Amos Tversky, diversified portfolio, family office, I think there is a world market for maybe five computers, index fund, Isaac Newton, Jeff Bezos, Long Term Capital Management, loss aversion, Market Wizards by Jack D. Schwager, Pershing Square Capital Management, Richard Thaler, Robert Shiller, rolodex, Skype, South Sea Bubble, Stanford marshmallow experiment, Steve Jobs, technology bubble, The Wisdom of Crowds, too big to fail, tulip mania, world market for maybe five computers, zero-sum game

Unfashionable insects One of the most important influences on the Rabbits is what I call NaFF-Bee – or narrative fallacy framing bias. I have to admit that every time I think of this term my mind conjures up an image of an insect with poor fashion sense, but it’s actually a very important concept. It is a condition that was alluded to in 1974 by two brilliant Israeli academics, Amos Tversky and his Nobel-Prize-winning collaborator Daniel Kahneman.3 (Their ideas will crop up throughout these points.) Tversky and Kahneman suggested that people’s decision making is influenced by a cognitive condition they referred to as a framing bias or anchoring heuristic. In other words, when people make decisions they tend to reach a conclusion based on the way a problem has been presented.

I find it bizarre that top athletes and sportsmen and women have coaches but the majority of investment professionals do not. How can they expect to improve their game if they do not have constructive feedback? * * * 3 ‘Judgment under uncertainty: Heuristics and biases’, Science, by Amos Tversky and Daniel Kahneman (1974). 4 Free Radicals: The Secret Anarchy of Science, by Michael Brooks (2011). 5 The General Theory of Employment, Interest and Money, by John Maynard Keynes (1936). 6 How We Decide, by Johan Lehrer (2009). 7 ‘Money: A Bias for the Whole’, Journal of Consumer Research, by Himanshu Mishra, Arul Mishra and Dhananjay Nayakankuppam (2006). 8 ‘Denomination Effect’, Journal of Consumer Research, Priya Raghubir and Joydeep Srivastava (2009). 9 One Up on Wall Street, by Peter Lynch and John Rothchild (2000). 10 The Dhandho Investor, by Mohnish Pabrai (2007). 11 Quote attributed to Donald Rumsfeld. 12 Being Right or Making Money, by Ned Davis (2000). 13 Ibid. 14 Fortune’s Formula, by William Poundstone (2006). 15 blog.asmartbear.com/ignoring-the-wisdom-of-crowds.html 16 The Little Book of Behavioural Investing, by James Montier (2010). 17 An Astronaut’s Guide to Life on Earth, by Col.

“[T]o be a great investor you should have a clear maximum time for the idea to play out.” 23 The Dhandho Investor, by Mohnish Pabrai (2007). 24 ‘Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice’, Management Science, Richard H. Thaler and Eric J. Johnson, (1990). Available at SSRN: ssrn.com/abstract=1424076 25 Lynch (2000). 26 ‘Prospect Theory: An Analysis of Decision Under Risk’, Econometrica, by Daniel Kahneman and Amos Tversky (1979). 27 ‘The disposition effect and underreaction to news,’ The Journal of Finance, by A. Frazzini (2006). 28 Extract from Warren Buffett’s annual letter to the shareholders of Berkshire Hathaway, (1993). 29 Pabrai (2007). 30 In nominal terms.


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Decisive: How to Make Better Choices in Life and Work by Chip Heath, Dan Heath

behavioural economics, billion-dollar mistake, call centre, Captain Sullenberger Hudson, Cass Sunstein, classic study, Daniel Kahneman / Amos Tversky, en.wikipedia.org, endowment effect, Great Leap Forward, hindsight bias, index fund, it is difficult to get a man to understand something, when his salary depends on his not understanding it, job satisfaction, Kevin Kelly, loss aversion, Max Levchin, medical residency, mental accounting, meta-analysis, Mikhail Gorbachev, PalmPilot, Paradox of Choice, pattern recognition, Peter Thiel, pets.com, Richard Thaler, Ronald Reagan, shareholder value, Silicon Valley, unpaid internship, Upton Sinclair, US Airways Flight 1549, young professional

Repetition sparked trust: Alice Dechêne, et al. (2010), “The Truth About the Truth: A Meta-analytic Review of the Truth Effect,” Personality and Social Psychology Review 14: 238–57. 5 Loss aversion. The classic first discussion of loss aversion is Daniel Kahneman and Amos Tversky (1979), “Prospect Theory: An Analysis of Decision Under Risk,” Econometrica 47: 263–92. This paper by two psychologists appeared in the journal that is the high temple of technical economics and became the most cited paper ever to appear in the journal. It was one of the pieces of research discussed in Kahneman’s Nobel Prize citation (sadly, Amos Tversky had died a few years earlier). The coin-flip example is from that paper. Purchase protection: David M. Cutler and Richard Zeckhauser (2004), “Extending the Theory to Meet the Practice of Insurance,” Working paper, Harvard University.

The Inc. magazine case study is Jennifer Alsever (January 24, 2012). “Case Study: To Sue or Not to Sue.” Inc., http://​www.​inc.​com/​magazine/​201202/​case-​study-​the-​rival-​mixed-​chicks-​sally-​beauty.​html. ACKNOWLEDGMENTS Anyone who writes about decision making owes a deep debt to Daniel Kahneman and Amos Tversky. Chip is grateful to Amos for introducing him to decision making and teaching him to admire elegant results. Some readers—you know who you are—gave us critical feedback on an early draft of the book. Your comments made such a difference; we hope you can see it in the final draft. It’s a lot better, thanks to you.

Carroll and Chunka Mui (2008), Billion Dollar Lessons: What You Can Learn from the Most Inexcusable Business Failures of the Last Twenty-five Years (New York: Portfolio). The market-cap history is from Wolfram Alpha http://​www.​wolfram​alpha.​com/​input/?​i=​market+​cap+​eastman+​kodak+​history&​dataset= (accessed on July 20, 2012). 4 Amos Tversky and Eldar Shafir. Amos Tversky and Eldar Shafir (1992), “Choice Under Conflict: The Dynamics of Deferred Decision,” Psychological Science 3: 358–61. 5 Decided to eliminate submission deadlines. The Economic and Social Research Council example is from Colin Camerer, et al. (2003), “Regulation for Conservatives: Behavioral Economics and the Case for ‘Asymmetric Paternalism,’ ” University of Pennsylvania Law Review 151: 1211–54. 6 Partitioning study.


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The Choice Factory: 25 Behavioural Biases That Influence What We Buy by Richard Shotton

active measures, behavioural economics, call centre, cashless society, cognitive dissonance, Daniel Kahneman / Amos Tversky, data science, David Brooks, Estimating the Reproducibility of Psychological Science, Firefox, framing effect, fundamental attribution error, Goodhart's law, Google Chrome, Kickstarter, loss aversion, nudge unit, Ocado, placebo effect, price anchoring, principal–agent problem, Ralph Waldo Emerson, replication crisis, Richard Feynman, Richard Thaler, Robert Shiller, Rory Sutherland, TED Talk, Veblen good, When a measure becomes a target, World Values Survey

The answer lies in the concept of anchoring. 2. Ensure that the anchors that you communicate increases sales Anchoring occurs when exposure to a number serves as a reference point for subsequent decisions. This occurs whether that number is relevant or not. The original evidence for anchoring came from Amos Tversky and Daniel Kahneman, psychologists who at the time were based at Hebrew University in Jerusalem. In 1974, they published their findings on a seemingly bizarre experiment in the journal Science. The psychologists had recruited participants to spin a wheel of fortune. The wheel was rigged so that it stopped either on the number 10 or 65.

Consumer.ology: The Truth About Consumers and the Psychology of Shopping [Philip Graves, 2010] David Ogilvy famously said, “People don’t think how they feel. They don’t say what they think and they don’t do what they say.” Graves proves this is true and outlines the implications for market research. Thinking, Fast and Slow [Daniel Kahneman, 2011] Kahneman won the Nobel Prize for Economics in 2002 for his work on behavioural economics with Amos Tversky. This book gives an overview of his major ideas. It’s not as easy to read as the other titles I’ve listed. Jordan Ellenberg, a professor at the University of Wisconsin-Madison, analysed data from Amazon’s Kindle to estimate how much of a book was read by the average reader.

It should be installed in the CEO’s office and nowhere else, and certainly not in a basement room. 2. Introduce a higher-end line A simpler approach than forging a new comparison set is to adapt your own product range. Introducing a higher-end offering establishes a new comparison benchmark and, therefore, makes your other lines seem better value. An experiment by Amos Tversky and Itamar Simonson in 1993 quantified the effectiveness of this approach. The Stanford University psychologists questioned 221 participants about which camera they would prefer to buy. One group selected between two cameras: the Minolta X-370 priced at $170 or the Minolta Maxxum 3000i at $240.


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Against the Gods: The Remarkable Story of Risk by Peter L. Bernstein

Alan Greenspan, Albert Einstein, Alvin Roth, Andrew Wiles, Antoine Gombaud: Chevalier de Méré, Bayesian statistics, behavioural economics, Big bang: deregulation of the City of London, Bretton Woods, business cycle, buttonwood tree, buy and hold, capital asset pricing model, cognitive dissonance, computerized trading, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Lloyd's coffeehouse, endowment effect, experimental economics, fear of failure, Fellow of the Royal Society, Fermat's Last Theorem, financial deregulation, financial engineering, financial innovation, full employment, Great Leap Forward, index fund, invention of movable type, Isaac Newton, John Nash: game theory, John von Neumann, Kenneth Arrow, linear programming, loss aversion, Louis Bachelier, mental accounting, moral hazard, Myron Scholes, Nash equilibrium, Norman Macrae, Paul Samuelson, Philip Mirowski, Post-Keynesian economics, probability theory / Blaise Pascal / Pierre de Fermat, prudent man rule, random walk, Richard Thaler, Robert Shiller, Robert Solow, spectrum auction, statistical model, stocks for the long run, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, Thomas Bayes, trade route, transaction costs, tulip mania, Vanguard fund, zero-sum game

The following people also made significant contributions to my work and warrant my deepest appreciation: Kenneth Arrow, Gilbert Bassett, William Baumol, Zalmon Bernstein, Doris Bullard, Paul Davidson, Donald Dewey, David Durand, Barbara Fotinatos, James Fraser, Greg Hayt, Roger Hertog, Victor Howe, Bertrand Jacquillat, Daniel Kahneman, Mary Kentouris, Mario Laserna, Dean LeBaron, Michelle Lee, Harry Markowitz, Morton Meyers, James Norris, Todd Petzel, Paul Samuelson, Robert Shiller, Charles Smithson, Robert Solow, Meir Statman, Marta Steele, Richard Thaler, James Tinsley, Frank Trainer, Amos Tversky,* and Marina von N. Whitman. Eight people generously undertook to read the manuscript in its entirety and to give me the benefit of their expert criticisms and suggestions.

Extensive research and experimentation, however, reveal that departures from that model occur more frequently than most of us admit. You will discover yourself in many of the examples that follow. The most influential research into how people manage risk and uncertainty has been conducted by two Israeli psychologists, Daniel Kahneman and Amos Tversky. Although they now live in the United States-one at Princeton and the other at Stanford-both served in the Israeli armed forces during the 1950s. Kahneman developed a psychological screening system for evaluating Israeli army recruits that is still in use. Tversky served as a paratroop captain and earned a citation for bravery.

Journal of Portfolio Management, Vol. 22, No. 1 (Fall), pp. 21-32. Kagel, John H., and Alvin E. Roth, eds., 1995. The Handbook of Experimental Economics. Princeton, New Jersey: Princeton University Press. Kahneman, Daniel, and Amos Tversky, 1979. "Prospect Theory: An Analysis of Decision under Risk." Econometrica, Vol. 47, No. 2, pp. 263-291.` Kahneman, Daniel, and Amos Tversky, 1984. "Choices, Values, and Frames." American Psychologist, Vol. 39, No. 4 (April), pp. 342-347. Kahneman, Daniel, Jack L. Knetsch, and Richard H. Thaler, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem."


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Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions by Dan Ariely

air freight, Al Roth, Alan Greenspan, Bear Stearns, behavioural economics, Bernie Madoff, Burning Man, butterfly effect, Cass Sunstein, collateralized debt obligation, compensation consultant, computer vision, corporate governance, credit crunch, Daniel Kahneman / Amos Tversky, David Brooks, delayed gratification, endowment effect, financial innovation, fudge factor, Gordon Gekko, greed is good, housing crisis, IKEA effect, invisible hand, John Perry Barlow, lake wobegon effect, late fees, loss aversion, market bubble, Murray Gell-Mann, payday loans, Pepsi Challenge, placebo effect, price anchoring, Richard Thaler, second-price auction, Silicon Valley, Skinner box, Skype, subprime mortgage crisis, The Wealth of Nations by Adam Smith, Upton Sinclair

Chapter 1: The Truth about Relativity RELATED READINGS Amos Tversky, “Features of Similarity,” Psychological Review, Vol. 84 (1977). Amos Tversky and Daniel Kahneman, “The Framing of Decisions and the Psychology of Choice,” Science (1981). Joel Huber, John Payne, and Chris Puto, “Adding Asymmetrically Dominated Alternatives: Violations of Regularity and the Similarity Hypothesis,” Journal of Consumer Research (1982). Itamar Simonson, “Choice Based on Reasons: The Case of Attraction and Compromise Effects,” Journal of Consumer Research (1989). Amos Tversky and Itamar Simonson, “Context-Dependent Preferences,” Management Science (1993).

Uri Simonsohn and George Loewenstein, “Mistake #37: The Impact of Previously Faced Prices on Housing Demand,” Economic Journal (2006). Chapter 3: The Cost of Zero Cost BASED ON Kristina Shampanier, Nina Mazar, and Dan Ariely, “How Small Is Zero Price? The True Value of Free Products,” Marketing Science (2007). RELATED READINGS Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision under Risk,” Econometrica (1979). Eldar Shafir, Itamar Simonson, and Amos Tversky, “Reason-Based Choice,” Cognition (1993). Chapter 4: The Cost of Social Norms BASED ON Uri Gneezy and Aldo Rustichini, “A Fine Is a Price,” Journal of Legal Studies (2000). James Heyman and Dan Ariely, “Effort for Payment: A Tale of Two Markets,” Psychological Science (2004).

If we are thinking of buying a new house, we can be selective about the open houses we go to, skipping the houses that are above our means. If we are thinking about buying a new car, we can focus on the models that we can afford, and so on. We can also change our focus from narrow to broad. Let me explain with an example from a study conducted by two brilliant researchers, Amos Tversky and Daniel Kahneman. Suppose you have two errands to run today. The first is to buy a new pen, and the second is to buy a suit for work. At an office supply store, you find a nice pen for $25. You are set to buy it, when you remember that the same pen is on sale for $18 at another store 15 minutes away.


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Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Nassim Nicholas Taleb

Alan Greenspan, Antoine Gombaud: Chevalier de Méré, availability heuristic, backtesting, behavioural economics, Benoit Mandelbrot, Black Swan, commoditize, complexity theory, corporate governance, corporate raider, currency peg, Daniel Kahneman / Amos Tversky, discounted cash flows, diversified portfolio, endowment effect, equity premium, financial engineering, fixed income, global village, hedonic treadmill, hindsight bias, junk bonds, Kenneth Arrow, Linda problem, Long Term Capital Management, loss aversion, mandelbrot fractal, Mark Spitznagel, Market Wizards by Jack D. Schwager, mental accounting, meta-analysis, Michael Milken, Myron Scholes, PalmPilot, Paradox of Choice, Paul Samuelson, power law, proprietary trading, public intellectual, quantitative trading / quantitative finance, QWERTY keyboard, random walk, Richard Feynman, risk free rate, road to serfdom, Robert Shiller, selection bias, shareholder value, Sharpe ratio, Steven Pinker, stochastic process, survivorship bias, too big to fail, Tragedy of the Commons, Turing test, Yogi Berra

This category of people includes Karl Popper (falsificationism and distrust of intellectual “answers,” actually of anyone who is confident that he knows anything with certainty), Friedrich Hayek and Milton Friedman (suspicion of governments), Adam Smith (intention of man), Herbert Simon (bounded rationality), Amos Tversky and Daniel Kahneman (heuristics and biases), the speculator George Soros, etc. The most neglected one is the misunderstood philosopher Charles Sanders Peirce, who was born a hundred years too early (he coined the term scientific “fallibilism” in opposition to Papal infallibility). Needless to say that the ideas of this book fall squarely into the Tragic category: We are faulty and there is no need to bother trying to correct our flaws.

Go to the airport and ask travelers en route to some remote destination how much they would pay for an insurance policy paying, say, a million tugrits (the currency of Mongolia) if they died during the trip (for any reason).Then ask another collection of travelers how much they would pay for insurance that pays the same in the event of death from a terrorist act (and only a terrorist act). Guess which one would command a higher price? Odds are that people would rather pay for the second policy (although the former includes death from terrorism). The psychologists Daniel Kahneman and Amos Tversky figured this out several decades ago. The irony is that one of the sampled populations did not include people on the street, but professional predictors attending some society of forecasters’ annual meeting. In a now famous experiment they found that the majority of people, whether predictors or nonpredictors, will judge a deadly flood (causing thousands of deaths) caused by a California earthquake to be more likely than a fatal flood (causing thousands of deaths) occurring somewhere in North America (which happens to include California).

It is a platitude that children learn only from their own mistakes; they will cease to touch a burning stove only when they are themselves burned; no possible warning by others can lead to developing the smallest form of cautiousness. Adults, too, suffer from such a condition. This point has been examined by behavioral economics pioneers Daniel Kahneman and Amos Tversky with regard to the choices people make in selecting risky medical treatments—I myself have seen it in my being extremely lax in the area of detection and prevention (i.e., I refuse to derive my risks from the probabilities computed on others, feeling that I am somewhat special) yet extremely aggressive in the treatment of medical conditions (I overreact when I am burned), which is not coherent with rational behavior under uncertainty.


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The Irrational Economist: Making Decisions in a Dangerous World by Erwann Michel-Kerjan, Paul Slovic

"World Economic Forum" Davos, Alan Greenspan, An Inconvenient Truth, Andrei Shleifer, availability heuristic, bank run, behavioural economics, Black Swan, business cycle, Cass Sunstein, classic study, clean water, cognitive dissonance, collateralized debt obligation, complexity theory, conceptual framework, corporate social responsibility, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-subsidies, Daniel Kahneman / Amos Tversky, endowment effect, experimental economics, financial innovation, Fractional reserve banking, George Akerlof, hindsight bias, incomplete markets, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, iterative process, Kenneth Arrow, Loma Prieta earthquake, London Interbank Offered Rate, market bubble, market clearing, money market fund, moral hazard, mortgage debt, Oklahoma City bombing, Pareto efficiency, Paul Samuelson, placebo effect, precautionary principle, price discrimination, price stability, RAND corporation, Richard Thaler, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, social discount rate, source of truth, statistical model, stochastic process, subprime mortgage crisis, The Wealth of Nations by Adam Smith, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, ultimatum game, University of East Anglia, urban planning, Vilfredo Pareto

On checking out of our hotel five days later, we needed to verify the date of our arrival. It turned out to have been Friday the thirteenth! RECOMMENDED READING Kahneman, Daniel, Paul Slovic, and Amos Tversky, eds. (1982). Judgment Under Uncertainty: Heuristics and Biases. Cambridge: Cambridge University Press, 1982. Kahneman, Daniel, and Amos Tversky, eds. (2000). Choices, Values, and Frames. Cambridge: Cambridge University Press, 2000. Langer, Ellen J. (1982). “The Illusion of Control.” In Daniel Kahneman, Paul Slovic, and Amos Tversky, eds. Judgment Under Uncertainty: Heuristics and Biases. Cambridge: Cambridge University Press. Schelling, Thomas (1996). “Coping Rationally with Lapses from Rationality,” Eastern Economic Journal (Summer): 251-269.

Fortunately, the story did not stop there. Stimulated by creative conceptual, methodological, and empirical work by the more senior authors in The Irrational Economist and many others, including Amos Tversky, Daniel Kahneman, and Richard Thaler, the trickle of studies challenging traditional economic assumptions of rationality became a torrent. Nobel prizes in economics awarded to Herbert Simon in 1978, to George Akerlof in 2001, and to Daniel Kahneman and Vernon Smith in 2002 for their contributions toward understanding the behavioral dynamics of economic decisions further contributed to what has become a revolution in thinking.

(Maybe it is not a truly superstitious belief that if I drive without a license I’ll be stopped by an officer. It may be that if I drive without a license I cannot stop thinking I have no license, and cannot stop looking in the mirror for a police car. It’s my imagination I cannot control, not my logic.) We’ve been taught by psychologists Daniel Kahneman and Amos Tversky that many people are innocent of statistical sampling, that many get “anchored” by a randomly produced number, that many are seduced by “representativeness,” and many don’t understand “regression to the mean.” You walk into a public library in the suburb of a large city and see a man, dressed in tie and jacket, reading Thucydides; you have already learned that he is either a concert violinist or a truck driver.


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Misbehaving: The Making of Behavioral Economics by Richard H. Thaler

3Com Palm IPO, Alan Greenspan, Albert Einstein, Alvin Roth, Amazon Mechanical Turk, Andrei Shleifer, Apple's 1984 Super Bowl advert, Atul Gawande, behavioural economics, Berlin Wall, Bernie Madoff, Black-Scholes formula, book value, business cycle, capital asset pricing model, Cass Sunstein, Checklist Manifesto, choice architecture, clean water, cognitive dissonance, conceptual framework, constrained optimization, Daniel Kahneman / Amos Tversky, delayed gratification, diversification, diversified portfolio, Edward Glaeser, endowment effect, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, George Akerlof, hindsight bias, Home mortgage interest deduction, impulse control, index fund, information asymmetry, invisible hand, Jean Tirole, John Nash: game theory, John von Neumann, Kenneth Arrow, Kickstarter, late fees, law of one price, libertarian paternalism, Long Term Capital Management, loss aversion, low interest rates, market clearing, Mason jar, mental accounting, meta-analysis, money market fund, More Guns, Less Crime, mortgage debt, Myron Scholes, Nash equilibrium, Nate Silver, New Journalism, nudge unit, PalmPilot, Paul Samuelson, payday loans, Ponzi scheme, Post-Keynesian economics, presumed consent, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, random walk, randomized controlled trial, Richard Thaler, risk free rate, Robert Shiller, Robert Solow, Ronald Coase, Silicon Valley, South Sea Bubble, Stanford marshmallow experiment, statistical model, Steve Jobs, sunk-cost fallacy, Supply of New York City Cabdrivers, systematic bias, technology bubble, The Chicago School, The Myth of the Rational Market, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, transaction costs, ultimatum game, Vilfredo Pareto, Walter Mischel, zero-sum game

Notes Bibliography List of Figures Acknowledgments Index The foundation of political economy and, in general, of every social science, is evidently psychology. A day may come when we shall be able to deduce the laws of social science from the principles of psychology. —VILFREDO PARETO, 1906 PREFACE Before we get started, here are two stories about my friends and mentors, Amos Tversky and Daniel Kahneman. The stories provide some hints about what to expect in this book. Striving to please Amos Even for those of us who can’t remember where we last put our keys, life offers indelible moments. Some are public events. If you are as old as I am, one may be the day John F. Kennedy was assassinated (freshman in college, playing pickup basketball in the college gym).

It was like discovering a new species. I had never met anyone in academia with their backgrounds. I ended up giving Fischhoff a ride to the airport. As we drove, Fisch-hoff told me he had completed a PhD in psychology at the Hebrew University in Israel. There he had worked with two guys whose names I had never heard: Daniel Kahneman and Amos Tversky. Baruch told me about his now-famous thesis on “hindsight bias.” The finding is that, after the fact, we think that we always knew the outcome was likely, if not a foregone conclusion. After the virtually unknown African American senator Barack Obama defeated the heavily favored Hillary Clinton for the Democratic Party presidential nomination, many people thought they had seen it coming.

Wall Street Journal, October 1. Camerer, Colin F. 1989. “Bubbles and Fads in Asset Prices.” Journal of Economic Surveys 3, no. 1: 3–41. ———. 1997. “Progress in Behavioral Game Theory.” Journal of Economic Perspectives 11, no. 4: 167–88. ———. 2000. “Prospect Theory in the Wild: Evidence from the Field.” In Daniel Kahneman and Amos Tversky, eds., Choices, Values, and Frames. Cambridge, UK: Cambridge University Press. ———. 2003. Behavioral Game Theory: Experiments in Strategic Interaction. Princeton: Princeton University Press. ———, Teck-Hua Ho, and Juin-Kuan Chong. 2004. “A Cognitive Hierarchy Model of Games.” Quarterly Journal of Economics 119, no. 3: 861–98. ———, Samuel Issacharoff, George Loewenstein, Ted O’Donoghue, and Matthew Rabin. 2003.


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Irrational Exuberance: With a New Preface by the Author by Robert J. Shiller

Alan Greenspan, Andrei Shleifer, asset allocation, banking crisis, benefit corporation, Benoit Mandelbrot, book value, business cycle, buy and hold, computer age, correlation does not imply causation, Daniel Kahneman / Amos Tversky, demographic transition, diversification, diversified portfolio, equity premium, Everybody Ought to Be Rich, experimental subject, hindsight bias, income per capita, index fund, Intergovernmental Panel on Climate Change (IPCC), Joseph Schumpeter, Long Term Capital Management, loss aversion, Mahbub ul Haq, mandelbrot fractal, market bubble, market design, market fundamentalism, Mexican peso crisis / tequila crisis, Milgram experiment, money market fund, moral hazard, new economy, open economy, pattern recognition, Phillips curve, Ponzi scheme, price anchoring, random walk, Richard Thaler, risk tolerance, Robert Shiller, Ronald Reagan, Small Order Execution System, spice trade, statistical model, stocks for the long run, Suez crisis 1956, survivorship bias, the market place, Tobin tax, transaction costs, tulip mania, uptick rule, urban decay, Y2K

The ranges serve as “anchors” to which they make their answers conform. Psychologists have shown that people’s decisions in ambiguous situations are influenced by whatever available anchor is at hand. When you must come up with an estimate, and you are unsure what to say, you take whatever number is before you. Psychologists Amos Tversky and Daniel Kahneman demonstrated this tendency clearly in an experiment involving a wheel of fortune: a large wheel with the numbers from 1 to 100 on it, similar to those used in television game shows, that is designed to stop at a random number when it is spun. Subjects were asked questions whose answers were numbers between 1 and 100, difficult questions such as the percentage of African nations in the United Nations.

For a more comprehensive recent survey of the role of psychology in finance, see Hersh Shefrin, Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing (Boston: Harvard Business School Press, 2000); or Andrei Shleifer, Inefficient Markets: An Introduction to Behavioral Finance (Oxford: Oxford University Press, 2000). 2. See Amos Tversky and Daniel Kahneman, “Judgment under Uncertainty: Heuristics and Biases,” Science, 185 (1974): 1124–31. 3. See Robert J. Shiller, “Comovements in Stock Prices and Comovements in Dividends,” Journal of Finance, 44 (1989): 719–29. 4. See Steven L. Heston and K. Geert Rouwenhorst, “Does Industrial Structure Explain the Benefits of International Diversification?”

Advanced Macroeconomics. New York: McGraw-Hill, 1996. Schäfer, Bodo. Der Weg zur finanziellen Freiheit: In sieben Jahren die erste Million. Frankfurt: Campus Verlag, 1999. Shafir, Eldar, Peter Diamond, and Amos Tversky. “Money Illusion.” Quarterly Journal of Economics, 112(2) (1997): 341–74. Shafir, Eldar, Itamar Simonson, and Amos Tversky. “Reason-Based Choice.” Cognition, 49 (1993): 11–36. Shafir, Eldar, and Amos Tversky. “Thinking through Uncertainty: Nonconsequential Reasoning and Choice.” Cognitive Psychology, 24 (1992): 449–74. Sharpe, Steven. “Stock Prices, Expected Returns and Inflation.” Unpublished paper, Board of Governors of the Federal Reserve System, Washington, D.C., 1999.


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Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard H. Thaler, Cass R. Sunstein

Al Roth, Albert Einstein, asset allocation, availability heuristic, behavioural economics, call centre, carbon tax, Cass Sunstein, choice architecture, continuous integration, currency risk, Daniel Kahneman / Amos Tversky, desegregation, diversification, diversified portfolio, do well by doing good, endowment effect, equity premium, feminist movement, financial engineering, fixed income, framing effect, full employment, George Akerlof, index fund, invisible hand, late fees, libertarian paternalism, loss aversion, low interest rates, machine readable, Mahatma Gandhi, Mason jar, medical malpractice, medical residency, mental accounting, meta-analysis, Milgram experiment, money market fund, pension reform, presumed consent, price discrimination, profit maximization, rent-seeking, Richard Thaler, Right to Buy, risk tolerance, Robert Shiller, Saturday Night Live, school choice, school vouchers, systems thinking, Tragedy of the Commons, transaction costs, Vanguard fund, Zipcar

And one to which we will return: “No more than 25 percent of the guests at a university dinner party can come from the economics department without spoiling the conversation.” Although rules of thumb can be very helpful, their use can also lead to systematic biases. This insight, first developed decades ago by two Israeli psychologists, Amos Tversky and Daniel Kahneman (1974), has changed the way psychologists (and eventually economists) think about thinking. Their original work identified three heuristics, or rules of thumb—anchoring, availability, and representativeness—and the biases that are associated with each. Their research program has come to be known as the “heuristics and biases” approach to the study of human judgment.

How We Know What Isn’t So: The Fallibility of Human Reason in Everyday Life. New York: Free Press, 1991. Gilovich, Thomas, Dale Gri¤n, and Daniel Kahneman. Heurisitics and Biases: The Psychology of Intuitive Judgment. Cambridge: Cambridge University Press, 2002. Gilovich, Thomas, Victoria H. Medvec, and Kenneth Savitsky. “The Spotlight Effect in Social Judgment: An Egocentric Bias in Estimates of the Salience of One’s Own Actions and Appearance.” Journal of Personality and Social Psychology 78 (2000): 211–22. Gilovich, Thomas, Robert Vallone, and Amos Tversky. “The Hot Hand in Basketball: On the Misperception of Random Sequences.” Cognitive Psychology 17 (1985): 295– 314.

Journal of Risk and Uncertainty 1 (1988): 7–59. Schkade, David A., and Daniel Kahneman. “Does Living in California Make People Happy? A Focusing Illusion in Judgments of Life Satisfaction.” Psychological Science 9 (1998): 340–46. Schkade, David, Cass R. Sunstein, and Daniel Kahneman. “Deliberating About Dollars: The Severity Shift.” Columbia Law Review 100 (2000): 1139–76. Schneider, Carl E. The Practice of Autonomy: Patients, Doctors, and Medical Decisions. Oxford: Oxford University Press, 1998. Schreiber, Charles A., and Daniel Kahneman. “Determinants of the Remembered Welfare of Aversive Sounds.”


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Dollars and Sense: How We Misthink Money and How to Spend Smarter by Dr. Dan Ariely, Jeff Kreisler

accounting loophole / creative accounting, Airbnb, Albert Einstein, behavioural economics, bitcoin, Burning Man, collateralized debt obligation, Daniel Kahneman / Amos Tversky, delayed gratification, endowment effect, experimental economics, hedonic treadmill, IKEA effect, impact investing, invisible hand, loss aversion, mental accounting, mobile money, PalmPilot, placebo effect, price anchoring, Richard Thaler, sharing economy, Silicon Valley, Snapchat, Stanford marshmallow experiment, Steve Jobs, TaskRabbit, the payments system, Uber for X, ultimatum game, Walter Mischel, winner-take-all economy

Ziv Carmon (INSEAD) and Dan Ariely (MIT), “Focusing on the Forgone: How Value Can Appear So Different to Buyers and Sellers,” Journal of Consumer Research 27, no. 3 (2000): 360–370. 4. Daniel Kahneman (UC Berkeley), Jack L. Knetsch (Simon Fraser University), and Richard Thaler (Cornell), “Experimental Tests of the Endowment Effect and the Coarse Theorem,” Journal of Political Economy 98 (1990): 1325–1348. 5. James R. Wolf (Illinois State University), Hal R. Arkes (Ohio State University), and Waleed A. Muhanna (Ohio State University), “The Power of Touch: An Examination of the Effect of Duration of Physical Contact on the Valuation of Objects,” Judgment and Decision Making 3, no. 6 (2008): 476–482. 6. Daniel Kahneman (University of British Columbia) and Amos Tversky (Stanford), “Prospect Theory: An Analysis of Decision under Risk,” Econometrica: Journal of Econometric Society 47, no. 2 (1979): 263–291. 7.

Once we’ve purchased a can of soda for a dollar, that decision stays with us and influences how we determine its value from that point forward. We have married a monetary amount with a product, for better or worse, till death—or shaken can of soda—do us part. Anchoring’s impact was originally demonstrated by Amos Tversky and Daniel Kahneman in a 1974 experiment regarding the United Nations.2 They had a group of college students spin a wheel that, because it was rigged, landed on either 10 or 65. They then asked the students two questions: 1.Is the percentage of African nations in the UN higher or lower than 10 or 65 (whichever number the wheel had landed on)?

That will be us, on the beach, drinking that cerveza with those unemployed twenty-year-olds. We just hope they include either virtual weight loss or a virtual appreciation for “Dad bod,” too. IT’S IN THE WAY THAT YOU LOSE IT The endowment effect is deeply connected to LOSS AVERSION. The principle of loss aversion, first proposed by Daniel Kahneman and Amos Tversky,6 holds that we value gains and losses differently. We feel the pain of losses more strongly than we do the same magnitude of pleasure. And it’s not just a small difference—it’s about twice as much. In other words, we feel the pain of losing $10 about twice as strongly as we do the pleasure of winning $10.


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Mindware: Tools for Smart Thinking by Richard E. Nisbett

affirmative action, Albert Einstein, availability heuristic, behavioural economics, big-box store, Cass Sunstein, choice architecture, cognitive dissonance, confounding variable, correlation coefficient, correlation does not imply causation, cosmological constant, Daniel Kahneman / Amos Tversky, dark matter, do well by doing good, Edward Jenner, endowment effect, experimental subject, feminist movement, fixed income, fundamental attribution error, Garrett Hardin, glass ceiling, Henri Poincaré, if you see hoof prints, think horses—not zebras, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, job satisfaction, Kickstarter, lake wobegon effect, libertarian paternalism, longitudinal study, loss aversion, low skilled workers, Menlo Park, meta-analysis, Neil Armstrong, quantitative easing, Richard Thaler, Ronald Reagan, selection bias, Shai Danziger, Socratic dialogue, Steve Jobs, Steven Levy, tacit knowledge, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Tragedy of the Commons, William of Occam, Yitang Zhang, Zipcar

The research has also convinced some students of the law that self-reports about motives and goals can be highly unreliable—not for reasons of self-enhancement or self-protection, but because so much of mental life is inaccessible. The errors discovered in self-reports led me to a concern with the accuracy of our inferences in everyday life in general. Following the cognitive psychologists Amos Tversky and Daniel Kahneman, I compared people’s reasoning to scientific, statistical, and logical standards and found large classes of judgments to be systematically mistaken. Inferences frequently violate principles of statistics, economics, logic, and basic scientific methodology. Work by psychologists on these questions has influenced philosophers, economists, and policy makers.

Such heuristics are helpful guides for judgment—they’ll often give us the right answer and normally beat a stab in the dark, often by a long shot. Marseille does indeed have a bigger population than Nice. But Toulouse has a bigger population than Nice. Several important heuristics were identified by the Israeli cognitive psychologists Amos Tversky and Daniel Kahneman. The most important of their heuristics is the representativeness heuristic.22 This rule of thumb leans heavily on judgments of similarity. Events are judged as more likely if they’re similar to the prototype of the event than if they’re less similar. The heuristic is undoubtedly helpful more often than not.

Inequality: A Reassessment of the Effects of Family and Schooling in America. New York: Harper and Row, 1972. Jennings, Dennis, Teresa M. Amabile, and Lee Ross. “Informal Covariation Assessment: Data-Based Vs. Theory-Based Judgments.” In Judgment Under Uncertainty: Heuristics and Biases, edited by Amos Tversky and Daniel Kahneman. New York: Cambridge University Press, 1980. Ji, Li-Jun, Yanjie Su, and Richard E. Nisbett. “Culture, Change and Prediction.” Psychological Science 12 (2001): 450–56. Ji, Li-Jun, Zhiyong Zhang, and Tieyuan Guo. “To Buy or to Sell: Cultural Differences in Stock Market Decisions Based on Stock Price Trends.”


Infotopia: How Many Minds Produce Knowledge by Cass R. Sunstein

affirmative action, Andrei Shleifer, availability heuristic, behavioural economics, Build a better mousetrap, c2.com, Cass Sunstein, cognitive bias, cuban missile crisis, Daniel Kahneman / Amos Tversky, Edward Glaeser, en.wikipedia.org, feminist movement, framing effect, Free Software Foundation, hindsight bias, information asymmetry, Isaac Newton, Jean Tirole, jimmy wales, market bubble, market design, minimum wage unemployment, prediction markets, profit motive, rent control, Richard Stallman, Richard Thaler, Robert Shiller, Ronald Reagan, Savings and loan crisis, slashdot, stem cell, systematic bias, Ted Sorensen, the Cathedral and the Bazaar, The Wisdom of Crowds, winner-take-all economy

., Behavioral Law and Economics (Cambridge, UK: Cambridge University Press, 2000). 2. See Amos Tversky and Daniel Kahneman, “Availability: A Heuristic for Judging Frequency and Probability,” Cognitive Psychology 5 (1973): 208 (discussing availability heuristic). 3. Paul Slovic, The Perception of Risk (London: Earthscan Publications, 2000), 37–48. Notes to Pages 70–76 / 241 4. Ibid., 40. 5. See Donald A. Redelmeier et al., “Understanding Patients’ Decisions: Cognitive and Emotional Perspectives,” Journal of the American Medical Association 270 (1993): 73 (discussing framing effects in medical context). 6. Amos Tversky and Daniel Kahneman, “Extensional versus Intuitive Reasoning: The Conjunction Fallacy in Probability Judgment,” in Gilovich et al., Heuristics and Biases, 19, 22–25 (discussing representativeness). 7.

Amos Tversky and Daniel Kahneman, “Extensional versus Intuitive Reasoning: The Conjunction Fallacy in Probability Judgment,” in Gilovich et al., Heuristics and Biases, 19, 22–25 (discussing representativeness). 7. See Amos Tversky and Daniel Kahneman, “Judgment under Uncertainty: Heuristics and Biases,” in Judgment under Uncertainty: Heuristics and Biases, ed. Daniel Kahneman, Paul Slovic, and Amos Tversky (Cambridge, UK: Cambridge University Press, 1982), 11–12; Barbara Mellers et al., “Do Frequency Representations Eliminate Conjunction Effects?,” Psychological Science Journal 12 (2001). 8. See Stasser and Dietz-Uhler, “Collective Choice, Judgment, and Problem Solving,” 49–50.


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How to Predict the Unpredictable by William Poundstone

accounting loophole / creative accounting, Albert Einstein, Bernie Madoff, Brownian motion, business cycle, butter production in bangladesh, buy and hold, buy low sell high, call centre, centre right, Claude Shannon: information theory, computer age, crowdsourcing, Daniel Kahneman / Amos Tversky, Edward Thorp, Firefox, fixed income, forensic accounting, high net worth, index card, index fund, Jim Simons, John von Neumann, market bubble, money market fund, pattern recognition, Paul Samuelson, Ponzi scheme, power law, prediction markets, proprietary trading, random walk, Richard Thaler, risk-adjusted returns, Robert Shiller, Rubik’s Cube, statistical model, Steven Pinker, subprime mortgage crisis, transaction costs

It sounds like I’m saying that people believe that random winning streaks will continue … except when they believe the complete opposite. The gambler’s fallacy and the hot hand theory are really two sides of the same coin. Both are consequences of the “law of small numbers.” That is a semifacetious rule proposed in 1971 by Amos Tversky and Daniel Kahneman. It runs, People’s intuitions about random sampling appear to satisfy the law of small numbers, which asserts that the law of large numbers applies to small numbers as well. To understand the point, and the verbal wit, you need to know what the “law of large numbers” is. It’s one of the most fundamental rules of probability.

Be suspicious when too many numbers just top a psychologically significant threshold. • A last-two-digits test can help detect fraudulent managers who unconsciously favor certain digit pairs. See notes on this chapter Part Two The Hot Hand Theory Thirteen In the Zone Basketball was an obsession of 5'9" Israeli-American psychologist Amos Tversky. He watched the game as a fan, and he played it with friends, aggressively. “He was a rough player,” Tversky’s wife, Barbara, told me. “He came home from a basketball game wounded. I said, ‘Basketball is not a contact sport!’” As a fan, Tversky was aware of the hot hand theory. This is a belief in winning streaks, widespread among basketball players, coaches, commentators, and fans.

Geoghegan, Bernard Dionysius (2011). “From Information Theory to French Theory: Jakobson, Lévi-Strauss, and the Cybernetic Apparatus.” Critical Inquiry 38, 96–126. Gilovich, Thomas (1993). How We Know What Isn’t So: The Fallibility of Human Reason in Everyday Life. New York: Free Press. Gilovich, Thomas, Robert Vallone, and Amos Tversky (1985). “The Hot Hand in Basketball: On the Misperception of Random Sequences.” Cognitive Psychology 17, 295–314. Gladstone, Beth Pinsker (2012). “Abandon online shopping cart, reap discount?” Reuters, Jun. 7, 2012. Golden, Daniel (2009). “Cash Me If You Can.” Portfolio.com, Mar. 18, 2009. Goodfellow, Louis D. (1992).


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The Paradox of Choice: Why More Is Less by Barry Schwartz

accounting loophole / creative accounting, attribution theory, Atul Gawande, availability heuristic, Cass Sunstein, Daniel Kahneman / Amos Tversky, endowment effect, framing effect, hedonic treadmill, income per capita, job satisfaction, loss aversion, medical residency, mental accounting, Own Your Own Home, PalmPilot, Paradox of Choice, Pareto efficiency, peak-end rule, positional goods, price anchoring, psychological pricing, RAND corporation, Richard Thaler, science of happiness, search costs, The Wealth of Nations by Adam Smith

Evaluating the Information EVEN IF WE CAN ACCURATELY DETERMINE WHAT WE WANT AND THEN find good information, in a quantity we can handle, do we really know how to analyze, sift, weigh, and evaluate it to arrive at the right conclusions and make the right choices? Not always. Spear-headed by psychologists Daniel Kahneman and Amos Tversky, researchers have spent the last thirty years studying how people make decisions. Their work documents the variety of rules of thumb we use that often lead us astray as we try to make wise decisions. Availability IMAGINE THAT YOU’RE IN THE MARKET FOR A NEW CAR AND THAT YOU care about only two things: safety and reliability.

Beyond the difference in presentation, though, there is no difference in the price structure at these two gas stations. A discount for paying cash is, effectively, the same as a surcharge for using credit. Nonetheless, fuel-hungry consumers will have very different subjective responses to the two different propositions. Daniel Kahneman and Amos Tversky call this effect framing. What determines whether a given price represents a discount or a surcharge? Consumers certainly can’t tell from the price itself. In addition to the current price, potential buyers would need to know the standard or “reference” price. If the reference price of gas is $1.55, then those who pay cash are getting a discount.

As long as expectations keep pace with realizations, people may live better, but they won’t feel better about how they live. Prospects, Frames, and Evaluation IN CHAPTER 3, I DISCUSSED A VERY IMPORTANT FRAMEWORK FOR understanding how we assess subjective experience. It is called prospect theory, and it was developed by Daniel Kahneman and Amos Tversky. What the theory claims is that evaluations are relative to a baseline. A given experience will feel positive if it’s an improvement on what came before and negative if it’s worse than what came before. To understand how we will judge an experience, it is necessary first to find out where we set our hedonic zero point.


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Why Nudge?: The Politics of Libertarian Paternalism by Cass R. Sunstein

Affordable Care Act / Obamacare, Andrei Shleifer, availability heuristic, behavioural economics, Cass Sunstein, choice architecture, clean water, cognitive load, Daniel Kahneman / Amos Tversky, Edward Glaeser, endowment effect, energy security, framing effect, invisible hand, late fees, libertarian paternalism, loss aversion, nudge unit, randomized controlled trial, Richard Thaler

See generally ADVANCES IN BEHAVIORAL ECONOMICS (Colin F. Camerer et al. eds., 2003) (offering wide range of findings); ADVANCES IN BEHAVIORAL FINANCE, VOLUME II (Richard H. Thaler ed., 2005); CHOICES, VALUES, AND FRAMES (Daniel Kahneman & Amos Tversky eds., 2000) (offering a large number of relevant findings); HEURISTICS AND BIASES: THE PSYCHOLOGY OF INTUITIVE Judgment (Thomas Gilovich et al. eds., 2002) (outlining a variety of empirical findings). 2. DANIEL KAHNEMAN, THINKING, FAST AND SLOW (2011); see also RICHARD H. THALER & CASS R. SUNSTEIN, NUDGE: IMPROVING DECISIONS ABOUT HEALTH, WEALTH, AND HAPPINESS 19–22 (2008) (discussing “Humans” and “Econs”). 3.

See SHAROT ET AL., supra note 50. 60. Id. at 1477. For some compelling evidence of the neural foundations of optimism, and particularly the more ready incorporation of good news than bad news, see SHAROT ET AL., supra note 52. 61. SHAROT ET AL., supra note 50, at 1477. 62. See id. 63. See Amos Tversky & Daniel Kahneman, Availability: A Heuristic for Judging Frequency and Probability, 5 COGNITIVE PSYCHOL. 207, 221 (1973). 64. See Elke U. Weber, Experience-Based and Description-Based Perceptions of Long-Term Risk: Why Global Warming Does Not Scare Us (Yet), 77 CLIMATIC CHANGE 103, 107–8 (2006). 65. See Laurette Dubé-Rioux & J.

This is the basic argument of SARAH CONLY, AGAINST AUTONOMY: JUSTIFYING COERCIVE PATERNALISM (2012), who emphasizes the need to assess the full set of costs and benefits. 37. See CHRISTOPHER CHABRIS & DANIEL SIMONS, THE INVISIBLE GORILLA: AND OTHER WAYS OUR INTUITIONS DECEIVE US 6–8 (2010). 38. See OREN BAR-GILL, SEDUCTION BY CONTRACT 18–23 (2012). Early work by Daniel Kahneman focused on closely related questions. See DANIEL KAHNEMAN, ATTENTION AND EFFORT (1973). 39. See Victor Stango & Jonathan Zinman, Limited and Varying Consumer Attention: Evidence from Shocks to the Salience of Bank Overdraft Fees 27–28 (Fed. Reserve Bank of Phila., Working Paper No. 11–17, 2011), http://ssrn.com/abstract=1817916. 40.


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Retirementology: Rethinking the American Dream in a New Economy by Gregory Brandon Salsbury

Alan Greenspan, Albert Einstein, asset allocation, Bear Stearns, behavioural economics, buy and hold, carried interest, Cass Sunstein, credit crunch, Daniel Kahneman / Amos Tversky, diversification, estate planning, financial independence, fixed income, full employment, hindsight bias, housing crisis, loss aversion, market bubble, market clearing, mass affluent, Maui Hawaii, mental accounting, mortgage debt, mortgage tax deduction, National Debt Clock, negative equity, new economy, RFID, Richard Thaler, risk tolerance, Robert Shiller, side project, Silicon Valley, Steve Jobs, the rule of 72, Yogi Berra

In fact, the quaint notion that people will behave in ways that are predictable and observable ignores what 2002 Nobel Prize winner in Economics Dr. Daniel Kahneman calls “the human agent.” In an interview I conducted with Dr. Kahneman in 2004, this pioneer in behavioral finance told me about how his discipline doesn’t assume perfect rationality, which is why perceptual bias, complexity, and emotions like pride and anger, illustrated in our exercise, can overshadow sound financial decisions. For example, research from Dr. Kahneman and Dr. Amos Tversky showed that investors are more sensitive to decreases in the value of their portfolio than to increases in value.41 Even in good times, many investors tend to suffer from what experts refer to as “myopic loss aversion”—a basic tenet from the field of behavioral finance, which holds that people psychologically weigh losses twice as heavily as gains.

The result is that they end up working much shorter hours on the very lucrative rainy days, when everyone is looking for a cab, and giving up the opportunity to earn much more money. Conversely, when a cabbie works much longer hours on sunny days when cabs are plentiful, he gives up the opportunity to do something that may be more profitable or enjoyable than trying to meet the $200 threshold he’s set for himself driving the cab. “Opportunity costs,” according to Daniel Kahneman, Amos Tversky and Richard Thaler, “typically receive much less weight than out-of-pocket costs.”9 It’s conceivable that if the cab driver were to maximize the opportunity to earn money when the weather was bad, he’d easily earn an average of $200 a day. When investors try to calculate the returns on their portfolios, they often don’t bother to use calculators.

November 17, 2009. 31 The Heritage Foundation, “The Obama Budget: Spending, Taxes, and Doubling the National Debt,” March 16, 2009. 32 Reuters, “Obama seeks estate tax hike,” May 11, 2009. 33 The Heritage Foundation, “The Obama Budget: Spending, Taxes, and Doubling the National Debt,” March 16, 2009. 34 Center on Budget and Policy Priorities, “Tax Measures Help Balance State Budgets: A Common and Reasonable Response to Shortfalls,” July 9, 2009. 35 TheTrumpet.com, “California Budget Crisis About to Affect People’s Everyday Lives,” January 21, 2009. 36 Los Angeles Times, “California faces financial meltdown as debt grows by $1.7m an hour,” December 12, 2008. 37 The Dallas Morning News, “In bad economy, many Californians packing up and leaving,” January 11, 2009. 38 National Coalition on Healthcare, “Insurance: Issue Areas,” 2009. 39 Center on Budget and Policy Priorities, “Poverty Rose, Median Income Declined, and Job-Based Health Insurance Continued to Weaken in 2008; Recession Likely to Expand Ranks of Poor and Uninsured in 2009 and 2010,” September 10, 2009. 40 The Pew Charitable Trusts, Financial Report: Entitlement Programs Underfunded by Trillions, December 16, 2008. 41 Kahneman, Daniel, and Amos Tversky, “Prospect Theory: An Analysis of Decision Under Risk,” Econometrica, Vol. 47, No. 2 (March 1979), pp. 263–292. 42 USA Today, “Is this the next baby boom?” July 16, 2008. 1. Great Expectations MONELERIOUS: [mun-ih-lair-ee-uhs] The state of being wildly incorrect in one’s thinking about any given money matter.


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The Irrational Bundle by Dan Ariely

accounting loophole / creative accounting, air freight, Albert Einstein, Alvin Roth, An Inconvenient Truth, assortative mating, banking crisis, Bear Stearns, behavioural economics, Bernie Madoff, Black Swan, Broken windows theory, Burning Man, business process, cashless society, Cass Sunstein, clean water, cognitive dissonance, cognitive load, compensation consultant, computer vision, Cornelius Vanderbilt, corporate governance, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, delayed gratification, Demis Hassabis, Donald Trump, end world poverty, endowment effect, Exxon Valdez, fake it until you make it, financial engineering, first-price auction, Ford Model T, Frederick Winslow Taylor, fudge factor, Garrett Hardin, George Akerlof, Gordon Gekko, greed is good, happiness index / gross national happiness, hedonic treadmill, IKEA effect, Jean Tirole, job satisfaction, John Perry Barlow, Kenneth Arrow, knowledge economy, knowledge worker, lake wobegon effect, late fees, loss aversion, Murray Gell-Mann, name-letter effect, new economy, operational security, Pepsi Challenge, Peter Singer: altruism, placebo effect, price anchoring, Richard Feynman, Richard Thaler, Saturday Night Live, Schrödinger's Cat, search costs, second-price auction, Shai Danziger, shareholder value, Silicon Valley, Skinner box, Skype, social contagion, software as a service, Steve Jobs, subprime mortgage crisis, sunk-cost fallacy, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tragedy of the Commons, ultimatum game, Upton Sinclair, Walter Mischel, young professional

Chapter 1: The Truth about Relativity RELATED READINGS Amos Tversky, “Features of Similarity,” Psychological Review, Vol. 84 (1977). Amos Tversky and Daniel Kahneman, “The Framing of Decisions and the Psychology of Choice,” Science (1981). Joel Huber, John Payne, and Chris Puto, “Adding Asymmetrically Dominated Alternatives: Violations of Regularity and the Similarity Hypothesis,” Journal of Consumer Research (1982). Itamar Simonson, “Choice Based on Reasons: The Case of Attraction and Compromise Effects,” Journal of Consumer Research (1989). Amos Tversky and Itamar Simonson, “Context-Dependent Preferences,” Management Science (1993).

If we are thinking of buying a new house, we can be selective about the open houses we go to, skipping the houses that are above our means. If we are thinking about buying a new car, we can focus on the models that we can afford, and so on. We can also change our focus from narrow to broad. Let me explain with an example from a study conducted by two brilliant researchers, Amos Tversky and Daniel Kahneman. Suppose you have two errands to run today. The first is to buy a new pen, and the second is to buy a suit for work. At an office supply store, you find a nice pen for $25. You are set to buy it, when you remember that the same pen is on sale for $18 at another store 15 minutes away.

Chapter 1: Paying More for Less: Why Big Bonuses Don’t Always Work Based on Dan Ariely, Uri Gneezy, George Loewenstein, and Nina Mazar, “Large Stakes and Big Mistakes,” The Review of Economic Studies 76, vol. 2 (2009): 451–469. Racheli Barkan, Yosef Solomonov, Michael Bar-Eli, and Dan Ariely, “Clutch Players at the NBA,” manuscript, Duke University, 2010. Mihály Csíkszentmihályi, Flow: The Psychology of Optimal Experience (New York: Harper and Row, 1990). Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision under Risk,” Econometrica 47, no. 2 (1979): 263–291. Robert Yerkes and John Dodson, “The Relation of Strength of Stimulus to Rapidity of Habit-Formation,” Journal of Comparative Neurology and Psychology 18 (1908): 459–482. Robert Zajonc, “Social Facilitation,” Science 149 (1965): 269–274.


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Adaptive Markets: Financial Evolution at the Speed of Thought by Andrew W. Lo

Alan Greenspan, Albert Einstein, Alfred Russel Wallace, algorithmic trading, Andrei Shleifer, Arthur Eddington, Asian financial crisis, asset allocation, asset-backed security, backtesting, bank run, barriers to entry, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, bitcoin, Bob Litterman, Bonfire of the Vanities, bonus culture, break the buck, Brexit referendum, Brownian motion, business cycle, business process, butterfly effect, buy and hold, capital asset pricing model, Captain Sullenberger Hudson, carbon tax, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, confounding variable, corporate governance, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, Daniel Kahneman / Amos Tversky, delayed gratification, democratizing finance, Diane Coyle, diversification, diversified portfolio, do well by doing good, double helix, easy for humans, difficult for computers, equity risk premium, Ernest Rutherford, Eugene Fama: efficient market hypothesis, experimental economics, experimental subject, Fall of the Berlin Wall, financial deregulation, financial engineering, financial innovation, financial intermediation, fixed income, Flash crash, Fractional reserve banking, framing effect, Glass-Steagall Act, global macro, Gordon Gekko, greed is good, Hans Rosling, Henri Poincaré, high net worth, housing crisis, incomplete markets, index fund, information security, interest rate derivative, invention of the telegraph, Isaac Newton, it's over 9,000, James Watt: steam engine, Jeff Hawkins, Jim Simons, job satisfaction, John Bogle, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, language acquisition, London Interbank Offered Rate, Long Term Capital Management, longitudinal study, loss aversion, Louis Pasteur, mandelbrot fractal, margin call, Mark Zuckerberg, market fundamentalism, martingale, megaproject, merger arbitrage, meta-analysis, Milgram experiment, mirror neurons, money market fund, moral hazard, Myron Scholes, Neil Armstrong, Nick Leeson, old-boy network, One Laptop per Child (OLPC), out of africa, p-value, PalmPilot, paper trading, passive investing, Paul Lévy, Paul Samuelson, Paul Volcker talking about ATMs, Phillips curve, Ponzi scheme, predatory finance, prediction markets, price discovery process, profit maximization, profit motive, proprietary trading, public intellectual, quantitative hedge fund, quantitative trading / quantitative finance, RAND corporation, random walk, randomized controlled trial, Renaissance Technologies, Richard Feynman, Richard Feynman: Challenger O-ring, risk tolerance, Robert Shiller, Robert Solow, Sam Peltzman, Savings and loan crisis, seminal paper, Shai Danziger, short selling, sovereign wealth fund, Stanford marshmallow experiment, Stanford prison experiment, statistical arbitrage, Steven Pinker, stochastic process, stocks for the long run, subprime mortgage crisis, survivorship bias, systematic bias, Thales and the olive presses, The Great Moderation, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Malthus, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, Triangle Shirtwaist Factory, ultimatum game, uptick rule, Upton Sinclair, US Airways Flight 1549, Walter Mischel, Watson beat the top human players on Jeopardy!, WikiLeaks, Yogi Berra, zero-sum game

Fortune favors the brave, and market prices reflect our innate tendency to avoid uncertainty. LOSING HURTS MORE THAN WINNING FEELS GOOD While the distinction between risk and uncertainty might seem subtle at first, even subtler biases are hardwired into our psychology. Two experimental psychologists, Daniel Kahneman and Amos Tversky, both outsiders to economics, made their careers studying these biases, and in so doing, they radically changed how scientists viewed the human decision-making process. Kahneman and Tversky were one of the great scientific partnerships of the modern era. They worked so closely together that they would randomly choose which author would appear first in their publication credits by tossing a coin—a method entirely fitting with their research focus: decision making under uncertainty.

The representativeness heuristic also explains why people believe in winning streaks, from the picks of a hot stock market guru to the “hot hand” on a basketball court. Basketball fans and players alike believe in the hot hand phenomenon—the ability of a player to develop a streak of exceptional performance in sinking baskets—where a mathematician might say it’s due to luck. In 1985, Thomas Gilovich, Robert Vallone, and Amos Tversky (this time without Daniel Kahneman) set out to discover if the hot hand was actually true.27 The researchers had unprecedented access to the Philadelphia 76ers, including the team’s coach, all of whom were convinced that players developed hot hands from time to time. Professional sports are an excellent place to find large quantities of meticulously recorded behavioral data, and in this case, the team statistician for the Philadelphia 76ers had recorded every three-point attempt made by a player during Philadelphia’s home games in the 1980–81 season.

In the bigger picture, if we let our fear instinct drive our reaction to financial crises, we’ll likely regret the responses produced by our amygdalas. This applies not only to investors, but also to regulators and policymakers, whose responses to fear can have much larger consequences on the financial system than any single player in the market. The psychologist Paul Slovic, a colleague of Daniel Kahneman and Amos Tversky, has studied in depth how people perceive risk while experiencing strong emotion. Slovic found a persistent emotional bias that colors our reactions to risk.12 If the potential risks and benefits of a policy are framed in a manner to provoke a negative emotional response, people overweigh the risks and downplay the benefits, while if a policy is framed in a positive manner, people overweigh the benefits and downplay the risks.


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Licence to be Bad by Jonathan Aldred

"Friedman doctrine" OR "shareholder theory", Affordable Care Act / Obamacare, Alan Greenspan, Albert Einstein, availability heuristic, Ayatollah Khomeini, behavioural economics, Benoit Mandelbrot, Berlin Wall, Black Monday: stock market crash in 1987, Black Swan, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Cass Sunstein, Charles Babbage, clean water, cognitive dissonance, corporate governance, correlation does not imply causation, cuban missile crisis, Daniel Kahneman / Amos Tversky, Donald Trump, Douglas Engelbart, Douglas Engelbart, Dr. Strangelove, Edward Snowden, fake news, Fall of the Berlin Wall, falling living standards, feminist movement, framing effect, Frederick Winslow Taylor, From Mathematics to the Technologies of Life and Death, full employment, Gary Kildall, George Akerlof, glass ceiling, Glass-Steagall Act, Herman Kahn, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, Jeff Bezos, John Nash: game theory, John von Neumann, Linda problem, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, meta-analysis, Mont Pelerin Society, mutually assured destruction, Myron Scholes, Nash equilibrium, Norbert Wiener, nudge unit, obamacare, offshore financial centre, Pareto efficiency, Paul Samuelson, plutocrats, positional goods, power law, precautionary principle, profit maximization, profit motive, race to the bottom, RAND corporation, rent-seeking, Richard Thaler, ride hailing / ride sharing, risk tolerance, road to serfdom, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, scientific management, Skinner box, Skype, Social Responsibility of Business Is to Increase Its Profits, spectrum auction, The Nature of the Firm, The Wealth of Nations by Adam Smith, Tragedy of the Commons, transaction costs, trickle-down economics, Vilfredo Pareto, wealth creators, zero-sum game

THE WEIRD WORLD OF NUDGE A widely discussed development in economics in recent years has been the emergence of behavioural economics. In essence, behavioural economics tries to study how people actually behave – in contrast to fantasies such as homo economicus which dominate orthodox economics. It uses ideas and methods from psychology, and it was two psychologists, Daniel Kahneman and Amos Tversky, who perhaps did more than anyone else to dislodge old orthodoxies in economics about how we think and choose. One big idea in behavioural economics began with Kahneman and Tversky’s Asian disease problem: Suppose you are told that an unusual Asian disease is expected to kill 600 people in your country.

Forster famously contrasted a simple succession of facts – ‘The king died and then the queen died’ – with a plot: ‘The king died, and then the queen died of grief.’ There is more information in this plot, yet it is no harder to remember: it is cognitively more efficient.16 However, there is a catch. Daniel Kahneman and Amos Tversky provided the first clear evidence. The Linda Problem remains one of their most famous experiments: 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 anti-nuclear demonstrations.

If economics needs deflating to a more humble and modest position in our culture, then we need not wait for economists to let the air out. Ultimately, we have the power to put economics back in its proper place. We should not delay. Further Reading At the end of his superb account of the collaboration between Daniel Kahneman and Amos Tversky, The Undoing Project, Michael Lewis provides a note on sources. But he warns the reader that when researchers write papers for publication in academic journals, they ‘aren’t trying to engage their readers, much less give them pleasure. They’re trying to survive them.’ In other words, most academic journal papers in fields such as economics don’t try to enter into dialogue with their readers.


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The Panic Virus: The True Story Behind the Vaccine-Autism Controversy by Seth Mnookin

Albert Einstein, autism spectrum disorder, British Empire, Cass Sunstein, cognitive dissonance, correlation does not imply causation, Daniel Kahneman / Amos Tversky, disinformation, Edward Jenner, en.wikipedia.org, illegal immigration, index card, Isaac Newton, John Gilmore, loss aversion, meta-analysis, mouse model, neurotypical, pattern recognition, placebo effect, precautionary principle, Richard Thaler, Saturday Night Live, selection bias, Stephen Hawking, Steven Pinker, the scientific method, Thomas Kuhn: the structure of scientific revolutions

., August 27, 1993), footnote, 15. 17 “fills me with horror”: Tsouderos, “Autism ‘Miracle’ Called Junk Science.” 17 “If someone like Mark Geier comes up”: Kevin Leitch, interview with author, May 5, 2009. 18 in a series of groundbreaking papers in the 1970s: Daniel Kahneman and Amos Tversky, “Subjective Probability: A Judgment of Representativeness,” Cognitive Psychology 1973;3: 430–54; Daniel Kahneman and Amos Tversky, “Judgment Under Uncertainty: Heuristics and Biases,” Science 1974;185(4157): 1124–31; Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decisions Under Risk,” Econometrica March 1979;47(2): 313–27. See also: Preference, Belief, and Similarity—Selected Writings, Amos Tversky, edited by Eldar Shafir (Cambridge: Massachusetts Institute of Technology Press, 2004), Chapter 7, “Belief in the Law of Small Numbers,” 193–202; Chapter 9, “Extensional Versus Intuitive Reasoning: The Conjunction Fallacy in Probability Judgment,” 221–56. 18 A recent Hib outbreak in Minnesota: Centers for Disease Control and Prevention, “Invasive Haemophilus influenzae Type B Disease in Five Young Children—Minnesota, 2008,” Morbidity and Mortality Weekly Report, January 23, 2009;58(Early Release): 1–3. 19 Among those infected was Dana McCaffery: Toni and David McCaffery, interview and e-mails with author, 2009–2010. 19 A decade after the World Health Organization: World Health Organization, “Measles Eradication Still a Long Way Off,” Bulletin of the World Health Organization 2001;79(6), http://www.who.int/mediacentre/ factsheets/fs288/en/index.html. 19 In Great Britain, there’s been more than a thousandfold increase: “Agency Publishes Annual Measles Figures for 2008,” Health Protection Agency (U.K.), February 9, 2009. 19 outbreaks in many of the country’s most populous states: Centers for Disease Control and Prevention, “Update: Measles—United States, January–July 2008,” Morbidity and Mortality Weekly Report, August 22, 2008;57(33): 893–96. 19 “felt safe in making the choice”: “How My Son Spread the Measles,” Time, May 25, 2008. 20 Before the MMR vaccine was introduced: Nancy Shute, “Parents’ Vaccine Safety Fears Mean Big Trouble for Children’s Health,” usnews.com, March 1, 2010. 20 On the fourth morning of Matthew Lacek’s coma: Kelly Lacek, interview with author, May 7, 2009. 20 “We just celebrated [Matthew’s] 7th birthday”: Kelly Lacek, e-mail to author, “Subject: Re: from Seth Mnookin/via Trish at PKids,” April 12, 2010.

A lot of parenting decisions come down to our gut reactions—science can’t tell us what’s an appropriate curfew for a sixteen-year-old or whether it’s better to indulge or resist a child who says he wants to quit violin lessons—and when it comes to vaccines, most of the “commonsense” arguments appear to line up on one side of the equation: Vaccines contain viruses, viruses are dangerous, infants’ immune systems aren’t fully developed, drug companies are interested only in profit, and the government can’t always be trusted. The problem, as psychologist and Nobel laureate Daniel Kahneman and his longtime research partner Amos Tversky demonstrated in a series of groundbreaking papers in the 1970s, is that in many situations regarding risk perception and data processing, “commonsense” arguments are precisely the ones that lead us astray.5 Because the risks associated with foregoing vaccines feel so hypothetical, and because the infinitesimally remote possibility that vaccines could hurt our children is so scary, and because there’s nothing in our daily experience to indicate that a little fluid administered through a needle would protect us from a threat we can’t even see, it’s very hard for parents working by intuition alone to know what’s best for their children in this situation.

New England Journal of Medicine 2007;357(13): 1281–92. Trevelyan, Barry, et al. “The Spatial Dynamics of Poliomyelitis in the United States: From Epidemic Emergence to Vaccine-Induced Retreat, 1910–1971.” Annals of the Association of American Geographers 2005;95(2): 269–93. Tversky, Amos, and Daniel Kahneman. “Belief in the Law of Small Numbers.” Psychological Bulletin 1971;76(2): 105–10. Uhlmann, V., et al. “Potential Viral Pathogenic Mechanism for New Variant Inflammatory Bowel Disease.” Journal of Clinical Pathology: Molecular Pathology 2002;55(2): 84–90. Van Damme, Wim, et al. “Measles Vaccination and Inflammatory Bowel Disease.”


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The Organized Mind: Thinking Straight in the Age of Information Overload by Daniel J. Levitin

Abraham Maslow, airport security, Albert Einstein, Amazon Mechanical Turk, Anton Chekhov, autism spectrum disorder, Bayesian statistics, behavioural economics, big-box store, business process, call centre, Claude Shannon: information theory, cloud computing, cognitive bias, cognitive load, complexity theory, computer vision, conceptual framework, correlation does not imply causation, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, data science, deep learning, delayed gratification, Donald Trump, en.wikipedia.org, epigenetics, Eratosthenes, Exxon Valdez, framing effect, friendly fire, fundamental attribution error, Golden Gate Park, Google Glasses, GPS: selective availability, haute cuisine, How many piano tuners are there in Chicago?, human-factors engineering, if you see hoof prints, think horses—not zebras, impulse control, index card, indoor plumbing, information retrieval, information security, invention of writing, iterative process, jimmy wales, job satisfaction, Kickstarter, language acquisition, Lewis Mumford, life extension, longitudinal study, meta-analysis, more computing power than Apollo, Network effects, new economy, Nicholas Carr, optical character recognition, Pareto efficiency, pattern recognition, phenotype, placebo effect, pre–internet, profit motive, randomized controlled trial, Rubik’s Cube, Salesforce, shared worldview, Sheryl Sandberg, Skype, Snapchat, social intelligence, statistical model, Steve Jobs, supply-chain management, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Bayes, traumatic brain injury, Turing test, Twitter Arab Spring, ultimatum game, Wayback Machine, zero-sum game

I’ve learned a lot from having this fly-on-the-wall view of companies in prosperity and companies in crisis. An organized mind leads effortlessly to good decision-making. As an undergraduate, I had two brilliant professors, Amos Tversky and Lee Ross, both of whom were pioneers in the science of social judgments and decision-making. They sparked a fascination for how we assess others in our social world and how we interact with them, the various biases and misinformation we bring to those relationships, along with how to overcome them. Amos, with his colleague Daniel Kahneman (who won the Nobel Prize for their work together a few years after Amos passed away), uncovered a host of systematic errors in the way the human brain evaluates evidence and processes information.

Say that one item on your To Do list was “Make a decision about assisted living facilities for Aunt Rose.” You’ve already visited a few and gathered information, but you haven’t yet made the decision. On a morning scan of your cards, you find you aren’t ready to do it. Take two minutes now to think about what you need in order to make the decision. Daniel Kahneman and Amos Tversky said that the problem with making decisions is that we are often making them under conditions of uncertainty. You’re uncertain of the outcome of putting Rose in a home, and that makes the decision difficult. You also fear regret if you make the wrong decision. If more information will remove that uncertainty, then figure out what that information is and how to obtain it, then—to keep the system working for you—put it on an index card.

Instead, we rely on trusted authorities, newspapers, radio, TV, books, sometimes your brother-in-law, the neighbor with the perfect lawn, the cab driver who dropped you at the airport, your memory of a similar experience. . . . Sometimes these authorities are worthy of our trust, sometimes not. My teacher, the Stanford cognitive psychologist Amos Tversky, encapsulates this in “the Volvo story.” A colleague was shopping for a new car and had done a great deal of research. Consumer Reports showed through independent tests that Volvos were among the best built and most reliable cars in their class. Customer satisfaction surveys showed that Volvo owners were far happier with their purchase after several years.


pages: 381 words: 101,559

Currency Wars: The Making of the Next Gobal Crisis by James Rickards

"World Economic Forum" Davos, Alan Greenspan, Asian financial crisis, bank run, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, borderless world, Bretton Woods, BRICs, British Empire, business climate, buy and hold, capital controls, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-border payments, currency manipulation / currency intervention, currency peg, currency risk, Daniel Kahneman / Amos Tversky, deal flow, Deng Xiaoping, diversification, diversified portfolio, Dr. Strangelove, Fall of the Berlin Wall, family office, financial innovation, floating exchange rates, full employment, game design, German hyperinflation, Gini coefficient, global rebalancing, global reserve currency, Great Leap Forward, guns versus butter model, high net worth, income inequality, interest rate derivative, it's over 9,000, John Meriwether, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, Long Term Capital Management, low interest rates, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, Money creation, money market fund, money: store of value / unit of account / medium of exchange, Myron Scholes, Network effects, New Journalism, Nixon shock, Nixon triggered the end of the Bretton Woods system, offshore financial centre, oil shock, one-China policy, open economy, paradox of thrift, Paul Samuelson, power law, price mechanism, price stability, private sector deleveraging, proprietary trading, quantitative easing, race to the bottom, RAND corporation, rent-seeking, reserve currency, Ronald Reagan, short squeeze, sovereign wealth fund, special drawing rights, special economic zone, subprime mortgage crisis, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, time value of money, too big to fail, value at risk, vertical integration, War on Poverty, Washington Consensus, zero-sum game

Merton, “The Self-Fulfilling Prophecy,” The Antioch Review 8, no. 2 (Summer 1948): 193–210. 197 A breakthrough in the impact of social psychology on economics . . . This work on what became the foundation of behavioral economics is contained in two volumes: Daniel Kahneman and Amos Tversky, eds., Choices, Values, and Frames, Cambridge: Cambridge University Press, 2000; and Daniel Kahneman et al., eds., Judgment under Uncertainty: Heuristics and Biases, Cambridge: Cambridge University Press, 1982. 201 If they are diverse they will respond differently to various inputs producing . . . The extended analysis that follows, including elements of diversity, connectedness, interdependence and adaptability, draws on a series of lectures under the title “Understanding Complexity,” delivered in 2009 by Professor Scott E.

From iconoclastic mathematical genius Benoît Mandelbrot came insights that showed future prices are not independent of the past—that the market had a kind of “memory” that could cause it to react or overreact in disruptive ways, giving rise to alternating periods of boom and bust. Daniel Kahneman and his colleague Amos Tversky demonstrated in a series of simple but brilliantly constructed experiments that individuals were full of irrational biases. The subjects of their experiments were more concerned about avoiding a loss than achieving a gain, even though an economist would say the two outcomes had exactly the same value.

Forty-eight hours later Bear Stearns was headed to bankruptcy after frightened Wall Street banks withdrew billions of dollars of credit lines. For Bear Stearns, this was a real-life version of Merton’s thought experiment. A breakthrough in the impact of social psychology on economics came with the work of Daniel Kahneman, Amos Tversky, Paul Slovic and others in a series of experiments conducted in the 1950s and 1960s. In the most famous set of experiments, Kahneman and Tversky showed that subjects, given the choice between two monetary outcomes, would select the one with the greater certainty of being received even though it did not have the highest expected return.


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Big Mistakes: The Best Investors and Their Worst Investments by Michael Batnick

activist fund / activist shareholder / activist investor, Airbnb, Albert Einstein, AOL-Time Warner, asset allocation, Bear Stearns, behavioural economics, bitcoin, Bretton Woods, buy and hold, buy low sell high, Carl Icahn, cognitive bias, cognitive dissonance, Credit Default Swap, cryptocurrency, Daniel Kahneman / Amos Tversky, endowment effect, financial engineering, financial innovation, fixed income, global macro, hindsight bias, index fund, initial coin offering, invention of the wheel, Isaac Newton, Jim Simons, John Bogle, John Meriwether, Kickstarter, Long Term Capital Management, loss aversion, low interest rates, Market Wizards by Jack D. Schwager, mega-rich, merger arbitrage, multilevel marketing, Myron Scholes, Paul Samuelson, Pershing Square Capital Management, quantitative easing, Reminiscences of a Stock Operator, Renaissance Technologies, Richard Thaler, Robert Shiller, short squeeze, Snapchat, Stephen Hawking, Steve Jobs, Steve Wozniak, stocks for the long run, subprime mortgage crisis, transcontinental railway, two and twenty, value at risk, Vanguard fund, Y Combinator

In Charlie Munger: The Complete Investor, Tren Griffin writes, “In doing their due‐diligence analysis for Dexter Shoes, Buffett and Munger made the mistake of not making sure the business had a moat and being too focused on what they thought was an attractive purchase price.”19 Psychologists Dale Griffin and Amos Tversky wrote, “Intuitive judgments are overly influenced by the degree to which the available evidence is representative of the hypothesis in question.”20 The evidence Buffett had available, other than Dexter's financials and the proposed purchase price, was the success he experienced less than two years earlier with his purchase of H.

Quoted in New York Times, “Company News; Berkshire Hathaway Set to Acquire Dexter Shoe,” October 1, 1993. 17. Warren Buffett, 1993 Berkshire Hathaway annual letter, March 1, 1994. 18. Alice Schroeder, The Snowball (New York: Bantam, 2009). 19. Tren Griffin, Charlie Munger: The Complete Investor (New York: Columbia University Press, 2015). 20. Dale Griffin and Amos Tversky, “The Weighing of Evidence and the Determinants of Confidence,” Cognitive Psychology 24 (1992): 411–435. 21. Anthony Bianco, “The Warren Buffett You Don't Know,” Bloomberg.com, July 5, 1999. 22. Warren Buffett, 1999 Berkshire Hathaway annual letter, March 1, 2000. 23. Warren Buffett, 2000 Berkshire Hathaway annual letter, February 28, 2001. 24.

“It is quite possible to decide by inspection that a woman is old enough to vote without knowing her age or that a man is heavier than he should be without knowing his exact weight.”9 Graham was far ahead of his time, writing about behavioral economics, the study of how psychology affects financial decision making, long before the term even existed. Security Analysis was published the same year that Nobel laureate Daniel Kahneman, who took this field mainstream, was born. Graham identified some of the cognitive and emotional biases that caused investors to send a strong company diving 50% in 12 months. He examined the case of General Electric, which the stock market valued at $1.87 billion in 1937 and $784 million just one year later.


Capital Ideas Evolving by Peter L. Bernstein

Albert Einstein, algorithmic trading, Andrei Shleifer, asset allocation, behavioural economics, Black Monday: stock market crash in 1987, Bob Litterman, book value, business cycle, buy and hold, buy low sell high, capital asset pricing model, commodity trading advisor, computerized trading, creative destruction, currency risk, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, diversification, diversified portfolio, endowment effect, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, fixed income, high net worth, hiring and firing, index fund, invisible hand, Isaac Newton, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Arrow, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, market bubble, mental accounting, money market fund, Myron Scholes, paper trading, passive investing, Paul Samuelson, Performance of Mutual Funds in the Period, price anchoring, price stability, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, seminal paper, Sharpe ratio, short selling, short squeeze, Silicon Valley, South Sea Bubble, statistical model, survivorship bias, systematic trading, tail risk, technology bubble, The Wealth of Nations by Adam Smith, transaction costs, yield curve, Yogi Berra, zero-sum game

Although these questions have always been central to understanding the way investors behave and how their responses affect the performance of financial markets, no one made any systematic effort to provide the answers until the mid-1960s. The most significant and inf luential effort to approach these problems, a field of study that has come to be known as Behavioral Finance, began to take shape quite by accident when two junior psychology professors at Hebrew University in Jerusalem, Daniel Kahneman and Amos Tversky, happened to compare notes one day about their work and their life experiences. The hugely productive result of their friendship and subsequent collaboration has created a competing vision to the rational model of how people make choices and reach decisions under conditions of uncertainty.* The essence of this work is the study of man—of human behavior.

“Maps of Bounded Rationality: Psychology for Behavioral Economics,” American Economic Review, Vol. 93, No. 5 ( Fall), pp. 1449–1475. Kahneman, Daniel, Harry Markowitz, Robert C. Merton, Myron Scholes, Bill Sharpe, and Peter Bernstein, 2005. “Most Nobel Minds,” CFA Magazine, November-December, pp. 36–43. Kahneman, Daniel, Paul Slovic, and Amos Tversky, 1974. “Judgment Under Uncertainty,” Science, Vol. 185, pp. 1124 –1131. Kahneman, Daniel, Paul Slovic, and Amos Tversky, 1982. Judgment Under Uncertainty: Heuristics and Biases, New York: Cambridge University Press. Kahneman, Daniel, and Tversky, Amos, 1979. “Prospect Theory,” Econometrica, Vol. 47, No. 2 (March). Kim, E. Han, Adair Morse, and Luigi Zingales, 2006.

Thaler, Richard, Daniel Kahneman, and J. L. Knetsch, 1992. “The Endowment Effect, Loss Aversion and Status Quo Bias,” in Richard Thaler, The Winner ’s Curse, Princeton, NJ: Princeton University Press. Temin, Peter, and Hans-Joachim Voth, 2003. “Riding the South Sea Bubble,” MIT Economics Department Working Paper No. 04-02 ( December). Treynor, Jack, 1961. “Toward a Theory of Market Value of Risky Assets.” Unpublished manuscript. Treynor, Jack, and Fischer Black, 1973. “How to Use Security Analysis to Improve Portfolio Selection,” Journal of Business, Vol. 46, pp. 66–73. Tversky, Amos, and Daniel Kahneman, 1992.


pages: 1,737 words: 491,616

Rationality: From AI to Zombies by Eliezer Yudkowsky

Albert Einstein, Alfred Russel Wallace, anthropic principle, anti-pattern, anti-work, antiwork, Arthur Eddington, artificial general intelligence, availability heuristic, backpropagation, Bayesian statistics, behavioural economics, Berlin Wall, Boeing 747, Build a better mousetrap, Cass Sunstein, cellular automata, Charles Babbage, cognitive bias, cognitive dissonance, correlation does not imply causation, cosmological constant, creative destruction, Daniel Kahneman / Amos Tversky, dematerialisation, different worldview, discovery of DNA, disinformation, Douglas Hofstadter, Drosophila, Eddington experiment, effective altruism, experimental subject, Extropian, friendly AI, fundamental attribution error, Great Leap Forward, Gödel, Escher, Bach, Hacker News, hindsight bias, index card, index fund, Isaac Newton, John Conway, John von Neumann, Large Hadron Collider, Long Term Capital Management, Louis Pasteur, mental accounting, meta-analysis, mirror neurons, money market fund, Monty Hall problem, Nash equilibrium, Necker cube, Nick Bostrom, NP-complete, One Laptop per Child (OLPC), P = NP, paperclip maximiser, pattern recognition, Paul Graham, peak-end rule, Peter Thiel, Pierre-Simon Laplace, placebo effect, planetary scale, prediction markets, random walk, Ray Kurzweil, reversible computing, Richard Feynman, risk tolerance, Rubik’s Cube, Saturday Night Live, Schrödinger's Cat, scientific mainstream, scientific worldview, sensible shoes, Silicon Valley, Silicon Valley startup, Singularitarianism, SpaceShipOne, speech recognition, statistical model, Steve Jurvetson, Steven Pinker, strong AI, sunk-cost fallacy, technological singularity, The Bell Curve by Richard Herrnstein and Charles Murray, the map is not the territory, the scientific method, Turing complete, Turing machine, Tyler Cowen, ultimatum game, X Prize, Y Combinator, zero-sum game

For it is written: If you can lighten your burden you must do so. There is no straw that lacks the power to break your back. * 1. William S. Gilbert and Arthur Sullivan, The Mikado, Opera, 1885. 2. Tversky and Kahneman, “Extensional Versus Intuitive Reasoning.” 3. Amos Tversky and Daniel Kahneman, “Judgments of and by Representativeness,” in Judgment Under Uncertainty: Heuristics and Biases, ed. Daniel Kahneman, Paul Slovic, and Amos Tversky (New York: Cambridge University Press, 1982), 84–98. 7 Planning Fallacy The Denver International Airport opened 16 months late, at a cost overrun of $2 billion. (I’ve also seen $3.1 billion asserted.) The Eurofighter Typhoon, a joint defense project of several European countries, was delivered 54 months late at a cost of $19 billion instead of $7 billion.

,” Behavioral and Brain Sciences 23, no. 5 (2000): 645–665, http://journals.cambridge.org/abstract_S0140525X00003435. 6. Timothy D. Wilson, David B. Centerbar, and Nancy Brekke, “Mental Contamination and the Debiasing Problem,” in Heuristics and Biases: The Psychology of Intuitive Judgment, ed. Thomas Gilovich, Dale Griffin, and Daniel Kahneman (Cambridge University Press, 2002). 7. Amos Tversky and Daniel Kahneman, “Extensional Versus Intuitive Reasoning: The Conjunction Fallacy in Probability Judgment,” Psychological Review 90, no. 4 (1983): 293–315, doi:10.1037/0033-295X.90.4.293. 8. Richards J. Heuer, Psychology of Intelligence Analysis (Center for the Study of Intelligence, Central Intelligence Agency, 1999). 9.

Hillsdale, NJ: Lawrence Erlbaum Associates, Inc., 1978. Tversky, Amos, and Daniel Kahneman. “Extensional Versus Intuitive Reasoning: The Conjunction Fallacy in Probability Judgment.” Psychological Review 90, no. 4 (1983): 293–315. doi:10.1037/0033-295X.90.4.293. ———. “Judgment Under Uncertainty: Heuristics and Biases.” Science 185, no. 4157 (1974): 1124–1131. doi:10.1126/science.185.4157.1124. ———. “Judgments of and by Representativeness.” In Judgment Under Uncertainty: Heuristics and Biases, edited by Daniel Kahneman, Paul Slovic, and Amos Tversky, 84–98. New York: Cambridge University Press, 1982. Tzu, Sun.


pages: 401 words: 93,256

Alchemy: The Dark Art and Curious Science of Creating Magic in Brands, Business, and Life by Rory Sutherland

"World Economic Forum" Davos, 3D printing, Alfred Russel Wallace, barriers to entry, basic income, behavioural economics, Black Swan, Brexit referendum, butterfly effect, California gold rush, call centre, Captain Sullenberger Hudson, Cass Sunstein, cognitive dissonance, confounding variable, Daniel Kahneman / Amos Tversky, Dava Sobel, delayed gratification, Donald Trump, double helix, Downton Abbey, driverless car, Easter island, Edward Jenner, Elon Musk, Firefox, Ford Model T, General Magic , George Akerlof, gig economy, Google Chrome, Google X / Alphabet X, Grace Hopper, Hyperloop, Ignaz Semmelweis: hand washing, IKEA effect, information asymmetry, it is difficult to get a man to understand something, when his salary depends on his not understanding it, James Dyson, John Harrison: Longitude, loss aversion, low cost airline, Mason jar, Murray Gell-Mann, nudge theory, Peter Thiel, placebo effect, race to the bottom, Richard Feynman, Richard Thaler, Rory Sutherland, shareholder value, Silicon Valley, social intelligence, Steve Jobs, supply-chain management, systems thinking, TED Talk, the map is not the territory, The Market for Lemons, The Wealth of Nations by Adam Smith, ultimatum game, universal basic income, Upton Sinclair, US Airways Flight 1549, Veblen good, work culture

But, strange though it may seem, the study of economics has long been detached from how people behave in the real world, preferring to concern itself with a parallel universe in which people behave as economists think they should. It is to correct this circular logic that behavioural economics – made famous by experts such as Daniel Kahneman, Amos Tversky, Dan Ariely and Richard Thaler – has come to prominence. In many areas of policy and business there is much more value to be found in understanding how people behave in reality than how they should behave in theory.* Behavioural economics might well be described as the study of the nonsensical and the non-sensical aspects of human behaviour.

This way, they were able to gain the potential custom of people who had previously avoided the product because of its artificiality, without creating an imagined taste change among its regular customers, who suddenly discovered they had been eating the healthier variant all along.* 6.9: The Focusing Illusion Attention affects our thoughts and actions far more than we realise. Daniel Kahneman, along with Amos Tversky, is one of the fathers of behavioural economics; ‘the focusing illusion’, as he calls it, causes us to vastly overestimate the significance of anything to which our attention is drawn. As he explains: ‘Nothing is as important as we think it is while we are thinking about it. Marketers exploit the focusing illusion.

Just as dog breeders and pigeon fanciers understood the principles of natural selection before Darwin codified them, many people involved in selling things have an instinctive grasp of the difference between what people say and what they do. When he won a MacArthur Foundation fellowship in 1984, Amos Tversky said of his work as a cognitive psychologist, ‘What we do is take what is already instinctively known by used-car salesmen and advertising executives, and we examine them in a scientific way.’ We do not have a similar mechanism for politics, or for areas where there is no mechanism for distinguishing unconscious feelings from post-rationalised beliefs.


Virtual Competition by Ariel Ezrachi, Maurice E. Stucke

"World Economic Forum" Davos, Airbnb, Alan Greenspan, Albert Einstein, algorithmic management, algorithmic trading, Arthur D. Levinson, barriers to entry, behavioural economics, cloud computing, collaborative economy, commoditize, confounding variable, corporate governance, crony capitalism, crowdsourcing, Daniel Kahneman / Amos Tversky, David Graeber, deep learning, demand response, Didi Chuxing, digital capitalism, disintermediation, disruptive innovation, double helix, Downton Abbey, driverless car, electricity market, Erik Brynjolfsson, Evgeny Morozov, experimental economics, Firefox, framing effect, Google Chrome, independent contractor, index arbitrage, information asymmetry, interest rate derivative, Internet of things, invisible hand, Jean Tirole, John Markoff, Joseph Schumpeter, Kenneth Arrow, light touch regulation, linked data, loss aversion, Lyft, Mark Zuckerberg, market clearing, market friction, Milgram experiment, multi-sided market, natural language processing, Network effects, new economy, nowcasting, offshore financial centre, pattern recognition, power law, prediction markets, price discrimination, price elasticity of demand, price stability, profit maximization, profit motive, race to the bottom, rent-seeking, Richard Thaler, ride hailing / ride sharing, road to serfdom, Robert Bork, Ronald Reagan, search costs, self-driving car, sharing economy, Silicon Valley, Skype, smart cities, smart meter, Snapchat, social graph, Steve Jobs, sunk-cost fallacy, supply-chain management, telemarketer, The Chicago School, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, Travis Kalanick, turn-by-turn navigation, two-sided market, Uber and Lyft, Uber for X, uber lyft, vertical integration, Watson beat the top human players on Jeopardy!, women in the workforce, yield management

Ismat Sarah Mangla, “3 Tricks to Help You Snag the Best Deals Online,” Time, September 8, 2014, http://time.com/money/3136612/dynamic-pricing -amazon-best-buy-walmart/. 50. Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision under Risk,” Econometrica 47 (1979): 263; U.K. Office of Fair Trading, Consumer Behavioural Biases in Competition: A Survey, Final Report, OFT1324 (May 2011), 3.10–3.201.11. 51. E. Vis and J. Toth, “ The Abolition of the No-Discrimination Rule,” (Amsterdam: ITM Research, March 2000), 7–10, http://www.creditslips.org/fi les /netherlands-no-discrimination-rule-study.pdf. Notes to Pages 111–115 293 52. Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler, “Fairness as a Constraint on Profit Seeking: Entitlements in the Market,” in Advances in Behavioral Economics, Colin F.

Federal Trade Commission, Data Brokers: A Call for Transparency and Accountability (Washington, DC: Federal Trade Commission, May 2014), 19–20, https://www.ftc.gov/system/fi les/documents/reports/data-brokers-call -transparency-accountability-report-federal-trade-commission-may-2014 /140527databrokerreport.pdf. 14. Lifehack Quotes, http://quotes.lifehack.org/edward-norton/we-buy-things -we-dont-need-with/. 15. Karen Freeman, “Amos Tversky, Expert on Decision Making, Is Dead at 59,” New York Times, June 6, 1996, http://www.nytimes.com/1996/06/06/us/amos -tversky-expert-on-decision-making-is-dead-at-59.html. 16. Ned Welch, “A Marketer’s Guide to Behavioral Economics,” McKinsey Quarterly, February 2010, http://www.mckinsey.com/insights/marketing _ sales/a _marketers _ guide _to_behavioral _economics. 17.

One popu lar Internet quote is “We buy things we don’t need with money we don’t have to impress people we don’t like.”14 So to increase demand for their products and ser vices, companies will likely appeal to our emotional wants. As noted earlier, most of us are not rational, self-interested individuals with willpower. The field of behavioral economics, as one of its pioneers, Amos Tversky, noted, has quantified what every good advertiser and car salesman already knew.15 We have cognitive biases, which refer to our tendency to react, think, or operate in a certain way, which diverge from assumed rationality. Biases can be observed. But businesses and governments can trigger consumers’ biases to achieve certain goals.16 As noted by Cialdini, factors such as relative pricing, reciprocity, and the illusion of scarcity play a powerful role in the persuasion game.17 One competition authority official told us in 2015 that the behavioral economics literature identifies over one hundred human biases linked to decision making, information processing, memory, and social interaction.


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The Behavioral Investor by Daniel Crosby

affirmative action, Asian financial crisis, asset allocation, availability heuristic, backtesting, bank run, behavioural economics, Black Monday: stock market crash in 1987, Black Swan, book value, buy and hold, cognitive dissonance, colonial rule, compound rate of return, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, disinformation, diversification, diversified portfolio, Donald Trump, Dunning–Kruger effect, endowment effect, equity risk premium, fake news, feminist movement, Flash crash, haute cuisine, hedonic treadmill, housing crisis, IKEA effect, impact investing, impulse control, index fund, Isaac Newton, Japanese asset price bubble, job automation, longitudinal study, loss aversion, market bubble, market fundamentalism, mental accounting, meta-analysis, Milgram experiment, moral panic, Murray Gell-Mann, Nate Silver, neurotypical, Nick Bostrom, passive investing, pattern recognition, Pepsi Challenge, Ponzi scheme, prediction markets, random walk, Reminiscences of a Stock Operator, Richard Feynman, Richard Thaler, risk tolerance, Robert Shiller, science of happiness, Shai Danziger, short selling, South Sea Bubble, Stanford prison experiment, Stephen Hawking, Steve Jobs, stocks for the long run, sunk-cost fallacy, systems thinking, TED Talk, Thales of Miletus, The Signal and the Noise by Nate Silver, Tragedy of the Commons, trolley problem, tulip mania, Vanguard fund, When a measure becomes a target

Notes 27 Nathaniel Branden, The Psychology of Self-Esteem: A Revolutionary Approach to Self-Understanding that Launched a New Era in Modern Psychology (Jossey-Bass, 2001). 28 Daniel Crosby, You’re Not That Great (Word Association Publishers, 2012). 29 Dan Gilbert, ‘The surprising science of happiness’ TED Talk (February 2004). 30 Ibid. 31 Lee Ross and Craig Anderson, ‘Shortcomings in the attribution process: On the origins and maintenance of erroneous social assessments,’ in Daniel Kahneman, Paul Slovic and Amos Tversky (eds.), Judgment Under Uncertainty: Heuristics and Biases (Cambridge University Press, 1982), pp. 129–152. 32 2014 NTSB US Civil Aviation Acccident Statistics. 33 Gerd Gigerenzer, Risk Savvy: How to Make Good Decisions (Penguin, 2015). 34 Justin Kruger and David Dunning, ‘Unskilled and unaware of it: How difficulties in recognizing one’s own incompetence lead to inflated self-assessments,’ Journal of Personality and Social Psychology 77:6 (1999), pp. 1121–34.

No matter what exotic economic measures professors and pundits may dream up in the future, there will always be some that show some fleeting correlation with stock returns, but fail to pass the sniff test of “Should it matter when determining whether or not to become partial owner of a business?” The coming wave of big data seems just as likely to yield a ton of false positives as it is any great new insights about the way markets behave. Too much of a good thing Daniel Kahneman and Amos Tversky’s ‘Linda the Bank Teller’ study provides yet another powerful example of how more information is not always better. The two researchers set out to prove something that they had observed empirically – that emotional signals can overwhelm probability. We now refer to this as base rate fallacy.

The Swiss model demonstrates that our views are an outcropping of a specific way of viewing wealth rather than something deterministic about human nature. We are not our worst impulses and it is up to us to determine to support each other on the way to balance and true happiness, rather than prodding each other toward jealousy and excess. How much is enough? Daniel Kahneman helmed a Princeton study set out to answer the age-old question, “Can money buy happiness?” Their answer? Sort of. Researchers found that making little money did not cause sadness in and of itself, but it did tend to heighten and exacerbate existing worries. For instance, among people who were divorced, 51% of those who made less than $1,000/month reported having felt sad or stressed the previous day, whereas that number fell to 24% among those earning more than $3,000/month.


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The Great Mental Models: General Thinking Concepts by Shane Parrish

Albert Einstein, anti-fragile, Atul Gawande, Barry Marshall: ulcers, bitcoin, Black Swan, colonial rule, correlation coefficient, correlation does not imply causation, cuban missile crisis, Daniel Kahneman / Amos Tversky, dark matter, delayed gratification, feminist movement, Garrett Hardin, if you see hoof prints, think horses—not zebras, index fund, Isaac Newton, Jane Jacobs, John Bogle, Linda problem, mandelbrot fractal, Pepsi Challenge, Philippa Foot, Pierre-Simon Laplace, Ponzi scheme, Richard Feynman, statistical model, stem cell, The Death and Life of Great American Cities, the map is not the territory, the scientific method, Thomas Bayes, Torches of Freedom, Tragedy of the Commons, trolley problem

The best we can do is estimate the future by generating realistic, useful probabilities. So how do we do that? Probability is everywhere, down to the very bones of the world. The probabilistic machinery in our minds—the cut-to-the-quick heuristics made so famous by the psychologists Daniel Kahneman and Amos Tversky—was evolved by the human species in a time before computers, factories, traffic, middle managers, and the stock market. It served us in a time when human life was about survival, and still serves us well in that capacity.2 But what about today—a time when, for most of us, survival is not so much the issue?

The simpler and thus more likely explanation is that they didn’t see you. It was a mistake. There was no intent. So why would you assume the former? Why do our minds make these kinds of connections when the logic says otherwise? The famous Linda problem, demonstrated by the psychologists Daniel Kahneman2 and Amos Tversky in a 1982 paper, is an illuminating example of how our minds work and why we need Hanlon’s Razor. It went like this: Linda is 31 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 anti-nuclear demonstrations.

The best will always appear to get worse and the worst will appear to get better, regardless of any additional action. This is called regression to the mean, and it means we have to be extra careful when diagnosing causation. This is something that the general media and sometimes even trained scientists fail to recognize. Consider the example Daniel Kahneman gives in Thinking Fast and Slow:5 Depressed children treated with an energy drink improve significantly over a three-month period. I made up this newspaper headline, but the fact it reports is true: if you treated a group of depressed children for some time with an energy drink, they would show a clinically significant improvement.


pages: 545 words: 137,789

How Markets Fail: The Logic of Economic Calamities by John Cassidy

Abraham Wald, Alan Greenspan, Albert Einstein, An Inconvenient Truth, Andrei Shleifer, anti-communist, AOL-Time Warner, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black Monday: stock market crash in 1987, Black-Scholes formula, Blythe Masters, book value, Bretton Woods, British Empire, business cycle, capital asset pricing model, carbon tax, Carl Icahn, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, corporate raider, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, different worldview, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, Garrett Hardin, George Akerlof, Glass-Steagall Act, global supply chain, Gunnar Myrdal, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kickstarter, laissez-faire capitalism, Landlord’s Game, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, low interest rates, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, military-industrial complex, Minsky moment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, Naomi Klein, negative equity, Network effects, Nick Leeson, Nixon triggered the end of the Bretton Woods system, Northern Rock, paradox of thrift, Pareto efficiency, Paul Samuelson, Phillips curve, Ponzi scheme, precautionary principle, price discrimination, price stability, principal–agent problem, profit maximization, proprietary trading, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, Savings and loan crisis, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, subprime mortgage crisis, tail risk, Tax Reform Act of 1986, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, Tragedy of the Commons, transaction costs, Two Sigma, unorthodox policies, value at risk, Vanguard fund, Vilfredo Pareto, wealth creators, zero-sum game

., 211. 193 “our telescopic faculty is defective . . .”: Pigou, The Economics of Welfare, 25. 194 “We spent hours each day . . .”: Daniel Kahneman, Nobel Prize autobiography, available at http://nobelprize.org/nobel_prizes/economics/laureates/2002/kahneman-autobio.html. 195 “put too much faith . . .”: Amos Tversky and Daniel Kahneman, “Judgement under Uncertainty: Heuristics and Biases,” Science 185, no. 4157 (1974): 1126. 195 “Steve is very shy . . .”: Ibid., 1124. 196 Hot hand theory: Thomas Gilovich, Robert Vallone, and Amos Tversky, “The Hot Hand in Basketball: On the Misperception of Random Sequences,” Cognitive Psychology 17 (1985): 295–314. 196 “with little or no regard . . .”: Tversky and Kahneman, “Judgement under Uncertainty,” 1126. 197 Likelihood of getting killed in a terrorist attack: See N.

Within orthodox economics, beginning in the late 1960s, a new generation of researchers began working on a number of topics that didn’t fit easily within the free market model, such as information problems, monopoly power, and herd behavior. At about the same time, two experimental psychologists, Amos Tversky and Daniel Kahneman, were subjecting rational economic man—Homo economicus—to a withering critique. As only an economist would be surprised to discover, humans aren’t supercomputers: we have trouble doing sums, let alone solving the mathematical optimization problems that lie at the heart of many economic theories.

It was in the aftermath of World War II that economists began to focus almost exclusively on Homo economicus, elevating rationality to a near-sacred principle. By the 1970s, economists had locked themselves in straitjackets, and it took external help to liberate them. Assistance arrived in the unlikely form of two Israeli experimental psychologists, Daniel Kahneman and Amos Tversky, who were studying how people choose between uncertain outcomes, a subject that most economists regarded as having been settled in the 1940s, when John von Neumann and Oskar Morgenstern, the founders of game theory, put forward the “expected utility hypothesis.” According to this theory, decision-makers weigh possible outcomes according to how likely they are.


pages: 254 words: 61,387

This Could Be Our Future: A Manifesto for a More Generous World by Yancey Strickler

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, Abraham Maslow, accelerated depreciation, Adam Curtis, basic income, benefit corporation, Big Tech, big-box store, business logic, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, cognitive dissonance, corporate governance, Daniel Kahneman / Amos Tversky, data science, David Graeber, Donald Trump, Doomsday Clock, Dutch auction, effective altruism, Elon Musk, financial independence, gender pay gap, gentrification, global supply chain, Hacker News, housing crisis, Ignaz Semmelweis: hand washing, invention of the printing press, invisible hand, Jeff Bezos, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Nash: game theory, Joi Ito, Joseph Schumpeter, Kickstarter, Kōnosuke Matsushita, Larry Ellison, Louis Pasteur, Mark Zuckerberg, medical bankruptcy, Mr. Money Mustache, new economy, Oculus Rift, off grid, offshore financial centre, Parker Conrad, Ralph Nader, RAND corporation, Richard Thaler, Ronald Reagan, Rutger Bregman, self-driving car, shareholder value, Silicon Valley, Simon Kuznets, Snapchat, Social Responsibility of Business Is to Increase Its Profits, Solyndra, stem cell, Steve Jobs, stock buybacks, TechCrunch disrupt, TED Talk, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Travis Kalanick, Tyler Cowen, universal basic income, white flight, Zenefits

They’re the customs, traditions, and social codes that form our tribes and nations. The rituals around births, weddings, and death. Why we wear one color and not another. They’re the narratives that we live within. The currents that pull us through life that are easy to miss. Behavioral economists Daniel Kahneman, Amos Tversky, Dan Ariely, Iris Bohnet, and others have demonstrated how susceptible we are to influence. Our choices are easily manipulated, especially when we’re not conscious it’s happening. This is the space where hidden defaults live. Kahneman and Tversky showed this with research on anchoring and bias—how the presence of a single word or irrelevant but memorable piece of information will shift our behavior.

approval rate layered on top: Data on congressional approval ratings and reelection rates comes from the Center for Responsive Politics. “What’s water?”: The David Foster Wallace story is paraphrased from a commencement address he gave at Kenyon College called “This Is Water.” shift our behavior: Daniel Kahneman and Amos Tversky’s work is collected in the book Thinking, Fast and Slow. how we think: Dan Ariely writes about our emotions’ effect on our choices in his 2008 book Predictably Irrational: The Hidden Forces That Shape Our Decisions. 62 percent of personal bankruptcies: 62 percent of American bankruptcies are caused by medical bills according to a 2009 report published in the American Journal of Medicine (“Medical Bankruptcy in the United States, 2007: Results of a National Study” by David U.

But in Maslow’s hierarchy, money is also quite “low” on the list. Though some people use money as a proxy for self-esteem, money is not a higher value on its own. It is, however, a necessary foundation for the pursuit of higher values. A 2010 study by the Nobel Prize–winning behavioral economist Daniel Kahneman sheds interesting light on this idea. Kahneman found a “statistically significant and quantitatively important” correlation between emotional well-being and income. The more money someone made, his research discovered, the happier the person was. But this was true only up to a point. The research found that up until a salary of $75,000 this was the case.


pages: 218 words: 70,323

Critical: Science and Stories From the Brink of Human Life by Matt Morgan

agricultural Revolution, Atul Gawande, biofilm, Black Swan, Checklist Manifesto, cognitive dissonance, crew resource management, Daniel Kahneman / Amos Tversky, David Strachan, discovery of penicillin, en.wikipedia.org, hygiene hypothesis, job satisfaction, John Snow's cholera map, meta-analysis, personalized medicine, publication bias, randomized controlled trial, Silicon Valley, stem cell, Steve Jobs, sugar pill, traumatic brain injury

As I approached Joe’s bed in the white light of intensive care, there were all the telltale signs of what had happened. The book Blink by my hero, Malcolm Gladwell, beautifully describes the human brain’s immense ability to make accurate judgements from tiny snippets of information. (This was based on the work of Nobel Prize winner Daniel Kahneman and his late colleague Amos Tversky.) From simply a brief glance towards Joe’s bed, his problems were clear. Firstly, I could see the white propofol syringe slowly injecting its payload to keep him deeply unconscious. Next, I could see the ventilator fighting hard to keep Joe’s carbon dioxide levels just right.

Patient reported outcome of adult perioperative anaesthesia in the United Kingdom: a cross-sectional observational study. British Journal of Anaesthesia 117, 758–766r (2016). ‘The book Blink by my hero, Malcolm Gladwell . . .’ Gladwell, M. Blink (Hachette UK, 2007). ‘(This was based on the work of Nobel Prize winner Daniel Kahneman and his late colleague Amos Tversky.)’ Kahneman, D. & Tversky, A. On the reality of cognitive illusions. Psychol Rev 103, 582–91– discussion 592–6 (1996). ‘Later, as a fighter pilot in the Second World War, he came close to death after landing his Gloster Gladiator biplane hard in the Egyptian desert and breaking his nose, fracturing his skull and being knocked unconscious.’

CRM can help teams come together in the fog of a disaster and work together effectively and safely. During emergencies in critical care, I now take a step backwards rather than forwards to get an overview of the situation, assign roles and act on good ideas provided by others. The final transformative strand was built on the work of Nobel Prize-winning Daniel Kahneman in his life-affirming book, Thinking, Fast and Slow. Recognising that medical error is effectively a manifestation of ingrained human heuristics has allowed commonly described cognitive errors to be anticipated in healthcare. Every day, I see evidence of anchoring bias, where an incorrect diagnostic label is permanently attached to a patient after being applied earlier by another doctor.


pages: 292 words: 94,660

The Loop: How Technology Is Creating a World Without Choices and How to Fight Back by Jacob Ward

2021 United States Capitol attack, 4chan, Abraham Wald, AI winter, Albert Einstein, Albert Michelson, Amazon Mechanical Turk, assortative mating, autonomous vehicles, availability heuristic, barriers to entry, Bayesian statistics, Benoit Mandelbrot, Big Tech, bitcoin, Black Lives Matter, Black Swan, blockchain, Broken windows theory, call centre, Cass Sunstein, cloud computing, contact tracing, coronavirus, COVID-19, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, dark matter, data science, deep learning, Donald Trump, drone strike, endowment effect, George Akerlof, George Floyd, hindsight bias, invisible hand, Isaac Newton, Jeffrey Epstein, license plate recognition, lockdown, longitudinal study, Lyft, mandelbrot fractal, Mark Zuckerberg, meta-analysis, natural language processing, non-fungible token, nudge unit, OpenAI, opioid epidemic / opioid crisis, pattern recognition, QAnon, RAND corporation, Richard Thaler, Robert Shiller, selection bias, self-driving car, seminal paper, shareholder value, smart cities, social contagion, social distancing, Steven Levy, survivorship bias, TikTok, Turing test

Scientists can often remain at odds with one another for years over a finding that in the meantime becomes the functional basis for whole industries. Scientists today publish roughly 2.5 million papers each year. Presumably they all hope each paper will make an impact. But only a tiny percentage ever do. The psychologists Daniel Kahneman and Amos Tversky wrote seven papers together between 1971 and 1979. They blew a gaping hole in their field with each one, and while their work is still being tested and replicated at the pace of science, their findings are already a tent pole of a whole industry of behavioral guidance. Working together in an extraordinarily tight and symbiotic professional partnership, they identified a series of commonly held biases—unconscious human preferences that manifest themselves under pressure and in moments of uncertainty, preferences that often produce bizarre and irrational decisions.

Its process of making decisions is an unconscious form of mental activity that takes in information, decides what to do with it, and enacts a response. System 1 balances the easel, unscrews the caps of the paint tubes without dropping them, and holds the brush. System 2 is the part of your mind that’s meanwhile free to think, “Hmm, what shall I paint?” In 2002, after a career working variously alone and with Amos Tversky, who died of cancer in 1996, Daniel Kahneman won the Nobel Prize. In his speech to the committee (which I would have spent simply congratulating myself), he described his new interest in what Stanovich and West were talking about. He began by pointing out that he and Tversky had always imagined the biases they were identifying sprang from a place “between the automatic operations of perception and the deliberate operations of reasoning.”

As a college math major, Fischhoff had taken psychology because students had to take a certain number of classes outside their major, and because the psychology department’s schedule fit his 4 p.m. to midnight work shift at Great Lake Lanes, the local bowling alley. When he decided he preferred life as a married academic, rather than as a divorced farmer, his unusual background in math and psychology earned him a place at Hebrew University of Jerusalem, studying for his PhD under Amos Tversky. “I was in a very progressive, activist part of my life,” Fischhoff recalls. “I was reading a lot of history, I was interested in politics, and the subject of hindsight was something I’d been thinking about.” Paul Meehl, a University of Minnesota professor of psychology, had just published, in 1973, a paper titled “Why I Do Not Attend Case Conferences,” a twelve-point critique of the tendencies of experts gathered at professional meetings to make a hash of their subject after endless arguing and schmoozing.


pages: 450 words: 113,173

The Age of Entitlement: America Since the Sixties by Christopher Caldwell

1960s counterculture, affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, Alvin Toffler, anti-communist, behavioural economics, Bernie Sanders, big data - Walmart - Pop Tarts, Black Lives Matter, blue-collar work, Cass Sunstein, choice architecture, classic study, computer age, crack epidemic, critical race theory, crony capitalism, Daniel Kahneman / Amos Tversky, David Attenborough, desegregation, disintermediation, disruptive innovation, Edward Snowden, Erik Brynjolfsson, Ferguson, Missouri, financial deregulation, financial innovation, Firefox, full employment, Future Shock, George Gilder, global value chain, Home mortgage interest deduction, illegal immigration, immigration reform, informal economy, James Bridle, Jeff Bezos, John Markoff, junk bonds, Kevin Kelly, Lewis Mumford, libertarian paternalism, Mark Zuckerberg, Martin Wolf, mass immigration, mass incarceration, messenger bag, mortgage tax deduction, Nate Silver, new economy, Norman Mailer, Northpointe / Correctional Offender Management Profiling for Alternative Sanctions, open immigration, opioid epidemic / opioid crisis, post-industrial society, pre–internet, profit motive, public intellectual, reserve currency, Richard Thaler, Robert Bork, Robert Gordon, Robert Metcalfe, Ronald Reagan, Rosa Parks, Silicon Valley, Skype, South China Sea, Steve Jobs, tech billionaire, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, too big to fail, transatlantic slave trade, transcontinental railway, W. E. B. Du Bois, War on Poverty, Whole Earth Catalog, zero-sum game

a move for which his defenders claimed: Bruce Ackerman, “Like the Emancipation Proclamation, Obama’s Order Forces Democracy,” Los Angeles Times, November 21, 2014. New York Times columnist Joe Nocera: Joe Nocera, “Tea Party’s War on America,” New York Times, August 2, 2011. 1 × 2 × 3 × 4: Amos Tversky and Daniel Kahneman, “Judgment Under Uncertainty: Heuristics and Biases,” in Judgment Under Uncertainty: Heuristics and Biases, edited by Daniel Kahneman, Paul Slovic, and Amos Tversky (Cambridge, England: Cambridge University Press, 1982), 15. Nudge: The discussion of Nudge draws on the following sources: Christopher Caldwell, “The Perils of Shaping Choice,” Financial Times, April 4, 2008.

Nudge and behavioral economics The fallibility of human decision-making had lately preoccupied social scientists. They were out to show that Homo economicus, the reliably rational calculator of his own advantage who inhabits the works of Adam Smith and Alfred Marshall, did not exist. In 2002 the Israeli psychologist Daniel Kahneman of Princeton had won the Nobel Prize in economics for work done with his late compatriot Amos Tversky of Stanford. Their work in so-called behavioral economics described people’s tendency to mis-predict and mis-assess. Human reason, it turns out, can cut its way through problems only if the choices are laid out in the proper way. When you ask people what the product of the first eight integers is, much depends on whether you express the multiplication in the form 1 × 2 × 3 × 4 × 5 × 6 × 7 × 8 or in the form 8 × 7 × 6 × 5 × 4 × 3 × 2 × 1 Given five seconds to make an estimate, the average person thinks the product of the first string is 512 and of the second 2,250.

Primitive Rebels. Manchester: Manchester University Press, 1959. Howe, Irving. Selected Writings, 1950–1990. San Diego: Harcourt Brace Jovanovich, 1990. Inglehart, Ronald. Culture Shift in Advanced Industrial Society. Princeton: Princeton University Press, 1990. Kahneman, Daniel, Paul Slovic, and Amos Tversky, eds. Judgment Under Uncertainty: Heuristics and Biases. Cambridge, England: Cambridge University Press, 1982. Kalven, Harry, Jr. The Negro and the First Amendment. Columbus: Ohio State University Press, 1965. Kaplan, Roberta, with Lisa Dickey. Then Comes Marriage: How Two Women Fought for and Won Equal Dignity for All.


pages: 342 words: 72,927

Transport for Humans: Are We Nearly There Yet? by Pete Dyson, Rory Sutherland

Abraham Maslow, Alan Greenspan, autonomous vehicles, barriers to entry, behavioural economics, bitcoin, Black Swan, Boeing 747, BRICs, butterfly effect, car-free, carbon footprint, Charles Babbage, choice architecture, cognitive bias, cognitive load, coronavirus, COVID-19, Crossrail, Daniel Kahneman / Amos Tversky, decarbonisation, demand response, Diane Coyle, digital map, driverless car, Dunning–Kruger effect, Elon Musk, fake news, functional fixedness, gender pay gap, George Akerlof, gig economy, global supply chain, Goodhart's law, Greta Thunberg, Gödel, Escher, Bach, high-speed rail, hive mind, Hyperloop, Induced demand, informal economy, Isaac Newton, Jane Jacobs, lockdown, longitudinal study, loss aversion, low cost airline, Lyft, megaproject, meta-analysis, Network effects, nudge unit, Ocado, overview effect, Paul Samuelson, performance metric, pneumatic tube, RAND corporation, randomized controlled trial, remote working, ride hailing / ride sharing, risk tolerance, Rory Sutherland, Sapir-Whorf hypothesis, selection bias, Skype, smart transportation, social distancing, South Sea Bubble, systems thinking, TED Talk, the map is not the territory, The Market for Lemons, the scientific method, The Wisdom of Crowds, Thomas Malthus, Uber and Lyft, uber lyft, urban planning, Veblen good, When a measure becomes a target, yield management, zero-sum game

In the private sector, we see more ‘customer insights’ positions within airlines and rail companies, while automotive companies have widened their scope too: the launch of Ford Mobility to develop new products and infrastructure for cities is a good example. But ‘fluffy’ is often the word attached to this young science, often because organizations adopt ‘thinking behaviourally’ merely as a perspective, without applying analytical models, creative frameworks or rigorous trials. Amos Tversky – the pioneering economist who, with his colleague Daniel Kahneman, created much of the theory that underpins behavioural economics – explained that they ‘merely examined, in a scientific way, things about behaviour that were already known to advertisers and used-car salesmen’.26 Their work (for which Kahneman won the Nobel Memorial Prize in Economic Sciences) is the opposite of fluffy.

Mr Crane is told that his flight left on time. Mr Thomas is told that his flight was delayed, and just left five minutes ago. Who is more upset? Did you decide that Mr Thomas was more likely to be upset? If so, you agree with 96% of the research subjects in an experiment conducted by Daniel Kahneman and Amos Tversky in 1982.14 Mr Thomas and Mr Crane faced the same situation, had the same outcome and neither was responsible for missing their flight, but the former came so close to making his flight. This is the simulation heuristic. If we narrowly fail to get a train or a bus or a flight, it’s easier to imagine an alternate reality in which we succeeded: if just one more set of traffic lights had been green, or if you’d been just one spot further forward in a queue.

Our homes are designed so that cars live right outside our front doors, meaning we don’t even consider our other options. A study of Londoners’ travel behaviour showed that only 4% of drivers reported giving serious thought to which mode of travel they should use for a given journey.11 The psychologist Daniel Kahneman described this phenomenon with the phrase ‘what you see is all there is’. A behaviourally framed solution would make us walk to our cars by shifting residential parking out of sight, away from driveways and streets into separate car parks. Streets then become car free, with exceptions made for pick-up and drop-off zones.


pages: 292 words: 94,324

How Doctors Think by Jerome Groopman

affirmative action, Atul Gawande, classic study, Daniel Kahneman / Amos Tversky, deliberate practice, fear of failure, framing effect, if you see hoof prints, think horses—not zebras, index card, iterative process, lateral thinking, machine translation, medical malpractice, medical residency, Menlo Park, pattern recognition, placebo effect, seminal paper, stem cell, theory of mind

She was an absolutely classic case—the rapid breathing, the shift in her blood electrolytes—and I missed it. I got cavalier." As there are classic clinical maladies, there are classic cognitive errors. Alter's misdiagnosis resulted from such an error, the use of a heuristic called "availability." Amos Tversky and Daniel Kahneman, psychologists from the Hebrew University in Jerusalem, explored this shortcut in a seminal paper more than two decades ago. Kahneman won the Nobel Prize in economics in 2002 for work illuminating the way certain patterns of thinking cause irrational decisions in the marketplace; Tversky certainly would have shared the prize had he not died an untimely death in 1996.

Ironside, "Iatrogenic contributions to suicide and a report on 37 suicide attempts," New Zealand Medical Journal 69 (1969), p. 207; John Maltsberger and Donald Buie, "Countertransference hate in the treatment of suicidal patients," Archives of General Psychiatry 30 (1974), pp. 625–633. The connections between cognition and emotion are beautifully described in Antonio Damasio's Descartes' Error: Emotion, Reason, and the Human Brain (Itasca, Ill.: Putnam, 1994). 2. Lessons from the Heart Amos Tversky and Daniel Kahneman were the pioneers in categorizing cognitive biases. Kahneman was awarded a Nobel Prize for their work; alas, Tversky died before the Nobel Committee's decision. Valuable articles by these researchers on errors include "Availability: A heuristic for judging frequency and probability," Cognitive Psychology 5 (1973), pp. 207–232, and "Judgment under uncertainty: Heuristics and biases," Science 185 (1974), pp. 1124–1131.

Its simplicity and comprehensiveness make it a useful aid that can move a doctor away from the far end of the Yerkes-Dodson curve where anxiety impairs performance. I wish that I'd learned these ABCs before my first day of internship when I froze in front of Mr. Morgan. Earlier, I cited the extraordinary insights of Amos Tversky and Daniel Kahneman. Their exploration of availability errors is found in "Availability: A heuristic for judging frequency and probability," Cognitive Psychology 5 (1973), pp. 207–232. Note how incomplete communication and cognitive pitfalls are linked in the case of Blanche Begaye. Once Alter had anchored his assumption that she had a viral infection, he limited his dialogue with her.


pages: 1,239 words: 163,625

The Joys of Compounding: The Passionate Pursuit of Lifelong Learning, Revised and Updated by Gautam Baid

Abraham Maslow, activist fund / activist shareholder / activist investor, Airbnb, Alan Greenspan, Albert Einstein, Alvin Toffler, Andrei Shleifer, asset allocation, Atul Gawande, availability heuristic, backtesting, barriers to entry, beat the dealer, Benoit Mandelbrot, Bernie Madoff, bitcoin, Black Swan, book value, business process, buy and hold, Cal Newport, Cass Sunstein, Checklist Manifesto, Clayton Christensen, cognitive dissonance, collapse of Lehman Brothers, commoditize, corporate governance, correlation does not imply causation, creative destruction, cryptocurrency, Daniel Kahneman / Amos Tversky, deep learning, delayed gratification, deliberate practice, discounted cash flows, disintermediation, disruptive innovation, Dissolution of the Soviet Union, diversification, diversified portfolio, dividend-yielding stocks, do what you love, Dunning–Kruger effect, Edward Thorp, Elon Musk, equity risk premium, Everything should be made as simple as possible, fear index, financial independence, financial innovation, fixed income, follow your passion, framing effect, George Santayana, Hans Rosling, hedonic treadmill, Henry Singleton, hindsight bias, Hyman Minsky, index fund, intangible asset, invention of the wheel, invisible hand, Isaac Newton, it is difficult to get a man to understand something, when his salary depends on his not understanding it, Jeff Bezos, John Bogle, Joseph Schumpeter, junk bonds, Kaizen: continuous improvement, Kickstarter, knowledge economy, Lao Tzu, Long Term Capital Management, loss aversion, Louis Pasteur, low interest rates, Mahatma Gandhi, mandelbrot fractal, margin call, Mark Zuckerberg, Market Wizards by Jack D. Schwager, Masayoshi Son, mental accounting, Milgram experiment, moral hazard, Nate Silver, Network effects, Nicholas Carr, offshore financial centre, oil shock, passive income, passive investing, pattern recognition, Peter Thiel, Ponzi scheme, power law, price anchoring, quantitative trading / quantitative finance, Ralph Waldo Emerson, Ray Kurzweil, Reminiscences of a Stock Operator, reserve currency, Richard Feynman, Richard Thaler, risk free rate, risk-adjusted returns, Robert Shiller, Savings and loan crisis, search costs, shareholder value, six sigma, software as a service, software is eating the world, South Sea Bubble, special economic zone, Stanford marshmallow experiment, Steve Jobs, Steven Levy, Steven Pinker, stocks for the long run, subscription business, sunk-cost fallacy, systems thinking, tail risk, Teledyne, the market place, The Signal and the Noise by Nate Silver, The Wisdom of Crowds, time value of money, transaction costs, tulip mania, Upton Sinclair, Walter Mischel, wealth creators, Yogi Berra, zero-sum game

Planning Fallacy and the Critical Role of a Premortem Overly optimistic forecasts of the outcome of projects are evident everywhere. This bias, a phenomenon in which predictions about how much time or cost will be needed to complete a future task display an overly optimistic view, is called “planning fallacy,” a term coined by Daniel Kahneman and Amos Tversky. Planning fallacy occurs when plans and forecasts assume a best-case scenario and ignore the base rates of similar cases in the past. This, in turn, leads to significant time and cost overruns. What causes people to succumb to the planning fallacy? The “inside view,” according to Kahneman and Tversky, is the culprit here.

The threat of potential loss plays a significant role in our decision-making, and we have a natural tendency to be loss averse. Or, in Munger’s words, “The quantity of a man’s pleasure from a ten-dollar gain does not exactly match the quantity of his displeasure from a ten-dollar loss.”7 This is the foundational principle of Daniel Kahneman and Amos Tversky’s prospect theory (figure 31.3). FIGURE 31.3 Prospect theory. Source: Dave Rothschild, “How People Think About Buying New Products,” JTBD.info, August 21, 2015, https://jtbd.info/getting-consumers-to-switch-to-your-solution-fa292bb29cea. When reframing the problem from a “gain frame” to a “loss frame,” we shift from a sure-shot (conservative) option toward the riskier option—gambling.

Peter Bevelin gave me some of the finest pieces of work on multidisciplinary thinking and inversion. Thornton Oglove, Howard Schilit, and Charles Mulford educated me on how to assess the quality of reported earnings. Stephen Penman and Baruch Lev taught me the finer nuances of interpreting accounting information from the vantage point of a business analyst and a value investor. Daniel Kahneman, Amos Tversky, Richard Thaler, Dan Ariely, and James Montier educated me on the various cognitive biases. Herbert Simon enlightened me on bounded rationality, that is, the cognitive limitations of our minds. Fred Schwed made me aware of the inherent conflicts of interest in the investment industry.


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The Strange Order of Things: The Biological Roots of Culture by Antonio Damasio

Albert Einstein, algorithmic bias, biofilm, business process, CRISPR, Daniel Kahneman / Amos Tversky, double helix, Gordon Gekko, invention of the wheel, invention of writing, invisible hand, job automation, mental accounting, meta-analysis, microbiome, Nick Bostrom, Norbert Wiener, pattern recognition, Peter Singer: altruism, planetary scale, post-truth, profit motive, Ray Kurzweil, Richard Feynman, self-driving car, Silicon Valley, Steven Pinker, Stuart Kauffman, Thomas Malthus

Opitz, Bruna Martins, Michiko Sakaki, and Mara Mather, “Thinking About a Limited Future Enhances the Positivity of Younger and Older Adults’ Recall: Support for Socioemotional Selectivity Theory,” Memory and Cognition 44, no. 6 (2016): 869–82; Mara Mather, “The Affective Neuroscience of Aging,” Annual Review of Psychology 67 (2016): 213–38. 31. Daniel Kahneman, “Experienced Utility and Objective Happiness: A Moment-Based Approach,” in Choices, Values, and Frames, eds. Daniel Kahneman and Amos Tversky (New York: Russell Sage Foundation, 2000); Daniel Kahneman, “Evaluation by Moments: Past and Future,” in ibid.; Bruna Martins, Gal Sheppes, James J. Gross, and Mara Mather, “Age Differences in Emotion Regulation Choice: Older Adults Use Distraction Less Than Younger Adults in High-Intensity Positive Contexts,” Journals of Gerontology Series B: Psychological Sciences and Social Sciences (2016): gbw028. 9 CONSCIOUSNESS 1.

But perhaps the not so good memories do not gain strength with time in contrast to the good memories that replay better than on past recalls. It would be a case not of suppressing details of bad memories but of lingering less over them, thus diminishing their negativity. The upshot is a highly adaptive increase in well-being.30 The peak-end effect described by Daniel Kahneman and Amos Tversky could contribute as well. We would be prone to creating strong memories for the more rewarding aspects of a past scene and obscure the rest. Memory is imperfect.31 Not everyone reports this sort of affectively positive reshaping of remembrances. Some people consider that their recollections are precisely as they should be, neither better nor worse.

Epicurus and Bertrand Russell would have been pleased to know that their philosophical concerns for human happiness have not been forgotten. Epicurus, The Epicurus Reader, eds. B. Inwood and L. P. Gerson (Indianapolis: Hackett, 1994); Bertrand Russell, The Conquest of Happiness (New York: Liveright, 1930); Daniel Kahneman, “Objective Happiness,” in Well-Being: Foundations of Hedonic Psychology, eds. Daniel Kahneman, Edward Diener, and Norbert Schwarz (New York: Russell Sage Foundation, 1999); Amartya Sen, “The Economics of Happiness and Capability,” in Capabilities and Happiness, eds. Luigino Bruni, Flavio Comim, and Maurizio Pugno (New York: Oxford University Press, 2008); Richard Davidson and Brianna S.


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Thinking in Bets by Annie Duke

banking crisis, behavioural economics, Bernie Madoff, Cass Sunstein, cognitive bias, cognitive dissonance, cognitive load, Daniel Kahneman / Amos Tversky, delayed gratification, Demis Hassabis, disinformation, Donald Trump, Dr. Strangelove, en.wikipedia.org, endowment effect, Estimating the Reproducibility of Psychological Science, fake news, Filter Bubble, Herman Kahn, hindsight bias, Jean Tirole, John Nash: game theory, John von Neumann, loss aversion, market design, mutually assured destruction, Nate Silver, p-value, phenotype, prediction markets, Richard Feynman, ride hailing / ride sharing, Stanford marshmallow experiment, Stephen Hawking, Steven Pinker, systematic bias, TED Talk, the scientific method, The Signal and the Noise by Nate Silver, urban planning, Walter Mischel, Yogi Berra, zero-sum game

Don’t fall in love or even date anybody if you want only positive results. The world is structured to give us lots of opportunities to feel bad about being wrong if we want to measure ourselves by outcomes. Don’t fall for it! Second, being wrong hurts us more than being right feels good. We know from Daniel Kahneman and Amos Tversky’s work on loss aversion, part of prospect theory (which won Kahneman the Nobel Prize in Economics in 2002), that losses in general feel about two times as bad as wins feel good. So winning $100 at blackjack feels as good to us as losing $50 feels bad to us. Because being right feels like winning and being wrong feels like losing, that means we need two favorable results for every one unfavorable result just to break even emotionally.

Stanford Law Review 64 (2012): 851–906. Kahan, Dan, Ellen Peters, Erica Dawson, and Paul Slovic. “Motivated Numeracy and Enlightened Self-Government.” Behavioural Public Policy 1, no. 1 (May 2017): 54–86. Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011. Kahneman, Daniel, and Amos Tversky. “Prospect Theory: An Analysis of Decision Under Risk.” Econometrica: Journal of the Econometric Society 47, no. 2 (March 1979): 263–91. Katyal, Neil. “Washington Needs More Dissent Channels.” New York Times, July 1, 2016. https://www.nytimes.com/2016/07/02/opinion/washington-needs-more-dissent-channels.html.

When we work backward from results to figure out why those things happened, we are susceptible to a variety of cognitive traps, like assuming causation when there is only a correlation, or cherry-picking data to confirm the narrative we prefer. We will pound a lot of square pegs into round holes to maintain the illusion of a tight relationship between our outcomes and our decisions. Different brain functions compete to control our decisions. Nobel laureate and psychology professor Daniel Kahneman, in his 2011 best-selling Thinking, Fast and Slow, popularized the labels of “System 1” and “System 2.” He characterized System 1 as “fast thinking.” System 1 is what causes you to hit the brakes the instant someone jumps into the street in front of your car. It encompasses reflex, instinct, intuition, impulse, and automatic processing.


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To Sell Is Human: The Surprising Truth About Moving Others by Daniel H. Pink

always be closing, Atul Gawande, barriers to entry, behavioural economics, business cycle, call centre, Cass Sunstein, Checklist Manifesto, choice architecture, complexity theory, Credit Default Swap, Daniel Kahneman / Amos Tversky, disintermediation, Elisha Otis, future of work, George Akerlof, independent contractor, information asymmetry, Jeff Bezos, Kickstarter, longitudinal study, Marc Andreessen, Menlo Park, out of africa, Richard Thaler, rolodex, Ronald Reagan, Steve Jobs, The Market for Lemons, Upton Sinclair, Wall-E, zero-sum game

Research Report R-1424-08-RR (October 2008), available at http://www.artsusa.org/pdf/information_services/research/policy_roundtable/readytoinnovatefull.pdf. 11. Robert B. Cialdini, Influence: Science and Practice, 5th ed. (Boston: Allyn & Bacon, 2009), 12–16. 12. For a good introduction, see Daniel Kahneman and Amos Tversky, “The Framing of Decisions and the Psychology of Choice,” Science 211 (1981): 453–58; Daniel Kahneman and Amos Tversky, “Rational Choice and the Framing of Decisions,” in Robin M. Hogarth and Melvin W. Reder, eds., Rational Choice: The Contrast Between Economics and Psychology (Chicago: University of Chicago Press, 1987); Erving Goffman, Frame Analysis: An Essay on the Organization of Experience (Cambridge MA: Harvard University Press, 1974). 13.

Damien Erceau and Nicolas Guéguen, “Tactile Contact and Evaluation of the Toucher,” Journal of Social Psychology 147, no. 4 (August 2007): 441–44. 22. See also Liam C. Kavanagh, Christopher L. Suhler, Patricia S. Churchland, and Piotr Winkielman, “When It’s an Error to Mirror: The Surprising Reputational Costs of Mimicry,” Psychological Science 22, no. 10 (October 2011): 1274–76. 23. Daniel Kahneman, Ed Diener, and Norbert Schwarz, eds., Well-Being: The Foundations of Hedonic Psychology (New York: Russell Sage Foundation, 1999), 218. 24. P. T. Costa Jr. and R. R. McCrae, NEO PI-R Professional Manual (Odessa, FL: Psychological Assessment Resources, Inc., 1992), 15; Susan Cain, Quiet: The Power of Introverts in a World That Can’t Stop Talking (New York: Crown, 2012). 25.


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Wait: The Art and Science of Delay by Frank Partnoy

algorithmic trading, Atul Gawande, behavioural economics, Bernie Madoff, Black Swan, blood diamond, Cass Sunstein, Checklist Manifesto, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, cotton gin, Daniel Kahneman / Amos Tversky, delayed gratification, Flash crash, Frederick Winslow Taylor, George Akerlof, Google Earth, Hernando de Soto, High speed trading, impulse control, income inequality, information asymmetry, Isaac Newton, Long Term Capital Management, Menlo Park, mental accounting, meta-analysis, MITM: man-in-the-middle, Nick Leeson, paper trading, Paul Graham, payday loans, Pershing Square Capital Management, Ralph Nader, Richard Thaler, risk tolerance, Robert Shiller, Ronald Reagan, Saturday Night Live, scientific management, six sigma, social discount rate, Spread Networks laid a new fibre optics cable between New York and Chicago, Stanford marshmallow experiment, statistical model, Steve Jobs, systems thinking, The Market for Lemons, the scientific method, The Wealth of Nations by Adam Smith, upwardly mobile, Walter Mischel, work culture

For most of the twentieth century, economists assumed that people discount the future at a consistent rate for both the short term and the long term.28 If our discount rate is 10 percent, they assumed, we use that same rate regardless of when we owe money—in a day, a month, or a year.29 Economists also assumed we use the same rate regardless of our level of wealth, or whether we owe or are owed money. The standard economic model assumed that people think about these factors and are consistent about risk and time. Then, in 1979, psychologists began dropping bombs on these assumptions. Daniel Kahneman and Amos Tversky published an article in Econometrica, a prestigious economics journal, arguing that the standard economic model of decisions was wrong. A few economists, particularly Richard Thaler, showed that people’s discount rates vary dramatically depending on how far into the future they are discounting.

It questions the long-held assumptions by financial economists that investors are rational and act in their self-interest, as well as the mathematical equations that purport to show how markets are largely predictable and efficient. A few economists, such as Eugene Fama, one of the founding fathers of efficient market theory, continue to cling to some of these assumptions. But many financial economists are jumping ship. A wave of research, spurred on by Daniel Kahneman, Amos Tversky, and Richard Thaler, has demonstrated that investors have systematic biases. Numerous researchers have documented how we make mistakes in our financial decisions.2 We anchor around certain numbers and concepts, we travel in herds, we overreact, we are overconfident, and we are very, very bad at assessing risk.3 We trade too frequently.

IMDb, “Memorable Quotes for ‘Fight Club,’” http://www.imdb.com/title/tt0137523/quotes. 5 | BAD CALL Psychologists often say there are two systems of the mind: system 1, which is automatic and involuntary, and system 2, which is effortful and deliberative. They don’t really mean there are two separate physical systems. As Nobel laureate Daniel Kahneman has written, “The two systems do not really exist in the brain or anywhere else.”1 But some scientists find this two-system idea to be a useful metaphor in describing our different mental approaches. So far in this book, we have been looking at what a psychologist would refer to as system 1.


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Reinventing Capitalism in the Age of Big Data by Viktor Mayer-Schönberger, Thomas Ramge

accounting loophole / creative accounting, Air France Flight 447, Airbnb, Alvin Roth, Apollo 11, Atul Gawande, augmented reality, banking crisis, basic income, Bayesian statistics, Bear Stearns, behavioural economics, bitcoin, blockchain, book value, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, Cass Sunstein, centralized clearinghouse, Checklist Manifesto, cloud computing, cognitive bias, cognitive load, conceptual framework, creative destruction, Daniel Kahneman / Amos Tversky, data science, Didi Chuxing, disruptive innovation, Donald Trump, double entry bookkeeping, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, Evgeny Morozov, flying shuttle, Ford Model T, Ford paid five dollars a day, Frederick Winslow Taylor, fundamental attribution error, George Akerlof, gig economy, Google Glasses, Higgs boson, information asymmetry, interchangeable parts, invention of the telegraph, inventory management, invisible hand, James Watt: steam engine, Jeff Bezos, job automation, job satisfaction, joint-stock company, Joseph Schumpeter, Kickstarter, knowledge worker, labor-force participation, land reform, Large Hadron Collider, lone genius, low cost airline, low interest rates, Marc Andreessen, market bubble, market design, market fundamentalism, means of production, meta-analysis, Moneyball by Michael Lewis explains big data, multi-sided market, natural language processing, Neil Armstrong, Network effects, Nick Bostrom, Norbert Wiener, offshore financial centre, Parag Khanna, payday loans, peer-to-peer lending, Peter Thiel, Ponzi scheme, prediction markets, price anchoring, price mechanism, purchasing power parity, radical decentralization, random walk, recommendation engine, Richard Thaler, ride hailing / ride sharing, Robinhood: mobile stock trading app, Sam Altman, scientific management, Second Machine Age, self-driving car, Silicon Valley, Silicon Valley startup, six sigma, smart grid, smart meter, Snapchat, statistical model, Steve Jobs, subprime mortgage crisis, Suez canal 1869, tacit knowledge, technoutopianism, The Future of Employment, The Market for Lemons, The Nature of the Firm, transaction costs, universal basic income, vertical integration, William Langewiesche, Y Combinator

., My Years with General Motors (New York: Doubleday, 1990), 129, quoted in Garvin and Levesque, “Executive Decision Making at General Motors.” a range of fundamental cognitive limitations: Amos Tversky and Daniel Kahneman, “Judgment Under Uncertainty: Heuristics and Biases,” Science 185, no. 4157 (September 27, 1974), 1124–1131. In 2002, Kahneman earned the Nobel Prize in Economics for the Tversky-Kahneman research; Tversky died in 1996 and therefore did not share in the honor. See also Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Straus and Giroux, 2011); on how Kahneman and Tversky achieved their breakthrough insights, see Michael Lewis, The Undoing Project: A Friendship That Changed Our Minds (New York: W.

But much of the efficiency gains have now been absorbed, and to reap further benefits firms will have to focus on improving information processing among a firm’s top decision makers. There, however, firms face a far more difficult challenge: constraints in human cognition. As psychologists Daniel Kahneman and Amos Tversky pointed out in their groundbreaking studies (which fueled the creation of a new academic field, behavioral economics), humans are plagued by a range of fundamental cognitive limitations that impair our general ability to decide well. We have seen this in the context of price, but the constraints are far more universal.

simplifying data to make it more digestible: Mayer-Schönberger and Cukier, Big Data, 164–165, 168. tools to shape the flow of information: Ludwig Siegele and Joachim Zepelin, Matrix der Welt: SAP und der neue globale Kapitalismus (Frankfurt: Campus Verlag, 2009). the “noise” they create in the organization: Daniel Kahneman, Andrew M. Rosenfield, Linnea Gandhi, and Tom Blaser, “Noise: How to Overcome the High, Hidden Cost of Inconsistent Decision Making,” Harvard Business Review (October 2016), https://hbr.org/2016/10/noise. Checklists in aircraft: Brigette M. Hales and Peter J. Pronovost, “The Checklist—a Tool for Error Management and Performance,” Journal of Critical Care 21 (2006), 231–235.


Innovation and Its Enemies by Calestous Juma

3D printing, additive manufacturing, agricultural Revolution, Asilomar, Asilomar Conference on Recombinant DNA, autonomous vehicles, behavioural economics, big-box store, biodiversity loss, business cycle, Cass Sunstein, classic study, clean water, collective bargaining, colonial rule, computer age, creative destruction, CRISPR, Daniel Kahneman / Amos Tversky, deskilling, disruptive innovation, driverless car, electricity market, energy transition, Erik Brynjolfsson, fail fast, financial innovation, global value chain, Honoré de Balzac, illegal immigration, Intergovernmental Panel on Climate Change (IPCC), Internet of things, invention of movable type, invention of the printing press, Joseph Schumpeter, knowledge economy, loss aversion, Marc Andreessen, means of production, Menlo Park, mobile money, New Urbanism, Nicholas Carr, pensions crisis, phenotype, precautionary principle, Ray Kurzweil, Recombinant DNA, refrigerator car, Second Machine Age, self-driving car, smart grid, smart meter, stem cell, Steve Jobs, synthetic biology, systems thinking, tacit knowledge, technological singularity, The Future of Employment, Thomas Kuhn: the structure of scientific revolutions, Travis Kalanick

Sheth, “Psychology of Innovation Resistance: The Less Developed Concept (LDC) in Diffusion Research,” in Research in Marketing, vol. 4, ed. Jagdish N. Sheth (Greenwich, CT: JAI Press, 1981), 273–282. 90. Sheth, “Psychology of Innovation Resistance.” 91. Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision under Risk,” Econometrica 47, no. 2 (1979): 263–292. 92. For a more detailed explanation, see Daniel Kahneman and Amos Tversky, “Choices, Frames, and Values,” American Psychologist 39, no. 4 (1984): 341–350; and Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Straus and Giroux, 2011). 93. Bazerman and Moore, Judgment. 94. William Samuelson and Richard Zeckhauser, “Status Quo Bias in Decision Making,” Journal of Risk and Uncertainty 1 (1988): 7–59. 95.

See Center for Veterinary Medicine, “AquAdvantage Salmon: Environmental Assessment,” FDA, November 12, 2015, http://www.fda.gov/downloads/AnimalVeterinary/DevelopmentApprovalProcess/GeneticEngineering/GeneticallyEngineeredAnimals/UCM466218.pdf. 26. Van Eenennaam, Muir, and Hallermann, Unaccountable Regulatory Delay, 3. 27. Max H. Bazerman and Don Moore, Judgment in Managerial Decision Making (New York: Wiley, 2008). 28. Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision under Risk,” Econometrica 47, no. 2 (1979): 263–292. 29. Alison L. van Eenennaam, Eric M. Hallerman, and William M. Muir, The Science and Regulation of Food from Genetically Engineered Animals (Washington, DC: Council for Agricultural Science and Technology, 2011). 30.

William Samuelson and Richard Zeckhauser, “Status Quo Bias in Decision Making,” Journal of Risk and Uncertainty 1 (1988): 7–59. 95. Bazerman and Moore, Judgment. 96. Ilans Ritov and Jonathan Baron, “Reluctance to Vaccinate: Omission Bias and Ambiguity,” Journal of Behavioral Decision Making 3 (1990): 263–277. 97. Ritov and Baron, “Reluctance to Vaccinate”; Daniel Kahneman and Dale T. Miller, “Norm Theory: Comparing Reality to Its Alternatives,” Psychological Review 93, no. 2 (1986): 136–153. 98. Ritov and Baron, “Reluctance to Vaccinate.” 99. Nidhi Gupta, Arnout Fischer, and Lynn Frewer, “Socio-psychological Determinants of Public Acceptance of Technologies: A Review,” Public Understanding of Science 22 (2012): 817–831. 100.


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The Self-Made Billionaire Effect: How Extreme Producers Create Massive Value by John Sviokla, Mitch Cohen

Bear Stearns, Blue Ocean Strategy, business cycle, Cass Sunstein, Colonization of Mars, corporate raider, Daniel Kahneman / Amos Tversky, driverless car, eat what you kill, Elon Musk, Frederick Winslow Taylor, game design, global supply chain, James Dyson, Jeff Bezos, John Harrison: Longitude, Jony Ive, loss aversion, Mark Zuckerberg, market design, megaproject, old-boy network, paper trading, RAND corporation, randomized controlled trial, Richard Thaler, risk tolerance, scientific management, self-driving car, Sheryl Sandberg, Silicon Valley, smart meter, Steve Ballmer, Steve Jobs, Steve Wozniak, tech billionaire, Tony Hsieh, Toyota Production System, Virgin Galactic, young professional

Who are we going to chase?’ 3. http://onlinenevada.org/kirk_kerkorian. 4. Michael Specter, “Branson’s Luck,” New Yorker, May 14, 2007. 5. The original paper was published by Econometrica. See Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision Under Risk,” Econometrica 47, no. 2 (March 1979): 263–91. For a more approachable treatment, see Daniel Kahneman, Thinking Fast and Slow (New York: Farrar, Straus and Giroux, 2011), in which Kahneman revisits that work with thirty years of perspective and corroborating experiments. 6. Quote published at www.womenofchina.cn/html/womenofchina/report/123585-1.htm, accessed February 3, 2014. 7.

More important, the real source of risk resides in other places than the average professional would see them. Risk is a matter of perception. This may seem like an uncontroversial statement, but viewing risk as a subjective rather than objective factor moves against economic orthodoxy—not to mention corporate practice. The Nobel Prize winner Daniel Kahneman and his research partner Amos Tversky first proposed the subjective nature of risk in a 1979 paper in which they describe a series of experiments they conducted to come up with their famous Prospect Theory, a model for human decision making. At its core, Prospect Theory argues that individual perceptions of risk can be influenced by how an opportunity is framed, the context in which it is presented, personal experience, and other factors.


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Doing Good Better: How Effective Altruism Can Help You Make a Difference by William MacAskill

barriers to entry, basic income, behavioural economics, Black Swan, Branko Milanovic, Cal Newport, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, clean water, corporate social responsibility, correlation does not imply causation, Daniel Kahneman / Amos Tversky, David Brooks, Edward Jenner, effective altruism, en.wikipedia.org, end world poverty, experimental subject, follow your passion, food miles, immigration reform, income inequality, index fund, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, job automation, job satisfaction, Lean Startup, M-Pesa, mass immigration, meta-analysis, microcredit, Nate Silver, Peter Singer: altruism, power law, public intellectual, purchasing power parity, quantitative trading / quantitative finance, randomized controlled trial, self-driving car, Skype, Stanislav Petrov, Steve Jobs, Steve Wozniak, Steven Pinker, The Future of Employment, The Wealth of Nations by Adam Smith, Tyler Cowen, universal basic income, William MacAskill, women in the workforce

within economics the number of people who seek academic employment more closely matches the number of academic jobs: Richard B. Freeman, “It’s Better Being an Economist (But Don’t Tell Anyone),” Journal of Economic Perspectives 13, no. 3 (Summer 1999), 139–45. Daniel Kahneman and Amos Tversky were psychologists who caused a revolution within economics: For an excellent overview of this pathbreaking research, see Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Straus and Giroux, 2011). this field has improved our ability to cause desirable behavior change: For examples, see “Poor Behaviour: Behavioural Economics Meets Development Policy,” The Economist, December 6, 2014, and Dean Karlan and Jacob Appel, More Than Good Intentions: How a New Economics Is Helping to Solve Global Poverty (New York: Dutton, 2011).

There are far more combinations of fields than there are individual fields, and research tends to be influenced by traditional disciplinary distinctions, so research at the intersection of two disciplines is often particularly neglected and can for that reason be very high-impact. For example, Daniel Kahneman and Amos Tversky were psychologists who caused a revolution within economics: they applied methods developed in psychology to test assumptions about rational choice that were prevalent within economics, thereby leading to the new field of “behavioral economics.” By giving us a better understanding of human behavior, this field has improved our ability to cause desirable behavior change, including in development.

Scientists who have clearly had a huge positive effect on the world include Fritz Haber and Carl Bosch, who invented synthetic fertilizer; Karl Landsteiner, who discovered blood groups, thus allowing blood transfusions to be possible; Grace Eldering and Pearl Kendrick, who developed the first whooping cough vaccine; and Françoise Barré-Sinoussi and Luc Montagnier, who discovered HIV. In each of these cases, even after taking into account that these developments would have eventually happened anyway, the good each of these researchers did should be measured in the millions of lives saved. And clearly many other researchers, from Isaac Newton to Daniel Kahneman, have made a huge contribution to human progress even if it’s not easy to quantify their impact in terms of lives saved. Like innovative entrepreneurship, research is an area that is drastically undersupplied by the market because the benefits are open to everyone, and because much of the benefit of research occurs decades into the future.


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The Scandal of Money by George Gilder

Affordable Care Act / Obamacare, Alan Greenspan, bank run, behavioural economics, Bernie Sanders, bitcoin, blockchain, borderless world, Bretton Woods, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, Claude Shannon: information theory, Clayton Christensen, cloud computing, corporate governance, cryptocurrency, currency manipulation / currency intervention, currency risk, Daniel Kahneman / Amos Tversky, decentralized internet, Deng Xiaoping, disintermediation, Donald Trump, fiat currency, financial innovation, Fractional reserve banking, full employment, George Gilder, glass ceiling, guns versus butter model, Home mortgage interest deduction, impact investing, index fund, indoor plumbing, industrial robot, inflation targeting, informal economy, Innovator's Dilemma, Internet of things, invisible hand, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Jeff Bezos, John Bogle, John von Neumann, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, Law of Accelerating Returns, low interest rates, Marc Andreessen, Mark Spitznagel, Mark Zuckerberg, Menlo Park, Metcalfe’s law, Money creation, money: store of value / unit of account / medium of exchange, mortgage tax deduction, Nixon triggered the end of the Bretton Woods system, obamacare, OSI model, Paul Samuelson, Peter Thiel, Ponzi scheme, price stability, Productivity paradox, proprietary trading, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, Ray Kurzweil, reality distortion field, reserve currency, road to serfdom, Robert Gordon, Robert Metcalfe, Ronald Reagan, Sand Hill Road, Satoshi Nakamoto, Search for Extraterrestrial Intelligence, secular stagnation, seigniorage, Silicon Valley, Skinner box, smart grid, Solyndra, South China Sea, special drawing rights, The Great Moderation, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Tim Cook: Apple, time value of money, too big to fail, transaction costs, trickle-down economics, Turing machine, winner-take-all economy, yield curve, zero-sum game

Most alert to the problem, the Austrian school of economics, led by Friedrich Hayek and Ludwig von Mises, laboriously makes room for human creativity and entrepreneurship, “opportunity scouts” and arbitrageurs.5 Then they explain it all away as a function of “spontaneous order,” apparently restricting human beings to finding price differences and “assembling or reassembling chemical elements” in an effort to restore “equilibrium.” We are back again to the great machine purring away as deterministically as the stars and planets of Newton’s galaxy. In recent years, some pioneers of what is called behavioral economics—led by the psychologists Daniel Kahneman and Amos Tversky—have caused a stir by challenging our faith in Homo economicus.6 Kahneman won a Nobel Prize. But astonishingly enough, the behavioralists question the concept only to diminish it further, by denying the rationality that makes the machine operational and its outcomes just. The putatively rational economic agents—who’da thunk it?

Boudreaux, Choice: Cooperation, Enterprise and Human Action (Oakland, CA: Independent Institute, 2015). For the definitive texts, see Ludwig von Mises, Human Action, and Friedrich Hayek, The Road to Serfdom, both available in many editions. 6.Daniel Kahneman, Thinking, Fast and Slow (New York, NY: Farrar, Straus and Giroux, 2011). The Israeli cognitive psychologist Amos Tversky was his collaborator. CHAPTER 1: THE DREAM AND THE DOLLAR 1.Louis Simpson, “In California,” in The Owner of the House: New Collected Poems, 1940–2001 (Rochester, NY: BOA Editions, 2003), 173. 2.“There was virtually no growth before 1750, and thus there is no guarantee that growth will continue indefinitely.


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Luxury Fever: Why Money Fails to Satisfy in an Era of Excess by Robert H. Frank

Alan Greenspan, business cycle, clean water, company town, compensation consultant, Cornelius Vanderbilt, correlation coefficient, Daniel Kahneman / Amos Tversky, full employment, Garrett Hardin, germ theory of disease, global village, haute couture, hedonic treadmill, impulse control, income inequality, invisible hand, job satisfaction, Kenneth Arrow, lake wobegon effect, loss aversion, market clearing, McMansion, means of production, mega-rich, mortgage debt, New Urbanism, Pareto efficiency, Post-Keynesian economics, RAND corporation, rent control, Richard Thaler, rising living standards, Ronald Reagan, Silicon Valley, Tax Reform Act of 1986, telemarketer, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, Tragedy of the Commons, trickle-down economics, ultimatum game, winner-take-all economy, working poor

“Another Year, Another Bundle,” New York Times, December 5, 1997: D1, D4. Tversky, Amos, and Dale Griffen. “Endowment and Contrast in Judgments of Well-being,” in Strategy and Choice, ed. Richard Zeckhauser, Cambridge: MIT Press, 1991: 297-319. Tversky, Amos, and Daniel Kahneman. “Judgment Under Uncertainty: Heuristics and Biases,” in Judgment Under Uncertainty: Heuristics and Biases, ed. Daniel Kahneman, Paul Slovic, and Amos Tversky, New York: Cambridge University Press, 1982. Uchitelle, Louis. “As Taste for Comfort Rises, So Do Corporations’ Profits,” New York Times, September 14, 1997: A1, A34. U.S. Bureau of the Census. Statistical Abstract of the United States: 1996 (116th ed.), Washington, DC, 1996.

For example, students who are shown brief violent cartoons by experimenters are more likely than others to employ physical violence when involved in disputes with their classmates.2 And subjects in jury experiments who are shown slasher films, such as Nightmare on Elm Street and Texas Chain Saw Massacre, are considerably less likely than control subjects to express sympathy for a rape victim.3 The information to which we are exposed can affect our responses even when we have every reason to believe that it is manifestly irrelevant. In one remarkable experiment, for example, the psychologists Daniel Kahneman and Amos Tversky showed that people’s responses to an estimation problem were strongly influenced by a number they knew to be completely random. The specific problem they posed to subjects was to estimate the percentage of African countries in the United Nations.4 But before even asking this question, Kahneman and Tversky had subjects spin a random number wheel with an indicator that was equally likely to stop on any whole number between 0 and 100.

“National Differences in Subjective Well-Being,” in Understanding Well-Being: Scientific Perspectives on Enjoyment and Suffering, ed. Daniel Kahneman, Ed Diener, and Norbert Schwartz, New York: Russell Sage, 1998. Diener, Ed, and Frank Fujita, “Social Comparisons and Subjective Well-Being,” in Health, Coping, and Social Comparison, B. Buunk and R. Gibbons , Hillsdale, NJ: Erlbaum, forthcoming. Diener, Ed, and Richard E. Lucas. “Personality and Subjective Well-Being,” in Understanding Well-Being: Scientific Perspectives on Enjoyment and Suffering, ed. Daniel Kahneman, Ed Diener, and Norbert Schwartz, New York, Russell Sage, 1998. Diener, Ed; Ed Sandvik; Larry Seidlitz; and Marissa Diener .


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How Not to Network a Nation: The Uneasy History of the Soviet Internet (Information Policy) by Benjamin Peters

Albert Einstein, American ideology, Andrei Shleifer, Anthropocene, Benoit Mandelbrot, bitcoin, Brownian motion, Charles Babbage, Claude Shannon: information theory, cloud computing, cognitive dissonance, commons-based peer production, computer age, conceptual framework, continuation of politics by other means, crony capitalism, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Graeber, disinformation, Dissolution of the Soviet Union, Donald Davies, double helix, Drosophila, Francis Fukuyama: the end of history, From Mathematics to the Technologies of Life and Death, Gabriella Coleman, hive mind, index card, informal economy, information asymmetry, invisible hand, Jacquard loom, John von Neumann, Kevin Kelly, knowledge economy, knowledge worker, Lewis Mumford, linear programming, mandelbrot fractal, Marshall McLuhan, means of production, megaproject, Menlo Park, Mikhail Gorbachev, military-industrial complex, mutually assured destruction, Network effects, Norbert Wiener, packet switching, Pareto efficiency, pattern recognition, Paul Erdős, Peter Thiel, Philip Mirowski, power law, RAND corporation, rent-seeking, road to serfdom, Ronald Coase, scientific mainstream, scientific management, Steve Jobs, Stewart Brand, stochastic process, surveillance capitalism, systems thinking, technoutopianism, the Cathedral and the Bazaar, the strength of weak ties, The Structural Transformation of the Public Sphere, transaction costs, Turing machine, work culture , Yochai Benkler

Boyd Rayward and Mary Ellen Bowden, 15–28 (Medford, NJ: Information Today, 2004). 23. Arturo Rosenblueth, Norbert Wiener, and Julian Bigelow, “Behavior, Purpose, and Teleology,” Philosophy of Science 10 (1943): 18–24. 24. Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decisions under Risk,” Econometrica 47 (2) (1979): 263–291. See also Daniel Kahneman and Amos Tversky, eds., Choices, Values and Frames (New York: Cambridge University Press and Russell Sage Foundation, 2000). 25. David Stark, The Sense of Dissonance: Accounts of Worth in Economic Life (Princeton: Princeton University Press, 2009), 1–34. 26.

Twentieth World Congress of Philosophy (1998), accessed October 11, 2011, http://www.bu.edu/wcp/Papers/Comp/CompJurc.htm. Kahnemann, Daniel. Thinking Fast and Slow. New York: Farrar, Straus, and Giroux, 2011. Kahneman, Daniel and Amos Tversky. “Prospect Theory: An Analysis of Decisions under Risk,” Econometrica 47 (2) (1979): 263–291. Kahneman, Daniel and Amos Tversky, eds., Choices, Values and Frames. New York: Cambridge University Press and Russell Sage Foundation, 2000. Kapitonova, Yulia O., and Aleksandr A. Letichevsky, Paradigmi i idei akademika V. M. Glushkova [Paradigms and ideas of academician V.


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This Will Make You Smarter: 150 New Scientific Concepts to Improve Your Thinking by John Brockman

23andMe, adjacent possible, Albert Einstein, Alfred Russel Wallace, Anthropocene, banking crisis, Barry Marshall: ulcers, behavioural economics, Benoit Mandelbrot, Berlin Wall, biofilm, Black Swan, Bletchley Park, butterfly effect, Cass Sunstein, cloud computing, cognitive load, congestion charging, correlation does not imply causation, Daniel Kahneman / Amos Tversky, dark matter, data acquisition, David Brooks, delayed gratification, Emanuel Derman, epigenetics, Evgeny Morozov, Exxon Valdez, Flash crash, Flynn Effect, Garrett Hardin, Higgs boson, hive mind, impulse control, information retrieval, information security, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, Jaron Lanier, Johannes Kepler, John von Neumann, Kevin Kelly, Large Hadron Collider, lifelogging, machine translation, mandelbrot fractal, market design, Mars Rover, Marshall McLuhan, microbiome, Murray Gell-Mann, Nicholas Carr, Nick Bostrom, ocean acidification, open economy, Pierre-Simon Laplace, place-making, placebo effect, power law, pre–internet, QWERTY keyboard, random walk, randomized controlled trial, rent control, Richard Feynman, Richard Feynman: Challenger O-ring, Richard Thaler, Satyajit Das, Schrödinger's Cat, scientific management, security theater, selection bias, Silicon Valley, Stanford marshmallow experiment, stem cell, Steve Jobs, Steven Pinker, Stewart Brand, Stuart Kauffman, sugar pill, synthetic biology, the scientific method, Thorstein Veblen, Turing complete, Turing machine, twin studies, Vilfredo Pareto, Walter Mischel, Whole Earth Catalog, WikiLeaks, zero-sum game

Some considerations about each of these questions: Question 1: If you said that the university should remodel on the grounds that it was expensive to build the old hospital, you have fallen into the “sunk-cost trap” shorthand abstraction (SHA)identified by economists. The money spent on the hospital is irrelevant—it’s sunk—and has no bearing on the present choice. Amos Tversky and Daniel Kahneman pointed out that people’s ability to avoid such traps might be helped by a couple of thought experiments like the following: Imagine that you have two tickets to tonight’s NBA game in your city and that the arena is forty miles away. But it’s begun to snow, and you’ve found out that your team’s star has been injured and won’t be playing.

And if this is true, this anecdotalism will give new legs to the tragic misconception that the mentally ill are more dangerous than the rest of us. So maybe when I argue for anecdotalism going into everyone’s cognitive toolkit, I am really arguing for two things to be incorporated: (a) an appreciation of how distortive it can be; and (b) recognition, in a salute to the work of people like Amos Tversky and Daniel Kahneman, of its magnetic pull, its cognitive satisfaction. As social primates complete with a region of the cortex specialized for face recognition, we find that the individual face—whether literal or metaphorical—has a special power. But unappealing, unintuitive patterns of statistics and variation generally teach us much more.

Douglas Rushkoff Technologies Have Biases Our widespread inability to recognize or even acknowledge the biases of the technologies we use renders us incapable of gaining any real agency through them. Gerald Smallberg Bias Is the Nose for the Story Our brains evolved having to make the right bet with limited information. Jonah Lehrer Control Your Spotlight Too often, we assume that willpower is about having strong moral fiber. But that’s wrong. Daniel Kahneman The Focusing Illusion The mismatch in the allocation of attention between thinking about a life condition and actually living it is the cause of the focusing illusion. Carlo Rovelli The Uselessness of Certainty The very foundation of science is to keep the door open to doubt.


pages: 387 words: 120,155

Inside the Nudge Unit: How Small Changes Can Make a Big Difference by David Halpern

Affordable Care Act / Obamacare, availability heuristic, behavioural economics, carbon footprint, Cass Sunstein, centre right, choice architecture, cognitive dissonance, cognitive load, collaborative consumption, correlation does not imply causation, Daniel Kahneman / Amos Tversky, data science, different worldview, endowment effect, gamification, happiness index / gross national happiness, hedonic treadmill, hindsight bias, IKEA effect, illegal immigration, job satisfaction, Kickstarter, language acquisition, libertarian paternalism, light touch regulation, longitudinal study, machine readable, market design, meta-analysis, Milgram experiment, nudge unit, peer-to-peer lending, pension reform, precautionary principle, presumed consent, QR code, quantitative easing, randomized controlled trial, Richard Thaler, Right to Buy, Ronald Reagan, Rory Sutherland, Simon Kuznets, skunkworks, supply chain finance, the built environment, theory of mind, traffic fines, twin studies, World Values Survey

Prior to this, David was Chief Analyst in the Prime Minister’s Strategy Unit (2001–2007), and has held academic positions at the Universities of Cambridge, Oxford and Harvard. To the elected FOREWORD ONE OF THE most powerful and pernicious of the many cognitive biases that have been uncovered by behavioural scientists is ‘hindsight bias’, first investigated by Baruch Fischhoff when he was a graduate student studying at the Hebrew University with Daniel Kahneman and Amos Tversky. Simply put, hindsight bias is the phenomenon that after the fact, we think we knew it all along. Would America elect an African-American as President before a woman? Sure, we all thought that could happen. Did we think in 2000 that fifteen years later most of us would be carrying powerful computers in our pockets that could keep us up-to-date with email, answer nearly any factual question just by speaking to it, and get us anywhere without getting lost?

The rise of empirical social psychology marked a decisive shift in approach to the study of human behaviour, from the armchair musings of philosophers into an empirical project. In so doing, it has had profound ramifications for how we think of everything from war and wickedness, to kindness and love. Third, cognitive psychology has looked into our internal thought processes. To most contemporary psychologists, the ground-breaking work of Amos Tversky and Daniel Kahneman from the 1970s onwards stands out, highlighting the mental shortcuts that people use in everyday decision-making. For example, people generally don’t estimate the safety of air versus car travel by dividing the number of crashes over the last year by the number of planes versus cars travelling in the world over that time.

It considers whether behavioural insights have anything to add to the deepest and most daunting challenges that face us today, including how we get along with our fellow humans – challenges and frontiers that ‘nudgers’ are starting to explore. Suffice it to say that when the time came for the two-year sunset review of BIT, far from shutting the team down the Prime Minister decided to expand it. The Nobel Laureate Daniel Kahneman, whose research has led the field, commended the team’s work. The press, civil service and political parties turned – for the most part – from sceptics to supporters. Love it, or hate it, nudging is here to stay. The history and remarkable results of the 10 Downing Street Behavioural Insights Team have led governments across the world to adopt similar approaches, many advised by the Behavioural Insights Team itself.


pages: 459 words: 103,153

Adapt: Why Success Always Starts With Failure by Tim Harford

An Inconvenient Truth, Andrew Wiles, banking crisis, Basel III, behavioural economics, Berlin Wall, Bernie Madoff, Black Swan, Boeing 747, business logic, car-free, carbon footprint, carbon tax, Cass Sunstein, charter city, Clayton Christensen, clean water, cloud computing, cognitive dissonance, complexity theory, corporate governance, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, Dava Sobel, Deep Water Horizon, Deng Xiaoping, disruptive innovation, double entry bookkeeping, Edmond Halley, en.wikipedia.org, Erik Brynjolfsson, experimental subject, Fall of the Berlin Wall, Fermat's Last Theorem, financial engineering, Firefox, food miles, Gerolamo Cardano, global supply chain, Great Leap Forward, Herman Kahn, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, Jane Jacobs, Jarndyce and Jarndyce, Jarndyce and Jarndyce, John Harrison: Longitude, knowledge worker, loose coupling, Martin Wolf, mass immigration, Menlo Park, Mikhail Gorbachev, mutually assured destruction, Netflix Prize, New Urbanism, Nick Leeson, PageRank, Piper Alpha, profit motive, Richard Florida, Richard Thaler, rolodex, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, South China Sea, SpaceShipOne, special economic zone, spectrum auction, Steve Jobs, supply-chain management, tacit knowledge, the market place, The Wisdom of Crowds, too big to fail, trade route, Tyler Cowen, Tyler Cowen: Great Stagnation, Virgin Galactic, web application, X Prize, zero-sum game

Available at: http://timharford.com/2006/05/the-poker-machine/; and Tim Harford, The Logic of Life (New York: Random House, 2008). 32 The brain refuses to register: Gary Smith, Michael Levere and Robert Kurtzman, ‘Poker Player Behavior after Big Wins and Big Losses’, Management Science, Vol. 55, No. 9 (September 2009), pp. 1547–55. 32 The great economic psychologists Daniel Kahneman and Amos Tversky: Daniel Kahneman and Amos Tversky, ‘Prospect Theory: An Analysis of Decision under Risk’, Econometrica, Vol. 47, No. 2 (1979), p. 287. 33 Found the perfect setting to analyse the way we respond to losses: Thierry Post, Martijn J. Van den Assem, Guido Baltussen and Richard H. Thaler, ‘Deal or No Deal?

Acknowledging the loss and recalculating one’s strategy would be the right thing to do, but that is too painful. Instead, the player makes crazy bets to rectify what he unconsciously believes is a temporary situation. It isn’t the initial loss that does for him, but the stupid plays he makes in an effort to deny that the loss has happened. The eat economic psychologists Daniel Kahneman and Amos Tversky summarised the behaviour in their classic analysis of the psychology of risk: ‘a person who has not made peace with his losses is likely to accept gambles that would be unacceptable to him otherwise’. Even those of us who aren’t professional poker players know how it feels to chase a loss.


pages: 302 words: 83,116

SuperFreakonomics by Steven D. Levitt, Stephen J. Dubner

agricultural Revolution, airport security, An Inconvenient Truth, Andrei Shleifer, Atul Gawande, barriers to entry, behavioural economics, Bernie Madoff, Boris Johnson, call centre, clean water, cognitive bias, collateralized debt obligation, creative destruction, credit crunch, Daniel Kahneman / Amos Tversky, deliberate practice, Did the Death of Australian Inheritance Taxes Affect Deaths, disintermediation, endowment effect, experimental economics, food miles, indoor plumbing, Intergovernmental Panel on Climate Change (IPCC), John Nash: game theory, Joseph Schumpeter, Joshua Gans and Andrew Leigh, longitudinal study, loss aversion, Louis Pasteur, market design, microcredit, Milgram experiment, Neal Stephenson, ocean acidification, oil shale / tar sands, patent troll, power law, presumed consent, price discrimination, principal–agent problem, profit motive, randomized controlled trial, Richard Feynman, Richard Thaler, selection bias, South China Sea, Stanford prison experiment, Stephen Hawking, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, ultimatum game, urban planning, William Langewiesche, women in the workforce, young professional

. / 169 There is much to be read about the influence of uncertainty, especially as it compares with its cousin risk. The Israeli psychologists Amos Tversky and Daniel Kahneman, whose work is generally credited with giving ultimate birth to behavioral economics, conducted pioneering research on how people make decisions under pressure and found that uncertainty leads to “severe and systematic errors” in judgment. (See “Judgment Under Uncertainty: Heuristics and Biases,” from Judgment Under Uncertainty: Heuristics and Biases, ed. Daniel Kahneman, Paul Slovic, and Amos Tversky [Cambridge University Press, 1982].) We wrote about the difference between risk and uncertainty in a New York Times Magazine column (“The Jane Fonda Effect,” September 16, 2007) about the fear over nuclear power: “[The economist Frank Knight] made a distinction between two key factors in decision making: risk and uncertainty.

While teaching there, he also served on the President’s Council of Economic Advisors; List was the lone economist on a forty-two-person U.S. delegation to India to help negotiate the Kyoto Protocol. He was by now firmly at the center of experimental economics, a field that had never been hotter. In 2002, the Nobel Prize for economics was shared by Vernon Smith and Daniel Kahneman, a psychologist whose research on decision-making laid the groundwork for behavioral economics. These men and others of their generation had built a canon of research that fundamentally challenged the status quo of classical economics, and List was following firmly in their footsteps, running variants of Dictator and other behavioralist lab games.

ULTIMATUM AND DICTATOR: The first paper on Ultimatum as it is commonly known is Werner Guth, Rolf Schmittberger, and Bernd Schwarze, “An Experimental Analysis of Ultimatum Bargaining,” Journal of Economic Behavior and Organization 3, no. 4 (1982). For a good background on the evolution of such games, see Steven D. Levitt and John A. List, “What Do Laboratory Experiments Measuring Social Preferences Tell Us About the Real World,” Journal of Economic Perspectives 21, no. 2 (2007). See also: Daniel Kahneman, Jack L. Knetsch, and Richard Thaler, “Fairness as a Constraint on Profit Seeking: Entitlements in the Market,” American Economic Review 76, no. 4 (September 1986); Robert Forsythe, Joel L. Horowitz, N. E. Savin, and Martin Sef-ton, “Fairness in Simple Bargaining Experiments,” Games and Economic Behavior 6, no. 3 (May 1994); Colin F.


pages: 291 words: 80,068

Framers: Human Advantage in an Age of Technology and Turmoil by Kenneth Cukier, Viktor Mayer-Schönberger, Francis de Véricourt

Albert Einstein, Andrew Wiles, Apollo 11, autonomous vehicles, Ben Bernanke: helicopter money, Berlin Wall, bitcoin, Black Lives Matter, blockchain, Blue Ocean Strategy, circular economy, Claude Shannon: information theory, cognitive dissonance, cognitive load, contact tracing, coronavirus, correlation does not imply causation, COVID-19, credit crunch, CRISPR, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, deep learning, DeepMind, defund the police, Demis Hassabis, discovery of DNA, Donald Trump, double helix, Douglas Hofstadter, Elon Musk, en.wikipedia.org, fake news, fiat currency, framing effect, Francis Fukuyama: the end of history, Frank Gehry, game design, George Floyd, George Gilder, global pandemic, global village, Gödel, Escher, Bach, Higgs boson, Ignaz Semmelweis: hand washing, informal economy, Isaac Newton, Jaron Lanier, Jeff Bezos, job-hopping, knowledge economy, Large Hadron Collider, lockdown, Louis Pasteur, Mark Zuckerberg, Mercator projection, meta-analysis, microaggression, Mustafa Suleyman, Neil Armstrong, nudge unit, OpenAI, packet switching, pattern recognition, Peter Thiel, public intellectual, quantitative easing, Ray Kurzweil, Richard Florida, Schrödinger's Cat, scientific management, self-driving car, Silicon Valley, Steve Jobs, Steven Pinker, TED Talk, The Structural Transformation of the Public Sphere, Thomas Kuhn: the structure of scientific revolutions, TikTok, Tim Cook: Apple, too big to fail, transaction costs, Tyler Cowen

Only when these uses were flipped around did the technologies catch on. Thomas Edison in the early 1900s believed motion pictures would replace classrooms—a vision only realized a century later when Zoom became the new schoolhouse. The term framing is well established in the social sciences. The psychologists Daniel Kahneman and Amos Tversky eloquently explained how different characterizations of outcomes influence decision-making—which they called the “framing effect,” and described it as a flaw in human reasoning. Though we share the same term, the meaning here is somewhat different: not how something is positioned but a deliberate act of harnessing mental models to elicit options prior to making a decision.

Rosen, “The Magical, Revolutionary Telephone,” Atlantic, March 7, 2012, https://www.theatlantic.com/technology/archive/2012/03/the-magical-revolutionary-telephone/254149/; “History of the Cylinder Phonograph,” Library of Congress, accessed November 10, 2020, https://www.loc.gov/collections/edison-company-motion-pictures-and-sound-recordings/articles-and-essays/history-of-edison-sound-recordings/history-of-the-cylinder-phonograph/. On Edison and education: Todd Oppenheimer, The Flickering Mind: Saving Education from the False Promise of Technology (New York: Random House, 2004). On Kahneman and Tversky’s “framing effect”: Amos Tversky and Daniel Kahneman, “The Framing of Decisions and the Psychology of Choice,” Science 211, no. 4481 (January 30, 1981): 453–58. On Kuhn’s “paradigm shift”: Thomas S. Kuhn, The Structure of Scientific Revolutions (Chicago: University of Chicago Press, 1962). On the origin of art perspective: Giorgio Vasari, “The Life of Filippo Brunelleschi, Sculptor and Architect,” in The Lives of the Artists, trans.

When we imagine a situation and play it out in our minds, we can experience it almost like a bystander watching an alternative reality as it unfolds. Rather than having to painstakingly conceptualize how a situation might play out, we can simply watch our dreams. That is less belabored and more visual; it’s easier for us to envisage something that doesn’t exist than to think it through in purely conceptual terms. As Daniel Kahneman, the renowned psychologist, has put it, “The most important aspect . . . of mental simulation is that it is experienced as an act of observation, not as an act of construction.” It is “the sense that the outcome is observed, not contrived.” The fourth benefit of counterfactuals is that they tap into our implicit knowledge.


pages: 309 words: 95,495

Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe by Greg Ip

Affordable Care Act / Obamacare, Air France Flight 447, air freight, airport security, Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, behavioural economics, Boeing 747, book value, break the buck, Bretton Woods, business cycle, capital controls, central bank independence, cloud computing, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, Daniel Kahneman / Amos Tversky, diversified portfolio, double helix, endowment effect, Exxon Valdez, Eyjafjallajökull, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, foreign exchange controls, full employment, global supply chain, hindsight bias, Hyman Minsky, Joseph Schumpeter, junk bonds, Kenneth Rogoff, lateral thinking, Lewis Mumford, London Whale, Long Term Capital Management, market bubble, Michael Milken, money market fund, moral hazard, Myron Scholes, Network effects, new economy, offshore financial centre, paradox of thrift, pets.com, Ponzi scheme, proprietary trading, quantitative easing, Ralph Nader, Richard Thaler, risk tolerance, Ronald Reagan, Sam Peltzman, savings glut, scientific management, subprime mortgage crisis, tail risk, technology bubble, TED Talk, The Great Moderation, too big to fail, transaction costs, union organizing, Unsafe at Any Speed, value at risk, William Langewiesche, zero-sum game

Another approach is to imagine you flipped a coin 100 times. You’d probably come up heads 50 times and win $50,000, which works out to $500 per coin flip. 9 Amos Tversky and Daniel Kahneman, two Israeli psychologists: The findings of Tversky and Kahneman are based on their papers “Advances in Prospect Theory: Cumulative Representation of Uncertainty,” Journal of Risk and Uncertainty 5 (1992): 297–323, and ”Prospect Theory: An Analysis of Decision under Risk,” Econometrica 47, no. 2 (1979): 263–291, and Daniel Kahneman’s book Thinking, Fast and Slow (New York: Farrar, Straus and Giroux, 2011). I have modified one of their examples to express the value of the bet in dollars; their original paper didn’t specify a currency. 10 In other words, the typical: The expected value is the reward, times its probability.

That simply demonstrates that real people are not “risk neutral”: they value certainty so much that they will give up economic value to achieve it. This observation was first made by the Swiss mathematician Daniel Bernoulli in 1738 and has been confirmed repeatedly in real life and experimental settings. Amos Tversky and Daniel Kahneman, two Israeli psychologists, concluded after a series of experiments that the expected value of a gamble would have to be worth twice as much as the sure thing before people found it equally appealing. In other words, the typical person wouldn’t pick the coin flip over $500 in an envelope until he was promised $2,000 for winning the coin flip.

This tends to happen in the case of extreme events—devastating floods, earthquakes, and financial crises—when insurance must cope with two problems: emotional consumers, and emotional insurance companies. Recall that Howard Kunreuther, a risk expert at the Wharton School, says that consumers suffer from “disaster myopia”: they are simply incapable of evaluating risk when probabilities are small. Kunreuther, Nathan Novemsky, and Daniel Kahneman demonstrated this incisively in an experiment they reported on in 2001. They asked several hundred participants to consider a scenario that described a chemical plant in an urban New Jersey area that used a dangerous chemical called Syntox (in fact, a fictitious agent). An accidental release of the chemical could produce a deadly toxic plume.


pages: 324 words: 93,175

The Upside of Irrationality: The Unexpected Benefits of Defying Logic at Work and at Home by Dan Ariely

Alvin Roth, An Inconvenient Truth, assortative mating, Bear Stearns, behavioural economics, Burning Man, business process, cognitive dissonance, Cornelius Vanderbilt, corporate governance, Daniel Kahneman / Amos Tversky, Demis Hassabis, end world poverty, endowment effect, Exxon Valdez, first-price auction, Ford Model T, Frederick Winslow Taylor, George Akerlof, happiness index / gross national happiness, hedonic treadmill, IKEA effect, Jean Tirole, job satisfaction, knowledge economy, knowledge worker, loss aversion, name-letter effect, Peter Singer: altruism, placebo effect, Richard Thaler, Saturday Night Live, search costs, second-price auction, Skinner box, software as a service, subprime mortgage crisis, sunk-cost fallacy, The Wealth of Nations by Adam Smith, ultimatum game, Upton Sinclair, young professional

Chapter 1: Paying More for Less: Why Big Bonuses Don’t Always Work Based on Dan Ariely, Uri Gneezy, George Loewenstein, and Nina Mazar, “Large Stakes and Big Mistakes,” The Review of Economic Studies 76, vol. 2 (2009): 451–469. Racheli Barkan, Yosef Solomonov, Michael Bar-Eli, and Dan Ariely, “Clutch Players at the NBA,” manuscript, Duke University, 2010. Mihály Csíkszentmihályi, Flow: The Psychology of Optimal Experience (New York: Harper and Row, 1990). Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision under Risk,” Econometrica 47, no. 2 (1979): 263–291. Robert Yerkes and John Dodson, “The Relation of Strength of Stimulus to Rapidity of Habit-Formation,” Journal of Comparative Neurology and Psychology 18 (1908): 459–482. Robert Zajonc, “Social Facilitation,” Science 149 (1965): 269–274.

The funny thing about this theory is that if you follow it to its logical conclusion, you would not only pay CEOs ridiculously high salaries, but you would also force them to spend more time with their friends and families and send them on expensive vacations in order to complete the picture of a perfect life—because this would be the best way to motivate other people to try to become CEOs. *Each participant played in a different, random order. The order of the games did not make a difference in terms of performance. *Loss aversion is a powerful idea that was introduced by Danny Kahneman and Amos Tversky, and it has been applied to many domains. For this line of work, Danny received the 2002 Nobel Prize in Economics (sadly, Amos had already passed away in 1996). *I suspect that economists who fully believe in the rationality of businesses have never worked a day outside academia. *In defense of those who place too much confidence in their intuition, the payment-to-performance link is not easy to figure out or study.

Leone, “Psychological Implications of Customer Participation in Co-Production,” Journal of Marketing 67, no. 1 (2003): 14–28. Ziv Carmon and Dan Ariely, “Focusing on the Forgone: How Value Can Appear So Different to Buyers and Sellers,” Journal of Consumer Research 27, no. 3 (2000): 360–370. Daniel Kahneman, Jack Knetsch, and Richard Thaler, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias,” Journal of Economic Perspectives 5, no. 1 (1991): 193–206. Daniel Kahneman, Jack Knetsch, and Richard Thaler, “Experimental Tests of the Endowment Effect and the Coase Theorem,” The Journal of Political Economy 98, no. 6 (1990): 1325–1348. Jack Knetsch, “The Endowment Effect and Evidence of Nonreversible Indifference Curves,” The American Economic Review 79, no. 5 (1989): 1277–1284.


Deep Value by Tobias E. Carlisle

activist fund / activist shareholder / activist investor, Andrei Shleifer, availability heuristic, backtesting, behavioural economics, book value, business cycle, buy and hold, Carl Icahn, corporate governance, corporate raider, creative destruction, Daniel Kahneman / Amos Tversky, discounted cash flows, financial engineering, fixed income, Henry Singleton, intangible asset, John Bogle, joint-stock company, low interest rates, margin call, passive investing, principal–agent problem, Richard Thaler, risk free rate, riskless arbitrage, Robert Shiller, Rory Sutherland, shareholder value, Sharpe ratio, South Sea Bubble, statistical model, Teledyne, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Tim Cook: Apple

Like the lay investor, they too commit the investment sin of putting too much weight on the recent past for the particular stock under examination, rather than a rational prior, which is the probability of returns to glamorous, high-growth story stocks. This is a common judgment error not just in the stock market, but also in many situations requiring predictions about uncertain future states. It is known as “neglect of the base rate,” and it was first examined by two pioneers in behavioral finance research, Daniel Kahneman and Amos Tversky, who gave it a prominent place in their groundbreaking paper, “Judgment under Uncertainty: Heuristics and Biases” (1974).42 Kahneman and Tversky found that we make decisions about uncertain future events based on three heuristics—short cuts or simple rules of thumb—that help us break down complex cognitive tasks into simpler operations.

Bogle to the United States Senate Governmental Affairs Subcommittee,” November 3, 2003. Available at http:// www.vanguard.com/bogle_site/sp20031103.html. 41. J. Lakonishok, A. Shleifer, and R.W. Vishny.“Contrarian Investments, Extrapolation, and Risk.” Journal of Finance, Vol. XLIX, No. 5, (1994) pp. 1541–1578. 42. Amos Tversky and Daniel Kahneman. “Judgment under Uncertainty: Heuristics and Biases.”Science,New Series,Vol.185,No.4157.(Sep.27,1974),pp.1124–1131. http://www.jstor.org/pss/1738360. 43. Leonard Mlodinow. The Drunkard’s Walk: How Randomness Rules Our Lives. (New York: Pantheon Books) Reprint edition, 2009. 44. John B.

Working Paper, University of Florida, November 2004. 18. Ibid. 19. Warren Buffett. “Chairman’s Letter.” Berkshire Hathaway, Inc. Annual Report, 1985. 20. Sebastien Brant. The Ship of Fools. Translated by Alexander Barclay. (Edinburgh: William Paterson) 1874. Available at http://www.gutenberg.org/ files/20179/20179-h/images/t311.png. 21. Daniel Kahneman. “Daniel Kahneman—Autobiographical.” The Nobel Prizes 2002, Editor Tore Frängsmyr, Nobel Foundation, Stockholm, 2003. Available at http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2002/ kahneman-bio.html. 22. J. Lakonishok, A. Shleifer, and R.W. Vishny. “Contrarian Investments, Extrapolation, and Risk.”


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Smart Money: How High-Stakes Financial Innovation Is Reshaping Our WorldÑFor the Better by Andrew Palmer

Affordable Care Act / Obamacare, Alan Greenspan, algorithmic trading, Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, behavioural economics, Black Monday: stock market crash in 1987, Black-Scholes formula, bonus culture, break the buck, Bretton Woods, call centre, Carmen Reinhart, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Graeber, diversification, diversified portfolio, Edmond Halley, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, eurozone crisis, family office, financial deregulation, financial engineering, financial innovation, fixed income, Flash crash, Google Glasses, Gordon Gekko, high net worth, housing crisis, Hyman Minsky, impact investing, implied volatility, income inequality, index fund, information asymmetry, Innovator's Dilemma, interest rate swap, Kenneth Rogoff, Kickstarter, late fees, London Interbank Offered Rate, Long Term Capital Management, longitudinal study, loss aversion, low interest rates, margin call, Mark Zuckerberg, McMansion, Minsky moment, money market fund, mortgage debt, mortgage tax deduction, Myron Scholes, negative equity, Network effects, Northern Rock, obamacare, payday loans, peer-to-peer lending, Peter Thiel, principal–agent problem, profit maximization, quantitative trading / quantitative finance, railway mania, randomized controlled trial, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Savings and loan crisis, short selling, Silicon Valley, Silicon Valley startup, Skype, South Sea Bubble, sovereign wealth fund, statistical model, subprime mortgage crisis, tail risk, Thales of Miletus, the long tail, transaction costs, Tunguska event, unbanked and underbanked, underbanked, Vanguard fund, web application

The guinea pigs in the trial got e-mails that included extra sentences designed to act as savings cues.20 The idea was to test another big behavioral quirk: the effect that exposure to arbitrary numbers, or “anchors,” can have on people. The effect was first formally identified by Amos Tversky and Daniel Kahneman, a pair of psychologists whose studies of human decision making laid the foundations for the field of behavioral economics. In a 1974 experiment, they rigged a roulette wheel to stop at either 10 or 65 and then asked people to estimate the percentage of African countries in the United Nations.

Evidence from Capuchin Monkey Trading Behaviour,” Journal of Political Economy (2006). 19. Shlomo Bernartzi and Richard Thaler, “Behavioural Economics and the Retirement Savings Crisis,” Science (March 8, 2013). 20. James Choi et al., “Small Cues Change Savings Choices” (NBER Working Paper 17843, February 2012). 21. Amos Tversky and Daniel Kahnemann, “Judgment Under Uncertainty: Heuristics and Biases,” Science (September 1974). 22. “Reverse Mortgages: Report to Congress” (Consumer Financial Protection Bureau, June 2012). 23. Esteban Calvo, Kelly Haverstick, and Natalia Zhivan, “Determinants and Consequences of Moving Decisions for Older Americans” (Center for Retirement Research at Boston College, August 2009). 24.

Financial traders do significantly better than other bank employees in classic tests of cognitive reasoning like the following question: “A bat and a ball cost $1.10 in total. The bat costs $1.00 more than the ball. How many cents does the ball cost?” It may well be that the best traders are those who can switch off the rules of thumb and use a more reflective style of thinking—what Daniel Kahneman, a pioneer of behavioral finance, would call using a System 2 process rather than a System 1 process.11 The most recent crisis showed how thin on the ground such stars are. Most investors used fallible heuristics to guide their decision making. Most obviously, home buyers and lenders fell for the rule of thumb that stated house prices in the United States do not fall nationwide.


pages: 410 words: 101,260

Originals: How Non-Conformists Move the World by Adam Grant

"World Economic Forum" Davos, Abraham Maslow, Albert Einstein, Apple's 1984 Super Bowl advert, availability heuristic, barriers to entry, behavioural economics, Bluma Zeigarnik, business process, business process outsourcing, Cass Sunstein, classic study, clean water, cognitive dissonance, creative destruction, cuban missile crisis, Daniel Kahneman / Amos Tversky, Dean Kamen, double helix, Elon Musk, emotional labour, fear of failure, Firefox, George Santayana, Ignaz Semmelweis: hand washing, information security, Jeff Bezos, Jeff Hawkins, job satisfaction, job-hopping, Joseph Schumpeter, Kevin Roose, Kickstarter, Lean Startup, Louis Pasteur, Mahatma Gandhi, Mark Zuckerberg, meta-analysis, minimum viable product, Neil Armstrong, Nelson Mandela, Network effects, off-the-grid, PalmPilot, pattern recognition, Paul Graham, Peter Thiel, Ralph Waldo Emerson, random walk, risk tolerance, Rosa Parks, Saturday Night Live, Sheryl Sandberg, Silicon Valley, Skype, Steve Jobs, Steve Wozniak, Steven Pinker, TED Talk, The Wisdom of Crowds, women in the workforce

Now, we’re willing to do whatever it takes to avoid that loss, even if it means risking an even bigger one. We’re going to lose thousands of jobs anyway, so we throw caution to the wind and make the big gamble, hoping that we’ll lose nothing. This line of research was conducted by psychologists Amos Tversky and Daniel Kahneman; it helped give rise to the field of behavioral economics and win Kahneman a Nobel Prize. It revealed that we can dramatically shift risk preferences just by changing a few words to emphasize losses rather than gains. This knowledge has major implications for understanding how to motivate people to take risks.

Bateman, “Individual Environmental Initiative: Championing Natural Environmental Issues in U.S. Business Organizations,” Academy of Management Journal 43 (2000): 548–70. sense of urgency: John Kotter, Leading Change (Boston: Harvard Business School Press, 1996). dramatically shift risk preferences: Amos Tversky and Daniel Kahneman, “The Framing of Decisions and the Psychology of Choice,” Science 211 (1981): 453–58; Max Bazerman, Judgment in Managerial Decision Making (New York: John Wiley, 1994). perceive the new behavior as safe or risky: Alexander J. Rothman, Roger D. Bartels, Jhon Wlaschin, and Peter Salovey, “The Strategic Use of Gain- and Loss-Framed Messages to Promote Healthy Behavior: How Theory Can Inform Practice,” Journal of Communication 56 (2006): 202–20.

On the golf course, people drive electric carts around all day long. Why will they use this instead? Jobs, meanwhile, stuck to his intuition about novelty: “If enough people see the machine, you won’t have to convince them to architect cities around it. People are smart, and it’ll happen.” As Nobel Prize–winning psychologist Daniel Kahneman and decision expert Gary Klein explain, intuitions are only trustworthy when people build up experience making judgments in a predictable environment. If you’re confronting a patient’s symptoms as a doctor or entering a burning building as a firefighter, experience will make your intuitions more accurate.


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Willful: How We Choose What We Do by Richard Robb

activist fund / activist shareholder / activist investor, Alvin Roth, Asian financial crisis, asset-backed security, Bear Stearns, behavioural economics, Bernie Madoff, Brexit referendum, capital asset pricing model, cognitive bias, collapse of Lehman Brothers, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, delayed gratification, diversification, diversified portfolio, effective altruism, endowment effect, Eratosthenes, experimental subject, family office, George Akerlof, index fund, information asymmetry, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, lake wobegon effect, loss aversion, market bubble, market clearing, money market fund, Paradox of Choice, Pareto efficiency, Paul Samuelson, Peter Singer: altruism, Philippa Foot, principal–agent problem, profit maximization, profit motive, Richard Thaler, search costs, Silicon Valley, sovereign wealth fund, survivorship bias, the scientific method, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, transaction costs, trolley problem, ultimatum game

Instead of adhering to plans that are dictated by preferences, the Homo ludens chooses how to respond to new scenarios as they arise and which challenges to tackle. These choices and the ensuing struggle are for-itself. This depiction of choice through time shares elements with prospect theory, an influential thrust of behavioral economics. In 1979, Daniel Kahneman and Amos Tversky proposed this psychological account of various anomalies such as the tendency to become more risk averse when confronting small losses rather than small gains or to take inordinate risks to earn back previous losses. According to prospect theory, a person facing choice under uncertainty begins by computing a base-case outcome or reference point, then characterizes each outcome as a gain or loss relative to that reference point.

Enjoying a dramatic plot with a buildup of tension is no more paradoxical than the paradox of choice. The second puzzle is called the “disjunction effect.” It occurs when someone can’t act until he determines his motive, even if all possible motives justify the same action. It is supposed to represent a deviation from rationality. Amos Tversky and Eldar Shafir coined “disjunction effect” after conducting the following experiment: undergraduates are told to imagine that they have just taken a grueling qualifying exam. They will learn the next day, before the winter holiday, whether they passed or failed. They can buy a five-day vacation to Hawaii at an exceptionally low price today, pay a small nonrefundable fee for the option of buying the trip in two days when they know the exam results, or pass up the opportunity altogether.

Iyengar, Sheena S., and Mark R. Lepper. “When Choice Is Demotivating: Can One Desire Too Much of a Good Thing?” Journal of Personality and Social Psychology 79, no. 6 (2000): 995–1006. Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011. Kahneman, Daniel, and Amos Tversky. “Prospect Theory: An Analysis of Decision under Risk.” Econometrica 47, no. 2 (1979): 263–291. Karabarbounis, Loukas. “The Labor Wedge: MRS vs. MPN.” Review of Economic Dynamics 17, no. 2 (2014): 206–223. Kestenbaum, David. “Keynes Predicted We Would Be Working 15-Hour Weeks. Why Was He So Wrong?”


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Progress: Ten Reasons to Look Forward to the Future by Johan Norberg

agricultural Revolution, anti-communist, availability heuristic, Bartolomé de las Casas, Berlin Wall, bread and circuses, British Empire, business climate, carbon tax, classic study, clean water, continuation of politics by other means, Daniel Kahneman / Amos Tversky, demographic transition, desegregation, Donald Trump, Edward Jenner, Flynn Effect, germ theory of disease, Gini coefficient, Great Leap Forward, Gunnar Myrdal, Haber-Bosch Process, Hans Island, Hans Rosling, Ignaz Semmelweis: hand washing, income inequality, income per capita, indoor plumbing, Isaac Newton, Jane Jacobs, John Snow's cholera map, Kibera, Louis Pasteur, Mahatma Gandhi, meta-analysis, Mikhail Gorbachev, more computing power than Apollo, moveable type in China, Naomi Klein, Nelson Mandela, open economy, place-making, Rosa Parks, sexual politics, special economic zone, Steven Pinker, telerobotics, The Wealth of Nations by Adam Smith, transatlantic slave trade, very high income, working poor, Xiaogang Anhui farmers, zero-sum game

Indeed, when they don’t cover it, we often make up a worst-case scenario ourselves. When news reporters do not have access to a spectacular event, we often fill in the gaps with rumours and horror stories. When something bad happens anywhere, two billion smartphones will nowadays make sure that we find out, even if no reporters are on the scene. The psychologists Daniel Kahneman and Amos Tversky have shown that people do not base their estimates of how frequent something is on data, but on how easy it is to recall examples from memory.16 This ‘availability heuristic’ means that the more memorable an incident is, the more probable we think it is, so we imagine that horrible and shocking things, which stay in our thoughts, are more frequent than they are.

Washington, ‘Estimating the future number of cases in the Ebola epidemic – Liberia and Sierra Leone, 2014–2015’, Morbidity and Mortality Weekly Report Supplements, 63, 3 (2014), 1–14. 13 ‘Predictions with a Purpose’, The Economist, 7 February 2015. 14 Strömstads Tidning, 30 June 2007. 15 Anders Bolling, Apokalypsens gosiga mörker. Stockholm: Bonniers, 2009, p. 51. 16 Amos Tversky and Daniel Kahneman, ‘Availability: a heuristic for judging frequency and probability’, Cognitive Psychology, 5, 2 (1973), 207–232. 17 Steven Pinker, ‘If everything is getting better, why are people so pessimistic?’, Cato Policy Report, January/February 2015. 18 Roy F. Baumeister, Ellen Bratslavsky, Catrin Finkenauer and Kathleen D.


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Everydata: The Misinformation Hidden in the Little Data You Consume Every Day by John H. Johnson

Affordable Care Act / Obamacare, autism spectrum disorder, Black Swan, business intelligence, Carmen Reinhart, cognitive bias, correlation does not imply causation, Daniel Kahneman / Amos Tversky, data science, Donald Trump, en.wikipedia.org, Kenneth Rogoff, labor-force participation, lake wobegon effect, Long Term Capital Management, Mercator projection, Mercator projection distort size, especially Greenland and Africa, meta-analysis, Nate Silver, obamacare, p-value, PageRank, pattern recognition, publication bias, QR code, randomized controlled trial, risk-adjusted returns, Ronald Reagan, selection bias, statistical model, The Signal and the Noise by Nate Silver, Thomas Bayes, Tim Cook: Apple, wikimedia commons, Yogi Berra

Malkiel, “Returns from Investing in Equity Mutual Funds, 1971–1991,” Journal of Finance 50 (1995), 549–572. 24. Not to mention the distinction between causation and correlation, which we talked about in chapter 4. 25. Esteemed economist Daniel Kahneman shared the Nobel Prize in 2002 for his work related to psychological factors that affect our decisions. Much of Kahneman’s work was done in collaboration with Amos Tversky, who passed away in 1996 and was therefore ineligible for the Nobel Prize. 26. In case you’re wondering, the first example is the Johns Hopkins Hospital (“The Johns Hopkins Hospital Ranked Among the Top Hospitals in the Nation in 2015,” Johns Hopkins Medicine website, accessed September 1, 2015, http://www.hopkinsmedicine.org/usnews/); the second is Mayo Clinic (Mayo Clinic website homepage, accessed September 1, 2015, http://www.mayoclinic.org/); and the third is New York-Presbyterian (“Awards and Recognition,” New York-Presbyterian website, accessed September 1, 2015, http://nyp.org/about/americas-top-doctors.html). 27.

That said, there is conflicting research in terms of whether or not athletes can have a so-called “hot hand,” with one paper finding that “[t]he belief in the hot hand and the ‘detection’ of streaks in random sequences is attributed to a general misconception of chance” (Thomas Gilovich, Robert Vallone, and Amos Tversky, “The Hot Hand in Basketball: On the Misperception of Random Sequences,” Cognitive Psychology 17 (1985): 295–314, http://citeseerx.ist.psu.edu/viewdoc/summary?doi=10.1.1.115.6700), while a study from Harvard found that “players who are outperforming will continue to do so, conditional on the difficulty of their present shot” (Andrew Bocskocsky, John Ezekowitz, and Carolyn Stein, “The Hot Hand: A New Approach to an Old ‘Fallacy,’” presented at the MIT Sloan Sports Analytics Conference, February 28–March 1, 2014, http://www.sloansportsconference.com/wp-content/uploads/2014/02/2014_SSAC_The-Hot-Hand-A-New-Approach.pdf). 26.

Ola Svenson, “Are We All Less Risky and More Skillful Than Our Fellow Drivers?,” Acta Psychologica 47, no. 2 (February 1981): 143–148. 43. “Podcast,” A Prairie Home Companion website, accessed September 1, 2015, http://prairiehome.org/listen/podcast/. 44. If you want to learn more about these biases, pick up a copy of Daniel Kahneman’s Thinking, Fast and Slow (New York: Farrar, Straus and Giroux, 2013). 45. Adrian Furnham, Joanna Moutafi, and Thomas Chamorro-Premuzic, “Personality and Intelligence: Gender, the Big Five, Self-Estimated and Psychometric Intelligence,” International Journal of Selection and Assessment 13 (March 4, 2005): 11–24, doi: 10.1111/j.0965-075X.2005.00296.x. 46.


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The Social Animal: The Hidden Sources of Love, Character, and Achievement by David Brooks

"World Economic Forum" Davos, Abraham Maslow, Albert Einstein, asset allocation, assortative mating, Atul Gawande, behavioural economics, Bernie Madoff, business process, Cass Sunstein, choice architecture, classic study, clean water, cognitive load, creative destruction, Daniel Kahneman / Amos Tversky, David Brooks, delayed gratification, deliberate practice, disintermediation, Donald Trump, Douglas Hofstadter, Emanuel Derman, en.wikipedia.org, fake it until you make it, fear of failure, financial deregulation, financial independence, Flynn Effect, George Akerlof, Henri Poincaré, hiring and firing, impulse control, invisible hand, Jeff Hawkins, Joseph Schumpeter, labor-force participation, language acquisition, longitudinal study, loss aversion, medical residency, meta-analysis, mirror neurons, Monroe Doctrine, Paul Samuelson, power law, Richard Thaler, risk tolerance, Robert Shiller, school vouchers, six sigma, social intelligence, Stanford marshmallow experiment, Steve Jobs, Steven Pinker, tacit knowledge, the scientific method, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, Tyler Cowen, Walter Mischel, young professional

Mitchell Waldrop put it, “Theoretical economists use their mathematical prowess the way great stags of the forest use their antlers: to do battle with one another and to establish dominance. A stag who doesn’t use his antlers is nothing.” Behavioral economists argue that the caricature is not accurate enough to produce reliable predictions about real events. Two psychologists, Daniel Kahneman and Amos Tversky, were the pioneers. Then their insights were picked up by economists proper: including Richard Thaler, Sendhil Mullainathan, Robert Schiller, George Akerlof, and Colin Camerer. These scholars investigate cognition that happens below the level of awareness. Rationality is bounded by emotion.

In the aroused state, 46 percent said they could imagine it. In the nonaroused state, 20 percent said they would try to have sex with their date after she said no. In the aroused state, 45 percent said they would keep trying. Finally, there is loss aversion. Losing money brings more pain than winning money brings pleasure. Daniel Kahneman and Amos Tversky asked people if they would accept certain bets. They found that people needed the chance of winning $40 if they were going to undergo a bet that might cost them $20. Because of loss aversion investors are quicker to sell stocks that have made them money than they are to sell stocks that have been declining.

Ornstein, Multimind: A New Way of Looking at Human Behavior (New York: Houghton Mifflin, 1996), 86. 21 high Social Security numbers Dan Ariely, “The Fallacy of Supply and Demand,” Huffington Post, March 20, 2008, http://www.huffingtonpost.com/dan-ariely/the-fallacy-of-supply-and_b_92590.html. 22 People who are given Hallinan, 50. 23 “Their predictions became” Jonah Lehrer, How We Decide (New York: Houghton Mifflin Co., 2009), 146. 24 They just stick with Thaler and Sunstein, 34. 25 The picture of the smiling Hallinan, 101. 26 In the aroused state Ariely, 96 and 106. 27 Daniel Kahneman and Amos Tversky Jonah Lehrer, “Loss Aversion,” The Frontal Cortex, February 10, 2010, http://scienceblogs.com/cortex/2010/02/loss_aversion.php. CHAPTER 12: FREEDOM AND COMMITMENT 1 In Guess culture Oliver Burkerman, “This Column Will Change Your Life,” The Guardian, May 8, 2010, http://www.guardian.co.uk/lifeandstyle/2010/may/08/change-life-asker-guesser. 2 Thirty-eight percent of young Americans “Pew Report on Community Satisfaction,” Pew Research Center (January 29, 2009): 10, http://pewsocialtrends.org/assets/pdf/Community-Satisfaction.pdf. 3 In Western Europe William A.


Spies, Lies, and Algorithms by Amy B. Zegart

2021 United States Capitol attack, 4chan, active measures, air gap, airport security, Apollo 13, Bellingcat, Bernie Sanders, Bletchley Park, Chelsea Manning, classic study, cloud computing, cognitive bias, commoditize, coronavirus, correlation does not imply causation, COVID-19, crowdsourcing, cryptocurrency, cuban missile crisis, Daniel Kahneman / Amos Tversky, deep learning, deepfake, DeepMind, disinformation, Donald Trump, drone strike, dual-use technology, Edward Snowden, Elon Musk, en.wikipedia.org, end-to-end encryption, failed state, feminist movement, framing effect, fundamental attribution error, Gene Kranz, global pandemic, global supply chain, Google Earth, index card, information asymmetry, information security, Internet of things, job automation, John Markoff, lockdown, Lyft, Mark Zuckerberg, Nate Silver, Network effects, off-the-grid, openstreetmap, operational security, Parler "social media", post-truth, power law, principal–agent problem, QAnon, RAND corporation, Richard Feynman, risk tolerance, Robert Hanssen: Double agent, Ronald Reagan, Rubik’s Cube, Russian election interference, Saturday Night Live, selection bias, seminal paper, Seymour Hersh, Silicon Valley, Steve Jobs, Stuxnet, synthetic biology, uber lyft, unit 8200, uranium enrichment, WikiLeaks, zero day, zero-sum game

We use them without even thinking about it—skimming Yelp reviews to pick a restaurant, watching shows recommended by Netflix’s search algorithm, and voting party-line tickets rather than carefully assessing each candidate for every local position. But mental shortcuts are also prone to error.34 To see this in action, consider one of the early and controversial experiments conducted by Amos Tversky and Daniel Kahneman, pioneers in the psychology field. Participants were given the following description about an imaginary woman named Linda: Linda is 31 years old, single, outspoken and very bright. She majored in philosophy. As a student, she was deeply concerned with the issue of discrimination and social justice, and also participated in antinuclear demonstrations.

.: Georgetown University Press, 2008), 122–37. 32. “Chairman Khrushchev’s Letter to President Kennedy, October 23, 1962,” John F. Kennedy Presidential Library and Museum, https://microsites.jfklibrary.org/cmc/oct23/doc6.html. 33. Weintraub, MacArthur’s War, 197. 34. Kahneman, Thinking, Fast and Slow. 35. Amos Tversky and Daniel Kahneman, “Extensional versus Intuitive reasoning: The conjunction fallacy in probability judgement,” Psychological Review 90, no. 4 (October 1983): 293–315. 36. “List of cognitive biases,” Wikipedia, https://en.wikipedia.org/wiki/List_of_cognitive_biases (accessed April 26, 2021). 37. Charles G.

Ward Casscells, Arno Schoenberger, and Thomas Grayboys, “Interpretation by physicians of clinical laboratory results,” New England Journal of Medicine 299 (1978): 999–1000; David M. Eddy, “Probabilistic Reasoning in Clinical Medicine: Problems and Opportunities,” in Judgment Under Uncertainty: Heuristics and Biases, edited by Dan Kahneman, Paul Slovic, and Amos Tversky (Cambridge, U.K.: Cambridge University Press, 1982), 249–67. 110. Gigerenzer and Hoffrage, “How to improve Bayesian reasoning,” 684–704. 111. This section draws from Chang et al., “Developing expert political judgment.” 112. Another initiative was the creation of the Intelligence Advanced Research Projects Activity (IARPA).


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Never Split the Difference: Negotiating as if Your Life Depended on It by Chris Voss, Tahl Raz

banking crisis, behavioural economics, Black Swan, clean water, cognitive bias, Daniel Kahneman / Amos Tversky, Donald Trump, framing effect, friendly fire, iterative process, loss aversion, market fundamentalism, price anchoring, telemarketer, ultimatum game, uranium enrichment

For years after that book came out, everybody—including the FBI and the NYPD—focused on a problem-solving approach to bargaining interactions. It just seemed so modern and smart. Halfway across the United States, a pair of professors at the University of Chicago was looking at everything from economics to negotiation from a far different angle. They were the economist Amos Tversky and the psychologist Daniel Kahneman. Together, the two launched the field of behavioral economics—and Kahneman won a Nobel Prize—by showing that man is a very irrational beast. Feeling, they discovered, is a form of thinking. As you’ve seen, when business schools like Harvard’s began teaching negotiation in the 1980s, the process was presented as a straightforward economic analysis.

What I am saying is that while our decisions may be largely irrational, that doesn’t mean there aren’t consistent patterns, principles, and rules behind how we act. And once you know those mental patterns, you start to see ways to influence them. By far the best theory for describing the principles of our irrational decisions is something called Prospect Theory. Created in 1979 by the psychologists Daniel Kahneman and Amos Tversky, prospect theory describes how people choose between options that involve risk, like in a negotiation. The theory argues that people are drawn to sure things over probabilities, even when the probability is a better choice. That’s called the Certainty Effect. And people will take greater risks to avoid losses than to achieve gains.

To locate a specific passage, please use the search feature on your e-book reader CHAPTER 1: THE NEW RULES 1.Robert Mnookin, Bargaining with the Devil: When to Negotiate, When to Fight (New York: Simon & Schuster, 2010). 2.Roger Fisher and William Ury, Getting to Yes: Negotiating Agreement Without Giving In (Boston: Houghton Mifflin, 1981). 3.Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Straus & Giroux, 2011). 4.Philip B. Heymann and United States Department of Justice, Lessons of Waco: Proposed Changes in Federal Law Enforcement (Washington, DC: U.S. Department of Justice, 1993). CHAPTER 2: BE A MIRROR 1.George A. Miller, “The Magical Number Seven, Plus or Minus Two: Some Limits on Our Capacity for Processing Information,” Psychological Review 63, no. 2 (1956): 81–97.


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Work Rules!: Insights From Inside Google That Will Transform How You Live and Lead by Laszlo Bock

Abraham Maslow, Abraham Wald, Airbnb, Albert Einstein, AltaVista, Atul Gawande, behavioural economics, Black Swan, book scanning, Burning Man, call centre, Cass Sunstein, Checklist Manifesto, choice architecture, citizen journalism, clean water, cognitive load, company town, correlation coefficient, crowdsourcing, Daniel Kahneman / Amos Tversky, deliberate practice, en.wikipedia.org, experimental subject, Fairchild Semiconductor, Frederick Winslow Taylor, future of work, Google Earth, Google Glasses, Google Hangouts, Google X / Alphabet X, Googley, helicopter parent, immigration reform, Internet Archive, Kevin Roose, longitudinal study, Menlo Park, mental accounting, meta-analysis, Moneyball by Michael Lewis explains big data, nudge unit, PageRank, Paul Buchheit, power law, Ralph Waldo Emerson, Rana Plaza, random walk, Richard Thaler, Rubik’s Cube, self-driving car, shareholder value, Sheryl Sandberg, side project, Silicon Valley, six sigma, statistical model, Steve Ballmer, Steve Jobs, Steven Levy, Steven Pinker, survivorship bias, Susan Wojcicki, TaskRabbit, The Wisdom of Crowds, Tony Hsieh, Turing machine, Wayback Machine, winner-take-all economy, Y2K

Unfortunately, the Nobel is not awarded posthumously. At his Nobel acceptance speech, Kahneman’s first words were, “The work on which the award was given… was done jointly with Amos Tversky during a long period of unusually close collaboration. He should have been here.” Prize Lecture by Daniel Kahneman, Stockholm University, December 8, 2002, http://www.nobelprize.org/mediaplayer/?id=531. 203. “Inflation Calculator.” 204. Amos Tversky and Daniel Kahneman, “The Framing of Decisions and the Psychology of Choice,” Science 211, no. 4481 (January 30, 1981): 453–458, http://psych.hanover.edu/classes/cognition/papers/tversky81.pdf. 205.

We believe we know ourselves, and that certainty is part of the problem. In his book Thinking, Fast and Slow, Daniel Kahneman, a Nobel Prize–winning professor emeritus of Princeton University, describes us as having two brains. One brain is slow, thoughtful, reflective, and data driven, and the other is fast, intuitive, and impulse driven. It’s the second brain we rely on most, which is why even when we think we’re being rational, we’re probably not. For example, how much is $5 worth to you? Would you be willing to leave a store and drive twenty minutes to save that much? In 1981, Kahneman and his colleague, Amos Tversky,202 wondered if we were consistent in how we valued money and time.


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The Price of Inequality: How Today's Divided Society Endangers Our Future by Joseph E. Stiglitz

affirmative action, Affordable Care Act / Obamacare, airline deregulation, Alan Greenspan, Andrei Shleifer, banking crisis, barriers to entry, Basel III, battle of ideas, Bear Stearns, behavioural economics, Berlin Wall, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collapse of Lehman Brothers, collective bargaining, colonial rule, corporate governance, Credit Default Swap, Daniel Kahneman / Amos Tversky, Dava Sobel, declining real wages, deskilling, electricity market, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, framing effect, full employment, George Akerlof, Gini coefficient, Glass-Steagall Act, Great Leap Forward, income inequality, income per capita, indoor plumbing, inflation targeting, information asymmetry, invisible hand, jobless men, John Bogle, John Harrison: Longitude, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, London Interbank Offered Rate, lone genius, low interest rates, low skilled workers, Marc Andreessen, Mark Zuckerberg, market bubble, market fundamentalism, mass incarceration, medical bankruptcy, microcredit, moral hazard, mortgage tax deduction, negative equity, obamacare, offshore financial centre, paper trading, Pareto efficiency, patent troll, Paul Samuelson, Paul Volcker talking about ATMs, payday loans, Phillips curve, price stability, profit maximization, profit motive, public intellectual, purchasing power parity, race to the bottom, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, Savings and loan crisis, search costs, shareholder value, short selling, Silicon Valley, Simon Kuznets, spectrum auction, Steve Jobs, stock buybacks, subprime mortgage crisis, technology bubble, The Chicago School, The Fortune at the Bottom of the Pyramid, The Myth of the Rational Market, The Spirit Level, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, Tragedy of the Commons, transaction costs, trickle-down economics, ultimatum game, uranium enrichment, very high income, We are the 99%, wealth creators, women in the workforce, zero-sum game

Know Your Values and Frame the Debate (White River Junction, VT: Chelsea Green, 2004). 11. This is called the anchoring effect. See discussions of anchoring and framing effects on judgments and preferences in Daniel Kahneman, Paul Slovic, and Amos Tversky, eds., Judgment under Uncertainty: Heuristics and Biases (Cambridge: Cambridge University Press, 1982); and Daniel Kahneman and Amos Tversky, eds., Choices, Values and Frames (New York: Cambridge University Press, 2000). For a popular and recent discussion, see Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Straus and Giroux, 2011); and Richard Thaler and Cass Sunstein, Nudge: Improving Decisions about Health, Wealth, and Happiness (New Haven and London: Yale University Press, 2008). 12.

This turns out to raise theoretical issues that are closely akin to the measurement of risk, and my early work, four decades ago, was done jointly with Michael Rothschild. Subsequently, I began work with a former student, Ravi Kanbur, on the measurement of socioeconomic mobility. The influence of behavioral economics on my thinking should be evident in this work. I was first introduced to these ideas some forty years ago by the late Amos Tversky, a pioneer in this field, and subsequently Richard Thaler and Danny Kahneman have greatly influenced my thinking. (When I founded the Journal of Economic Perspectives in the mid-1980s, I asked Richard to do a regular column on the subject.) I benefited enormously from the discussions with Edward Stiglitz of some of the legal issues treated in chapter 7, and with Robert Perkinson on the issues related to America’s high incarceration rate.

For a discussion of these outcomes (and the sums people will accept or veto in ultimatum games), see Colin Camerer and Richard Thaler, “Anomalies: Ultimatums, Dictators and Manners,” Journal of Economic Perspectives 9, no. 2 (1995): 209–19. 16. For a sample of the large literature, see, e.g., Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler, “Fairness and the Assumptions of Economics,” Journal of Business 59, no. 4 (1986): S285–S300; Gary E. Bolton and Axel Ockenfels, “ERC: A Theory of Equity, Reciprocity, and Competition,” American Economic Review 90, no. 1 (March 2000): 166–93; Armin Falk, Ernst Fehr, and Urs Fischbacher, “On the Nature of Fair Behavior,” Economic Inquiry 41, no. 1 (January 2003): 20–26; Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler, “Fairness as a Constraint on Profit Seeking: Entitlements in the Market,” American Economic Review 76, no. 4 (1986): 728–41; Amartya Sen, “Moral Codes and Economic Success,” in Market Capitalism and Moral Values, ed.


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Cheap: The High Cost of Discount Culture by Ellen Ruppel Shell

accelerated depreciation, Alan Greenspan, barriers to entry, behavioural economics, Berlin Wall, big-box store, bread and circuses, business cycle, cognitive dissonance, computer age, cotton gin, creative destruction, Daniel Kahneman / Amos Tversky, delayed gratification, deskilling, Donald Trump, Edward Glaeser, fear of failure, Ford Model T, Ford paid five dollars a day, Frederick Winslow Taylor, George Akerlof, global supply chain, global village, Howard Zinn, income inequality, interchangeable parts, inventory management, invisible hand, James Watt: steam engine, Joseph Schumpeter, Just-in-time delivery, knowledge economy, Lewis Mumford, loss aversion, market design, means of production, mental accounting, Monkeys Reject Unequal Pay, Pearl River Delta, planned obsolescence, Ponzi scheme, price anchoring, price discrimination, race to the bottom, Richard Thaler, Ronald Reagan, Salesforce, scientific management, side project, Steve Jobs, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas L Friedman, trade liberalization, traveling salesman, Triangle Shirtwaist Factory, ultimatum game, Victor Gruen, washing machines reduced drudgery, working poor, yield management, zero-sum game

(If they won’t pay more than $200 for the ticket, then $300 should in theory be worth more to them than the ticket.) In fact, utility maximization doesn’t explain many ways in which real people relate to money. In their seminal “Prospect Theory: An Analysis of Decision Under Risk,” published in the journal Econometrica in 1979, Israel-born psychologists Daniel Kahneman and Amos Tversky challenged the homo economicus orthodoxy. They argued that human decision making is less a matter of weighing evidence and calculating probabilities than it is of reconciling new information with old familiar patterns branded into the brain from as early as birth. These patterns of mind, or what psychologists call “heuristics,” allow us to make judgments quickly.

Those who were asked to memorize a long list were much more likely to choose chocolate cake, which the authors theorize indicates that their higher order brain is swamped in thought, allowing their lower order, more impulsive brain to assert itself. 60 “response to block the cognitive assessment”: Jodie Ferguson, “Beliefs of Fair Price Setting Rules: Pervasiveness in the Marketplace and Effects on Perceptions of Price Fairness,” dissertation delivered in abstract form at Fordham Pricing Conference, September 28, 2007, Fordham University, New York. 61 “the laws of society, is not altogether without it”: Adam Smith, The Theory of Moral Sentiments (1790, 6th edition), Part 1, Sec. 1, Ch 1:9. 62 “An Analysis of Decision Under Risk”: Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision Under Risk,” Econometrica 47, no. 2 (1979): 363-91. 63 are projected far into the future: See, for example, D. Soman et al., “The Psychology of Intertemporal Discounting: Why Are Distant Events Valued Differently from Proximal Ones?” Marketing Letters 16, nos. 3/4 (2005): 347-60. 63 the distance estimated by the students: Plenary lecture at the annual meeting of the American Association for the Advancement of Science, February 15, 2008, in Boston. 64 “for a new field of research”: As announced in the press release from the Royal Swedish Academy of Science, October 9, 2002, available at http://nobelprize. org/nobel__prizes/economics/laureates/2002/press.html. 65 when making financial transactions: Thaler compressed and compiled many of these cases into a book.

Discount retailers rely heavily on psychological manipulation to set customers up for the buy, but as Burman demonstrated, this tactic can backfire if customers get wise to it. “High-cognition customers will feel cheated, and this negative feeling will be transferred onto the product,” she said. “The value perception of the product itself may be reduced.” Again, most of us are highly sensitive to what we perceive as the fairness of transactions. Daniel Kahneman once surveyed randomly selected adults, asking them whether they thought it was okay for a hardware store to raise the price of snow shovels during a snowstorm, and the response was a resounding no. Years later another team of social scientists asked the same question of a large group of executives and got pretty much the same response.


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Fancy Bear Goes Phishing: The Dark History of the Information Age, in Five Extraordinary Hacks by Scott J. Shapiro

3D printing, 4chan, active measures, address space layout randomization, air gap, Airbnb, Alan Turing: On Computable Numbers, with an Application to the Entscheidungsproblem, availability heuristic, Bernie Sanders, bitcoin, blockchain, borderless world, Brian Krebs, business logic, call centre, carbon tax, Cass Sunstein, cellular automata, cloud computing, cognitive dissonance, commoditize, Compatible Time-Sharing System, Computing Machinery and Intelligence, coronavirus, COVID-19, CRISPR, cryptocurrency, cyber-physical system, Daniel Kahneman / Amos Tversky, Debian, Dennis Ritchie, disinformation, Donald Trump, double helix, Dr. Strangelove, dumpster diving, Edward Snowden, en.wikipedia.org, Evgeny Morozov, evil maid attack, facts on the ground, false flag, feminist movement, Gabriella Coleman, gig economy, Hacker News, independent contractor, information security, Internet Archive, Internet of things, invisible hand, John Markoff, John von Neumann, Julian Assange, Ken Thompson, Larry Ellison, Laura Poitras, Linda problem, loss aversion, macro virus, Marc Andreessen, Mark Zuckerberg, Menlo Park, meta-analysis, Minecraft, Morris worm, Multics, PalmPilot, Paul Graham, pirate software, pre–internet, QWERTY keyboard, Ralph Nader, RAND corporation, ransomware, Reflections on Trusting Trust, Richard Stallman, Richard Thaler, Ronald Reagan, Satoshi Nakamoto, security theater, Shoshana Zuboff, side hustle, Silicon Valley, Skype, SoftBank, SQL injection, Steve Ballmer, Steve Jobs, Steven Levy, Stuxnet, supply-chain attack, surveillance capitalism, systems thinking, TaskRabbit, tech billionaire, tech worker, technological solutionism, the Cathedral and the Bazaar, the new new thing, the payments system, Turing machine, Turing test, Unsafe at Any Speed, vertical integration, Von Neumann architecture, Wargames Reagan, WarGames: Global Thermonuclear War, Wayback Machine, web application, WikiLeaks, winner-take-all economy, young professional, zero day, éminence grise

The conjunction rule states that the probability of two events occurring can never be greater than the probability of either of those events occurring by itself: Conjunction Rule: Prob(x) ≥ Prob(x AND y) Thus, the probability that a coin will land heads twice in a row (for two tosses) cannot be greater than the probability that a coin lands heads just once (for one toss). Similarly, the probability that Linda is a feminist bank teller cannot be greater than the probability that Linda is a bank teller. The Linda problem, first formulated by the Israeli psychologists Daniel Kahneman and Amos Tversky, is perhaps the most famous example of human violations of the basic rules of probability theory. Kahneman and Tversky spent their careers uncovering how mistaken our judgments and choices can be. The human mind is riddled with upcode that causes us to make biased predictions and irrational choices.

Google domain name: Because of trademark disputes, some users in the U.K. and Germany have googlemail email addresses. See Andy B, “Change to Gmail from Google Mail,” July 21, 2016, https://support.google.com/mail/forum/ AAAAK7un8RUvxxPMMv5kXg/?hl=en&gpf=%23!topic%2Fgmail%2FvxxPMMv5kXg%3Bcontext-place%3Dforum%2Fgmail. “word starts with a K”: Amos Tversky and Daniel Kahneman, “Availability: A Heuristic for Judging Frequency and Probability,” Cognitive Psychology 5 (1973): 211. Availability Heuristic: In another Kahneman and Tversky experiment, participants listened to lists of names containing either nineteen famous women and twenty less famous men or nineteen famous men and twenty less famous women.

Johnson, “The Affect Heuristic in Judgments of Risks and Benefits,” Journal of Behavioral Decision Making 13 (2000): 5. Nigerian Astronaut: Katharine Trendacosta, “Here’s the Best Nigerian Prince Email Scam in the Galaxy,” Gizmodo, February 12, 2016, https://gizmodo.com/we-found-the-best-nigerian-prince-email-scam-in-the-gal-1758786973. “loss averse”: Amos Tversky and Daniel Kahneman, “Loss Aversion in Riskless Choice: A Reference-Dependent Model,” The Quarterly Journal of Economics, November 1991. Jack and Jill example from Kahneman, Thinking, Fast and Slow, 275. promise gains: Teodor Sommestad and Henrik Karlzén, “A Meta-Analysis of Field Experiments on Phishing Susceptibility” (2019 APWG Symposium on Electronic Crime Research [eCrime]).


pages: 339 words: 94,769

Possible Minds: Twenty-Five Ways of Looking at AI by John Brockman

AI winter, airport security, Alan Turing: On Computable Numbers, with an Application to the Entscheidungsproblem, Alignment Problem, AlphaGo, artificial general intelligence, Asilomar, autonomous vehicles, basic income, Benoit Mandelbrot, Bill Joy: nanobots, Bletchley Park, Buckminster Fuller, cellular automata, Claude Shannon: information theory, Computing Machinery and Intelligence, CRISPR, Daniel Kahneman / Amos Tversky, Danny Hillis, data science, David Graeber, deep learning, DeepMind, Demis Hassabis, easy for humans, difficult for computers, Elon Musk, Eratosthenes, Ernest Rutherford, fake news, finite state, friendly AI, future of work, Geoffrey Hinton, Geoffrey West, Santa Fe Institute, gig economy, Hans Moravec, heat death of the universe, hype cycle, income inequality, industrial robot, information retrieval, invention of writing, it is difficult to get a man to understand something, when his salary depends on his not understanding it, James Watt: steam engine, Jeff Hawkins, Johannes Kepler, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, John von Neumann, Kevin Kelly, Kickstarter, Laplace demon, Large Hadron Collider, Loebner Prize, machine translation, market fundamentalism, Marshall McLuhan, Menlo Park, military-industrial complex, mirror neurons, Nick Bostrom, Norbert Wiener, OpenAI, optical character recognition, paperclip maximiser, pattern recognition, personalized medicine, Picturephone, profit maximization, profit motive, public intellectual, quantum cryptography, RAND corporation, random walk, Ray Kurzweil, Recombinant DNA, Richard Feynman, Rodney Brooks, self-driving car, sexual politics, Silicon Valley, Skype, social graph, speech recognition, statistical model, Stephen Hawking, Steven Pinker, Stewart Brand, strong AI, superintelligent machines, supervolcano, synthetic biology, systems thinking, technological determinism, technological singularity, technoutopianism, TED Talk, telemarketer, telerobotics, The future is already here, the long tail, the scientific method, theory of mind, trolley problem, Turing machine, Turing test, universal basic income, Upton Sinclair, Von Neumann architecture, Whole Earth Catalog, Y2K, you are the product, zero-sum game

For the same reason, rationality is the standard assumption in inverse-reinforcement-learning models that try to make inferences from human behavior—perhaps with the concession that humans are not perfectly rational agents and sometimes randomly choose to act in ways unaligned with or even opposed to their best interests. The problem with rationality as a basis for modeling human cognition is that it is not accurate. In the domain of decision making, an extensive literature—spearheaded by the work of cognitive psychologists Daniel Kahneman and Amos Tversky—has documented the ways in which people deviate from the prescriptions of rational models. Kahneman and Tversky proposed that in many situations people instead follow simple heuristics that allow them to reach good solutions at low cognitive cost but sometimes result in errors. To take one of their examples, if you ask somebody to evaluate the probability of an event, they might rely on how easy it is to generate an example of such an event from memory, consider whether they can come up with a causal story for that event’s occurring, or assess how similar the event is to their expectations.

These scenarios echo Kurt Vonnegut’s 1961 short story “Harrison Bergeron,” in which exceptional aptitude is suppressed in deference to the mediocre lowest common denominator of society. Thought experiments like John Searle’s Chinese Room and Isaac Asimov’s Three Laws of Robotics all appeal to the sorts of intuitions plaguing human brains that Daniel Kahneman, Amos Tversky, and others have demonstrated. The Chinese Room experiment posits that a mind composed of mechanical and Homo sapiens parts cannot be conscious, no matter how competent at intelligent human (Chinese) conversation, unless a human can identify the source of the consciousness and “feel” it.

Like machines, human beings use algorithms to make decisions or solve problems; the remarkable difference lies in the human brain’s overall level of success despite the comparative limits on computational resources. The efficacy of human algorithms springs from what AI researchers refer to as “bounded optimality.” As psychologist Daniel Kahneman has notably pointed out, human beings are rational only up to a point. If you were perfectly rational, you would risk dropping dead before making an important decision—whom to hire, whom to marry, and so on—depending on the number of options available for your review. “With all of the successes of AI over the last few years, we’ve got good models of things like images and text, but what we’re missing are good models of people,” Tom says.


Daughter Detox: Recovering From an Unloving Mother and Reclaiming Your Life by Peg Streep

Daniel Kahneman / Amos Tversky, delayed gratification, fear of failure, hedonic treadmill, helicopter parent, Kintsugi, loss aversion, meta-analysis, Stanford marshmallow experiment, sunk-cost fallacy, Walter Mischel

The deck—yes, the unconscious processes that drive the car that is you and everyone else—is totally stacked in favor of hanging in, even when it makes us feel lousy. We can all thank evolution for that (and, yes, I am being ironic.) Humans are famously conservative, preferring to avert possible loss even when considering potential gain, as the work of psychologists Amos Tversky and Daniel Kahneman showed, earning a Nobel Prize in Economics for the latter. Moreover, when we contemplate change, we’re likely to frame the discussion in terms of what we already have invested instead of the possible gains we might reap from moving on. Focusing solely on our investment—which could be time, money, energy—gets in the way whether we’re thinking about leaving a marriage, another relationship, a job, or even selling a clunker car we’ve repaired again and again.

Erbas, Yasemin, Eva Ceulemans, Madeline Lee Pe, Peter Koval, and Peter Kuppens. Negative Emotion Differentiation: Its Personality and Well-being Correlates and a Comparison of Different Assessment Methods. Cognition and Emotion , 2014, vol. 28(7), pp. 1196-1213. Kahneman, Daniel. Thinking, Fast and Slow . New York: Farrar, Straus & Giroux, 2011. Kahneman, Daniel, and Amos Tversky. Prospect Theory: An Analysis of Decision Under Risk. Econometrica , 1979, vol. 47(2), pp. 263-292. Kay, Aaron C., S. Christian Wheeler, John A. Bargh, and Lee Ross. Material Priming: The Influence of Mundane Physical Objects on Situational Construal and Competitive Behavior Choice. Organizational Behavior and Human Decision Processes , 2004, vol. 95(1), pp. 83-96.

ABOUT THE EXERCISES IN DAUGHTER DETOX Most of the work involved in reclaiming your life from the effects of a toxic childhood is about bringing unconscious patterns of thinking and feeling to the surface so that they can be changed through consciousness. It’s all about connecting the dots. A great deal of research attests to the fact that much of what we think is, in fact, not governed by rational and conscious deliberation but by automatic, unconscious thought processes that the brain uses as shortcuts. (To use psychologist Daniel Kahneman’s terms, slow thinking versus fast thinking.) Thought processes are also affected by what are called “primes” in the environment, as research by John A. Bargh and Tanya L. Chartrand showed. So the environment in which you do these exercises, including journaling, matters. Choose a place to sit that makes you feel calm and focused.


pages: 263 words: 75,455

Quantitative Value: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors by Wesley R. Gray, Tobias E. Carlisle

activist fund / activist shareholder / activist investor, Alan Greenspan, Albert Einstein, Andrei Shleifer, asset allocation, Atul Gawande, backtesting, beat the dealer, Black Swan, book value, business cycle, butter production in bangladesh, buy and hold, capital asset pricing model, Checklist Manifesto, cognitive bias, compound rate of return, corporate governance, correlation coefficient, credit crunch, Daniel Kahneman / Amos Tversky, discounted cash flows, Edward Thorp, Eugene Fama: efficient market hypothesis, financial engineering, forensic accounting, Henry Singleton, hindsight bias, intangible asset, Jim Simons, Louis Bachelier, p-value, passive investing, performance metric, quantitative hedge fund, random walk, Richard Thaler, risk free rate, risk-adjusted returns, Robert Shiller, shareholder value, Sharpe ratio, short selling, statistical model, stock buybacks, survivorship bias, systematic trading, Teledyne, The Myth of the Rational Market, time value of money, transaction costs

This is not a matter of simply incorrectly guessing our performance on the test because the errors all tend to be in one direction—we reliably overestimate how well we perform. Further, the more difficult the questions, and the less familiar we are with the content, the more we tend overestimate how well we performed. The two pioneers of the field of behavioral finance, Daniel Kahneman and Amos Tversky, suggest that our overconfidence may stem from two other biases, self-attribution bias and hindsight bias.34 Self-attribution bias refers to our propensity to ascribe our successes to our skill, while blaming our failures on bad luck, rather than a lack of skill. For example, the stocks we buy that go up show our great stock picking skills, while those we buy that go down do so because of some outside factor, like Congress changing the law or the Federal Reserve increasing interest rates.

Wall Street Journal, Fund Track (December 31, 2009), http://online.wsj.com/article/SB10001424052748704876804574628561609012716.html. 33. Jesse J. Prinz, Gut Reactions: A Perceptual Theory of Emotion (Philosophy of Mind) (Oxford: Oxford University Press, USA, 2004). 34. Nicholas Barberis and Richard Thaler, “A Survey of Behavioral Finance.” NBER Working Paper No. 9222, September 2002, www.nber.org/papers/w9222. 35. Amos Tversky and Daniel Kahneman, “Judgment under Uncertainty: Heuristics and Biases.” Science, New Series 185(4157) (September 27, 1974): 1124–1131; www.jstor.org/pss/1738360. 36. Dan Ariely, Predictably Irrational: The Hidden Forces that Shape Our Decisions (New York: HarperCollins, 2008). 37. Philip E. Tetlock.


Stocks for the Long Run, 4th Edition: The Definitive Guide to Financial Market Returns & Long Term Investment Strategies by Jeremy J. Siegel

addicted to oil, Alan Greenspan, asset allocation, backtesting, behavioural economics, Black-Scholes formula, book value, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, capital asset pricing model, cognitive dissonance, compound rate of return, correlation coefficient, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, Everybody Ought to Be Rich, fixed income, German hyperinflation, implied volatility, index arbitrage, index fund, Isaac Newton, it's over 9,000, John Bogle, joint-stock company, Long Term Capital Management, loss aversion, machine readable, market bubble, mental accounting, Money creation, Myron Scholes, new economy, oil shock, passive investing, Paul Samuelson, popular capitalism, prediction markets, price anchoring, price stability, proprietary trading, purchasing power parity, random walk, Richard Thaler, risk free rate, risk tolerance, risk/return, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, stock buybacks, stocks for the long run, subprime mortgage crisis, survivorship bias, technology bubble, The Great Moderation, The Wisdom of Crowds, transaction costs, tulip mania, uptick rule, Vanguard fund, vertical integration

Until recently, finance was dominated by theories that assumed investors maximized their expected utility, or well-being, and always acted rationally. This was an extension of the rational theory of consumer choice under certainty applied to uncertain outcomes. In the 1970s two psychologists, Amos Tversky and Daniel Kahneman, noted that many individuals did not behave as this theory predicted. They developed a new model—called prospect theory—of how individuals actually behave and make decisions when faced with uncertainty.3 Their CHAPTER 19 Behavioral Finance and the Psychology of Investing 323 model established them as the pioneers of behavioral finance, and their research has been making much headway in the finance profession.

This was confirmed by a social psychologist named Solomon Asch. He conducted a famous experiment where subjects were presented with four lines and asked to pick the two that were the same length. The right answer was obvious, but when confederates of Dr. Asch presented conflicting views, the subjects often gave the incorrect answer.6 3 Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision under Risk,” Econometrica, vol. 47, no. 2 (March 1979). 4 Robert Shiller, “Stock Prices and Social Dynamics,” Brookings Papers on Economic Activity, Washington, D.C.: Brookings Institution, 1984. 5 Robert Shiller, “Do Stock Prices Move Too Much to Be Justified by Subsequent Movements in Dividends?”

Now he says that only one-third of his trades make money, but overall he’s way ahead. When things don’t work out as he planned, he gets rid of losing trades quickly while holding on to his winners. There is an old adage on Wall Street that sums up successful trading: “Cut your losers short and let your winners ride.” 22 Amos Tversky and Daniel Kahneman, “Judgment under Uncertainty: Heuristics and Biases,” Science, vol. 185 (1974), pp. 1124–1131. 23 Terrance Odean, “Are Investors Reluctant to Realize Their Losses,” Journal of Finance, vol. 53, no. 5 (October 1998), p. 1786. CHAPTER 19 Behavioral Finance and the Psychology of Investing 331 Rules for Avoiding Behavioral Traps Dave: I don’t feel secure enough to trade again soon.


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Stocks for the Long Run 5/E: the Definitive Guide to Financial Market Returns & Long-Term Investment Strategies by Jeremy Siegel

Alan Greenspan, AOL-Time Warner, Asian financial crisis, asset allocation, backtesting, banking crisis, Bear Stearns, behavioural economics, Black Monday: stock market crash in 1987, Black-Scholes formula, book value, break the buck, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, capital asset pricing model, carried interest, central bank independence, cognitive dissonance, compound rate of return, computer age, computerized trading, corporate governance, correlation coefficient, Credit Default Swap, currency risk, Daniel Kahneman / Amos Tversky, Deng Xiaoping, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Financial Instability Hypothesis, fixed income, Flash crash, forward guidance, fundamental attribution error, Glass-Steagall Act, housing crisis, Hyman Minsky, implied volatility, income inequality, index arbitrage, index fund, indoor plumbing, inflation targeting, invention of the printing press, Isaac Newton, it's over 9,000, John Bogle, joint-stock company, London Interbank Offered Rate, Long Term Capital Management, loss aversion, machine readable, market bubble, mental accounting, Minsky moment, Money creation, money market fund, mortgage debt, Myron Scholes, new economy, Northern Rock, oil shock, passive investing, Paul Samuelson, Peter Thiel, Ponzi scheme, prediction markets, price anchoring, price stability, proprietary trading, purchasing power parity, quantitative easing, random walk, Richard Thaler, risk free rate, risk tolerance, risk/return, Robert Gordon, Robert Shiller, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, stocks for the long run, survivorship bias, technology bubble, The Great Moderation, the payments system, The Wisdom of Crowds, transaction costs, tulip mania, Tyler Cowen, Tyler Cowen: Great Stagnation, uptick rule, Vanguard fund

Until recently, finance was dominated by theories that assumed investors maximized their expected utility, or well-being, and always acted rationally. This was an extension of the rational theory of consumer choice under certainty applied to uncertain outcomes. In the 1970s two psychologists, Daniel Kahneman and Amos Tversky, noted that many individuals did not behave as this theory predicted. Kahneman and Tversky developed a new model—called prospect theory—of how individuals actually behave and make decisions when faced with uncertainty.3 Their model established them as the pioneers of behavioral finance, and their research has been making much headway in the finance profession.

Currently, about two-thirds of the Dow Industrial stocks pay dividends in the first half of the month, which means that the difference between the first- and second-half returns is greater than reported here. Chapter 22 1. David Dreman, Contrarian Investment Strategies: The Next Generation, New York: Simon & Schuster, 1998. 2. Frank J. Williams, If You Must Speculate, Learn the Rules, Burlington, VT: Freiser Press, 1930. 3. Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision Under Risk,” Econometrica, vol. 47, no. 2 (March 1979). 4. Robert Shiller, “Stock Prices and Social Dynamics,” Brookings Papers on Economic Activity, Washington, DC: Brookings Institution, 1984. 5. Robert Shiller, “Do Stock Prices Move Too Much to Be Justified by Subsequent Movements in Dividends?”

Hersh Shefrin and Meir Statman, “The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence,” Journal of Finance, vol. 40, no. 3 (1985), pp. 777-792. 22. See Tom Chang, David Solomon, and Mark Westerfield, “Looking for Someone to Blame: Delegation, Cognitive Dissonance, and the Disposition Effect,” May 2013. 23. Leroy Gross, The Art of Selling Intangibles, New York: New York Institute of Finance, 1982. 24. Amos Tversky and Daniel Kahneman, “Judgment Under Uncertainty: Heuristics and Biases,” Science, vol. 185 (1974), pp. 1124-1131. 25. Terrance Odean, “Are Investors Reluctant to Realize Their Losses?” Journal of Finance, vol. 53, no. 5 (October 1998), p. 1786. 26. Hersh Shefrin and Richard Thaler, “An Economic Theory of Self-Control,” Journal of Political Economy, vol. 89, no. 21 (1981), pp. 392-406. 27.


Engineering Security by Peter Gutmann

active measures, address space layout randomization, air gap, algorithmic trading, Amazon Web Services, Asperger Syndrome, bank run, barriers to entry, bitcoin, Brian Krebs, business process, call centre, card file, cloud computing, cognitive bias, cognitive dissonance, cognitive load, combinatorial explosion, Credit Default Swap, crowdsourcing, cryptocurrency, Daniel Kahneman / Amos Tversky, Debian, domain-specific language, Donald Davies, Donald Knuth, double helix, Dr. Strangelove, Dunning–Kruger effect, en.wikipedia.org, endowment effect, false flag, fault tolerance, Firefox, fundamental attribution error, George Akerlof, glass ceiling, GnuPG, Google Chrome, Hacker News, information security, iterative process, Jacob Appelbaum, Jane Jacobs, Jeff Bezos, John Conway, John Gilmore, John Markoff, John von Neumann, Ken Thompson, Kickstarter, lake wobegon effect, Laplace demon, linear programming, litecoin, load shedding, MITM: man-in-the-middle, Multics, Network effects, nocebo, operational security, Paradox of Choice, Parkinson's law, pattern recognition, peer-to-peer, Pierre-Simon Laplace, place-making, post-materialism, QR code, quantum cryptography, race to the bottom, random walk, recommendation engine, RFID, risk tolerance, Robert Metcalfe, rolling blackouts, Ruby on Rails, Sapir-Whorf hypothesis, Satoshi Nakamoto, security theater, semantic web, seminal paper, Skype, slashdot, smart meter, social intelligence, speech recognition, SQL injection, statistical model, Steve Jobs, Steven Pinker, Stuxnet, sunk-cost fallacy, supply-chain attack, telemarketer, text mining, the built environment, The Death and Life of Great American Cities, The Market for Lemons, the payments system, Therac-25, too big to fail, Tragedy of the Commons, Turing complete, Turing machine, Turing test, Wayback Machine, web application, web of trust, x509 certificate, Y2K, zero day, Zimmermann PGP

[155] “Banks phishes its own customers”, Peter Gutmann, posting to the cryptography@metzdowd.com mailing list, message-ID E1MB80g-0001a31Y@wintermute01.cs.auckland.ac.nz, 2 June 2009. [156] “Judgement under uncertainty: Heuristics and biases”, Amos Tversky and Daniel Kahneman, Science, Vol.185, Issue 4157 (27 September 1974), p.1124. [157] “Judgment under Uncertainty: Heuristics and Biases”, Daniel Kahneman, Paul Slovic and Amos Tversky, Cambridge University Press, 1982. [158] “The Logic of Scientific Discovery”, Karl Popper, Basic Books, 1959. [159] “Critical Thinking Skills in Tactical Decision Making: A Model and A Training Strategy”, Marvin Cohen, Jared Freeman and Bryan Thompson, in References [160] [161] [162] [163] [164] [165] [166] [167] [168] [169] [170] [171] [172] [173] [174] [175] [176] [177] [178] [179] [180] 213 “Making Decisions Under Stress: Implications for Individual and Team Training”, American Psychological Association (APA), 1998, p.155.

“The framing of decisions and the psychology of choice”, Amos Tversky and Daniel Kahneman, Science, Vol.211, No.4481 (30 January 1981), p.453. “Gain-Loss Frames and Cooperation in Two-Person Social Dilemmas: A Transformational Analysis”, Carsten de Dreu and Christopher McCusker, Journal of Personality and Social Psychology, Vol.72, No.5 (1997), p.1093. “Framing of decisions and selection of alternatives in health care”, Dawn Wilson, Robert Kaplan and Lawrence Schneiderman, Social Behaviour, No.2 (1987). p.51. “Prospect Theory: An Analysis of Decision under Risk”, Daniel Kahneman and Amos Tversky, Econometrica, Vol.47, No.2 (March 1979), p.263.

The article that this talk is derived from was published as “Computer Security in the Real World”, Butler Lampson, IEEE Computer, Vol.37, No.6 (June 2004), p.37, although this version doesn't contain the Voltaire quote. “Information and Efficiency: Another Viewpoint”, Harold Demsetz, Journal of Law and Economics, Vol.12, No.1 (April 1969), p.1. 96 Problems [59] [60] [61] [62] [63] [64] [65] [66] [67] [68] [69] [70] [71] [72] “Prospect Theory: An Analysis of Decision under Risk”, Daniel Kahneman and Amos Tversky, Econometrica, Vol.47, No.2 (March 1979), p.263. “A Funny Thing Happened on the Way to the Market”, Sean Smith, IEEE Security and Privacy, Vol.1, No.6 (November/December 2003), p.74. “Zero as a Special Price: The True Value of Free Products”, Kristina Shampanier, Nina Mazar and Dan Ariely, Marketing Science, Vol.26, No.6 (November/December 2007), p.742.


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Stubborn Attachments: A Vision for a Society of Free, Prosperous, and Responsible Individuals by Tyler Cowen

agricultural Revolution, behavioural economics, Berlin Wall, Branko Milanovic, butterfly effect, conceptual framework, Daniel Kahneman / Amos Tversky, Fall of the Berlin Wall, framing effect, hedonic treadmill, impulse control, Peter Singer: altruism, rent-seeking, Robert Solow, social discount rate, Steven Pinker, The Wealth of Nations by Adam Smith, trade route, transaction costs, trickle-down economics, Tyler Cowen, Tyler Cowen: Great Stagnation, zero-sum game

Jones-Lee, M.W., ed. 1982. The Value of Life and Safety. North-Holland Publishing Company. Kagan, Shelley. 1998. Normative Ethics. Boulder: Westview Press. Kagan, Shelly. 2011. “Do I Make a Difference?” Philosophy and Public Affairs 39, no. 2: 105–141. Kahneman, Daniel, Paul Slovic, and Amos Tversky, eds. 1982. Judgment Under Uncertainty: Heuristics and Biases. Cambridge: Cambridge University Press. Kahneman, Daniel, et al., 2006. “Would You Be Happier if You Were Richer? A Focusing Illusion.” Science 312: 1908-1910. Keeley, Lawrence H. 1996. War Before Civilization: The Myth of the Peaceful Savage.

In Handbook of Bereavement Research: Consequences, Coping, and Care, edited by Margaret S. Stroebe, Robert O. Hansson, and Wolfgang Stroebe, 263–283. Washington, D.C.: American Psychological Association. Argyle, M. 1999. “Causes and Correlates of Happiness.” In Well-Being: The Foundations of Hedonic Psychology, edited by Daniel Kahneman, Edward Diener, and Nelson Schwarz. New York: Russell Sage Foundation. Arrow, Kenneth J., Edward Leamer, Howard Schuman, and Robert Solow. 1994. “Comments of Proposed NOAA Scope Test.” Appendix D of Comments of Proposed NOAA/DOI Regulations on Natural Resource Damage Assessment. U.S. Environmental Protection Agency.

Journal of Economic Perspectives 19, no. 4 (Fall): 25–42. Frederick, Shane. 2006. “Valuing Future Life and Future Lives: A Framework for Understanding Discounting.” Journal of Economic Psychology 27: 667–680. Frederick, Shane, and George Loewenstein. 1999. “Hedonic Adaptation.” In Well-Being: The Foundations of Hedonic Psychology, edited by Daniel Kahneman, Ed Diener, and Norbert Schwarz, 302–329. New York: Russell Sage Foundation. Frederick, Shane, George Loewenstein, and Ted O’Donoghue. 2002. “Time Discounting and Time Preference: A Critical Review.” Journal of Economic Literature 40, no. 2: 351–401. Frey, Bruno S., and Alois Stutzer. 2000.


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The Intelligent Investor (Collins Business Essentials) by Benjamin Graham, Jason Zweig

3Com Palm IPO, accounting loophole / creative accounting, air freight, Alan Greenspan, Andrei Shleifer, AOL-Time Warner, asset allocation, book value, business cycle, buy and hold, buy low sell high, capital asset pricing model, corporate governance, corporate raider, Daniel Kahneman / Amos Tversky, diversified portfolio, dogs of the Dow, Eugene Fama: efficient market hypothesis, Everybody Ought to Be Rich, George Santayana, hiring and firing, index fund, intangible asset, Isaac Newton, John Bogle, junk bonds, Long Term Capital Management, low interest rates, market bubble, merger arbitrage, Michael Milken, money market fund, new economy, passive investing, price stability, Ralph Waldo Emerson, Richard Thaler, risk tolerance, Robert Shiller, Ronald Reagan, shareholder value, sharing economy, short selling, Silicon Valley, South Sea Bubble, Steve Jobs, stock buybacks, stocks for the long run, survivorship bias, the market place, the rule of 72, transaction costs, tulip mania, VA Linux, Vanguard fund, Y2K, Yogi Berra

Many investment experts now feel that deflation, or falling prices, is an even greater threat than inflation; the best way to hedge against that risk is by including bonds as a permanent component of your portfolio. (See the commentary on Chapter 4.) 3 For more insights into this behavioral pitfall, see Eldar Shafir, Peter Diamond, and Amos Tversky, “Money Illusion,” in Daniel Kahneman and Amos Tversky, eds., Choices, Values, and Frames (Cambridge University Press,2000), pp. 335–355. 4 That year, President Jimmy Carter gave his famous “malaise” speech, in which he warned of “a crisis in confidence” that “strikes at the very heart and soul and spirit of our national will” and “threatens to destroy the social and the political fabric of America.” 5 See Stanley Fischer, Ratna Sahay, and Carlos A.

But when stocks drop, that financial loss fires up your amygdala—the part of the brain that processes fear and anxiety and generates the famous “fight or flight” response that is common to all cornered animals. Just as you can’t keep your heart rate from rising if a fire alarm goes off, just as you can’t avoid flinching if a rattlesnake slithers onto your hiking path, you can’t help feeling fearful when stock prices are plunging.9 In fact, the brilliant psychologists Daniel Kahneman and Amos Tversky have shown that the pain of financial loss is more than twice as intense as the pleasure of an equivalent gain. Making $1,000 on a stock feels great—but a $1,000 loss wields an emotional wallop more than twice as powerful. Losing money is so painful that many people, terrified at the prospect of any further loss, sell out near the bottom or refuse to buy more.

(The bars at the far right show a market index fund for comparison.) Source: Profs. Brad Barber, University of California at Davis, and Terrance Odean, University of California at Berkeley Unfortunately, for every IPO like Microsoft that turns out to be a big winner, there are thousands of losers. The psychologists Daniel Kahnerman and Amos Tversky have shown when humans estimate the likelihood or frequency of an event, we make that judgment based not on how often the event has actually occurred, but on how vivid the past examples are. We all want to buy “the next Microsoft”—precisely because we know we missed buying the first Microsoft.


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The Signal and the Noise: Why So Many Predictions Fail-But Some Don't by Nate Silver

airport security, Alan Greenspan, Alvin Toffler, An Inconvenient Truth, availability heuristic, Bayesian statistics, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, big-box store, Black Monday: stock market crash in 1987, Black Swan, Boeing 747, book value, Broken windows theory, business cycle, buy and hold, Carmen Reinhart, Charles Babbage, classic study, Claude Shannon: information theory, Climategate, Climatic Research Unit, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, computer age, correlation does not imply causation, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, Daniel Kahneman / Amos Tversky, disinformation, diversification, Donald Trump, Edmond Halley, Edward Lorenz: Chaos theory, en.wikipedia.org, equity premium, Eugene Fama: efficient market hypothesis, everywhere but in the productivity statistics, fear of failure, Fellow of the Royal Society, Ford Model T, Freestyle chess, fudge factor, Future Shock, George Akerlof, global pandemic, Goodhart's law, haute cuisine, Henri Poincaré, high batting average, housing crisis, income per capita, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Internet Archive, invention of the printing press, invisible hand, Isaac Newton, James Watt: steam engine, Japanese asset price bubble, John Bogle, John Nash: game theory, John von Neumann, Kenneth Rogoff, knowledge economy, Laplace demon, locking in a profit, Loma Prieta earthquake, market bubble, Mikhail Gorbachev, Moneyball by Michael Lewis explains big data, Monroe Doctrine, mortgage debt, Nate Silver, negative equity, new economy, Norbert Wiener, Oklahoma City bombing, PageRank, pattern recognition, pets.com, Phillips curve, Pierre-Simon Laplace, Plato's cave, power law, prediction markets, Productivity paradox, proprietary trading, public intellectual, random walk, Richard Thaler, Robert Shiller, Robert Solow, Rodney Brooks, Ronald Reagan, Saturday Night Live, savings glut, security theater, short selling, SimCity, Skype, statistical model, Steven Pinker, The Great Moderation, The Market for Lemons, the scientific method, The Signal and the Noise by Nate Silver, The Wisdom of Crowds, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, Timothy McVeigh, too big to fail, transaction costs, transfer pricing, University of East Anglia, Watson beat the top human players on Jeopardy!, Wayback Machine, wikimedia commons

If you forecast that a particular incumbent congressman will win his race 90 percent of the time, you’re also forecasting that he should lose it 10 percent of the time.28 The signature of a good forecast is that each of these probabilities turns out to be about right over the long run. Tetlock’s hedgehogs were especially bad at understanding these probabilities. When you say that an event has a 90 percent chance of happening, that has a very specific and objective meaning. But our brains translate it into something more subjective. Evidence from the psychologists Daniel Kahneman and Amos Tversky suggests that these subjective estimates don’t always match up with the reality. We have trouble distinguishing a 90 percent chance that the plane will land safely from a 99 percent chance or a 99.9999 percent chance, even though these imply vastly different things about whether we ought to book our ticket.

Shannon, “Programming a Computer for Playing Chess,” Philosophical Magazine, Series 7, 41, 314, March 1950. http://archive.computerhistory.org/projects/ chess/related_materials/software/2-0%20and%202-1.Programming_a_computer_for_playing_chess.shannon/2-0%20and%202-1.Programming_a_computer_for_playing_chess.shannon.062303002.pdf. 9. William G. Chase and Herbert A. Simon, “The Mind’s Eye in Chess” in Visual Information Processing (New York: Academic Press, 1973). 10. Douglas Harper, Online Etymology Dictionary. http://www.etymonline.com/index.php?term=eureka. 11. Amos Tversky and Daniel Kahneman, “Judgement Under Uncertainty: Heuristics and Biases,” Science, 185 (September 27, 1974), pp. 1124–1131. http://www.econ.yale.edu/~nordhaus/homepage/documents/tversky_kahn_science.pdf. 12. Lauren Himiak, “Bear Safety Tips,” National & States Parks, About.com. http://usparks.about.com/od/backcountry/a/Bear-Safety.htm. 13. billwall, “Who Is the Strongest Chess Player?”

Department of Homeland Security, University of Maryland. http://www.start.umd.edu/gtd/search/Results.aspx?page=2&casualties_type=b&casualties_max=&start_yearonly=1979&end_yearonly=2000&dtp2=all&sAttack=1&count=100&expanded=no&charttype=line&chart=overtime&ob=GTDID&od=desc#results-table. 39. Amos Tversky and Daniel Kahneman, “Availability: A Heuristic for Judging Frequency and Probability,” Cognitive Psychology, 5, 2 (Setepmber 1973), pp. 207–232. http://www.sciencedirect.com/science/article/pii/0010028573900339. 40. “Nineteen hijackers using commercial airliners as guided missiles to incinerate three thousand men, women, and children was perhaps the most horrific single unknown unknown America has experienced.”


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The Confidence Game: The Psychology of the Con and Why We Fall for It Every Time by Maria Konnikova

Abraham Maslow, attribution theory, Bear Stearns, behavioural economics, Bernie Madoff, Bluma Zeigarnik, British Empire, Cass Sunstein, cognitive dissonance, cognitive load, coherent worldview, Daniel Kahneman / Amos Tversky, dark triade / dark tetrad, endowment effect, epigenetics, Higgs boson, higher-order functions, hindsight bias, lake wobegon effect, lateral thinking, libertarian paternalism, Milgram experiment, placebo effect, Ponzi scheme, post-work, publish or perish, Richard Thaler, risk tolerance, seminal paper, side project, Skype, Steven Pinker, sunk-cost fallacy, the scientific method, tulip mania, Walter Mischel

The players and coaches, too, seemed to believe it—even going so far as to select certain draft picks because they were perceived to be playing hot at the time. To Gilovich, the whole thing seemed highly unlikely. He was a cognitive psychologist, studying rationality and its departures, and there was simply no reason to assume that people’s talent and skills could show such tremendous, lasting deviations. He’d also been working with Amos Tversky, who, along with Daniel Kahneman, had identified the “belief in the law of small numbers” some ten years prior: that we believe that chance rates seen over the long term should also be reflected in the short term, and if they are not, something else must be going on. For instance, since a coin is supposed to land on heads half the time, we expect it to do so if we toss it, say, ten times.

Anticipated regret makes us want to keep doing what we’re doing; anticipated stress makes us want to cope proactively, by not doing anything that might provoke said stress; and anticipated guilt makes us likewise want to prevent it from ever happening. In one of their famous thought experiments, Daniel Kahneman and Amos Tversky described two individuals who’d been playing the stock market. Both had just lost $1,200 on a certain stock. The difference between them was in how they’d lost it. The first had lost it after initially buying one stock and then, after a bit of thought, switching to another. The second had made the mistake of sticking with a losing stock rather than, after some reflection, switching to a winner.

While we’re good at the overt bodily cues, we are not so great at the cues of the mind. We infer entire belief systems from one rogue statement, craft personalities and backstories with no bearing on reality from one surface clue. We simplify when we should caveat and gloss where we should elaborate. Often, we use snap judgments—what Daniel Kahneman calls heuristics—when we meet someone new, and end up with a superficial, highly stereotyped version of what they are like. Take Saalfield’s impression of Mitchell: charming, comforting, pretty. And indeed, Mitchell is always elegant, impeccably dressed, well coiffed and manicured, with an enticing, open smile.


The Little Black Book of Decision Making by Michael Nicholas

Abraham Maslow, Airbnb, Albert Einstein, Apollo 13, call centre, classic study, clockwork universe, cognitive dissonance, Daniel Kahneman / Amos Tversky, Donald Trump, Frederick Winslow Taylor, hindsight bias, impulse control, James Dyson, late fees, Mahatma Gandhi, Nelson Mandela, Ralph Waldo Emerson, Richard Feynman, Richard Feynman: Challenger O-ring, scientific management, selection bias, Stephen Hawking

However, because they evolved to enable us to cope with an evolutionary past when we were living on the plains, hunting and gathering, the biases they introduce are often imperfect and may lead to terrible mistakes. Mental shortcuts can even lead to inappropriate biases in life or death situations, as demonstrated by a study by Amos Tversky which looked at how the way that data is presented can affect doctors’ choices. All of the participants received the same data on the effectiveness of two interventions for lung cancer: surgery and radiation treatment. It indicated that radiation offered a much better chance of survival in the short term, but a lower life expectancy over the next few years.

How did NASA, an organisation that places such importance on safety, end up so flagrantly violating its own rules and appear to have so little regard for human life? “Our comforting conviction that the world makes sense rests on a secure foundation: our almost unlimited ability to ignore our ignorance.” —Daniel Kahneman, Nobel Prize-winning Professor of Psychology and international best-selling author on judgment and decision making When a decision has gone badly, the benefit of hindsight often makes the correct decision look as though it should have been blindingly obvious. But once you are aware of this bias, you'll see it everywhere – from the immediate aftermath of the horrendous terrorist atrocities in Paris in November 2015, where the press began questioning how intelligence services had failed to anticipate the attacks as soon as the “facts” leading up to them began to emerge, to football supporters who believe they have far greater expertise at picking the team than the manager, to the times when we second-guess our own decisions: “I should have known not to take that job”, “I knew the housing market would collapse/go up”, “I should have known that he was being unfaithful to me”, “I knew that if I trusted her she'd hurt me”, “I should have listened to my intuition”, and on it goes … This “hindsight bias” refers to the tendency for uncertain outcomes to seem more likely once we know the outcome that has occurred.

We'll begin to address the first of them now, and then cover points two and three, which are related, in the next chapter. The Myth of Rationality “We think, each of us, that we're much more rational than we are. And we think that we make our decisions because we have good reasons to make them. Even when it's the other way around. We believe in the reasons, because we've already made the decision.” Daniel Kahneman The assumption of rational choice is essentially the belief that when faced with alternatives, human beings have the ability to make a decision that stands the test of reason. And because this capability is highly valued, we have learnt to associate logic with intellectual strength and even personal qualities such as stability and honesty.


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Essentialism: The Disciplined Pursuit of Less by Greg McKeown

90 percent rule, Albert Einstein, Clayton Christensen, Daniel Kahneman / Amos Tversky, David Sedaris, deliberate practice, double helix, en.wikipedia.org, endowment effect, impact investing, Isaac Newton, iterative process, Jeff Bezos, Lao Tzu, lateral thinking, loss aversion, low cost airline, Mahatma Gandhi, microcredit, minimum viable product, Nelson Mandela, North Sea oil, Peter Thiel, power law, Ralph Waldo Emerson, Richard Thaler, Rosa Parks, Salesforce, Shai Danziger, side project, Silicon Valley, Silicon Valley startup, sovereign wealth fund, Stanford prison experiment, Steve Jobs, TED Talk, Vilfredo Pareto

Richard Milne, “Debate Heralds Change for Norway’s Oil Fund,” FT.com, June 30, 2013, www.ft.com/cms/s/0/8466bd90-e007-11e2-9de6-00144feab7de.html#axzz2ZtQp4H13. 4. See Roland Huntford, The Last Place on Earth: Scott and Amundsen’s Race to the South Pole (New York: Modern Library, 1999). 5. Jim Collins and Morten T. Hansen, Great by Choice: Uncertainty, Chaos, and Luck—Why Some Thrive Despite Them All (New York: Harper Business, 2011). 6. Daniel Kahneman and Amos Tversky, “Intuitive Prediction: Biases and Corrective Procedures,” TIMS Studies in Management Science 12 (1979): 313–27. 7. Roger Buehler, Dale Griffin, and Michael Ross, “Exploring the ‘Planning Fallacy’: Why People Underestimate Their Task Completion Times,” Journal of Personality and Social Psychology 67, no. 3 (1994): 366–81, doi:10.1037/0022-3514.67.3.366. 8.

As the saying goes, nobody in the history of the world has washed their rental car! This is because of something called “the endowment effect,” our tendency to undervalue things that aren’t ours and to overvalue things because we already own them. In one study demonstrating the power of the endowment effect, the Nobel Prize–winning researcher Daniel Kahneman and colleagues randomly gave coffee mugs to only half the subjects in an experiment.5 The first group was asked how much they would be willing to sell their mug for, while the second group was asked what they would be willing to pay for it. It turned out the students who “owned” the mugs refused to sell for less than $5.25, while those without the cups were willing to pay only $2.25 to $2.75.

She would make a far greater contribution on all these rushed endeavors if she were simply to create a buffer. Have you ever underestimated how long a task will take? If you have, you are far from alone. The term for this very common phenomenon is the “planning fallacy.”6 This term, coined by Daniel Kahneman in 1979, refers to people’s tendency to underestimate how long a task will take, even when they have actually done the task before. In one study thirty-seven students were asked how long they thought it would take them to complete their senior thesis. When the students were asked to estimate how long it would take “if everything went as well as it possibly could,” their averaged estimate was 27.4 days.


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Radical Uncertainty: Decision-Making for an Unknowable Future by Mervyn King, John Kay

Airbus A320, Alan Greenspan, Albert Einstein, Albert Michelson, algorithmic trading, anti-fragile, Antoine Gombaud: Chevalier de Méré, Arthur Eddington, autonomous vehicles, availability heuristic, banking crisis, Barry Marshall: ulcers, battle of ideas, Bear Stearns, behavioural economics, Benoit Mandelbrot, bitcoin, Black Swan, Boeing 737 MAX, Bonfire of the Vanities, Brexit referendum, Brownian motion, business cycle, business process, capital asset pricing model, central bank independence, collapse of Lehman Brothers, correlation does not imply causation, credit crunch, cryptocurrency, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, DeepMind, demographic transition, discounted cash flows, disruptive innovation, diversification, diversified portfolio, Donald Trump, Dutch auction, easy for humans, difficult for computers, eat what you kill, Eddington experiment, Edmond Halley, Edward Lloyd's coffeehouse, Edward Thorp, Elon Musk, Ethereum, Eugene Fama: efficient market hypothesis, experimental economics, experimental subject, fear of failure, feminist movement, financial deregulation, George Akerlof, germ theory of disease, Goodhart's law, Hans Rosling, Helicobacter pylori, high-speed rail, Ignaz Semmelweis: hand washing, income per capita, incomplete markets, inflation targeting, information asymmetry, invention of the wheel, invisible hand, Jeff Bezos, Jim Simons, Johannes Kepler, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Snow's cholera map, John von Neumann, Kenneth Arrow, Kōnosuke Matsushita, Linda problem, Long Term Capital Management, loss aversion, Louis Pasteur, mandelbrot fractal, market bubble, market fundamentalism, military-industrial complex, Money creation, Moneyball by Michael Lewis explains big data, Monty Hall problem, Nash equilibrium, Nate Silver, new economy, Nick Leeson, Northern Rock, nudge theory, oil shock, PalmPilot, Paul Samuelson, peak oil, Peter Thiel, Philip Mirowski, Phillips curve, Pierre-Simon Laplace, popular electronics, power law, price mechanism, probability theory / Blaise Pascal / Pierre de Fermat, quantitative trading / quantitative finance, railway mania, RAND corporation, reality distortion field, rent-seeking, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Solow, Ronald Coase, sealed-bid auction, shareholder value, Silicon Valley, Simon Kuznets, Socratic dialogue, South Sea Bubble, spectrum auction, Steve Ballmer, Steve Jobs, Steve Wozniak, Suez crisis 1956, Tacoma Narrows Bridge, Thales and the olive presses, Thales of Miletus, The Chicago School, the map is not the territory, The Market for Lemons, The Nature of the Firm, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Davenport, Thomas Malthus, Toyota Production System, transaction costs, ultimatum game, urban planning, value at risk, world market for maybe five computers, World Values Survey, Yom Kippur War, zero-sum game

And so the meaning of risk is a product of the plans and expectations of that household or institution. Risk is necessarily particular. It does not mean the same thing to J. P. Morgan as it does to a paraglider or mountain climber, or to a household saving for retirement or the children’s education. In 1979, Daniel Kahneman and Amos Tversky, the two Israeli psychologists working in America who were popularised in Michael Lewis’s bestseller The Undoing Project , offered ‘prospect theory’ as an alternative account of behaviour under uncertainty to the conventional ‘rational’ view based on the Friedman– Savage axioms. Uncertainty was ‘coded’ relative to some reference point around which gains were valued less than losses of similar amount were resented.

and the wise sovereign would sensibly seek not another economic model, but another adviser on economic issues. It is not necessary to have an alternative tool available to know that the plumber who arrives armed only with a screwdriver is not the tradesman we need. In Michael Lewis’s book The Undoing Project , a revealing passage describes the transformation of Amos Tversky’s thinking after he gave a seminar in the course run by Daniel Kahneman. 19 Before that, Lewis describes Tversky’s thinking as ‘Until you could replace a theory with a better theory – a theory that better predicted what actually happened – you didn’t chuck a theory out.’ After the seminar, ‘he treated theories that he had more or less accepted as sound and plausible as objects of suspicion’.

And our knowledge of the world would lead us to think it more likely that Lenin met Rosa Luxemburg (the leader of the German communist revolution of 1918) than that he met James Joyce (if you are interested, Lenin and Luxemburg did meet when Lenin and his wife changed trains in Berlin in 1908). 8 Philadelphia is not the capital of Pennsylvania, and anyone who offers odds on the answer to such a question is a knave (and anyone who accepts them a fool). You will wind up with an earful of cider. The ‘Linda problem’ is one of the most frequently reported experiments in behavioural economics. In his bestseller Thinking, Fast and Slow , Daniel Kahneman describes it thus: ‘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 anti-nuclear demonstrations. Which of the following is more likely?


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Rationality: What It Is, Why It Seems Scarce, Why It Matters by Steven Pinker

affirmative action, Albert Einstein, autonomous vehicles, availability heuristic, Ayatollah Khomeini, backpropagation, basic income, behavioural economics, belling the cat, Black Lives Matter, butterfly effect, carbon tax, Cass Sunstein, choice architecture, classic study, clean water, Comet Ping Pong, coronavirus, correlation coefficient, correlation does not imply causation, COVID-19, critical race theory, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, data science, David Attenborough, deep learning, defund the police, delayed gratification, disinformation, Donald Trump, Dr. Strangelove, Easter island, effective altruism, en.wikipedia.org, Erdős number, Estimating the Reproducibility of Psychological Science, fake news, feminist movement, framing effect, George Akerlof, George Floyd, germ theory of disease, high batting average, if you see hoof prints, think horses—not zebras, index card, Jeff Bezos, job automation, John Nash: game theory, John von Neumann, libertarian paternalism, Linda problem, longitudinal study, loss aversion, Mahatma Gandhi, meta-analysis, microaggression, Monty Hall problem, Nash equilibrium, New Journalism, Paul Erdős, Paul Samuelson, Peter Singer: altruism, Pierre-Simon Laplace, placebo effect, post-truth, power law, QAnon, QWERTY keyboard, Ralph Waldo Emerson, randomized controlled trial, replication crisis, Richard Thaler, scientific worldview, selection bias, social discount rate, social distancing, Social Justice Warrior, Stanford marshmallow experiment, Steve Bannon, Steven Pinker, sunk-cost fallacy, TED Talk, the scientific method, Thomas Bayes, Tragedy of the Commons, trolley problem, twin studies, universal basic income, Upton Sinclair, urban planning, Walter Mischel, yellow journalism, zero-sum game

Normative models also serve as benchmarks against which we can assess how human schlemiels do reason, the subject matter of psychology and the other behavioral sciences. The many ways in which ordinary people fall short of these benchmarks have become famous through the Nobel Prize–winning research of Daniel Kahneman, Amos Tversky, and other psychologists and behavioral economists.15 When people’s judgments deviate from a normative model, as they so often do, we have a puzzle to solve. Sometimes the disparity reveals a genuine irrationality: the human brain cannot cope with the complexity of a problem, or it is saddled with a bug that cussedly drives it to the wrong answer time and again.

Liebenberg 2013/2021, p. 104. 11. Liebenberg 2020 and personal communication, May 27, 2020. 12. Moore 2005. See also Pew Forum on Religion and Public Life 2009, and note 8 to chapter 10 below. 13. Vosoughi, Roy, & Aral 2018. 14. Pinker 2010; Tooby & DeVore 1987. 15. Amos Tversky (1937–1996) and Daniel Kahneman (1934– ) pioneered the study of cognitive illusions and biases; see Tversky & Kahneman 1974, Kahneman, Slovic, & Tversky 1982, Hastie & Dawes 2010, and Kahneman’s bestseller, Thinking, Fast and Slow (2011). Their lives and collaboration are described in Michael Lewis’s The Undoing Project (2016) and Kahneman’s autobiographical statement for his 2002 Nobel Prize (Kahneman 2002). 16.

The decision weight graph differs from fig. 4 in Kahneman & Tversky 1979 and is instead based on fig. 12.2 in Hastie & Dawes 2010, which I believe is a better visualization of the theory. 35. Based on Kahneman & Tversky 1979. 36. This pervasive asymmetry is called the Negativity bias; Tierney & Baumeister 2019. 37. Maurice Allais, Herbert Simon, Daniel Kahneman, Richard Thaler, George Akerlof. 38. Gigerenzer 2008b, p. 20. 39. Abito & Salant 2018; Braverman 2018. 40. Sydnor 2010. 41. Gigerenzer & Kolpatzik 2017; see also Gigerenzer 2014, for a similar argument on breast cancer screening. CHAPTER 7: HITS AND FALSE ALARMS (SIGNAL DETECTION AND STATISTICAL DECISION THEORY) 1.


The End of Accounting and the Path Forward for Investors and Managers (Wiley Finance) by Feng Gu

active measures, Affordable Care Act / Obamacare, Alan Greenspan, barriers to entry, book value, business cycle, business process, buy and hold, carbon tax, Claude Shannon: information theory, Clayton Christensen, commoditize, conceptual framework, corporate governance, creative destruction, Daniel Kahneman / Amos Tversky, discounted cash flows, disruptive innovation, diversified portfolio, double entry bookkeeping, Exxon Valdez, financial engineering, financial innovation, fixed income, geopolitical risk, hydraulic fracturing, index fund, information asymmetry, intangible asset, inventory management, Joseph Schumpeter, junk bonds, Kenneth Arrow, knowledge economy, moral hazard, new economy, obamacare, quantitative easing, quantitative trading / quantitative finance, QWERTY keyboard, race to the bottom, risk/return, Robert Shiller, Salesforce, shareholder value, Steve Jobs, tacit knowledge, The Great Moderation, value at risk

The implications of this much-diminished usefulness of the bottom line for investors, lenders, and others relying on this seemingly important indicator (“earnings move markets”) are obvious.15 INVESTORS ALERT: AN ACCOUNTING LOSS ISN’T WHAT IT USED TO BE “Losses loom larger than gains” famously said Amos Tversky and the Nobel (economics) laureate Daniel Kahneman, meaning that people strongly prefer avoiding losses to acquiring gains.16 So, reporting a loss is a big deal for a company and its constituents, and it better be a credible signal of a company in distress, not a false alarm. Which brings us to another surprise for you: Many of the losses reported by companies are due to accounting procedures that don’t really reflect a permanent deterioration of business fundamentals.

However, the continual expansion of the balance sheet approach [by the FASB] is gradually destroying the forward-looking usefulness of earnings, mainly through the effect of various asset revaluations, which manifest as noise in the process of generating normal operating earnings.” In “On the Balance Sheet-Based Model of Financial Reporting,” Occasional Paper Series, Center for Excellence in Accounting and Security Analysis, Columbia Business School, 2007, p. 2. Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decisions Under Risk,” Econometrica, 47 (2) (1979): 263−292. This, of course, is a reflection of the widely known phenomenon—“mean reversion,” namely extreme observations in one period, will tend to get closer to the average in subsequent period. The speed of such reversion to the mean indicates the impact of chance, or transitory items on the observation (earnings in our case).


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The Logic of Life: The Rational Economics of an Irrational World by Tim Harford

activist fund / activist shareholder / activist investor, affirmative action, Albert Einstein, Andrei Shleifer, barriers to entry, behavioural economics, Berlin Wall, business cycle, colonial rule, company town, Daniel Kahneman / Amos Tversky, double entry bookkeeping, Dr. Strangelove, Edward Glaeser, en.wikipedia.org, endowment effect, European colonialism, experimental economics, experimental subject, George Akerlof, income per capita, invention of the telephone, Jane Jacobs, John von Neumann, Larry Ellison, law of one price, Martin Wolf, mutually assured destruction, New Economic Geography, new economy, Patri Friedman, plutocrats, Richard Florida, Richard Thaler, Ronald Reagan, Silicon Valley, spinning jenny, Steve Jobs, The Death and Life of Great American Cities, the market place, the strength of weak ties, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Malthus, Tyler Cowen, women in the workforce, zero-sum game

But it’s nearly a sphere, and for many purposes the simplification that the Earth is spherical will do nicely. I’VE CLAIMED THAT we’re smart, but I’ve admitted that we make mistakes. The laboratory work of psychologists and “behavioral” economists has provided plenty of proof. One of the most famous examples was a discovery by Daniel Kahneman and Amos Tversky: Their experiments showed that people make different choices depending on how the choices are framed. (Although he is a psychologist, Kahneman won the Nobel Prize in economics in 2002; Tversky had died a few years earlier, or he would have shared it.) To one group of subjects, Kahneman and Tversky offered this choice: Imagine that the U.S. is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people.

Smoking rates have fallen dramatically: According to the WHO Tobacco Atlas, www.who.int/tobacco/statistics/tobacco_atlas/en/, smoking among adult men in the United States fell from 52 to 26 percent between 1965 and 1999, and for women from 34 percent to 22 percent. In the United Kingdom, the fall was from 61 to 28 percent among men and 42 to 26 percent among women, between 1960 and 1999. To one group of subjects: Amos Tversky and Daniel Kahneman, “The Framing of Decisions and the Psychology of Choice,” Science 211 (1981): 453–58. “I was a sports card dealer”: Telephone interview with John List, January 2007. That’s why Professor List: John A. List, “Does Market Experience Eliminate Anomalies?” Quarterly Journal of Economics, February 2003.


pages: 345 words: 87,745

The Power of Passive Investing: More Wealth With Less Work by Richard A. Ferri

Alan Greenspan, asset allocation, backtesting, Benchmark Capital, Bernie Madoff, book value, buy and hold, capital asset pricing model, cognitive dissonance, correlation coefficient, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, endowment effect, estate planning, Eugene Fama: efficient market hypothesis, fixed income, implied volatility, index fund, intangible asset, John Bogle, junk bonds, Long Term Capital Management, money market fund, passive investing, Paul Samuelson, Performance of Mutual Funds in the Period, Ponzi scheme, prediction markets, proprietary trading, prudent man rule, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Sharpe ratio, survivorship bias, Tax Reform Act of 1986, too big to fail, transaction costs, Vanguard fund, yield curve, zero-sum game

Behavioral finance helps explain why overconfidence exists. Behavioral Finance Behavioral finance is a branch of financial analysis that uses social, cognitive, and emotional factors to understand the economic beliefs and decisions of investors. Its beginnings stem from a revolutionary 1979 paper by Daniel Kahneman and Amos Tversky on investor behavior. Their paper proposed a new theory called prospect theory (prospect in this sense means “lottery”). Prospect theory describes how people make choices based on how they analyze potential losses and payouts.3 Prospect theory is very involved and beyond the scope of this book.

LeRoy Gross, The Art Selling Intangibles: How to Make Your Millions Investing Other People’s Money (New York: Simon & Schuster, 1988). The firm I worked for was Kidder, Peabody, Inc. The firm was wholly acquired by General Electric in the late 1989 and sold in part to UBS in 1994. 2. John R. Nofsinger, The Psychology of Investing, 3rd ed. (New Jersey: Pearson, 2008), 11. 3. Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision under Risk,” Econometrica 47 (1979): 263–291. 4. Jason Zweig, Your Money & Your Brain (New York: Simon & Schuster, 2007), 1. 5. Anonymous, “Confessions of a Former Mutual Funds Reporter,” Fortune, April 26, 1999. 6. James J. Cramer, “Cramer: Mutual Fund Advertising” April 2, 2008, www.abcnews.go.com. 7.


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Success and Luck: Good Fortune and the Myth of Meritocracy by Robert H. Frank

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, Alan Greenspan, Amazon Mechanical Turk, American Society of Civil Engineers: Report Card, attribution theory, availability heuristic, behavioural economics, Branko Milanovic, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, carried interest, Daniel Kahneman / Amos Tversky, David Brooks, deliberate practice, en.wikipedia.org, endowment effect, experimental subject, framing effect, full employment, Gary Kildall, high-speed rail, hindsight bias, If something cannot go on forever, it will stop - Herbert Stein's Law, income inequality, invisible hand, labor-force participation, lake wobegon effect, loss aversion, low interest rates, meritocracy, minimum wage unemployment, Network effects, Paradox of Choice, Paul Samuelson, Report Card for America’s Infrastructure, Richard Thaler, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Rory Sutherland, selection bias, side project, sovereign wealth fund, Steve Jobs, the long tail, The Wealth of Nations by Adam Smith, Tim Cook: Apple, ultimatum game, Vincenzo Peruggia: Mona Lisa, winner-take-all economy

That’s why behavioral economics—a cross-disciplinary effort that draws insights from economics, psychology, biology, and other fields—has been the most vibrant and rapidly growing specialty in economics for the past three decades. Inspired by the pioneering work of the psychologists Daniel Kahneman and the late Amos Tversky, this field has cataloged a large inventory of behavioral anomalies in which people clearly violate the predictions and prescriptions of standard economic models.2 It is common, for example, for someone to be willing to drive across town to save $10 on a $20 clock radio, but unwilling to do so to save $10 on a $1,000 television set.

Chris McKittrick, “Bryan Cranston: ‘Without Luck You Will Not Have a Successful Career,’ ” Daily Actor, October 31, 2012, http://www.dailyactor.com/tv/bryan-cranston-acting-luck/. CHAPTER 5: WHY FALSE BELIEFS ABOUT LUCK AND TALENT PERSIST 1. Michael Mauboussin, The Success Equation, Cambridge, MA: Harvard Business Review Press, 2012. 2. Much of this research is elegantly summarized in Daniel Kahneman, Thinking Fast and Slow, New York: Farrar, Strauss, and Giroux, 2011. For an extremely readable account of how this work became important to economists, see Richard H. Thaler, Misbehaving, New York: W. W. Norton, 2015. 3. P. Cross, “Not Can but Will College Teachers Be Improved?,” New Directions for Higher Education 17 (1977): 1–15. 4.

Chunliang Feng, Yi Luo, Ruolei Gu, Lucas S Broster, Xueyi Shen, Tengxiang Tian, Yue-Jia Luo, Frank Krueger, “The Flexible Fairness: Equality, Earned Entitlement, and Self-Interest,” PLOS ONE 8.9 (September 2013), http://www.plosone.org/article/info%3Adoi%2F10.1371%2Fjournal.pone.0073106. 7. Mechanical Turk, https://www.mturk.com/mturk/welcome. 8. John Locke, Second Treatise on Civil Government, 1689, chap. 5, section 27, http://www.constitution.org/jl/2ndtr05.htm. 9. Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias,” Journal of Economic Perspectives 5.1 (1991): 193–206. 10. Liam Murphy and Thomas Nagel, The Myth of Ownership, New York: Oxford University Press, 2001. 11. David DeSteno, Monica Y.


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Good Economics for Hard Times: Better Answers to Our Biggest Problems by Abhijit V. Banerjee, Esther Duflo

3D printing, accelerated depreciation, affirmative action, Affordable Care Act / Obamacare, air traffic controllers' union, Airbnb, basic income, behavioural economics, Bernie Sanders, Big Tech, business cycle, call centre, Cambridge Analytica, Capital in the Twenty-First Century by Thomas Piketty, carbon credits, carbon tax, Cass Sunstein, charter city, company town, congestion pricing, correlation does not imply causation, creative destruction, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, decarbonisation, Deng Xiaoping, Donald Trump, Edward Glaeser, en.wikipedia.org, endowment effect, energy transition, Erik Brynjolfsson, experimental economics, experimental subject, facts on the ground, fake news, fear of failure, financial innovation, flying shuttle, gentrification, George Akerlof, Great Leap Forward, green new deal, high net worth, immigration reform, income inequality, Indoor air pollution, industrial cluster, industrial robot, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Jane Jacobs, Jean Tirole, Jeff Bezos, job automation, Joseph Schumpeter, junk bonds, Kevin Roose, labor-force participation, land reform, Les Trente Glorieuses, loss aversion, low skilled workers, manufacturing employment, Mark Zuckerberg, mass immigration, middle-income trap, Network effects, new economy, New Urbanism, no-fly zone, non-tariff barriers, obamacare, off-the-grid, offshore financial centre, One Laptop per Child (OLPC), open economy, Paul Samuelson, place-making, post-truth, price stability, profit maximization, purchasing power parity, race to the bottom, RAND corporation, randomized controlled trial, restrictive zoning, Richard Thaler, ride hailing / ride sharing, Robert Gordon, Robert Solow, Ronald Reagan, Savings and loan crisis, school choice, Second Machine Age, secular stagnation, self-driving car, shareholder value, short selling, Silicon Valley, smart meter, social graph, spinning jenny, Steve Jobs, systematic bias, Tax Reform Act of 1986, tech worker, technology bubble, The Chicago School, The Future of Employment, The Market for Lemons, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, total factor productivity, trade liberalization, transaction costs, trickle-down economics, Twitter Arab Spring, universal basic income, urban sprawl, very high income, War on Poverty, women in the workforce, working-age population, Y2K

These vagaries make them unhappy, but perhaps not as unhappy as making an active choice that ends up, purely as a result of bad luck, making them worse off than if they had done nothing. The status quo, the outcome of letting things be, serves as a natural benchmark. Any loss relative to that benchmark is particularly painful. This concept was named loss aversion by Daniel Kahneman and Amos Tversky, two psychologists who have been incredibly influential in economics. (Kahneman won the Nobel Prize in economics in 2002 and Tversky would probably have as well, but for his untimely demise.) Since their original work, a vast literature has demonstrated the existence of loss aversion and its ability to explain many apparently strange behaviors.

Khandelwal, and Adam Osman, “Exporting and Firm Performance: Evidence from a Randomized Experiment,” Quarterly Journal of Economics 132, no. 2 (2017): 551–615. 33 “Rankings by Country of Average Monthly Net Salary (After Tax) (Salaries and Financing),” Numbeo, accessed March 18, 2019, https://www.numbeo.com/cost-of-living/country_price_rankings?itemId=105. 34 Abhijit V. Banerjee and Esther Duflo, “Reputation Effects and the Limits of Contracting: A Study of the Indian Software Industry,” Quarterly Journal of Economics 115, no. 3 (2000): 989–1017. 35 Amos Tversky and Daniel Kahneman, “The Framing of Decisions and Psychology of Choice,” Science 211 (1981): 453–58. 36 Jean Tirole, “A Theory of Collective Reputations (with Applications to the Persistence of Corruption and to Firm Quality),” Review of Economic Studies 63, no. 1 (1996): 1–22. 37 Rocco Machiavello and Ameet Morjaria, “The Value of Relationships: Evidence from Supply Shock to Kenyan Rose Exports,” American Economic Review 105, no. 9 (2015): 2911–45. 38 Wang Xiaodong, “Govt Issues Guidance for Quality of Products,” China Daily, updated September 14, 2017, accessed March 29, 2019, http://www.chinadaily.com.cn/china/2017-09/14/content_31975019.htm. 39 Gujanita Kalita, “The Emergence of Tirupur as the Export Hub of Knitted Garments in India: A Case Study,” ICRIER, accessed April 21, 2019, https://www.econ-jobs.com/research/52329-The-Emergence-of-Tirupur-as-the-Export-Hub-of-Knitted-Garments-in-India-A-Case-Study.pdf. 40 L.

COHERENT ARBITRARINESS50 We know that people will go to great lengths to avoid evidence that would force them to revise their opinions on what they consider to be their core value system (including their opinion about other races or immigrants), because it is so related to their views of themselves. Unfortunately, it does not follow that people are particularly thoughtful about forming those initial opinions. In one of the most famous experiments in the field of behavioral economics, Daniel Kahneman and Richard Thaler chose college students randomly to receive a mug or a pen. Immediately following the gifts, they offered to buy them back from the newly endowed mug and pen owners. At the same time, they also offered those who did not get a mug or a pen the opportunity to buy what they did not get.


Super Thinking: The Big Book of Mental Models by Gabriel Weinberg, Lauren McCann

Abraham Maslow, Abraham Wald, affirmative action, Affordable Care Act / Obamacare, Airbnb, Albert Einstein, anti-pattern, Anton Chekhov, Apollo 13, Apple Newton, autonomous vehicles, bank run, barriers to entry, Bayesian statistics, Bernie Madoff, Bernie Sanders, Black Swan, Broken windows theory, business process, butterfly effect, Cal Newport, Clayton Christensen, cognitive dissonance, commoditize, correlation does not imply causation, crowdsourcing, Daniel Kahneman / Amos Tversky, dark pattern, David Attenborough, delayed gratification, deliberate practice, discounted cash flows, disruptive innovation, Donald Trump, Douglas Hofstadter, Dunning–Kruger effect, Edward Lorenz: Chaos theory, Edward Snowden, effective altruism, Elon Musk, en.wikipedia.org, experimental subject, fake news, fear of failure, feminist movement, Filter Bubble, framing effect, friendly fire, fundamental attribution error, Goodhart's law, Gödel, Escher, Bach, heat death of the universe, hindsight bias, housing crisis, if you see hoof prints, think horses—not zebras, Ignaz Semmelweis: hand washing, illegal immigration, imposter syndrome, incognito mode, income inequality, information asymmetry, Isaac Newton, Jeff Bezos, John Nash: game theory, karōshi / gwarosa / guolaosi, lateral thinking, loss aversion, Louis Pasteur, LuLaRoe, Lyft, mail merge, Mark Zuckerberg, meta-analysis, Metcalfe’s law, Milgram experiment, minimum viable product, moral hazard, mutually assured destruction, Nash equilibrium, Network effects, nocebo, nuclear winter, offshore financial centre, p-value, Paradox of Choice, Parkinson's law, Paul Graham, peak oil, Peter Thiel, phenotype, Pierre-Simon Laplace, placebo effect, Potemkin village, power law, precautionary principle, prediction markets, premature optimization, price anchoring, principal–agent problem, publication bias, recommendation engine, remote working, replication crisis, Richard Feynman, Richard Feynman: Challenger O-ring, Richard Thaler, ride hailing / ride sharing, Robert Metcalfe, Ronald Coase, Ronald Reagan, Salesforce, school choice, Schrödinger's Cat, selection bias, Shai Danziger, side project, Silicon Valley, Silicon Valley startup, speech recognition, statistical model, Steve Jobs, Steve Wozniak, Steven Pinker, Streisand effect, sunk-cost fallacy, survivorship bias, systems thinking, The future is already here, The last Blockbuster video rental store is in Bend, Oregon, The Present Situation in Quantum Mechanics, the scientific method, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Tragedy of the Commons, transaction costs, uber lyft, ultimatum game, uranium enrichment, urban planning, vertical integration, Vilfredo Pareto, warehouse robotics, WarGames: Global Thermonuclear War, When a measure becomes a target, wikimedia commons

However, there is no reason to jump immediately to the complex explanation when you have simpler alternatives to explore first. If you don’t simplify your assumptions, you can fall into a couple of traps, described in our next mental models. First, most people are, unfortunately, hardwired to latch onto unnecessary assumptions, a predilection called the conjunction fallacy, studied by Amos Tversky and Daniel Kahneman, who provided this example in the October 1983 Psychological Review: Linda is 31 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 anti-nuclear demonstrations.

These purchase prices are arbitrary numbers, independent of the current value of the assets, but they are meaningful to you because they represent losses or gains. Similarly, you may avoid killing a project because that would mean admitting the loss of your efforts up to that point. Daniel Kahneman and Amos Tversky’s work on this topic, detailed in the October 1992 issue of the Journal of Risk and Uncertainty, demonstrated that across many risky situations, such as winning or losing money based on a coin toss, people tend to want the potential payoff to be around double the potential loss before they are willing to take the gamble.

DON’T TRUST YOUR GUT You make most of your everyday decisions using your intuition, with your subconscious automatically intuiting what to do from instinct or encoded knowledge. It’s your common or sixth sense, your gut feeling, drawing on your past experiences and natural programming to react to circumstances. In his book Thinking, Fast and Slow, economics Nobel laureate Daniel Kahneman makes a distinction between this intuitive fast thinking and the more deliberate, logical thinking you do when you slow down and question your intuitive assumptions. He argues that when you do something frequently, it gradually gets encoded in your brain until at some point your intuition, via your fast thinking, takes over most of the time and you can do the task mindlessly: driving on the highway, doing simple arithmetic, saying your name.


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Hard Times: The Divisive Toll of the Economic Slump by Tom Clark, Anthony Heath

Affordable Care Act / Obamacare, Alan Greenspan, British Empire, business cycle, Carmen Reinhart, classic study, credit crunch, Daniel Kahneman / Amos Tversky, debt deflation, deindustrialization, Etonian, eurozone crisis, falling living standards, full employment, Gini coefficient, Greenspan put, growth hacking, hedonic treadmill, hiring and firing, income inequality, interest rate swap, invisible hand, It's morning again in America, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Rogoff, labour market flexibility, low interest rates, low skilled workers, MITM: man-in-the-middle, mortgage debt, new economy, Northern Rock, obamacare, oil shock, plutocrats, price stability, quantitative easing, Right to Buy, Ronald Reagan, science of happiness, statistical model, The Wealth of Nations by Adam Smith, unconventional monetary instruments, War on Poverty, We are the 99%, women in the workforce, working poor

If people blame ‘rising prices’ rather than falling wages for their difficulties, they may blame shops (for high prices) or the government (for failing to control inflation), rather than bosses (for having cut pay). 28. Daniel Kahneman and Amos Tversky dominate the relevant literature. One important early paper in which they developed the idea of ‘anchoring’ (i.e. making decisions with reference to gains and losses from a particular starting point, rather than on the basis of final outcomes) was Amos Tversky and Daniel Kahneman, ‘Judgment under uncertainty: Heuristics and biases source’, Science, NS 185:4157 (1974), pp. 1124–31, at: www.socsci.uci.edu/∼bskyrms/bio/readings/tversky_k_heuristics_biases.pdf This developed into the ‘prospect theory’ of decision making in: D.

‘Suicide in England and Wales 1861–2007: A time-trends analysis’, International Journal of Epidemiology, 39:6 (2010), pp. 1464–75, available at: http://ije.oxfordjournals.org/content/39/6/1464.full Tocqueville, Alexis de. Democracy in America, Fontana/HarperCollins, London, 1994 [1840]. Tversky, Amos and Daniel Kahneman. ‘Judgment under uncertainty: Heuristics and biases source’, Science, NS 185:4157 (1974), pp. 1124–31, available at: www.socsci.uci.edu/∼bskyrms/bio/readings/tversky_k_heuristics_biases.pdf Walkerdine, Valerie and Luis Jimenez. Gender, Work and Community after De-Industrialisation: A psychosocial approach to affect, Palgrave Macmillan, London, 2012.


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Descartes' Error: Emotion, Reason and the Human Brain by António R. Damásio

Albert Einstein, Benoit Mandelbrot, Daniel Kahneman / Amos Tversky, discovery of DNA, experimental subject, longitudinal study, mandelbrot fractal, placebo effect, Richard Feynman, social intelligence, theory of mind

But first, get a lot of paper and a pencil sharpener, and a large desk, and do not expect anybody to wait until you are finished. It is also important to note that the flaws of the common-sense view are not confined to the issue of limited memory capacity. Even with paper and pencil to hold the necessary knowledge in place, the reasoning strategies themselves are fraught with weaknesses, as Amos Tversky and Daniel Kahneman have demonstrated.4 One of those important weaknesses may well be humans’ devastating ignorance and defective use of probability theory and statistics, as Stuart Sutherland has suggested.5 Nonetheless, our brains can often decide well, in seconds, or minutes, depending on the time frame we set as appropriate for the goal we want to achieve, and if they can do so, they must do the marvelous job with more than just pure reason.

But although ages of evolution and dedicated neural systems may confer some independence to each of these reasoning/decision-making “modules,” I suspect they are all interdependent. When we witness signs of creativity in contemporary humans, we are probably witnessing the integrated operation of sundry combinations of these devices. THE HELP OF EMOTION, FOR BETTER AND FOR WORSE The work of Amos Tversky and Daniel Kahneman demonstrates that the objective reasoning we employ in day-to-day decisions is far less effective than it seems and than it ought to be.16 To put it simply, our reasoning strategies are defective and Stuart Sutherland strikes an important chord when he talks about irrationality as an “enemy within.”17 But even if our reasoning strategies were perfectly tuned, it appears, they would not cope well with the uncertainty and complexity of personal and social problems.


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Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George A. Akerlof, Robert J. Shiller

affirmative action, Andrei Shleifer, asset-backed security, bank run, banking crisis, Bear Stearns, behavioural economics, business cycle, buy and hold, collateralized debt obligation, conceptual framework, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, Deng Xiaoping, Donald Trump, Edward Glaeser, en.wikipedia.org, experimental subject, financial innovation, full employment, Future Shock, George Akerlof, George Santayana, housing crisis, Hyman Minsky, income per capita, inflation targeting, invisible hand, Isaac Newton, Jane Jacobs, Jean Tirole, job satisfaction, Joseph Schumpeter, junk bonds, Long Term Capital Management, loss aversion, market bubble, market clearing, mental accounting, Michael Milken, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, new economy, New Urbanism, Paul Samuelson, Phillips curve, plutocrats, Post-Keynesian economics, price stability, profit maximization, public intellectual, purchasing power parity, random walk, Richard Thaler, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, seminal paper, South Sea Bubble, The Chicago School, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, W. E. B. Du Bois, We are all Keynesians now, working-age population, Y2K, Yom Kippur War

“Samuelson’s Dictum and the Stock Market.” Economic Inquiry 43(2):221–28. Kahn, Richard F. 1931. “The Relation of Home Investment to Unemployment.” Economic Journal 41(162):173–98. Kahn, Shulamit. 1997. “Evidence of Nominal Wage Stickiness from Microdata.” American Economic Review 87(5):993–1008. Kahneman, Daniel, and Amos Tversky. 1979. “Prospect Theory: An Analysis of Decision under Risk.” Econometrica 47(2):263–92. ———. 2000. Choices, Values and Frames. Cambridge, Mass.: Cambridge University Press. Kahneman, Daniel, Jack Knetsch, and Richard H. Thaler. 1986a. “Fairness as a Constraint on Profit-Seeking: Entitlements in the Market.”

“Recent Inflation in the United States.” Study Paper 1, Joint Economic Committee, 86th Cong., 1st sess., September. Schumpeter, Joseph A. 1939. Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process. New York: McGraw-Hill. Shafir, Eldar, Peter Diamond, and Amos Tversky. 1997. “Money Illusion.” Quarterly Journal of Economics 112(2):341–74. Shapiro, Carl, and Joseph E. Stiglitz. 1984. “Equilibrium Unemployment as a Worker Discipline Device.” American Economic Review 74(3):433–44. Shea, John. 1995a. “Union Contracts and the Life-Cycle/Permanent-Income Hypothesis.”

It would be like burping loudly at a fancy dinner. It is just not done. Questionnaires But studies of fairness do indicate the strong possibility that such concerns will override the effects of rational economic motivation. One of our favorite studies comes from a team consisting of a psychologist, Daniel Kahneman, and two economists, Jack Knetsch and Richard Thaler.4 The study asked respondents about their reactions to a number of vignettes. Was the action taken acceptable or unfair? The first question, dealing with the price of snow shovels after a snowstorm, illustrates the method and the answers. According to the vignette, there has been a snowstorm, and the local hardware store has increased the price of snow shovels.


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Irresistible: The Rise of Addictive Technology and the Business of Keeping Us Hooked by Adam L. Alter

"World Economic Forum" Davos, Alexey Pajitnov wrote Tetris, augmented reality, barriers to entry, Bluma Zeigarnik, call centre, Cass Sunstein, cognitive dissonance, Daniel Kahneman / Amos Tversky, David Sedaris, death from overwork, drug harm reduction, easy for humans, difficult for computers, en.wikipedia.org, experimental subject, game design, gamification, Google Glasses, Great Leap Forward, Ian Bogost, IKEA effect, Inbox Zero, karōshi / gwarosa / guolaosi, Kickstarter, language acquisition, loss aversion, Mark Zuckerberg, Menlo Park, mental accounting, meta-analysis, Oculus Rift, Richard Thaler, Robert Durst, side project, Skype, Snapchat, Steve Jobs, telemarketer, three-martini lunch

Punishments are effective when they’re genuinely unpleasant, but some people might stop using a device that makes them feel bad. The trick for those people is to find a method that isn’t aversive. I was wrapping up my PhD at Princeton University in 2008, when Nobel prizewinner Daniel Kahneman invited me to his office. “You can tell me about your research,” he said. I was excited. Kahneman and his colleague Amos Tversky had pioneered the field of judgment and decision making, and now, forty years later, I was a young researcher in the same field. I told Kahneman that I wanted to invent a tiny alarm clock that followed each of us around and rang whenever we were about to make an important decision.

Abrams, “Reward and Punishment Act as Distinct Factors in Guiding Behavior,” Cognition 139 (June 2015): 154–67; Ronald G. Fryer, Steven D. Levitt, John List, and Sally Sadoff, “Enhancing the Efficacy of Teacher Incentives Through Loss Aversion: A Field Experiment,” Working Paper 18237, National Bureau of Economic Research, Cambridge, MA, 2012; Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision under Risk,” Econometrica 47, no. 2 (March 1979): 263–92. Don’t Waste Your Money game: Paul Simpson, Assessing and Treating Compulsive Internet Use (Brentwood, TN: Cross Country Education, 2013). Relational spending: Elizabeth Dunn and Michael Norton, Happy Money: The Science of Happier Spending (New York: Simon & Schuster, 2013).


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Don't Trust Your Gut: Using Data to Get What You Really Want in LIfe by Seth Stephens-Davidowitz

affirmative action, Airbnb, cognitive bias, commoditize, correlation does not imply causation, COVID-19, Daniel Kahneman / Amos Tversky, data science, deep learning, digital map, Donald Trump, en.wikipedia.org, Erik Brynjolfsson, General Magic , global pandemic, Mark Zuckerberg, meta-analysis, Moneyball by Michael Lewis explains big data, Paul Graham, peak-end rule, randomized controlled trial, Renaissance Technologies, Sam Altman, science of happiness, selection bias, side hustle, Silicon Valley, Steve Jobs, Steve Wozniak, systematic bias, Tony Fadell, twin studies, Tyler Cowen, urban planning, Y Combinator

The Dataist revolution, which has just started and, Harari says, may take decades or more to be fully embraced, questioned the feelings-centered worldview of the humanists. The quasi-religious status of our feelings was called into question by life scientists and biologists. They discovered that, in Harari’s words, “organisms are algorithms” and feelings merely “processes of biochemical calculations.” Further, legendary behavioral scientists, such as Amos Tversky and Daniel Kahneman, discovered that our feelings frequently lead us astray. The mind, Tversky and Kahneman told us, is riddled with biases. Think your gut is a reliable guide? Not so, they said. We are frequently too optimistic; overestimate the prevalence of easily remembered stories; latch on to information that fits what we want to believe; wrongly conclude that we can explain events that, at the time, were unpredictable; and on and on and on.

Because while it may be easy for us, while looking at actual data that the patients gave us during their colonoscopies, to say how bad a particular colonoscopy was, it turns out to be very difficult for the actual patient, without being shown the data, to recall precisely how bad it was. People tend to forget just how painful their colonoscopy was. The evidence: a paper by Donald Redelmeier and Daniel Kahneman where these charts were shown. The researchers recruited a whole bunch of colonoscopy patients and asked them to record their pain for every minute of the procedure, producing moment utility charts like those shown above. But what really made this paper special was another question that the scholars asked.

Dataism: Yuval Noah Harari, Homo Deus: A Brief History of Tomorrow (New York: Random House, 2016). “organisms are algorithms”: “Yuval Noah Harari. Organisms Are Algorithms. Body Is Calculator. Answer = Sensation~Feeling~Vedan?,” YouTube, uploaded by Rashid Kapadia, June 13, 2020, https://www.youtube.com/watch?v=GrQ7nY-vevY. riddled with biases: Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Straus & Giroux, 2011). Chapter 1: The AI Marriage “the most important decision that you make”: https://www.wesmoss.com/news/why-who-you-marry-is-the-most-important-decision-you-make/. compared the field of relationship science to an adolescent: Harry T.


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Obliquity: Why Our Goals Are Best Achieved Indirectly by John Kay

Andrew Wiles, Asian financial crisis, Bear Stearns, behavioural economics, Berlin Wall, Boeing 747, bonus culture, British Empire, business process, Cass Sunstein, computer age, corporate raider, credit crunch, Daniel Kahneman / Amos Tversky, discounted cash flows, discovery of penicillin, diversification, Donald Trump, Fall of the Berlin Wall, financial innovation, Goodhart's law, Gordon Gekko, greed is good, invention of the telephone, invisible hand, Jane Jacobs, junk bonds, lateral thinking, Long Term Capital Management, long term incentive plan, Louis Pasteur, market fundamentalism, Myron Scholes, Nash equilibrium, pattern recognition, Paul Samuelson, purchasing power parity, RAND corporation, regulatory arbitrage, shareholder value, Simon Singh, Steve Jobs, Suez canal 1869, tacit knowledge, Thales of Miletus, The Death and Life of Great American Cities, The Predators' Ball, The Wealth of Nations by Adam Smith, ultimatum game, urban planning, value at risk

And the attack on Franklin’s rule as the epitome of rational thought comes today from many quarters, especially the projects on decision making led by Gerd Gigerenzer. Behavioral economics tends, as I have described, to persist in the notion that the failure of standard concepts of rationality is a problem in our own behavior rather than in our models, but the work of Dan Kahneman and Amos Tversky must nevertheless be credited with a transformation in the way I—and many others—think about economic behavior. Ansoff, H. Igor. Corporate Strategy. Harmondsworth, UK: Penguin, 1985. Ariely, Dan. Predictably Irrational. London: HarperCollins, 2008. Aristotle. Nicomachean Ethics. Cambridge: Cambridge University Press, 2000.

Chapter 5: Objectives, Goals and Actions—How the Means Help Us Discover the End 1 Plutarch, Plutarch’s Lives (London, William Heinemann, 1948), p. 483. 2 Daniel Nettle, Happiness: The Science Behind Your Smile (Oxford: Oxford University Press, 2005), p. 18. 3 See, for example, C. D. Ryff, “Happiness Is Everything, or Is It?” Journal of Personality and Social Psychology 57, no. 6 (1989); Daniel Kahneman, “Objective Happiness,” in Daniel Kahneman, Ed Diener, and Norbert Schwarz, Well-being: The Foundations of Hedonic Psychology (New York, Russell Sage Foundation, 2001). 4 Jack Welch, “Jack Welch Elaborates: Shareholder Value,” BusinessWeek, March 16, 2009. 5 Ed Smith, What Sport Tells Us About Life (London: Penguin, 2008), p. 28. 6 Bob Rotella with Bob Cullen, Golf Is Not a Game of Perfect (London: Pocket Books, 2004).


pages: 170 words: 49,193

The People vs Tech: How the Internet Is Killing Democracy (And How We Save It) by Jamie Bartlett

Ada Lovelace, Airbnb, AlphaGo, Amazon Mechanical Turk, Andrew Keen, autonomous vehicles, barriers to entry, basic income, Bernie Sanders, Big Tech, bitcoin, Black Lives Matter, blockchain, Boris Johnson, Californian Ideology, Cambridge Analytica, central bank independence, Chelsea Manning, cloud computing, computer vision, creative destruction, cryptocurrency, Daniel Kahneman / Amos Tversky, data science, deep learning, DeepMind, disinformation, Dominic Cummings, Donald Trump, driverless car, Edward Snowden, Elon Musk, Evgeny Morozov, fake news, Filter Bubble, future of work, general purpose technology, gig economy, global village, Google bus, Hans Moravec, hive mind, Howard Rheingold, information retrieval, initial coin offering, Internet of things, Jeff Bezos, Jeremy Corbyn, job automation, John Gilmore, John Maynard Keynes: technological unemployment, John Perry Barlow, Julian Assange, manufacturing employment, Mark Zuckerberg, Marshall McLuhan, Menlo Park, meta-analysis, mittelstand, move fast and break things, Network effects, Nicholas Carr, Nick Bostrom, off grid, Panopticon Jeremy Bentham, payday loans, Peter Thiel, post-truth, prediction markets, QR code, ransomware, Ray Kurzweil, recommendation engine, Renaissance Technologies, ride hailing / ride sharing, Robert Mercer, Ross Ulbricht, Sam Altman, Satoshi Nakamoto, Second Machine Age, sharing economy, Silicon Valley, Silicon Valley billionaire, Silicon Valley ideology, Silicon Valley startup, smart cities, smart contracts, smart meter, Snapchat, Stanford prison experiment, Steve Bannon, Steve Jobs, Steven Levy, strong AI, surveillance capitalism, TaskRabbit, tech worker, technological singularity, technoutopianism, Ted Kaczynski, TED Talk, the long tail, the medium is the message, the scientific method, The Spirit Level, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, too big to fail, ultimatum game, universal basic income, WikiLeaks, World Values Survey, Y Combinator, you are the product

McLuhan’s prescient 50-year-old ‘probes’ (he called his ideas probes) into how technology would change behaviour are still significantly more insightful than almost every ‘thought-provoking’ TED Talk. But McLuhan wasn’t a scientist. He didn’t conduct studies or test theories. Fortunately Daniel Kahneman, the academic most associated with examining bias in human decision-making, did. Through decades of empirical research with long-time collaborator Amos Tversky, he pioneered the study of how we take decisions – and especially irrational ones. I won’t recite the Stanford Prison Experiments or the Ultimatum Game, but Kahneman’s main point was that there are two basic systems that govern human behaviour.

On ‘post-truth’, see books by Matthew D’Ancona, James Ball and Evan Davies. 6 Bruce Drake, ‘Six new findings about Millennials’, www.pewresearch.org, 7 March 2014. A survey repeatedly found that millennials have fewer institutional attachments than their parents, are more politically independent, but do ‘connect’ to personalised networks. 7 Daniel Kahneman, Thinking, Fast and Slow (Farrar, Straus and Giroux, 2011). S. Messing and S.J. Westwood (2014), ‘Selective exposure in the age of social media: Endorsements trump partisan source affiliation when selecting news online’. Communication Research, 41(8), 1042–1063. E. Bakshy, S. Messing and L.A.


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Rapt: Attention and the Focused Life by Winifred Gallagher

Abraham Maslow, Albert Einstein, Atul Gawande, behavioural economics, Build a better mousetrap, Daniel Kahneman / Amos Tversky, David Brooks, delayed gratification, do what you love, epigenetics, Frank Gehry, fundamental attribution error, Isaac Newton, knowledge worker, longitudinal study, loss aversion, Mahatma Gandhi, McMansion, mirror neurons, music of the spheres, Nelson Mandela, off-the-grid, Paradox of Choice, Ralph Waldo Emerson, Richard Feynman, Rodney Brooks, Ronald Reagan, Silicon Valley, social intelligence, Walter Mischel, zero-sum game

Next, he listens to a visitor’s attempt to put a temperament in a nutshell: “Do you want to spend more time today by yourself or with other people?” He considers this, then says, “That’s a good one. Although the answer would depend very much on your immediate context—on how much time you’re spending with other people now. You’d have to refine the question.” In their work on decision-making, Kahneman and his late partner Amos Tversky made the art of the refined query into a science. “Our research method was to write one question at a time, formulated to make a specific point,” he says. “Then we published our questions, answers, and predictions. That is what we did.” Of the Nobel, he says, “I got the prize because some economists became convinced that you could do economics in a slightly different way—by being more realistic about psychology.”

On the other hand, by zeroing in on certain criteria—a school’s status, say, or geographical location—and ignoring others, they can end up focused on one dimension of an important experience that might not prove to be as vital as they thought. Early in his long and varied career, the Princeton psychologist Daniel Kahneman wrote a book about attention, and the subject figures prominently in his more recent work on the decision-making process. In 2002, this research brought him the Nobel Prize in economics, yet Kahneman remains every inch a psychologist. His demeanor is that of a certain kind of therapist: not the warm, fuzzy sort but the penetrating, hard-hat type who doesn’t miss a thing.

Realizing that he has ventured into deep water, he laughs merrily and says, “Mind is not like any other thing, so it’s hard to explain. Just as air can’t explain fire, or space explain earth.” In the rinpoche’s tradition, paying attention is the way to experience true clarity about what is—knowledge that can’t be accessed through thinking, but only through being. (In the psychologist Daniel Kahneman’s terms, this awareness comes from the experiencing rather than the remembering self.) Within Buddhism, someone who sustains this effortless rapt focus on the right here, right now on a continual basis is said to be “enlightened” or “realized.” In the rinpoche’s Kargyu world, the ranks of these special individuals include elite yogi-monks called togdens.


pages: 345 words: 75,660

Prediction Machines: The Simple Economics of Artificial Intelligence by Ajay Agrawal, Joshua Gans, Avi Goldfarb

Abraham Wald, Ada Lovelace, AI winter, Air France Flight 447, Airbus A320, algorithmic bias, AlphaGo, Amazon Picking Challenge, artificial general intelligence, autonomous vehicles, backpropagation, basic income, Bayesian statistics, Black Swan, blockchain, call centre, Capital in the Twenty-First Century by Thomas Piketty, Captain Sullenberger Hudson, carbon tax, Charles Babbage, classic study, collateralized debt obligation, computer age, creative destruction, Daniel Kahneman / Amos Tversky, data acquisition, data is the new oil, data science, deep learning, DeepMind, deskilling, disruptive innovation, driverless car, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, everywhere but in the productivity statistics, financial engineering, fulfillment center, general purpose technology, Geoffrey Hinton, Google Glasses, high net worth, ImageNet competition, income inequality, information retrieval, inventory management, invisible hand, Jeff Hawkins, job automation, John Markoff, Joseph Schumpeter, Kevin Kelly, Lyft, Minecraft, Mitch Kapor, Moneyball by Michael Lewis explains big data, Nate Silver, new economy, Nick Bostrom, On the Economy of Machinery and Manufactures, OpenAI, paperclip maximiser, pattern recognition, performance metric, profit maximization, QWERTY keyboard, race to the bottom, randomized controlled trial, Ray Kurzweil, ride hailing / ride sharing, Robert Solow, Salesforce, Second Machine Age, self-driving car, shareholder value, Silicon Valley, statistical model, Stephen Hawking, Steve Jobs, Steve Jurvetson, Steven Levy, strong AI, The Future of Employment, the long tail, The Signal and the Noise by Nate Silver, Tim Cook: Apple, trolley problem, Turing test, Uber and Lyft, uber lyft, US Airways Flight 1549, Vernor Vinge, vertical integration, warehouse automation, warehouse robotics, Watson beat the top human players on Jeopardy!, William Langewiesche, Y Combinator, zero-sum game

No prediction machine would make an error like this. But perhaps humans don’t take such tasks seriously, since they may feel as if they are playing a game. Would they make similar errors if the consequences are decidedly not game-like? The answer—demonstrated over many experiments by psychologists Daniel Kahneman and Amos Tversky—is decidedly yes.2 When they told people to consider two hospitals—one with forty-five births per day and another with fifteen births per day—and asked which hospital would have more days when 60 percent or more of the babies born are boys, very few gave the correct answer—the smaller hospital.

Sixty percent of the time you choose X and are correct 60 percent of the time, while 40 percent of the time you choose O and are correct only 40 percent of the time. On average, this is 0.6^2 + 0.4^2 = 0.52. 2. Amost Tversky and Daniel Kahneman, “Judgment under Uncertainty: Heuristics and Biases,” Science 185, no. 4157 (1974): 1124–1131, https://people.hss.caltech.edu/~camerer/Ec101/JudgementUncertainty.pdf. 3. See Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Strauss and Giroux, 2011); and Dan Ariely, Predictably Irrational (New York: HarperCollins, 2009). 4. Michael Lewis, Moneyball (New York: Norton, 2003). 5.

Tesla CEO Elon Musk has been one of the most consistent, high-profile, and experienced individuals sounding alarm bells: “I have exposure to the very cutting-edge AI, and I think people should be really concerned about it … I keep sounding the alarm bell, but until people see robots going down the street killing people, they don’t know how to react, because it seems so ethereal.”1 Another learned expert with an opinion on this is renowned psychologist and Nobel laureate Daniel Kahneman. Among non-academics, he may be best known for his 2011 book, Thinking, Fast and Slow. In 2017, at a conference we organized in Toronto on the economics of artificial intelligence, he explained why he thinks AIs will be wiser than humans: A well-known novelist wrote me some time ago that he’s planning a novel.


pages: 227 words: 62,177

Numbers Rule Your World: The Hidden Influence of Probability and Statistics on Everything You Do by Kaiser Fung

Alan Greenspan, American Society of Civil Engineers: Report Card, Andrew Wiles, behavioural economics, Bernie Madoff, Black Swan, business cycle, call centre, correlation does not imply causation, cross-subsidies, Daniel Kahneman / Amos Tversky, edge city, Emanuel Derman, facts on the ground, financial engineering, fixed income, Gary Taubes, John Snow's cholera map, low interest rates, moral hazard, p-value, pattern recognition, profit motive, Report Card for America’s Infrastructure, statistical model, the scientific method, traveling salesman

As the professors showed us, a few well-chosen numbers paint a far richer picture than hundreds of thousands of disorganized data. Conclusion Statistical thinking is hard,” the Nobel prize winner Daniel Kahneman told a gathering of mathematicians in New York City in 2009. A revered figure in the world of behavioral economics, Professor Kahneman spoke about his renewed interest in this topic, which he first broached in the 1970s with his frequent collaborator Amos Tversky. The subject matter is not inherently difficult, but our brains are wired in such a way that it requires a conscious effort to switch away from the default mode of reasoning, which is not statistical.

As with traditional economics, queuing theory makes an assumption about rational human behavior that does not match reality. For example, in putting up signs showing inflated estimates of waiting time, the Disney engineers counted on irrationality, and customer surveys consistently confirmed their judgment. For further exploration of the irrational mind, see the seminal work of Daniel Kahneman, starting with his 2003 overview article “Maps of Bounded Rationality: Psychology for Behavioral Economics” in American Economic Review, and Predictably Irrational by Dan Ariely. Political considerations often intrude on the work of applied scientists. For instance, Minnesota state senator Dick Day seized upon the highway congestion issue to score easy points with his constituents, some of whom blamed the ramp-metering policy for prolonging their commute times.

Two books in the finance area also fit the bill: in The Black Swan, Nassim Taleb harangues theoreticians of financial mathematics (and other related fields) on their failure in statistical thinking, while in My Life as a Quant, Emanuel Derman offers many valuable lessons for financial engineers, the most important of which is that modelers in the social sciences—unlike physicists—should not seek the truth. Daniel Kahneman summarized his Nobel-prize-winning research on the psychology of judgment, including the distinction between intuition and reasoning, in “Maps of Bounded Rationality: Psychology for Behavioral Economics,” published in American Economic Review. This body of work has tremendous influence on the development of behavioral economics.


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Traffic: Why We Drive the Way We Do (And What It Says About Us) by Tom Vanderbilt

Albert Einstein, autonomous vehicles, availability heuristic, Berlin Wall, Boeing 747, call centre, cellular automata, Cesare Marchetti: Marchetti’s constant, cognitive dissonance, computer vision, congestion charging, congestion pricing, Daniel Kahneman / Amos Tversky, DARPA: Urban Challenge, Donald Shoup, endowment effect, extreme commuting, fundamental attribution error, Garrett Hardin, Google Earth, hedonic treadmill, Herman Kahn, hindsight bias, hive mind, human-factors engineering, if you build it, they will come, impulse control, income inequality, Induced demand, invisible hand, Isaac Newton, Jane Jacobs, John Nash: game theory, Kenneth Arrow, lake wobegon effect, loss aversion, megacity, Milgram experiment, Nash equilibrium, PalmPilot, power law, Sam Peltzman, Silicon Valley, SimCity, statistical model, the built environment, The Death and Life of Great American Cities, Timothy McVeigh, traffic fines, Tragedy of the Commons, traumatic brain injury, ultimatum game, urban planning, urban sprawl, women in the workforce, working poor

Waterson, “Are We Looking Where We Are Going? An Exploratory Examination of Eye Movement in High Speed Driving.” Paper 04-2602, Proceedings of the 83rd Annual Meeting of the Transportation Research Board (Washington D.C., January 2004). “loss aversion”: The notion of loss aversion was first hypothesized by Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision Under Risk,” Econometrica, vol. 47 (1979), pp. 263–91. sensitive to loss: See Sabrina M. Tom, Craig R. Fox, Christopher Trepel, and Russell A. Poldrack, “The Neural Basis of Loss Aversion in Decision-Making Under Risk,” Science, vol. 315, no. 5811 (26 January 2007), pp. 515–18.

to walk somewhere: Travel Behaviour Research Baseline Survey 2004: Sustainable Travel Demonstration Towns (SUSTRANS and Socialdata, 2004). Retrieved from http://www.sustrans.org.uk/webfiles/travelsmart/STDT%20Research%20FINAL.pdf. was at work: The “availability heuristic” is credited to Daniel Kahneman and Amos Tversky. (Heuristic is a sophisticated-sounding word that really just means “mental shortcut.”) When people are asked to imagine how often something happens, they tend to overestimate the probability of things that can be more easily recalled from memory—that is, that are “available”—or that loom more vividly in the imagination.

The fact that we spend more time seeing losses than gains while driving in congestion plays perfectly into a well-known psychological theory called “loss aversion.” Any number of experiments have shown that humans register losses more powerfully than gains. Our brains even seem rigged to be more sensitive to loss. In what psychologist Daniel Kahneman has called the “endowment affect,” once people have been given something, they are instantly more hesitant to give it up. Do you remember the childlike glee you felt the last time you found a parking spot at the mall on a crowded day? You may have left the spot with a certain reluctance, particularly if someone else was waiting for it.


Investment: A History by Norton Reamer, Jesse Downing

activist fund / activist shareholder / activist investor, Alan Greenspan, Albert Einstein, algorithmic trading, asset allocation, backtesting, banking crisis, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, book value, break the buck, Brownian motion, business cycle, buttonwood tree, buy and hold, California gold rush, capital asset pricing model, Carmen Reinhart, carried interest, colonial rule, Cornelius Vanderbilt, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, debt deflation, discounted cash flows, diversified portfolio, dogs of the Dow, equity premium, estate planning, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, family office, Fellow of the Royal Society, financial innovation, fixed income, flying shuttle, Glass-Steagall Act, Gordon Gekko, Henri Poincaré, Henry Singleton, high net worth, impact investing, index fund, information asymmetry, interest rate swap, invention of the telegraph, James Hargreaves, James Watt: steam engine, John Bogle, joint-stock company, Kenneth Rogoff, labor-force participation, land tenure, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, managed futures, margin call, means of production, Menlo Park, merger arbitrage, Michael Milken, money market fund, moral hazard, mortgage debt, Myron Scholes, negative equity, Network effects, new economy, Nick Leeson, Own Your Own Home, Paul Samuelson, pension reform, Performance of Mutual Funds in the Period, Ponzi scheme, Post-Keynesian economics, price mechanism, principal–agent problem, profit maximization, proprietary trading, quantitative easing, RAND corporation, random walk, Renaissance Technologies, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Sand Hill Road, Savings and loan crisis, seminal paper, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spinning jenny, statistical arbitrage, survivorship bias, tail risk, technology bubble, Teledyne, The Wealth of Nations by Adam Smith, time value of money, tontine, too big to fail, transaction costs, two and twenty, underbanked, Vanguard fund, working poor, yield curve

Behavioral finance essentially attempts to explain empirical anomalies and deviations from the classical risk models, including the efficient market hypothesis. Instead of considering market participants as hyperrational agents obeying arguably overly elegant utility functions, they are thought of as possessing biases, prejudices, and tendencies that have real and measurable effects on markets and financial transactions. Daniel Kahneman and Amos Tversky wrote a seminal paper in the field outlining what they call prospect theory, a description of individuals’ optimization outside of the classical expected utility framework. Their pioneering paper noted many 252 Investment: A History of the known behaviors that represent aberrations from expected utility theory, including lottery problems (in which individuals tend to elect a lump-sum payment up front even if that is smaller than the expected value of receiving a larger amount or zero when a coin flip is involved) and probabilistic insurance (in which individuals have a more disproportionate dislike for a form of insurance that would cover losses based on a coin flip more than the math suggests they should).

Benjamin Graham, The Intelligent Investor (New York: Harper, 1949). 44. Benjamin Graham, “A Conversation with Benjamin Graham,” Financial Analysts Journal 32, no. 5 (September–October 1976): 22. 45. Warren Buffett, “The Superinvestors of Graham-and-Doddsville,” Hermes (Columbia Business School), Fall 1984, 4–15. 46. Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision under Risk,” Econometrica 47, no. 2 (March 1979): 265–278. 47. Rajnish Mehra and Edward C. Prescott, “The Equity Premium: A Problem,” Journal of Monetary Economics 15, no. 2 (March 1985): 145–161. 48. Stephen J. Brown, William N. Goetzmann, and Stephen A.

Morgan Chase & Co. Annual Report 2013. April 9, 2014. http://investor .shareholder.com/jpmorganchase/annual.cfm. Kabele, Thomas. “James Dodson, First Lecture on Insurances, 1757: Discussion.” Kabele and Associates (New Canaan, CT), May 2, 2008. http:// www.kabele.us/papers/dodsonms2.pdf. Kahneman, Daniel, and Amos Tversky. “Prospect Theory: An Analysis of Decision under Risk.” Econometrica 47, no. 2 (March 1979): 263–292. Kaul, Chandrika. “From Empire to Independence: The British Raj in India, 1858–1947.” BBC. Last modified March 3, 2011. http://www.bbc.co.uk /history/british/modern/independence1947_01.shtml. Kedmey, Dan. “2 Years and 900 Pages Later, the Volcker Rule Gets the Green Light.”


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In Pursuit of the Perfect Portfolio: The Stories, Voices, and Key Insights of the Pioneers Who Shaped the Way We Invest by Andrew W. Lo, Stephen R. Foerster

Alan Greenspan, Albert Einstein, AOL-Time Warner, asset allocation, backtesting, behavioural economics, Benoit Mandelbrot, Black Monday: stock market crash in 1987, Black-Scholes formula, Bretton Woods, Brownian motion, business cycle, buy and hold, capital asset pricing model, Charles Babbage, Charles Lindbergh, compound rate of return, corporate governance, COVID-19, credit crunch, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, Edward Glaeser, equity premium, equity risk premium, estate planning, Eugene Fama: efficient market hypothesis, fake news, family office, fear index, fiat currency, financial engineering, financial innovation, financial intermediation, fixed income, hiring and firing, Hyman Minsky, implied volatility, index fund, interest rate swap, Internet Archive, invention of the wheel, Isaac Newton, Jim Simons, John Bogle, John Meriwether, John von Neumann, joint-stock company, junk bonds, Kenneth Arrow, linear programming, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, managed futures, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, money market fund, money: store of value / unit of account / medium of exchange, Myron Scholes, new economy, New Journalism, Own Your Own Home, passive investing, Paul Samuelson, Performance of Mutual Funds in the Period, prediction markets, price stability, profit maximization, quantitative trading / quantitative finance, RAND corporation, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, selection bias, seminal paper, shareholder value, Sharpe ratio, short selling, South Sea Bubble, stochastic process, stocks for the long run, survivorship bias, tail risk, Thales and the olive presses, Thales of Miletus, The Myth of the Rational Market, The Wisdom of Crowds, Thomas Bayes, time value of money, transaction costs, transfer pricing, tulip mania, Vanguard fund, yield curve, zero-coupon bond, zero-sum game

While most traditional models assume that all investors and decision makers are rational, behavioral finance recognizes that this is not always the case. The origin of behavioral economics is often traced to the development of prospect theory in 1979 by the famous social scientist duo of Daniel Kahneman and Amos Tversky.81 This theory describes the way individuals make risky choices when they are unsure about the probability of the outcome. Prospect theory attempts to capture mathematically the value of this choice relative to monetary gains and losses. According to prospect theory, such a relationship isn’t always one-to-one.

Market efficiency, like all classical microeconomics, assumes that investors are rational. Market efficiency is just simple supply and demand economics brought to asset markets. A camp of academics, known as the behavioralists, questioned this assumption. The best-known behavioral critics of rationality included Nobel laureate Daniel Kahneman and his longtime collaborator Amos Tversky (whose untimely passing almost certainly prevented him from sharing the award with Kahneman) as well as fellow Nobel laureates Robert Shiller and Richard (Dick) Thaler. As described in chapter 2, Kahneman and Tversky’s famous 1979 prospect theory presented a decision-making model in which people made decisions by weighing losses much more heavily than their gains.

“The Performance of Mutual Funds in the Period 1945–64.” Journal of Finance 23, no. 2: 389–416. ________. 1978. “Some Anomalous Evidence regarding Market Efficiency.” Journal of Financial Economics 6, no. 2–3: 95–101. Kahneman, Daniel. 2011. Thinking, Fast and Slow. New York: Farrar, Strauss and Giroux. Kahneman, Daniel, and Amos Tversky. 1979. “Prospect Theory: An Analysis of Decision under Risk.” Econometrica 47, no. 2: 263–92. Kalamazoo College. 2013. “Alumnus Wins Nobel Prize.” October 22, http://www.kzoo.edu/news/alumnus-wins-nobel-prize/. Kampmann, Ursula. 2012a. “The History of Coinage 2—The Cash.” CoinsWeekly, October 10, https://coinsweekly.com/the-history-of-chinese-coinage-2-the-cash/. ________. 2012b.


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The End of Alchemy: Money, Banking and the Future of the Global Economy by Mervyn King

Alan Greenspan, Andrei Shleifer, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, behavioural economics, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Monday: stock market crash in 1987, Black Swan, Boeing 747, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, classic study, collapse of Lehman Brothers, creative destruction, Credit Default Swap, crowdsourcing, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Doha Development Round, Edmond Halley, Fall of the Berlin Wall, falling living standards, fiat currency, financial engineering, financial innovation, financial intermediation, floating exchange rates, foreign exchange controls, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, German hyperinflation, Glass-Steagall Act, Great Leap Forward, Hyman Minsky, inflation targeting, invisible hand, Japanese asset price bubble, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, large denomination, lateral thinking, liquidity trap, Long Term Capital Management, low interest rates, manufacturing employment, market clearing, Martin Wolf, Mexican peso crisis / tequila crisis, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Nick Leeson, no-fly zone, North Sea oil, Northern Rock, oil shale / tar sands, oil shock, open economy, paradox of thrift, Paul Samuelson, Ponzi scheme, price mechanism, price stability, proprietary trading, purchasing power parity, quantitative easing, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Solow, Satoshi Nakamoto, savings glut, secular stagnation, seigniorage, stem cell, Steve Jobs, The Great Moderation, the payments system, The Rise and Fall of American Growth, Thomas Malthus, too big to fail, transaction costs, Tyler Cowen: Great Stagnation, yield curve, Yom Kippur War, zero-sum game

The main challenge to the economists’ assumption of optimising behaviour comes from ‘behavioural economics’, a relatively new field often associated with Daniel Kahneman, Richard Thaler and Amos Tversky.20 It studies the emotional and psychological dimensions of economic choices.21 Behavioural economics has identified an impressive array of cognitive biases in the way people behave in practice. For example, people are observed both to display overconfidence in their ability to judge probabilities and to underestimate the likelihood of rare events. But behavioural economics assumes that deviations from traditional optimising behaviour result from the fact that humans are hardwired to behave in a way that is ‘irrational’. Daniel Kahneman suggested that decisions are made by two different systems in the mind: one fast and intuitive, the other slower, deliberate, and closer to optimising behaviour.22 In this way he was able to explain aspects of behaviour that appear anomalous in the traditional approach.

Jarvie, J.R. (1934), The Old Lady Unveiled: A Criticism and Explanation of the Bank of England, Wishart & Company, London. Johnson, Paul (1997), A History of the American People, Weidenfeld and Nicolson, London. Kahneman, Daniel (2011), Thinking, Fast and Slow, Farrar, Straus and Giroux, New York. Kahneman, Daniel and Amos Tversky (1979), ‘Prospect Theory: An Analysis of Decision under Risk’, Econometrica, Vol. 47, pp. 263–91. Kalemli-Ozcan, Sebnem, Bent E. Sorensen and Sevcan Yesiltas (2012), ‘Leverage Across Firms, Banks and Countries’, Federal Reserve Bank of Dallas Conference on Financial Frictions and Monetary Policy in an Open Economy, mimeo.

Turner, Adair (2014), ‘Central Banking and Monetary Policy after the Crisis’, City Lecture at the Official Monetary and Financial Institutions Forum (OMFIF), London, 9 December 2014. —— (2015), Between Debt and the Devil, Princeton University Press, Princeton, New Jersey. Tversky, Amos and Daniel Kahneman (1974), ‘Judgment under Uncertainty: Heuristics and Biases’, Science, Vol. 185, No. 4157, pp. 1124–31. Waley, Arthur (1938), The Analects of Confucius, Allen and Unwin, London. Weale, Martin (2015), ‘Prospects for Supply Growth in Western Europe’, Speech at the Rijksuniversiteit, Groningen, 12 October, Bank of England website.


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The Problem of Political Authority: An Examination of the Right to Coerce and the Duty to Obey by Michael Huemer

Cass Sunstein, Chelsea Manning, cognitive dissonance, cuban missile crisis, Daniel Kahneman / Amos Tversky, en.wikipedia.org, Eratosthenes, experimental subject, framing effect, Garrett Hardin, Gini coefficient, illegal immigration, impulse control, Isaac Newton, Julian Assange, laissez-faire capitalism, land bank, Machinery of Freedom by David Friedman, Milgram experiment, moral hazard, Phillip Zimbardo, profit maximization, profit motive, Ralph Nader, RAND corporation, rent-seeking, Ronald Coase, Stanford prison experiment, systematic bias, The Wealth of Nations by Adam Smith, Tyler Cowen, unbiased observer, uranium enrichment, WikiLeaks

The Singing Revolution (documentary film). 94 min. Mountain View Productions. Tversky, Amos. 1969. ‘Intransitivity of Prefentryerences’, Psychological Review 76: 31–48. Tversky, Amos, and Daniel Kahneman. 1981. ‘The Framing of Decisions and the Psychology of Choice’, Science 211: 453–8. ——. 1982. ‘Evidential Impact of Base Rates’. Pp. 153–60 in Judgment under Uncertainty: Heuristics and Biases, ed. Daniel Kahneman, Paul Slovic, and Amos Tversky. Cambridge: Cambridge University Press. ——. 1986. ‘Rational Choice and the Framing of Decisions’, Journal of Business 59: S251–S278. ——. 2002. ‘Extensional versus Intuitive Reasoning: The Conjunction Fallacy in Probability Judgment’.

Rethinking Social Policy: Race, Poverty and the Underclass. Cambridge, MA: Harvard University Press. Julich, S. 2005. ‘“Stockholm Syndrome” and Child Sexual Abuse’, Journal of Child Sexual Abuse 14: 107–29. Juvenal, Decimus Junius. 1967. The Sixteen Satires, tr. Peter Green. Baltimore: Penguin. Kahneman, Daniel, Paul Slovic, and Amos Tversky, eds. 1982. Judgment under Uncertainty: Heuristics and Biases. Cambridge: Cambridge University Press. Kant, Immanuel. 1957. Perpetual Peace, ed. and tr. Lewis White Beck. Indianapolis: Bobbs-Merrill. Originally published 1795. Karsh, Efraim. 2002. The Iran-Iraq War 1980–1988. Oxford: Osprey.

Gat, Azar. 2006. War in Human Civilization. Oxford: Oxford University Press. Gaus, Gerald. 2003. Contemporary Theories of Liberalism: Public Reason as a Post-Enlightenment Project. London: Sage. Gauthier, David. 1986. Morals by Agreement. Oxford: Clarendon Press. Gilovich, Thomas, Dale Griffin, and Daniel Kahneman. 2002. Heuristics and Biases: The Psychology of Intuitive Judgment. Cambridge: Cambridge University Press. Gleditsch, Nils P. 1992. ‘Democracy and Peace’, Journal of Peace Research 29: 369–76. Goldstein, Amy. 2007. ‘More Security Firms Getting Police Powers: Some See Benefits To Public Safety, But Others Are Wary’, San Francisco Chronicle, Sunday, January 7, A3, www.sfgate.com/cgi-bin/article.cgi?


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Data-Ism: The Revolution Transforming Decision Making, Consumer Behavior, and Almost Everything Else by Steve Lohr

"World Economic Forum" Davos, 23andMe, Abraham Maslow, Affordable Care Act / Obamacare, Albert Einstein, Alvin Toffler, Bear Stearns, behavioural economics, big data - Walmart - Pop Tarts, bioinformatics, business cycle, business intelligence, call centre, Carl Icahn, classic study, cloud computing, computer age, conceptual framework, Credit Default Swap, crowdsourcing, Daniel Kahneman / Amos Tversky, Danny Hillis, data is the new oil, data science, David Brooks, driverless car, East Village, Edward Snowden, Emanuel Derman, Erik Brynjolfsson, everywhere but in the productivity statistics, financial engineering, Frederick Winslow Taylor, Future Shock, Google Glasses, Ida Tarbell, impulse control, income inequality, indoor plumbing, industrial robot, informal economy, Internet of things, invention of writing, Johannes Kepler, John Markoff, John von Neumann, lifelogging, machine translation, Mark Zuckerberg, market bubble, meta-analysis, money market fund, natural language processing, obamacare, pattern recognition, payday loans, personalized medicine, planned obsolescence, precision agriculture, pre–internet, Productivity paradox, RAND corporation, rising living standards, Robert Gordon, Robert Solow, Salesforce, scientific management, Second Machine Age, self-driving car, Silicon Valley, Silicon Valley startup, SimCity, six sigma, skunkworks, speech recognition, statistical model, Steve Jobs, Steven Levy, The Design of Experiments, the scientific method, Thomas Kuhn: the structure of scientific revolutions, Tony Fadell, unbanked and underbanked, underbanked, Von Neumann architecture, Watson beat the top human players on Jeopardy!, yottabyte

In short, what is the sensible division of labor in decision making between man and machine? In the fall of 2013, IBM held a symposium at its Watson research lab that probed that issue, in the context of computer software that keeps getting smarter and smarter. The first speaker was Daniel Kahneman, the Princeton psychologist and Nobel Prize winner in economics. His 2011 best seller, Thinking, Fast and Slow, describes his research, with Amos Tversky, a mathematical psychologist, into the basis of common human errors. Humans, Kahneman explains, are often error-prone when we make decisions by applying rules of thumb and biases. The culprit is “fast” thinking, the quick assessment of a situation to take action.

“But we were kind of sad when Watson no longer answered Wonder Woman,” recalls Jennifer Chu-Carroll, a scientist on the Watson team, as if a bit of whimsy had departed from their creation. Wonder Woman was soon shunted aside, as Watson’s knowledge base became larger, more detailed, and more refined. The computerized knowledge systems being developed at IBM, Google, other companies, and universities are starting to put together “a rich and accurate model of the world,” as Daniel Kahneman summed up the virtue of human-style fast thinking. That sort of cognitive model is the engine of intuition, inference, and cause-and-effect reasoning—getting to the “why” of things, to understanding. It is a horizon of connection that is well beyond correlation. But there is a lively debate among data enthusiasts as to whether the pursuit of causes is even necessary.

But what struck me while reporting these stories, and what came up repeatedly in conversations with artificial intelligence experts, is what awesome things the human brain and what we call general human intelligence really are. The general intelligence involves the effortless capacity to tap life experience, and make intuitive connections and quick decisions—what Daniel Kahneman calls “thinking fast.” Then there is the human brain as a processor, cramming incredible computing power into a tiny space and using only 20 watts of energy. By contrast, the Watson computer that won its Jeopardy! contest with human champions burned 85,000 watts. Still, the virtuous cycle of more and more varied data and smarter and smarter algorithms, written by human programmers, is delivering a big-data-fueled renaissance in artificial intelligence.


Spite: The Upside of Your Dark Side by Simon McCarthy-Jones

affirmative action, Atul Gawande, Bernie Sanders, Brexit referendum, Daniel Kahneman / Amos Tversky, dark triade / dark tetrad, Donald Trump, Elon Musk, en.wikipedia.org, experimental economics, Extinction Rebellion, greed is good, Greta Thunberg, income inequality, Jeremy Corbyn, Jon Ronson, loss aversion, Menlo Park, meta-analysis, Milgram experiment, New Journalism, Nick Bostrom, p-value, profit maximization, rent-seeking, rewilding, selective serotonin reuptake inhibitor (SSRI), shareholder value, Steven Pinker, TED Talk, The Wealth of Nations by Adam Smith, theory of mind, Tragedy of the Commons, ultimatum game, WikiLeaks

Sitkin and his colleagues argue that companies should undertake stretch goals when they are already well positioned and on a winning streak. A company that attempts stretch goals when it is weak communicates fear and desperation. Unfortunately, this is when management may be most likely to attempt them. To make this point, Sitkin draws on the psychological literature on loss aversion and decision-making. Psychologists Daniel Kahneman and Amos Tversky famously showed that failure makes people more inclined to take risks to dig themselves out of a hole.53 As a result, struggling firms are more likely to take risky actions. The other implication of Kahneman and Tversky’s work is that successful firms are likely to be more risk averse, despite the fact that they are the ones with the resources and motivation to fruitfully take risks and achieve stretch goals.

They just did not understand the game!”10 Despite these reactions, researchers around the world have found similar results to Güth’s. Indeed, a couple of years later, and six thousand kilometers west, another research group independently came up with the idea for an Ultimatum Game. This group included Daniel Kahneman, who would go on to win the Nobel Prize in Economic Sciences. They found the same pattern of results as Güth. What struck them was how the rejection of low offers clashed with economic theory. “It’s the resentment, the willingness to punish at cost, that is the whole thing,” Kahneman remarked.

Finding the right amount of revenge—and the right amount of spite—is a challenging process of what Barclay notes is “brinkmanship.” Spite is a powerful tool not only to influence the behavior of other individuals but also to use against corporations that are acting in their narrow self-interest. As Daniel Kahneman and colleagues point out, profit-maximizing firms will be incentivized to be fair if customers are prepared to spite them for their unfair practices.44 We need to be prepared to refrain from buying products we like, costing ourselves pleasure and corporations money, when we know the products are problematic.


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The Wisdom of Frugality: Why Less Is More - More or Less by Emrys Westacott

Airbnb, back-to-the-land, Bertrand Russell: In Praise of Idleness, Bonfire of the Vanities, carbon footprint, carbon tax, clean water, Community Supported Agriculture, corporate raider, critique of consumerism, Daniel Kahneman / Amos Tversky, dark matter, degrowth, Diane Coyle, discovery of DNA, Downton Abbey, dumpster diving, financial independence, full employment, greed is good, happiness index / gross national happiness, haute cuisine, hedonic treadmill, income inequality, invisible hand, Isaac Newton, it is difficult to get a man to understand something, when his salary depends on his not understanding it, loss aversion, McMansion, means of production, move fast and break things, negative equity, New Urbanism, off-the-grid, Paradox of Choice, paradox of thrift, Ralph Waldo Emerson, sunk-cost fallacy, Thales and the olive presses, Thales of Miletus, the market place, The Spirit Level, The Theory of the Leisure Class by Thorstein Veblen, Thorstein Veblen, Upton Sinclair, Veblen good, Virgin Galactic, Zipcar

He won’t allow the first to reason about or examine anything except how a little money can be made into great wealth. And he won’t allow the second to value or admire anything but wealth and wealthy people or to have any ambition other than the acquisition of wealth or whatever might contribute to getting it.8 The “sunk cost” fallacy: Research by psychologists Daniel Kahneman and Amos Tversky in the 1970s led them to conclude that for most human beings a concern to avoid losses is a more powerful motivator than the desire to realize gains. Many other psychologists have followed in their footsteps and investigated the phenomenon of loss aversion. A study by Hal Arkes and Catherine Blumer is representative and revealing.

It should be noted that Wilkinson and Pickett’s methodology, evidence, and conclusions have been challenged. See, for instance, Peter Saunders, “Beware False Prophets: Equality, the Good Society and the Spirit Level,” Policy Exchange, July 8, 2010. 22. Daniel Kahneman and Angus Deaton, “High Income Improves Evaluation of Life but Not Emotional Well-Being, Proceedings of the National Academy of Sciences of the United States of America, August 4, 2010. 23. See Daniel Kahneman, Thinking Fast and Slow (New York: Farrar, Straus and Giroux, 2011), p. 396. 24. Skidelsky and Skidelsky, How Much Is Enough?, p. 75. 25. Plato, Republic, 4.442a. 26. Nietzsche, The Gay Science, bk. 1, 14. 27.

After all, a much higher income than $75,000 would enable one to travel to exotic places, buy expensive concert tickets, try out fancy restaurants, and in general treat oneself to a few more luxuries. And it seems reasonable to suppose that increasing the number and quality of pleasurable experiences would make one happier. So why does this seem not to occur? Daniel Kahneman suggests one partial explanation that harks back to points made earlier about the simple life: as people become richer, their ability to savor small, simple, everyday pleasures is reduced.23 A study in which subjects seemed to derive less pleasure from eating chocolate after they had been primed with wealth-related ideas possibly lends support to this hypothesis.


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When to Rob a Bank: ...And 131 More Warped Suggestions and Well-Intended Rants by Steven D. Levitt, Stephen J. Dubner

Affordable Care Act / Obamacare, Airbus A320, airport security, augmented reality, barriers to entry, Bear Stearns, behavioural economics, Bernie Madoff, Black Swan, Broken windows theory, Captain Sullenberger Hudson, carbon tax, creative destruction, Daniel Kahneman / Amos Tversky, deliberate practice, feminist movement, food miles, George Akerlof, global pandemic, information asymmetry, invisible hand, loss aversion, mental accounting, Netflix Prize, obamacare, oil shale / tar sands, Pareto efficiency, peak oil, pre–internet, price anchoring, price discrimination, principal–agent problem, profit maximization, Richard Thaler, Sam Peltzman, security theater, sugar pill, Ted Kaczynski, the built environment, The Chicago School, the High Line, Thorstein Veblen, transaction costs, Tyler Cowen, US Airways Flight 1549

Loss Aversion in the NFL (SJD) Football coaches are known for being extraordinarily conservative when it comes to calling risky plays, since a single bad decision (or even a good decision that doesn’t work out) can get you fired. In the jargon of behavioral economics, coaches are “loss-averse”; this concept, pioneered by Amos Tversky and Daniel Kahneman, holds that we experience more pain with a loss of x than we experience pleasure with a gain of x. Who experiences loss aversion? Well, just about everyone: day traders, capuchin monkeys, and especially football coaches. Which is why the last play of yesterday’s Chiefs-Raiders game was so interesting.

Now it seems only logical that someone will step up to try to sue McDonald’s for putting all those extra pounds on the passengers in the first place. Daniel Kahneman Answers Your Questions (SDL) One of the first times I met Danny Kahneman was over dinner, just after SuperFreakonomics was published. “I enjoyed your new book,” Danny said. “It will change the future of the world.” I beamed with pride. Danny, however, was not done speaking. “It will change the future of the world—and not for the better.” While I’m sure many people would agree, he was the only person who ever said it to my face! If you don’t know the name, Daniel Kahneman is the non-economist who has had the greatest influence on economics of any non-economist who ever lived.

Unlike that first post, the vast majority of the blog entries were written by just one of us, not the pair, as in our book writing. We sometimes asked friends (and even enemies) to write for the blog; we’ve held “quorums” (asking a bunch of smart people to answer a tough question) and Q&As (with people like Daniel Kahneman and a high-end call girl named Allie). For several years, The New York Times hosted the blog, which gave it a veneer of legitimacy that wasn’t quite warranted. But the Times eventually came to its senses and sent us off to do the thing we do, once more on our lonesome. All these years, we routinely asked ourselves why we kept blogging.


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Economics Rules: The Rights and Wrongs of the Dismal Science by Dani Rodrik

airline deregulation, Alan Greenspan, Albert Einstein, bank run, barriers to entry, behavioural economics, Bretton Woods, business cycle, butterfly effect, capital controls, carbon tax, Carmen Reinhart, central bank independence, collective bargaining, congestion pricing, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Donald Davies, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, Fellow of the Royal Society, financial deregulation, financial innovation, floating exchange rates, fudge factor, full employment, George Akerlof, Gini coefficient, Growth in a Time of Debt, income inequality, inflation targeting, informal economy, information asymmetry, invisible hand, Jean Tirole, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labor-force participation, liquidity trap, loss aversion, low skilled workers, market design, market fundamentalism, minimum wage unemployment, oil shock, open economy, Pareto efficiency, Paul Samuelson, price elasticity of demand, price stability, prisoner's dilemma, profit maximization, public intellectual, quantitative easing, randomized controlled trial, rent control, rent-seeking, Richard Thaler, risk/return, Robert Shiller, school vouchers, South Sea Bubble, spectrum auction, The Market for Lemons, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, trade liberalization, trade route, ultimatum game, University of East Anglia, unorthodox policies, Vilfredo Pareto, Washington Consensus, white flight

Simon Wren-Lewis, “When Economics Students Rebel,” Mainly Macro (blog), April 24, 2014, http://mainlymacro.blogspot.co.uk-2014-04-when=economocs=students=rebel.html. 11. Herbert A. Simon, “A Behavioral Model of Rational Choice,” Quarterly Journal of Economics 69 (February 1955): 99–118; Richard R. Nelson and Sidney G. Winter, An Evolutionary Theory of Economic Change (Cambridge, MA: Belknap Press of Harvard University Press, 1982). 12. Daniel Kahneman, Paul Slovic, and Amos Tversky, Judgement under Uncertainty: Heuristics and Biases (Cambridge: Cambridge University Press, 1982). 13. Werner F. M. De Bondt and Richard Thaler, “Does the Stock Market Overreact?” Journal of Finance 40, no. 3 (1985): 793–805. 14. David Laibson, “Golden Eggs and Hyperbolic Discounting,” Quarterly Journal of Economics 112, no. 2 (1997): 443–77; Brigitte C.

The postulate always had its critics from within economics, such as Herbert Simon, who argued for a limited form of rationality (called “bounded rationality”), and Richard Nelson, who proposed that firms move by trial and error rather than by optimization—not to mention Adam Smith himself, who may have been the first behavioral economist.11 But it was the work of psychologist Daniel Kahneman and his coauthors that had the greatest impact on mainstream economics.12 This contribution was recognized by a Nobel memorial prize in economics given to Kahneman in 2002, the first time that the prize was awarded to a noneconomist.# Kahneman and his colleagues’ experiments cataloged a long list of behavioral regularities that violated rationality, as the concept is used in economics.


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Planet Ponzi by Mitch Feierstein

Affordable Care Act / Obamacare, Alan Greenspan, Albert Einstein, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Bear Stearns, Bernie Madoff, book value, break the buck, centre right, collapse of Lehman Brothers, collateralized debt obligation, commoditize, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, disintermediation, diversification, Donald Trump, energy security, eurozone crisis, financial innovation, financial intermediation, fixed income, Flash crash, floating exchange rates, frictionless, frictionless market, Future Shock, Glass-Steagall Act, government statistician, high net worth, High speed trading, illegal immigration, income inequality, interest rate swap, invention of agriculture, junk bonds, light touch regulation, Long Term Capital Management, low earth orbit, low interest rates, mega-rich, money market fund, moral hazard, mortgage debt, negative equity, Neil Armstrong, Northern Rock, obamacare, offshore financial centre, oil shock, pensions crisis, plutocrats, Ponzi scheme, price anchoring, price stability, proprietary trading, purchasing power parity, quantitative easing, risk tolerance, Robert Shiller, Ronald Reagan, tail risk, too big to fail, trickle-down economics, value at risk, yield curve

If that’s not what you signed up for when you started this chapter, remember I did try to warn you. I’m not short your house, but still … Sorry. 13 A brief flash of reality One of the most important papers in the history of the social sciences reported the results of a strange little experiment conducted by researchers Amos Tversky and Daniel Kahneman. It’s a paper which, ideally, every investor and every regulator should read. Everyone with an interest in the financial markets, in fact‌—‌a group which includes all those who have money and all those who would like to. The study was simple and emphatic. It took a group of subjects and asked them various questions‌—‌for example, the percentage of African countries among the United Nations member states.

You can get more recent information by searching the CoreLogic site at www.corelogic.com. 12 ‘Self harm,’ The Economist, Sept. 3, 2011. 13 FHFA report on ‘Housing and mortgage markets in 2010,’ figure 16. 14 Justin Fox, ‘A slow-motion wreck for commercial real estate,’ Time, Jan. 18, 2010. 15 John Gittelsohn, ‘Shiller says U.S. home-price declines of 10% to 25% “wouldn’t surprise me”,’ Bloomberg, June 9, 2011. Chapter 13: A brief flash of reality 1 Amos Tversky and Daniel Kahneman, ‘Judgment under uncertainty: heuristics and biases,’ Science, vol. 185, no. 4157, Sept. 1974, pp. 1124–31. 2 Tali Sharot, Alison M. Riccardi, Candace M. Raio, and Elizabeth A. Phelps, ‘Neural mechanisms mediating optimism bias,’ Nature, vol. 450, Oct. 2007, pp. 102–5. 3 Go to the UK Treasury website (www.hm-treasury.gov.uk) and search for ‘Optimism bias.’ 4 Goldman Sachs, Global Economic Outlook 2011, Dec. 2010.


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The Data Detective: Ten Easy Rules to Make Sense of Statistics by Tim Harford

Abraham Wald, access to a mobile phone, Ada Lovelace, affirmative action, algorithmic bias, Automated Insights, banking crisis, basic income, behavioural economics, Black Lives Matter, Black Swan, Bretton Woods, British Empire, business cycle, Cambridge Analytica, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, Charles Babbage, clean water, collapse of Lehman Brothers, contact tracing, coronavirus, correlation does not imply causation, COVID-19, cuban missile crisis, Daniel Kahneman / Amos Tversky, data science, David Attenborough, Diane Coyle, disinformation, Donald Trump, Estimating the Reproducibility of Psychological Science, experimental subject, fake news, financial innovation, Florence Nightingale: pie chart, Gini coefficient, Great Leap Forward, Hans Rosling, high-speed rail, income inequality, Isaac Newton, Jeremy Corbyn, job automation, Kickstarter, life extension, meta-analysis, microcredit, Milgram experiment, moral panic, Netflix Prize, Northpointe / Correctional Offender Management Profiling for Alternative Sanctions, opioid epidemic / opioid crisis, Paul Samuelson, Phillips curve, publication bias, publish or perish, random walk, randomized controlled trial, recommendation engine, replication crisis, Richard Feynman, Richard Thaler, rolodex, Ronald Reagan, selection bias, sentiment analysis, Silicon Valley, sorting algorithm, sparse data, statistical model, stem cell, Stephen Hawking, Steve Bannon, Steven Pinker, survivorship bias, systematic bias, TED Talk, universal basic income, W. E. B. Du Bois, When a measure becomes a target

It’s possible, of course, for shocking news to be positive. But the psychologist Steven Pinker has argued that good news tends to unfold slowly, while bad news is often more sudden.16 That sounds right—it is, after all, quicker to knock something down than to build it. Following a thought experiment the great psychologist Amos Tversky once shared with a young Pinker,17 imagine the best possible thing that could happen to you today. You could win the lottery, I suppose. (Would that really be good news?) There are certain other moments where something wonderful could happen: you could have been hoping for a baby after many months of fruitless trying, and finally the pregnancy test comes back positive; you might have applied for a promotion or a place at university, and you get it.

All we need to do is acquire the habit of stopping to think.22 Another study found that people who were best able to distinguish real from fake news were also the people who scored highly on what is called a cognitive reflection test.23 These tests—created by Shane Frederick, a behavioral economist, and made famous by Daniel Kahneman’s book Thinking, Fast and Slow—ask questions such as: A bat and ball cost $1.10, and the bat costs a dollar more than the ball. How much does the ball cost? and: A lake contains a patch of lily pads which doubles in size each day. If it takes 48 days for the patch to cover the entire lake, how long would it take for the patch to cover half of the lake?

The problem is that the news carries tales of lottery wins and fairy-tale romances, terrorist atrocities and gruesome assaults by strangers, and of course the latest trends, which are often not nearly as popular as they seem. None of these stories reflect everyday life; all of them are viscerally memorable and seem to take place in our living rooms. We form our impressions accordingly. As the great psychologist Daniel Kahneman explained in Thinking, Fast and Slow: “When faced with a difficult question, we often answer an easier one instead, usually without noticing the substitution.” Rather than asking, “Are terrorists likely to kill me?” we ask ourselves, “Have I recently seen a news report about terrorism?” Instead of saying, “Out of all the teenage girls I know, how many are already mothers?”


pages: 1,073 words: 314,528

Strategy: A History by Lawrence Freedman

Albert Einstein, anti-communist, Anton Chekhov, Ayatollah Khomeini, barriers to entry, battle of ideas, behavioural economics, Black Swan, Blue Ocean Strategy, British Empire, business process, butterfly effect, centre right, Charles Lindbergh, circulation of elites, cognitive dissonance, coherent worldview, collective bargaining, complexity theory, conceptual framework, Cornelius Vanderbilt, corporate raider, correlation does not imply causation, creative destruction, cuban missile crisis, Daniel Kahneman / Amos Tversky, defense in depth, desegregation, disinformation, Dr. Strangelove, Edward Lorenz: Chaos theory, en.wikipedia.org, endogenous growth, endowment effect, escalation ladder, Ford Model T, Ford paid five dollars a day, framing effect, Frederick Winslow Taylor, Gordon Gekko, greed is good, Herbert Marcuse, Herman Kahn, Ida Tarbell, information retrieval, interchangeable parts, invisible hand, John Nash: game theory, John von Neumann, Kenneth Arrow, lateral thinking, linear programming, loose coupling, loss aversion, Mahatma Gandhi, means of production, mental accounting, Murray Gell-Mann, mutually assured destruction, Nash equilibrium, Nelson Mandela, Norbert Wiener, Norman Mailer, oil shock, Pareto efficiency, performance metric, Philip Mirowski, prisoner's dilemma, profit maximization, race to the bottom, Ralph Nader, RAND corporation, Richard Thaler, road to serfdom, Ronald Reagan, Rosa Parks, scientific management, seminal paper, shareholder value, social contagion, social intelligence, Steven Pinker, strikebreaker, The Chicago School, The Myth of the Rational Market, the scientific method, theory of mind, Thomas Davenport, Thomas Kuhn: the structure of scientific revolutions, Torches of Freedom, Toyota Production System, transaction costs, Twitter Arab Spring, ultimatum game, unemployed young men, Upton Sinclair, urban sprawl, Vilfredo Pareto, W. E. B. Du Bois, War on Poverty, women in the workforce, Yogi Berra, zero-sum game

Chase, “Skill in Chess,” American Scientist 61, no. 4 (July 1973): 394–403. 12. Amos Tversky and Daniel Kahneman, “Judgment Under Uncertainty: Heuristics and Biases,” Science 185, no. 4157 (September 1974): 1124. See also Daniel Kahneman, “A Perspective on Judgment and Choice: Mapping Bounded Rationality,” American Psychologist 56, no. 9 (September 2003): 697–720. 13. “IRRATIONALITY: Rethinking thinking,” The Economist, December 16, 1999, available at http://www.economist.com/node/268946. 14. Amos Tversky and Daniel Kahneman, “The Framing of Decisions and the Psychology of Choice,” Science 211, no. 4481 (1981): 453–458; “Rational Choice and the Framing of Decisions,” Journal of Business 59, no. 4, Part 2 (October 1986): S251–S278. 15.

When the empirical work demonstrated strong and consistent patterns of behavior this might reflect the rational pursuit of egotistical goals, but alternatively these patterns might reflect the influence of powerful conventions that inclined people to follow the pack. Building upon Simon’s work, Amos Tversky and Daniel Kahneman introduced further insights from psychology into economics. To gain credibility, they used sufficient mathematics to demonstrate the seriousness of their methodology and so were able to create a new field of behavioral economics. They demonstrated how individuals used shortcuts to cope with complex situations, relying on processes that were “good enough” and interpreted information superficially using “rules of thumb.”

The designations System 1 and System 2 come from Keith Stanovich and Richard West, “Individual Differences in Reasoning: Implications for the Rationality Debate,” Behavioral and Brain Sciences 23 (2000): 645–665. Daniel Kahneman has popularized the terms in his Thinking Fast and Slow (London: Penguin Books, 2011). J. St. B. T. Evans, “In Two Minds: Dual-Process Accounts of Reasoning,” Trends in Cognition Science 7, no. 10 (October 2003): 454–459; “Dual-Processing Accounts of Reasoning, Judgment and Social Cognition,” The Annual Review of Psychology 59 (January 2008): 255–278. 43. Andreas Glöckner and Cilia Witteman, “Beyond Dual-Process Models: A Categorisation of Processes Underlying Intuitive Judgement and Decision Making,” Thinking & Reasoning 16, no. 1 (2009): 1–25. 44. Daniel Kahneman, Thinking Fast and Slow, 42. 45.


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Smarter Investing by Tim Hale

Albert Einstein, asset allocation, buy and hold, buy low sell high, capital asset pricing model, classic study, collapse of Lehman Brothers, corporate governance, credit crunch, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, eurozone crisis, fiat currency, financial engineering, financial independence, financial innovation, fixed income, full employment, Future Shock, implied volatility, index fund, information asymmetry, Isaac Newton, John Bogle, John Meriwether, Long Term Capital Management, low interest rates, managed futures, Northern Rock, passive investing, Ponzi scheme, purchasing power parity, quantitative easing, random walk, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, South Sea Bubble, technology bubble, the rule of 72, time value of money, transaction costs, Vanguard fund, women in the workforce, zero-sum game

Lesson: Do not believe that you have predictive powers – you do not, I assure you. I will throw my anchor out here thanks The human mind really likes to use ‘anchors’ when forming opinions, which in many cases leads to extraordinarily inaccurate estimates of outcomes. As an example, experiments undertaken by two of the most respected behavioural economists, Amos Tversky and Daniel Kahneman, used a wheel-of-fortune with the numbers 1 to 100 on it. Before asking their subjects a number of difficult questions, such as how many African nations are in the United Nations, they span the wheel. They first asked if the number was higher or lower than the number on the wheel, and then asked for the participants’ guesses.

Evolution occurs by a process of natural selection where the favorable heritable traits exhibited by an individual (defined by its genes) become more common in successive generations of a population. Physiological responses that made us run from shadows, avoid pain, devour sources of plenty in a greedy way would have been selected for. As Amos Tversky, one of the leading behavioural economists points out (Zweig, 2007): ‘Sensitivity to losses was probably more [beneficial] than the appreciation of gains … it would have been wonderful to be a species that was almost insensitive to pain and had the infinite capacity to appreciate pleasure. But you probably wouldn’t have survived the evolutionary battle.’


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Our Final Invention: Artificial Intelligence and the End of the Human Era by James Barrat

AI winter, air gap, AltaVista, Amazon Web Services, artificial general intelligence, Asilomar, Automated Insights, Bayesian statistics, Bernie Madoff, Bill Joy: nanobots, Bletchley Park, brain emulation, California energy crisis, cellular automata, Chuck Templeton: OpenTable:, cloud computing, cognitive bias, commoditize, computer vision, Computing Machinery and Intelligence, cuban missile crisis, Daniel Kahneman / Amos Tversky, Danny Hillis, data acquisition, don't be evil, drone strike, dual-use technology, Extropian, finite state, Flash crash, friendly AI, friendly fire, Google Glasses, Google X / Alphabet X, Hacker News, Hans Moravec, Isaac Newton, Jaron Lanier, Jeff Hawkins, John Markoff, John von Neumann, Kevin Kelly, Law of Accelerating Returns, life extension, Loebner Prize, lone genius, machine translation, mutually assured destruction, natural language processing, Neil Armstrong, Nicholas Carr, Nick Bostrom, optical character recognition, PageRank, PalmPilot, paperclip maximiser, pattern recognition, Peter Thiel, precautionary principle, prisoner's dilemma, Ray Kurzweil, Recombinant DNA, Rodney Brooks, rolling blackouts, Search for Extraterrestrial Intelligence, self-driving car, semantic web, Silicon Valley, Singularitarianism, Skype, smart grid, speech recognition, statistical model, stealth mode startup, stem cell, Stephen Hawking, Steve Jobs, Steve Jurvetson, Steve Wozniak, strong AI, Stuxnet, subprime mortgage crisis, superintelligent machines, technological singularity, The Coming Technological Singularity, Thomas Bayes, traveling salesman, Turing machine, Turing test, Vernor Vinge, Watson beat the top human players on Jeopardy!, zero day

Maybe we’re in that period right now with AI, and only an accident or a near-death experience will jar us awake. Another reason AI and human extinction do not often receive serious consideration may be due to one of our psychological blind spots—a cognitive bias. Cognitive biases are open manholes on the avenues of our thinking. Israeli American psychologists Amos Tversky and Daniel Kahneman began developing the science of cognitive biases in 1972. Their basic idea is that we humans make decisions in irrational ways. That observation alone won’t earn you a Nobel Prize (Kahneman received one in 2002); the stunner is that we are irrational in scientifically verifiable patterns.

H+ Magazine, February 5, 2010, http://hplusmagazine.com/2010/02/05/how-long-till-human-level-ai/ (accessed March 4, 2010). Furthermore, experts claim: Sandburg Anders, and Nick Bostrom, “Machine Intelligence Survey,” 2011, http://www.fhi.ox.ac.uk/__data/assets/pdf_file/0015/21516/MI_survey.pdf (accessed December 4, 2011). the science of cognitive biases: Kahneman, Daniel, Paul Slovic, and Amos Tversky, Judgment under Uncertainty: Heuristics and Biases (Cambridge: Cambridge University Press, 1982), 11. fire ranks well down the list: Centers for Disease Control and Prevention, “Accidents or Unintentional Injuries,” March 28, 2011, http://www.cdc.gov/nchs/fastats/acc-inj.htm (accessed April 4, 2011).


pages: 691 words: 203,236

Whiteshift: Populism, Immigration and the Future of White Majorities by Eric Kaufmann

4chan, Abraham Maslow, affirmative action, Amazon Mechanical Turk, anti-communist, anti-globalists, augmented reality, battle of ideas, behavioural economics, Berlin Wall, Bernie Sanders, Boris Johnson, Brexit referendum, British Empire, centre right, Chelsea Manning, cognitive dissonance, complexity theory, corporate governance, correlation does not imply causation, critical race theory, crowdsourcing, Daniel Kahneman / Amos Tversky, data science, David Brooks, deindustrialization, demographic transition, Donald Trump, Elon Musk, en.wikipedia.org, facts on the ground, failed state, fake news, Fall of the Berlin Wall, first-past-the-post, Francis Fukuyama: the end of history, gentrification, Great Leap Forward, Haight Ashbury, Herbert Marcuse, illegal immigration, immigration reform, imperial preference, income inequality, it's over 9,000, Jeremy Corbyn, knowledge economy, knowledge worker, liberal capitalism, longitudinal study, Lyft, mass immigration, meta-analysis, microaggression, moral panic, Nate Silver, New Urbanism, Norman Mailer, open borders, open immigration, opioid epidemic / opioid crisis, Overton Window, phenotype, postnationalism / post nation state, Ralph Waldo Emerson, Republic of Letters, Ronald Reagan, Scientific racism, Silicon Valley, Social Justice Warrior, statistical model, Steve Bannon, Steven Pinker, the built environment, the scientific method, The Wisdom of Crowds, transcontinental railway, twin studies, uber lyft, upwardly mobile, urban sprawl, W. E. B. Du Bois, Washington Consensus, white flight, working-age population, World Values Survey, young professional

The manager of the Oakland A’s baseball team, Billy Beane, in Michael Lewis’s Moneyball showed that large-scale datasets could reveal truths that scouts acting on gut instinct failed to see.5 On-base percentage mattered more than how athletic a batter looked or how many big hits he had. The scouts, like all of us, think in terms of vivid images, which lead us to make what Daniel Kahneman and Amos Tversky term ‘fast-thinking’ decisions.6 These can be misleading. In approaching populism, many have been seduced by stories of ‘left-behind’ working-class whites, the opioid crisis and rusting factories, so we’ve had numerous media ‘safaris’ into Trumpland which tend to simply confirm reporters’ biases.7 Journalists have been mesmerized by election maps.

Vance’s autobiographical and evocative Hillbilly Elegy, about growing up in backwoods poverty in Appalachia. Some tramped the byways of rustbelt Ohio or reported from struggling post-industrial towns to suggest that economic misery explained Trump’s success. None performed any sophisticated individual-level data analysis. Daniel Kahneman and Amos Tversky emphasize that our brains are wired to work with vivid images such as a coal miner in a down-at-the-heel West Virginia town.108 Like Billy Beane in Michael Lewis’s Moneyball, we are better off ignoring gut feel and looking at the individual-level data. It’s much harder for us to digest the fact that the psychological differences between two Appalachian miners matter more for the Trump vote than the social distance between Youngstown, Ohio, and the northern Virginia suburbs.

They tap into both authoritarianism – the desire for order and stability – and conservatism, a preference for continuity with the past. Perceptions of the nation are imagined through the media as well as by travelling around the country or hearing travel tales related by friends and relatives. Given people’s tendency to ‘fast think’ through what Amos Tversky and Daniel Kahneman term ‘system 1’ cognition, vivid images and stories will tend to carry more weight than representative data and rational ‘system 2’ deliberation.54 The media has an important role in reinforcing perceptions, but isn’t the only influence on whether people imagine threats to the nation.


pages: 254 words: 81,009

Busy by Tony Crabbe

airport security, Bluma Zeigarnik, British Empire, business process, classic study, cognitive dissonance, Daniel Kahneman / Amos Tversky, death from overwork, fear of failure, Frederick Winslow Taylor, gamification, haute cuisine, informal economy, inventory management, Isaac Newton, job satisfaction, karōshi / gwarosa / guolaosi, knowledge worker, Lao Tzu, Larry Ellison, loss aversion, low cost airline, machine readable, Marc Benioff, meta-analysis, Milgram experiment, Paradox of Choice, placebo effect, Richard Feynman, Rubik’s Cube, Salesforce, Saturday Night Live, science of happiness, scientific management, Shai Danziger, Stuart Kauffman, TED Talk, the long tail, Thorstein Veblen, Tim Cook: Apple

Occasionally you might be asked to do some long division when you don’t have a calculator on hand, but most of the time, we breeze through our decisions. There are two reasons for this: The first is that when faced with too much choice, we simply move on and don’t make a decision at all. The second reason we are seldom stumped was identified by Amos Tversky and Daniel Kahneman early in their work together. When faced with a hard question, we simply substitute it with a much easier one. The following experiment shows this nicely. German students were given a survey including the following questions: • How happy are you these days? • How many dates did you have last month?

The worst offender of all is the part responsible for decision-making, the most recent part of the brain to evolve: the prefrontal cortex. This isn’t just any old 4 x 4, it’s a 6.6-liter Hummer! This means that making rational choices is hard work, so the brain does all it can to avoid the effort. Psychologists, such as the Nobel Prize–winning Daniel Kahneman, have split our thinking into two forms: System One and System Two.2 System One is fast, automatic and unconscious; System Two is slow, effortful and conscious. Both systems are always on while you are awake. System One automatically and effortlessly responds to experiences, generating immediate impressions, intentions and feelings.

Great research and humor Author: Daniel Goleman Title: Focus Why you should read it: Describes the importance and mechanisms of focus Author: Jonathan Haidt Title: The Happiness Hypothesis Why you should read it: Accessible blend of modern and ancient wisdom Author: Edward Hallowell Title: CrazyBusy Why you should read it: Description of busy, likening it to ADHD Author: Tim Harford Title: Adapt Why you should read it: Why we have to fail to succeed—a great read Author: Chip and Dan Heath Title: Decisive Why you should read it: Great book on how we decide Author: Chip and Dan Heath Title: Switch Why you should read it: One of the best on how to make changes Author: Arianna Huffington Title: Thrive Why you should read it: Inspiring read on how to thrive today Author: Maggie Jackson Title: Distracted Why you should read it: This book really influenced my thinking Author: Daniel Kahneman Title: Thinking, Fast and Slow Why you should read it: A brilliant overview of System One and Two thinking Author: Tim Kasser Title: The High Price of Materialism Why you should read it: Explains the research behind Chapter 9 Author: Robert Kegan and Lisa Laskow Lahey Title: Immunity to Change Why you should read it: A great book: make deep, adaptive change Author: George Leonard Title: Mastery Why you should read it: Describes the joy of practice Author: Jim Loehr and Tony Schwartz Title: The Power of Full Engagement Why you should read it: Inspiring book on managing your energy Author: Steve Peters Title: The Chimp Paradox Why you should read it: A simple concept that helps manage emotions Author: David Rock Title: Your Brain at Work Why you should read it: Remarkably simple application of neuroscience Author: Brigid Schulte Title: Overwhelmed Why you should read it: Fantastic, and relevant book on the subject of busy Author: Barry Schwartz Title: The Paradox of Choice Why you should read it: The subtitle says it all: “Why more is less” Author: Martin Seligman Title: Flourish Why you should read it: The latest book by the founder of Positive Psychology Author: Sherry Turkle Title: Alone Together Why you should read it: Insightful: our response to technological immersion Author: Timothy D.


pages: 240 words: 73,209

The Education of a Value Investor: My Transformative Quest for Wealth, Wisdom, and Enlightenment by Guy Spier

Albert Einstein, Atul Gawande, Bear Stearns, Benoit Mandelbrot, big-box store, Black Swan, book value, Checklist Manifesto, classic study, Clayton Christensen, Daniel Kahneman / Amos Tversky, Exxon Valdez, Gordon Gekko, housing crisis, information asymmetry, Isaac Newton, Kenneth Arrow, Long Term Capital Management, Mahatma Gandhi, mandelbrot fractal, mirror neurons, Nelson Mandela, NetJets, pattern recognition, pre–internet, random walk, Reminiscences of a Stock Operator, risk free rate, Ronald Reagan, South Sea Bubble, Steve Jobs, Stuart Kauffman, TED Talk, two and twenty, winner-take-all economy, young professional, zero-sum game

Checking the stock price too frequently uses up my limited willpower since it requires me to expend unnecessary mental energy simply resisting these calls to action. Given that my mental energy is a scarce resource, I want to direct it in more constructive ways. We also know from behavioral finance research by Daniel Kahneman and Amos Tversky that investors feel the pain of loss twice as acutely as the pleasure of gain. So I need to protect my brain from the emotional storm that occurs when I see that my stocks—or the market—are down. If there’s average volatility, the market is typically up in most years over a 20-year period.

This is not a science book or a weighty tome about the structure of the brain, but it’s worth taking a few moments to ponder why it’s so hard to think and invest in a rational manner. People often misguidedly regard the brain as one structure: a neocortex that rationally takes in information, computes it, and spits out the answer. Daniel Kahneman, a trailblazing psychologist who won a Nobel Prize for economics in 2002, describes this aspect of the brain’s processes with the phrase “thinking slow.” For my part, I used to have a deluded image of myself as the equivalent of a fighter pilot, intensely focusing on the instrument panel in the cockpit of my jet, making optimal decisions and operating in full control of all the aircraft’s levers.

Force: The Hidden Determinants of Human Behavior by David Hawkins Simple Heuristics That Make Us Smart by Gerd Gigerenzer and Peter Todd The Archaeology of Mind: Neuroevolutionary Origins of Human Emotions by Jaak Panksepp and Lucy Biven The Art of Thinking Clearly by Rolf Dobelli The Developing Mind: How Relationships and the Brain Interact to Shape Who We Are by Daniel Siegel The Feeling of What Happens: Body and Emotion in the Making of Consciousness by Antonio Damasio The 48 Laws of Power by Robert Greene The Neuroscience of Psychotherapy: Healing the Social Brain by Louis Cozolino There Are No Accidents: Synchronicity and the Stories of Our Lives by Robert Hopcke Thinking, Fast and Slow by Daniel Kahneman Waking the Tiger: Healing Trauma by Peter Levine with Ann Frederick Willpower: Rediscovering the Greatest Human Strength by Roy Baumeister and John Tierney Science At Home in the Universe: The Search for the Laws of Self-Organization and Complexity by Stuart Kauffman Connected: The Surprising Power of Our Social Networks and How They Shape Our Lives by Nicholas Christakis and James Fowler Deep Simplicity: Bringing Order to Chaos and Complexity by John Gribbin Emergence: The Connected Lives of Ants, Brains, Cities, and Software by Steven Johnson How Nature Works: The Science of Self-Organized Criticality by Per Bak Journey to the Ants: A Story of Scientific Exploration by Bert Hölldobler and Edward O.


pages: 322 words: 77,341

I.O.U.: Why Everyone Owes Everyone and No One Can Pay by John Lanchester

Alan Greenspan, asset-backed security, bank run, banking crisis, Bear Stearns, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Monday: stock market crash in 1987, Black-Scholes formula, Blythe Masters, Celtic Tiger, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial engineering, financial innovation, fixed income, George Akerlof, Glass-Steagall Act, greed is good, Greenspan put, hedonic treadmill, hindsight bias, housing crisis, Hyman Minsky, intangible asset, interest rate swap, invisible hand, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Jane Jacobs, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, junk bonds, Kickstarter, laissez-faire capitalism, light touch regulation, liquidity trap, Long Term Capital Management, loss aversion, low interest rates, Martin Wolf, money market fund, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, new economy, Nick Leeson, Norman Mailer, Northern Rock, off-the-grid, Own Your Own Home, Ponzi scheme, quantitative easing, reserve currency, Right to Buy, risk-adjusted returns, Robert Shiller, Ronald Reagan, Savings and loan crisis, shareholder value, South Sea Bubble, statistical model, Tax Reform Act of 1986, The Great Moderation, the payments system, too big to fail, tulip mania, Tyler Cowen, value at risk

The economics profession, however, is split between economic rationalists in the Milton Friedman tradition and economic liberals in the tradition of John Maynard Keynes, and the subject of strict rationality is the occasion of a permanent pitched battle. The fact that noneconomists see the general assumption of rationality as self-evidently ridiculous has no effect on economists. What has had an effect, however, is the work of two Israeli psychologist-economists, Daniel Kahneman and Amos Tversky, who have produced a body of work studying “the susceptibility to erroneous intuitions of intelligent, sophisticated, and perceptive individuals,” in the words of the fascinating autobiography written by Kahneman on the occasion of winning the Nobel Prize in 2002. I have a confession to make about Kahneman and Tversky.

I can’t claim to have been onto this story early, but once I started working on it in the late summer of 2007, it was immediately clear to me that the global banking system was facing a structural crisis. If it was clear to me, why wasn’t it as obvious to the people in charge of the economy and to the people whose job it is to advise them? It’s the kind of question Daniel Kahneman has profitably studied. There is some really interesting work being done in the field of psychology and engineering (where it deeply matters) about “expert overconfidence”: the likelihood of experts in a field to place too high a confidence in their own judgments. It may be that the reason why some journalists were more alert to the imminent crunch than their betters were was because of expert overconfidence combined with an overreliance on the idea that because a crisis of this sort hadn’t happened, it therefore couldn’t happen.

I’d also like to thank Ann LoLordo, Fern Shen, Lisa Evans, Mary Waldrow, Tony Damazio, and Philip Robinson. I would also like to thank Fram Dinshaw, Rhomaios Ram, Nicolas Doisy, and Richard Smith. I would like to thank The Atlantic for permission to quote Simon Johnson’s article “The Quiet Coup,” and the Nobel Foundation for permission to quote Daniel Kahneman’s Biography. SOURCES This is a list both of sources and of suggestions for further reading. These are all books from which I have learnt a great deal. Ahamed, Liaquat. Lords of Finance: The Bankers Who Broke the World. Penguin Press, New York, 2009. Akerlof, George, and Robert Shiller.


pages: 309 words: 78,361

Plenitude: The New Economics of True Wealth by Juliet B. Schor

Asian financial crisis, behavioural economics, big-box store, business climate, business cycle, carbon footprint, carbon tax, clean tech, Community Supported Agriculture, creative destruction, credit crunch, Daniel Kahneman / Amos Tversky, decarbonisation, degrowth, dematerialisation, demographic transition, deskilling, Edward Glaeser, en.wikipedia.org, Gini coefficient, global village, Herman Kahn, IKEA effect, income inequality, income per capita, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, Jevons paradox, Joseph Schumpeter, Kenneth Arrow, knowledge economy, life extension, McMansion, new economy, ocean acidification, off-the-grid, peak oil, pink-collar, post-industrial society, prediction markets, purchasing power parity, radical decentralization, ride hailing / ride sharing, Robert Shiller, sharing economy, Simon Kuznets, single-payer health, smart grid, systematic bias, systems thinking, The Chicago School, Thomas L Friedman, Thomas Malthus, too big to fail, transaction costs, Yochai Benkler, Zipcar

Developments in the measurement of subjective well-being. Journal of Economic Perspectives 20 (1): 3-24. Kahneman, Daniel, Alan B. Krueger, David A. Schkade, Norbert Schwarz, and Arthur A. Stone. 2006. Would you be happier if you were richer? A focusing illusion. Science 312 (30): 1776-80. Kahneman, Daniel, and Amos Tversky. 2000. Choices, values and frames. New York: Cambridge University Press. Kasser, Tim, and Kirk W. Brown. 2003. On time, happiness, and ecological footprints. In Take back your time: Fighting overwork and time poverty in America, edited by John De Graaf. San Francisco: Berrett-Koehler, 107-12.

In a series of studies, the psychologists Tim Kasser and Kennon Sheldon found that being time-affluent is positively associated with well-being, even controlling for income. In some of their studies, time trumped material goods in importance. Kasser and Kirk Brown found that working hours are negatively correlated with life satisfaction. The study on neighbors’ incomes cited above had a similar finding. The Nobel laureate Daniel Kahneman and his Princeton colleague Alan Krueger, using a sample of working women in Texas, report that the three activities most likely to elicit a bad mood are the evening commute, work, and the morning commute. A study among European Union countries found that the higher the working hours, the lower the happiness level, again controlling for other variables.

Luttmer found that the impact of neighbors’ income rising is equivalent to a similarly sized fall in one’s own income. 178 anticipate that additional income will yield more happiness . . . projection bias: On overvaluing income, or projection bias, see Loewenstein, O’Donoghue, and Rabin (2003); on the related concept of the focusing illusion, see Kahneman et al. (2006). 178 In a series of studies, the psychologists Tim Kasser and Kennon Sheldon: Kasser and Sheldon (2009). 178 Kasser and Kirk Brown found that working hours: Kasser and Brown (2003). 178 Nobel laureate Daniel Kahneman and his Princeton colleague: Kahneman and Krueger (2006), table 2. 178 A study among European Union countries: Alesina, Glaeser, and Sacerdote (2005), table 15. 178 Data from a large-scale German survey: Pouwels, Siegers, and Vlasblom (2008). 178 income is positional, but leisure time is not: Vacations and shorter hours not being positional is from Solnick and Hemenway (1998).


pages: 471 words: 124,585

The Ascent of Money: A Financial History of the World by Niall Ferguson

Admiral Zheng, Alan Greenspan, An Inconvenient Truth, Andrei Shleifer, Asian financial crisis, asset allocation, asset-backed security, Atahualpa, bank run, banking crisis, banks create money, Bear Stearns, Black Monday: stock market crash in 1987, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, BRICs, British Empire, business cycle, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, classic study, collateralized debt obligation, colonial exploitation, commoditize, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, deglobalization, diversification, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Glaeser, Edward Lloyd's coffeehouse, equity risk premium, financial engineering, financial innovation, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, Francisco Pizarro, full employment, Future Shock, German hyperinflation, Greenspan put, Herman Kahn, Hernando de Soto, high net worth, hindsight bias, Home mortgage interest deduction, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, iterative process, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", John Meriwether, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour mobility, Landlord’s Game, liberal capitalism, London Interbank Offered Rate, Long Term Capital Management, low interest rates, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, Modern Monetary Theory, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, Naomi Klein, National Debt Clock, negative equity, Nelson Mandela, Nick Bostrom, Nick Leeson, Northern Rock, Parag Khanna, pension reform, price anchoring, price stability, principal–agent problem, probability theory / Blaise Pascal / Pierre de Fermat, profit motive, quantitative hedge fund, RAND corporation, random walk, rent control, rent-seeking, reserve currency, Richard Thaler, risk free rate, Robert Shiller, rolling blackouts, Ronald Reagan, Savings and loan crisis, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spice trade, stocks for the long run, structural adjustment programs, subprime mortgage crisis, tail risk, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Malthus, Thorstein Veblen, tontine, too big to fail, transaction costs, two and twenty, undersea cable, value at risk, W. E. B. Du Bois, Washington Consensus, Yom Kippur War

This brings us to the second reason for the inherent instability of the financial system: human behaviour. As we have seen, all financial institutions are at the mercy of our innate inclination to veer from euphoria to despondency; our recurrent inability to protect ourselves against ‘tail risk’; our perennial failure to learn from history. In a famous article, Daniel Kahneman and Amos Tversky demonstrated with a series of experiments the tendency that people have to miscalculate probabilities when confronted with simple financial choices. First, they gave their sample group 1,000 Israeli pounds each. Then they offered them a choice between either a) a 50 per cent chance of winning an additional 1,000 pounds or b) a 100 per cent chance of winning an additional 500 pounds.

., New York, 2005) 6 Idem, The Black Swan: The Impact of the Highly Improbable (London, 2007). 7 Georges Soros, The New Paradigm for Financial Markets: The Credit Crash of 2008 and What It Means, (New York, 2008), pp. 91 ff. 8 See Frank H. Knight, Risk, Uncertainty and Profit (Boston, 1921). 9 John Maynard Keynes, ‘The General Theory of Employment’, Economic Journal, 51, 2 (1937), p. 214. 10 Daniel Kahneman and Amos Tversky, ‘Prospect Theory: An Analysis of Decision under Risk’, Econometrica, 47, 2 (March 1979), p. 273. 11 Eliezer Yudkowsky, ‘Cognitive Biases Potentially Affecting Judgment of Global Risks’, in Nick Bostrom and Milan Cirkovic (eds.), Global Catastrophic Risks (Oxford University Press, 2008), pp. 91-119.


pages: 295 words: 66,824

A Mathematician Plays the Stock Market by John Allen Paulos

Alan Greenspan, AOL-Time Warner, Benoit Mandelbrot, Black-Scholes formula, book value, Brownian motion, business climate, business cycle, butter production in bangladesh, butterfly effect, capital asset pricing model, confounding variable, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, diversified portfolio, dogs of the Dow, Donald Trump, double entry bookkeeping, Elliott wave, endowment effect, equity risk premium, Erdős number, Eugene Fama: efficient market hypothesis, four colour theorem, George Gilder, global village, greed is good, index fund, intangible asset, invisible hand, Isaac Newton, it's over 9,000, John Bogle, John Nash: game theory, Larry Ellison, Long Term Capital Management, loss aversion, Louis Bachelier, mandelbrot fractal, margin call, mental accounting, Myron Scholes, Nash equilibrium, Network effects, passive investing, Paul Erdős, Paul Samuelson, Plato's cave, Ponzi scheme, power law, price anchoring, Ralph Nelson Elliott, random walk, Reminiscences of a Stock Operator, Richard Thaler, risk free rate, Robert Shiller, short selling, six sigma, Stephen Hawking, stocks for the long run, survivorship bias, transaction costs, two and twenty, ultimatum game, UUNET, Vanguard fund, Yogi Berra

A number of psychologists in recent years have pointed out the countless ways in which we’re all subject to other sorts of counterproductive behavior that spring from cognitive blind spots that are analogues, perhaps, of optical illusions. These psychological illusions and foibles often make us act irrationally in a variety of disparate endeavors, not the least of which is investing. Amos Tversky and Daniel Kahneman are the founders of this relatively new field of study, many of whose early results are reported upon in the classic book Judgment Under Uncertainty , edited by them and Paul Slovic. (Kahneman was awarded the 2002 Nobel Prize in economics, and Tversky almost certainly would have shared it had he not died.)

., Stocks for the Long Run, New York, McGraw-Hill, 1998. Shiller, Robert J., Irrational Exuberance, Princeton, Princeton University Press, 2000. Taleb, Nassim Nicholas, Fooled by Randomness, New York, Texere, 2001. Thaler, Richard, The Winner’s Curse, Princeton, Princeton University Press, 1992. Tversky, Amos, Daniel Kahneman, and Paul Slovic, Judgment Under Uncertainty: Heuristics and Biases, Cambridge, Cambridge University Press, 1982. Index accounting practices assumptions vs. practices auditors and comparing corporate and personal accounting conflict of interest and deciphering company financial health Enron reforms transparency vagueness and subjectivity of value investing and WorldCom (WCOM) accounting scandals. see also fraud Benford’s Law and deciphering company financial health Efficient Market Hypothesis and psychology of cover ups volatility and WCOM fraud Al Qaeda Albert, Réka anchoring effect financial numbers and number experiments online chatroom example arithmetic mean. see also mean value IPO purchases/sales outstripping geometric mean rate of return Arthur Andersen Arthur, W.


pages: 368 words: 96,825

Bold: How to Go Big, Create Wealth and Impact the World by Peter H. Diamandis, Steven Kotler

3D printing, additive manufacturing, adjacent possible, Airbnb, Amazon Mechanical Turk, Amazon Web Services, Apollo 11, augmented reality, autonomous vehicles, Boston Dynamics, Charles Lindbergh, cloud computing, company town, creative destruction, crowdsourcing, Daniel Kahneman / Amos Tversky, data science, deal flow, deep learning, dematerialisation, deskilling, disruptive innovation, driverless car, Elon Musk, en.wikipedia.org, Exxon Valdez, fail fast, Fairchild Semiconductor, fear of failure, Firefox, Galaxy Zoo, Geoffrey Hinton, Google Glasses, Google Hangouts, gravity well, hype cycle, ImageNet competition, industrial robot, information security, Internet of things, Jeff Bezos, John Harrison: Longitude, John Markoff, Jono Bacon, Just-in-time delivery, Kickstarter, Kodak vs Instagram, Law of Accelerating Returns, Lean Startup, life extension, loss aversion, Louis Pasteur, low earth orbit, Mahatma Gandhi, Marc Andreessen, Mark Zuckerberg, Mars Rover, meta-analysis, microbiome, minimum viable product, move fast and break things, Narrative Science, Netflix Prize, Network effects, Oculus Rift, OpenAI, optical character recognition, packet switching, PageRank, pattern recognition, performance metric, Peter H. Diamandis: Planetary Resources, Peter Thiel, pre–internet, Ray Kurzweil, recommendation engine, Richard Feynman, ride hailing / ride sharing, risk tolerance, rolodex, Scaled Composites, self-driving car, sentiment analysis, shareholder value, Sheryl Sandberg, Silicon Valley, Silicon Valley startup, skunkworks, Skype, smart grid, SpaceShipOne, stem cell, Stephen Hawking, Steve Jobs, Steven Levy, Stewart Brand, Stuart Kauffman, superconnector, Susan Wojcicki, synthetic biology, technoutopianism, TED Talk, telepresence, telepresence robot, Turing test, urban renewal, Virgin Galactic, Wayback Machine, web application, X Prize, Y Combinator, zero-sum game

“[People] will do things because others are doing them,” Musk explains, “because there is a trend, because they see everyone moving in one direction and decide that’s the best direction to go. Sometimes this is correct, but sometimes this will take you right off a cliff. Thinking in first principles protects you from these errors.” When it comes to scale, these aren’t the only errors one must guard against. Daniel Kahneman and Amos Tversky won the Nobel Prize for their work on human irrationality. One great example of this is what happens when two of the most common cognitive biases—loss aversion and narrow framing—begin to overlap. Loss aversion is the idea that humans are more sensitive to losses—even small losses—than gains, while narrow framing is our tendency to treat every risk we encounter as an isolated incident.

v=O4MtQGRIIuA. 8 Dominic Basulto, “The new #Fail: Fail fast, fail early and fail often,” Washington Post, May 30, 2012, http://www.washingtonpost.com/blogs/innovations/post/the-new-fail-fail-fast-fail-early-and-fail-often/2012/05/30/gJQAKA891U_blog.html. 9 John Anderson, “Change on a Dime: Agile Design,” UX Magazine, July 19, 2011, http://uxmag.com/articles/change-on-a-dime-agile-design. 10 AI with Ismail, 2013. 11 For an amazing breakdown of these ideas, see Dan Pink, “RSA Animate—Drive: The surprising truth about what motivates us,” RSA, April 1, 2010, https://www.youtube.com/watch?v=u6XAPnuFjJc. 12 Daniel Kahneman, “The riddle of experience vs. memory,” TED, March 1, 2010, http://www.ted.com/talks/daniel_kahneman_the_riddle_of_experience_vs_memory. 13 Daniel H. Pink, Drive: The Surprising Truth About What Motivates Us (New York: Riverhead Books, 2010). 14 Christopher Mims, “When 110% won’t do: Google engineers insist 20% time is not dead—it’s just turned into 120% time” qz.com, August 16, 2013. 15 James Marshall Reilly, “The Zappos Story: How Failure can Fuel Business Success,” Monster.com, http://hiring.monster.com/hr/hr-best-practices/workforce-management/hr-management-skills/business-success.aspx. 16 All Astro Teller quotes come from a series of AIs conducted between 2013 and 2014. 17 Susan Wojcicki, “The Eight Pillars of Innovation,” thinkwithgoogle.com, July 2011, http://www.thinkwithgoogle.com/articles/8-pillars-of-innovation.html. 18 For a much deeper look at flow and its impact on performance see Steven Kotler, The Rise of Superman: Decoding the Science of Ultimate Human Performance (New York: New Harvest, 2014). 19 AI with John Hagel conducted 2014. 20 Steven Kotler and Jamie Wheal, “Five Surprising Ways Richard Branson Harnessed Flow to Build A Multi-Billion Dollar Empire,” Forbes, March 25, 2014, http://www.forbes.com/sites/stevenkotler/2014/03/25/five-surprising-ways-richard-branson-harnessed-flow-to-build-a-multi-billion-dollar-empire/. 21 Steven Kotler, “The Rise of Superman: 17 Flow Triggers,” Slideshare.net, March 2014, http://www.slideshare.net/StevenKotler/17-flow-triggers. 22 AI with Ned Hallowell conducted 2013. 23 Kevin Rathunde, “Montessori Education and Optimal Experience: A Framework for New Research,” The NAMTA Journal (Winter 2001): 11–43. 24 Mihaly Csikszentmihalyi, Flow: The Psychology of Optimal Experience (New York: Harper & Row, 1990), 48–70. 25 For a great breakdown of group flow and the social triggers see Keith Sawyer, Group Genius: The Creative Power of Collaboration (New York: Basic Books), 2008. 26 AI with Ismail, 2013.

But once tasks become slightly more complex—such as shaping those nailed boards into a house—once they require even the slightest bit of conceptual ability, money actually has the exact opposite effect: It lowers motivation, hinders creativity, and decreases performance.11 What’s more, this isn’t the only issue with money as a motivator. Money, it now appears, is only an effective motivator until our basic biological needs are met, with a little left over for discretionary spending. This is why, in America, as the Nobel laureate Daniel Kahneman recently discovered, when you plot happiness and life satisfaction alongside income, they overlap until $70,000—i.e., the point at which money stops being a major issue—then wildly diverge.12 Once we pay people enough so that meeting basic needs is no longer a constant cause for concern, extrinsic rewards lose their effectiveness, while intrinsic rewards—meaning internal, emotional satisfactions—become far more critical.


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Everybody Lies: Big Data, New Data, and What the Internet Can Tell Us About Who We Really Are by Seth Stephens-Davidowitz

affirmative action, AltaVista, Amazon Mechanical Turk, Asian financial crisis, Bernie Sanders, big data - Walmart - Pop Tarts, Black Lives Matter, Cass Sunstein, computer vision, content marketing, correlation does not imply causation, crowdsourcing, Daniel Kahneman / Amos Tversky, data science, desegregation, Donald Trump, Edward Glaeser, Filter Bubble, game design, happiness index / gross national happiness, income inequality, Jeff Bezos, Jeff Seder, John Snow's cholera map, longitudinal study, Mark Zuckerberg, Nate Silver, Nick Bostrom, peer-to-peer lending, Peter Thiel, price discrimination, quantitative hedge fund, Ronald Reagan, Rosa Parks, sentiment analysis, Silicon Valley, statistical model, Steve Jobs, Steven Levy, Steven Pinker, TaskRabbit, The Signal and the Noise by Nate Silver, working poor

Even the most sophisticated neuroimaging methodologies can tell us how a thought is splayed out in 3-D space, but not what the thought consists of. As if the tradeoff between tractability and richness weren’t bad enough, scientists of human nature are vexed by the Law of Small Numbers—Amos Tversky and Daniel Kahneman’s name for the fallacy of thinking that the traits of a population will be reflected in any sample, no matter how small. Even the most numerate scientists have woefully defective intuitions about how many subjects one really needs in a study before one can abstract away from the random quirks and bumps and generalize to all Americans, to say nothing of Homo sapiens.

Ellenberg realized he could compare how frequently quotes were highlighted at the beginning of the book versus the end of the book. This would give a rough guide to readers’ propensity to make it to the end. By his measure, more than 90 percent of readers finished Donna Tartt’s novel The Goldfinch. In contrast, only about 7 percent made it through Nobel Prize economist Daniel Kahneman’s magnum opus, Thinking, Fast and Slow. Fewer than 3 percent, this rough methodology estimated, made it to the end of economist Thomas Piketty’s much discussed and praised Capital in the 21st Century. In other words, people tend not to finish treatises by economists. One of the points of this book is we have to follow the Big Data wherever it leads and act accordingly.

Google Will See You Now,” New York Times, August 11, 2013, SR12. 32 biggest dataset ever assembled on human relationships: Lars Backstrom and Jon Kleinberg, “Romantic Partnerships and the Dispersion of Social Ties: A Network Analysis of Relationship Status on Facebook,” in Proceedings of the 17th ACM Conference on Computer Supported Cooperative Work & Social Computing (2014). 33 people consistently rank: Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Straus and Giroux, 2011). 33 asthma causes about seventy times more deaths: Between 1979 and 2010, on average, 55.81 Americans died from tornados and 4216.53 Americans died from asthma. See Annual U.S. Killer Tornado Statistics, National Weather Service, http://www.spc.noaa.gov/climo/torn/fatalmap.php and Trends in Asthma Morbidity and Mortality, American Lung Association, Epidemiology and Statistics Unit. 33 Patrick Ewing: My favorite Ewing videos are “Patrick Ewing’s Top 10 Career Plays,” YouTube video, posted September 18, 2015, https://www.youtube.com/watch?


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Simple Rules: How to Thrive in a Complex World by Donald Sull, Kathleen M. Eisenhardt

Affordable Care Act / Obamacare, Airbnb, Apollo 13, asset allocation, Atul Gawande, barriers to entry, Basel III, behavioural economics, Berlin Wall, carbon footprint, Checklist Manifesto, complexity theory, Craig Reynolds: boids flock, Credit Default Swap, Daniel Kahneman / Amos Tversky, democratizing finance, diversification, drone strike, en.wikipedia.org, European colonialism, Exxon Valdez, facts on the ground, Fall of the Berlin Wall, Glass-Steagall Act, Golden age of television, haute cuisine, invention of the printing press, Isaac Newton, Kickstarter, late fees, Lean Startup, Louis Pasteur, Lyft, machine translation, Moneyball by Michael Lewis explains big data, Nate Silver, Network effects, obamacare, Paul Graham, performance metric, price anchoring, RAND corporation, risk/return, Saturday Night Live, seminal paper, sharing economy, Silicon Valley, Startup school, statistical model, Steve Jobs, TaskRabbit, The Signal and the Noise by Nate Silver, transportation-network company, two-sided market, Wall-E, web application, Y Combinator, Zipcar

.” [>] Chris Bingham, a professor: Christopher B. Bingham and Kathleen M. Eisenhardt, “Rational Heuristics: The ‘Simple Rules’ that Strategists Learn from Process Experience,” Strategic Management Journal 32, no. 13 (2011): 1437–64. [>] They lack the information: Daniel Kahneman, Thinking Fast and Thinking Slow (New York: Farrar, Straus and Giroux, 2011). See also Amos Tversky and Daniel Kahneman, “Judgment Under Uncertainty: Heuristics and Biases,” Science 185, no. 4157 (1974): 1124–31. [>] This pattern of improving: Paul J. Feltovich, Michael J. Prietula, and K. Anders Ericsson, “Studies of Expertise from Psychological Perspectives,” in Cambridge Handbook of Expertise and Expert Performance, edited by K.

Despite this cultural and geographic diversity, Chris and Kathy observed an identical pattern for improving simple rules across the countries. First off, Chris and Kathy found that people usually begin with poor rules or even no conscious rules at all. They lack the information and time to develop quality rules at the outset, so they engage in what Nobel Prize–winning psychologist Daniel Kahn­e­man termed fast thinking—rather than expending conscious cognitive effort, they adopt innate universal heuristics that are cognitively easy, like representativeness (“Pick what is usual”) and availability (“Pick what first comes to mind”). For example, every Finnish team began operating in Sweden as their first foreign country, although there was no particular reason for this choice beyond familiarity.


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Heads I Win, Tails I Win by Spencer Jakab

Alan Greenspan, Asian financial crisis, asset allocation, backtesting, Bear Stearns, behavioural economics, Black Monday: stock market crash in 1987, book value, business cycle, buy and hold, collapse of Lehman Brothers, correlation coefficient, crowdsourcing, Daniel Kahneman / Amos Tversky, diversification, dividend-yielding stocks, dogs of the Dow, Elliott wave, equity risk premium, estate planning, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, fear index, fixed income, geopolitical risk, government statistician, index fund, Isaac Newton, John Bogle, John Meriwether, Long Term Capital Management, low interest rates, Market Wizards by Jack D. Schwager, Mexican peso crisis / tequila crisis, money market fund, Myron Scholes, PalmPilot, passive investing, Paul Samuelson, pets.com, price anchoring, proprietary trading, Ralph Nelson Elliott, random walk, Reminiscences of a Stock Operator, risk tolerance, risk-adjusted returns, Robert Shiller, robo advisor, Savings and loan crisis, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, statistical model, Steve Jobs, subprime mortgage crisis, survivorship bias, technology bubble, transaction costs, two and twenty, VA Linux, Vanguard fund, zero-coupon bond, zero-sum game

The other is that there will be a huge amount of choppiness over the years if we do commit it to equities, and losses sting more than profits please. As I briefly mentioned a couple of chapters back, there’s a scientific basis for that assertion. The two psychologists who laid the foundations of behavioral finance, Daniel Kahneman and Amos Tversky, showed in the 1970s that we feel the pain of a loss more acutely than the pleasure of a gain and that this affects our financial decision making. The bias exists even among savvy subjects. Kahneman, who went on to win a Nobel Prize in Economics for those insights, offered his students a coin flip in which they can lose $10 or win a higher amount.

There’s a reason that five of the seven worst months were bad ones for the market rather than good ones. Losing money hurts in two ways—financially and psychologically. The pain of a loss has been shown to be far worse than an equivalent monetary gain, a concept called prospect theory that won its cocreator, psychologist Daniel Kahneman, the Nobel Prize in Economics. Those brilliant experiments measured the loss or gain of an equivalent dollar amount. A far less brilliant insight, but one more relevant to what I’m about to discuss, can be gleaned from some arithmetic that you probably learned in fifth grade or thereabouts: that it takes an increasingly large percentage gain to make yourself whole the bigger your initial loss.

Knowing what to do and even making a conscious decision to approach a certain situation such as a bear market differently the next time doesn’t mean you actually will. Some exceptionally bright people who understand investing foibles far better than I do still are prone to money mistakes, particularly near market extremes when most of the damage is done to our portfolios. Take Daniel Kahneman, the psychologist who won the Nobel Prize in Economics for his pioneering work in behavioral economics whom I’ve mentioned throughout this book. I was amused to read a recent interview with him about his own financial decisions. He said that even though he knows all about cognitive errors—heck, he discovered many of them—he continues to make those mistakes again and again with his own portfolio.


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Beyond the Random Walk: A Guide to Stock Market Anomalies and Low Risk Investing by Vijay Singal

3Com Palm IPO, Andrei Shleifer, AOL-Time Warner, asset allocation, book value, buy and hold, capital asset pricing model, correlation coefficient, cross-subsidies, currency risk, Daniel Kahneman / Amos Tversky, diversified portfolio, endowment effect, fixed income, index arbitrage, index fund, information asymmetry, information security, junk bonds, liberal capitalism, locking in a profit, Long Term Capital Management, loss aversion, low interest rates, margin call, market friction, market microstructure, mental accounting, merger arbitrage, Myron Scholes, new economy, prediction markets, price stability, profit motive, random walk, Richard Thaler, risk free rate, risk-adjusted returns, risk/return, selection bias, Sharpe ratio, short selling, short squeeze, survivorship bias, Tax Reform Act of 1986, transaction costs, uptick rule, Vanguard fund

In this way, prices can move away from fundamental values for an extended period of time, which makes arbitrage positions riskier and less profitable. Behavioral finance won worldwide recognition when the 2002 Nobel prize was awarded to Daniel Kahneman for having integrated insights from psychological research into economic science, especially concerning human judgment and decision making under uncertainty, and to Vernon Smith for having established laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms. Amos Tversky (who died in 1996) deserves as much credit as Daniel Kahneman for explaining the role of human behavior in economic decision making. Lessons from Behavioral Finance Though behavioral finance is here to stay, it is not important whether one agrees with the assumption of pervasive irrational behavior.

The Effect of Market Segmentation and Illiquidity on Asset Prices: Evidence from Exchange Listings. Journal of Finance 49(2), 611–36. Kahneman, Daniel, Jack L. Knetsch, and Richard H. Thaler. 1991. Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias. Journal of Economic Perspectives 5(1), 193–206. Kahneman, Daniel, and Amos Tversky. 1979. Prospect Theory: An Analysis of Decision Under Risk. Econometrica 47(2), 263–92. Mackenzie, Craig. 1997. Where Are the Motives? A Problem with Evidence in the Work of Richard Thaler. Journal of Economic Psychology 18(1), 123–35. Merton, Robert C. 1987. Presidential Address: A Simple Model of Capital Market Equilibrium with Incomplete Information.


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The Tyranny of Experts: Economists, Dictators, and the Forgotten Rights of the Poor by William Easterly

air freight, Andrei Shleifer, battle of ideas, Bretton Woods, British Empire, business process, business process outsourcing, Carmen Reinhart, classic study, clean water, colonial rule, correlation does not imply causation, creative destruction, Daniel Kahneman / Amos Tversky, Deng Xiaoping, desegregation, discovery of the americas, Edward Glaeser, en.wikipedia.org, European colonialism, Ford Model T, Francisco Pizarro, fundamental attribution error, gentrification, germ theory of disease, greed is good, Gunnar Myrdal, income per capita, invisible hand, James Watt: steam engine, Jane Jacobs, John Snow's cholera map, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, low interest rates, M-Pesa, microcredit, Monroe Doctrine, oil shock, place-making, Ponzi scheme, public intellectual, risk/return, road to serfdom, Robert Solow, Silicon Valley, Steve Jobs, tacit knowledge, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, Thomas L Friedman, urban planning, urban renewal, Washington Consensus, WikiLeaks, World Values Survey, young professional

We project that today’s (temporarily) high growth will continue to be miraculous forever. We give autocrats credit for a future that has not even happened yet and that will likely never happen. The key insight on this subject came from a paper about basketball.13 One author of this study was Kahneman’s longstanding coauthor of many key insights, psychologist Amos Tversky, who died in 1996. In basketball, a player has a “hot hand” when he or she has made a string of baskets in a row. The obvious recommendation to that player’s teammates would seem to be to pass the ball to the player with the hot hand the next time they go down the court. But Tversky compiled actual data on shots, made baskets, and missed baskets and found this recommendation was wrong—the “hot hand” player is no more likely to make the next basket than any other player.

USAID Ethiopia, Country Development Cooperation Strategy 2011–2015, page 3. 12. World Bank President Jim Kim speech at Brookings Institution, July 19, 2012; http://www.worldbank.org/en/news/2012/07/18/world-bank-group-president-jim-yong-kim-brookings-institution, accessed January 14, 2013. 13. Thomas Gilovich, Robert Vallone, and Amos Tversky, “The Hot Hand in Basketball: On the Misperception of Random Sequences,” Cognitive Psychology 17 (1985): 295–314. Available at www.psych.cornell.edu/sites/default/files/Gilo.Vallone.Tversky.pdf, accessed August 31, 2013. 14. In 2010 Ghana was the world’s second largest producer of cocoa beans (after Côte d’Ivoire).

DANGEROUS PROBABILITIES Unfortunately, before we can get to testing the weaker variant that some autocrats are benevolent, we have to deal with some psychological biases in favor of the stronger variant that most or all autocrats are benevolent and produce high growth. Psychologists have documented systematic biases in the way we think about evidence. The leading psychologist on these topics is the Nobel laureate Daniel Kahneman, whose book Thinking, Fast and Slow is essential reading. Kahneman discusses how “thinking fast”—acting on gut reactions—can be an amazing problem-solver for most real-life situations, when there is not enough time for formal deductive reasoning (“thinking slow”). However, one area where thinking fast does badly is probability and statistics—in other words, in interpreting evidence.4 Thinking fast, then, has systematic biases, and most of these biases reinforce strong beliefs in benevolent autocrats.


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Narrative Economics: How Stories Go Viral and Drive Major Economic Events by Robert J. Shiller

agricultural Revolution, Alan Greenspan, Albert Einstein, algorithmic trading, Andrei Shleifer, autism spectrum disorder, autonomous vehicles, bank run, banking crisis, basic income, behavioural economics, bitcoin, blockchain, business cycle, butterfly effect, buy and hold, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, central bank independence, collective bargaining, computerized trading, corporate raider, correlation does not imply causation, cryptocurrency, Daniel Kahneman / Amos Tversky, debt deflation, digital divide, disintermediation, Donald Trump, driverless car, Edmond Halley, Elon Musk, en.wikipedia.org, Ethereum, ethereum blockchain, fake news, financial engineering, Ford Model T, full employment, George Akerlof, germ theory of disease, German hyperinflation, Great Leap Forward, Gunnar Myrdal, Gödel, Escher, Bach, Hacker Ethic, implied volatility, income inequality, inflation targeting, initial coin offering, invention of radio, invention of the telegraph, Jean Tirole, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, litecoin, low interest rates, machine translation, market bubble, Modern Monetary Theory, money market fund, moral hazard, Northern Rock, nudge unit, Own Your Own Home, Paul Samuelson, Philip Mirowski, plutocrats, Ponzi scheme, public intellectual, publish or perish, random walk, Richard Thaler, Robert Shiller, Ronald Reagan, Rubik’s Cube, Satoshi Nakamoto, secular stagnation, shareholder value, Silicon Valley, speech recognition, Steve Jobs, Steven Pinker, stochastic process, stocks for the long run, superstar cities, The Rise and Fall of American Growth, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, theory of mind, Thorstein Veblen, traveling salesman, trickle-down economics, tulip mania, universal basic income, Watson beat the top human players on Jeopardy!, We are the 99%, yellow journalism, yield curve, Yom Kippur War

Schizophrenia is a serious mental illness that can manifest as a disorder of narrative, as it often involves hearing imaginary voices delivering a fantastic and jumbled narrative.22 Hearing voices as a symptom of schizophrenia is correlated with volume deficits in specific brain areas.23 The narrative disruption found in autism spectrum disorder also is related to brain anomalies.24 Framing, the Representativeness Heuristic, and the Affect Heuristic Narrative psychology also relates to the psychological concept of framing.25 If we can create an amusing story that will get retold, it can establish a point of view, a reference point, that will influence decisions. Framing is related to the Daniel Kahneman and Amos Tversky representativeness heuristic (1973), whereby people form their expectations based on some idealized story or model, judging these expectations based on the prominence of the idealized story rather than estimated probabilities. For example, we may judge the danger of an emerging economic crisis by its similarity to a remembered story of a previous crisis, rather than by any logic.

“The Watchman: What Became of the Christian Intellectuals?” Harper’s Magazine, September, 54–60. Jevons, William Stanley. 1878. “Commercial Crises and Sun-Spots.” Nature 19:33–37. Johnson, Edgar H. 1910. “The Economics of Henry George’s ‘Progress and Poverty.’ ” Journal of Political Economy 18(9):714–35. Johnson, Eric J., and Amos Tversky. 1983. “Affect, Generalization, and the Perception of Risk.” Journal of Personality and Social Psychology 45(1):20–31. Johnson, Marcia K., and Mary Ann Foley. 1984. “Differentiating Fact from Fantasy: The Reliability of Children’s Memory.” Journal of Social Issues 40(2):33–50. Johnson, Marcia K., Shahin Hashtroudi, and D.

“Short-Sale Constraints and Stock Returns.” Journal of Financial Economics 66(2–3):207–39. Jung, Carl. 1919. “Instinct and the Unconscious III.” British Journal of Psychology 10(1):15–23. Kahn, Richard F. 1931. “The Relation between Home Investment and Unemployment.” Economic Journal 41(162):173–98. Kahneman, Daniel, and Amos Tversky. 1973. “On the Psychology of Prediction.” Psychological Review 80(4):237–51. ________. 2000. Choices, Values and Frames. Cambridge: Cambridge University Press. Kasparov, Garry. 2017. Deep Thinking: Where Machine Intelligence Ends and Human Creativity Begins. New York: PublicAffairs. Katona, George. 1975.


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Actionable Gamification: Beyond Points, Badges and Leaderboards by Yu-Kai Chou

Apple's 1984 Super Bowl advert, barriers to entry, behavioural economics, bitcoin, Burning Man, Cass Sunstein, crowdsourcing, Daniel Kahneman / Amos Tversky, delayed gratification, Do you want to sell sugared water for the rest of your life?, don't be evil, en.wikipedia.org, endowment effect, Firefox, functional fixedness, game design, gamification, growth hacking, IKEA effect, Internet of things, Kickstarter, late fees, lifelogging, loss aversion, Maui Hawaii, Minecraft, pattern recognition, peer-to-peer, performance metric, QR code, recommendation engine, Richard Thaler, Silicon Valley, Skinner box, Skype, software as a service, Stanford prison experiment, Steve Jobs, TED Talk, The Wealth of Nations by Adam Smith, transaction costs

For the full rules of Texas Hold’em Poker, visit: http://www.yukaichou.com/PokerRules↩ Daniel Kahneman and Amos Tversky. Econometrica, 47:263-91.* “Prospect Theory: an analysis of decision under risk”. 1979.↩ Richard Thaler, and Cass Sunstein. Nudge: Improving Decisions about Health, Wealth, and Happiness. New Haven, CT: Yale University Press. 02/24/2009.↩ Gary Belsky and Thomas Gilovich. Why Smart People Make Big Money Mistakes - and How to Correct Them. Simon & Schuster, New York. 01/12/2010.↩ Daniel Kahneman. *Thinking, Fast and Slow.” P284. Farrar, Straus and Giroux. New York, NY. 2013.↩ An example would be the German billionaire Adolf Merckle who committed suicide after his wealth dropped from £8.5 billion to £6 billion.↩ Howard Leventhal, Robert Singer, and Susan Jones.

“Focusing on the Forgone: How Value Can Appear So Different to Buyers and Sellers”. 2000.↩ Daniel Kahneman. *Thinking, Fast and Slow.” P297. Farrar, Straus and Giroux. New York, NY. 2013.↩ James Heyman, Yesim Orhun, and Dan Ariely. Journal of Interactive Marketing.”Auction Fever: The Effect of Opponents and Quasi-Endowment on Product Valuations”. 2004.↩ Daniel Kahneman. *Thinking, Fast and Slow.” P294. Farrar, Straus and Giroux. New York, NY. 2013.↩ John A. List, *Quarterly Journal of Economics 118. “Does Marketing Experience Eliminate Market Anomalies?”. P46-71. 2003.↩ Daniel Kahneman. *Thinking, Fast and Slow.” P339. Farrar, Straus and Giroux.

It looks like this ingrained sense of Ownership & Possession, along with some added benefits of novelty (Core Drive 7: Unpredictability & Curiosity), made products like Pet Rocks, Tamagotchi, and later on Facebook games like Farmville or Pet Society4 such big successes worldwide. The Endowment Effect There is quite a bit of scientific research on how our psychology changes when we believe we own something. Much of it is summed up in what Academics call the Endowment Effect. In his book Thinking: Fast and Slow, Economics Nobel Prize Laureate Daniel Kahneman describes how a certain well-respected academic and wine lover becomes very reluctant to sell a bottle of wine from his collection for $100, but would also not pay more than $35 for a wine of similar quality. This made little economic sense because the same or similar wine should hold the same value in a person’s mind.


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Singularity Rising: Surviving and Thriving in a Smarter, Richer, and More Dangerous World by James D. Miller

23andMe, affirmative action, Albert Einstein, artificial general intelligence, Asperger Syndrome, barriers to entry, brain emulation, cloud computing, cognitive bias, correlation does not imply causation, crowdsourcing, Daniel Kahneman / Amos Tversky, David Brooks, David Ricardo: comparative advantage, Deng Xiaoping, en.wikipedia.org, feminist movement, Flynn Effect, friendly AI, hive mind, impulse control, indoor plumbing, invention of agriculture, Isaac Newton, John Gilmore, John von Neumann, knowledge worker, Larry Ellison, Long Term Capital Management, low interest rates, low skilled workers, Netflix Prize, neurotypical, Nick Bostrom, Norman Macrae, pattern recognition, Peter Thiel, phenotype, placebo effect, prisoner's dilemma, profit maximization, Ray Kurzweil, recommendation engine, reversible computing, Richard Feynman, Rodney Brooks, Silicon Valley, Singularitarianism, Skype, statistical model, Stephen Hawking, Steve Jobs, sugar pill, supervolcano, tech billionaire, technological singularity, The Coming Technological Singularity, the scientific method, Thomas Malthus, transaction costs, Turing test, twin studies, Vernor Vinge, Von Neumann architecture

Aron, Jonathan Dowson, and Barbara J. Sahakian. 2003. “Cognitive Enhancing Effects of Modafinil in Healthy Volunteers.” Psychopharmacology 165 (3): 260—69. doi:10.1007/s00213-002-1250-8. Tversky, Amos, and Daniel Kahneman. 1982. “Judgments Of and By Representativeness.” In Judgment under Uncertainty: Heuristics and Biases, edited by Daniel Kahneman, Paul Slovic, and Amos Tversky. New York: Cambridge University Press. Tversky, Amos, and Daniel Kahneman. 1983. “Extensional Versus Intuitive Reasoning: The Conjunction Fallacy in Probability Judgment. Psychological Review 90 (4): 293—315. Ulam, Stanislaw. 1958. “John von Neumann: 1903—1957.”

The community recognizes the danger of cognitive biases, and through the blog Less Wrong, many members of it study how to overcome them. It’s certainly possible, however, that the community hasn’t overcome enough of its innate biases to make our predictions trustworthy. For futurists, one of the most dangerous cognitive biases was uncovered by Daniel Kahneman, winner of a Nobel Prize in economics. Kahneman conducted an experiment in which he told his test subjects to imagine that: Linda is 31 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.342 The subjects were then asked to rank a set of statements by the likelihood of their being true.


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Mastermind: How to Think Like Sherlock Holmes by Maria Konnikova

Albert Einstein, Alfred Russel Wallace, availability heuristic, Bluma Zeigarnik, classic study, Daniel Kahneman / Amos Tversky, dark matter, delayed gratification, fear of failure, feminist movement, functional fixedness, Lao Tzu, pre–internet, Richard Feynman, Steve Jobs, Steven Pinker, the scientific method, Thomas Kuhn: the structure of scientific revolutions, Walter Mischel

After you’ve made your ranking, take a look at two pairs of statements in particular: Bill plays jazz for a hobby and Bill is an accountant who plays jazz for a hobby, and Linda is a bank teller and Linda is a bank teller and is active in the feminist movement. Which of the two statements have you ranked as more likely in each pair? I am willing to bet that it was the second one in both cases. If it was, you’d be with the majority, and you would be making a big mistake. This exercise was taken verbatim from a 1983 paper by Amos Tversky and Daniel Kahneman, to illustrate our present point: when it comes to separating crucial details from incidental ones, we often don’t fare particularly well. When the researchers’ subjects were presented with these lists, they repeatedly made the same judgment that I’ve just predicted you would make: that it was more likely that Bill was an accountant who plays jazz for a hobby than it was that he plays jazz for a hobby, and that it was more likely that Linda was a feminist bank teller than that she was a bank teller at all.

The trick is to duplicate that same process, to let your brain study and learn and make effortless what was once effortful, in something that lacks the discrete nature of a cognitive task like the sentence verification, in something that is so basic that we do it constantly, without giving it much thought or attention: the task of looking and thinking. Daniel Kahneman argues repeatedly that System 1—our Watson system—is hard to train. It likes what it likes, it trusts what it trusts, and that’s that. His solution? Make System 2—Holmes—do the work by taking System 1 forcibly out of the equation. For instance, use a checklist of characteristics when hiring a candidate for a job instead of relying on your impression, an impression that, as you’ll recall, is formed within the first five minutes or less of meeting someone.

Chapter Three: Stocking the Brain Attic The seminal work on the brain’s default network, resting state, and intrinsic natural activity and attentional disposition was conducted by Marcus Raichle. For a discussion of attention, inattentional blindness, and how our senses can lead us astray, I recommend Christopher Chabris and Daniel Simon’s The Invisible Gorilla. For an in-depth look at the brain’s inbuilt cognitive biases, Daniel Kahneman’s Thinking, Fast and Slow. The correctional model of observation is taken from the work of Daniel Gilbert. Chapter Four: Exploring the Brain Attic For an overview of the nature of creativity, imagination, and insight, I recommend the work of Mihaly Csikszentmihalyi, including his books Creativity: Flow and the Psychology of Discovery and Invention and Flow: The Psychology of Optimal Experience.


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Liars and Outliers: How Security Holds Society Together by Bruce Schneier

Abraham Maslow, airport security, Alvin Toffler, barriers to entry, behavioural economics, benefit corporation, Berlin Wall, Bernie Madoff, Bernie Sanders, Brian Krebs, Broken windows theory, carried interest, Cass Sunstein, Chelsea Manning, commoditize, corporate governance, crack epidemic, credit crunch, CRISPR, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Graeber, desegregation, don't be evil, Double Irish / Dutch Sandwich, Douglas Hofstadter, Dunbar number, experimental economics, Fall of the Berlin Wall, financial deregulation, Future Shock, Garrett Hardin, George Akerlof, hydraulic fracturing, impulse control, income inequality, information security, invention of agriculture, invention of gunpowder, iterative process, Jean Tirole, John Bogle, John Nash: game theory, joint-stock company, Julian Assange, language acquisition, longitudinal study, mass incarceration, meta-analysis, microcredit, mirror neurons, moral hazard, Multics, mutually assured destruction, Nate Silver, Network effects, Nick Leeson, off-the-grid, offshore financial centre, Oklahoma City bombing, patent troll, phenotype, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, profit motive, race to the bottom, Ralph Waldo Emerson, RAND corporation, Recombinant DNA, rent-seeking, RFID, Richard Thaler, risk tolerance, Ronald Coase, security theater, shareholder value, slashdot, statistical model, Steven Pinker, Stuxnet, technological singularity, The Market for Lemons, The Nature of the Firm, The Spirit Level, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Timothy McVeigh, too big to fail, traffic fines, Tragedy of the Commons, transaction costs, ultimatum game, UNCLOS, union organizing, Vernor Vinge, WikiLeaks, World Values Survey, Y2K, Yochai Benkler, zero-sum game

better model Rolf Kümmerli, Caroline Colliard, Nicolas Fiechter, Blaise Petitpierre, Flavien Russier, and Laurent Keller (2007), “Human Cooperation in Social Dilemmas: Comparing the Snowdrift Game with the Prisoner's Dilemma,” Proceedings of the Royal Society B: Biological Sciences, 274:2965–70. Prospect Theory Daniel Kahneman and Amos Tversky (1979), “Prospect Theory: An Analysis of Decision under Risk,” Econometrica, 47:263–92. systems of regulation Susan Jane Buck Cox (1985), “No Tragedy on the Commons,” Environmental Ethics, 7:49–62. superrationality Douglas Hofstadter (1985), Metamagical Themas, Bantam Dell Publishing Group.

Goldstein and Gerd Gigerenzer (2002), “Models of Ecological Rationality: The Recognition Heuristic,” Psychological Review, 109:75–90. There's social proof Herbert C. Kelman (1958), “Compliance, Identification, and Internalization: Three Processes of Attitude Change,” Journal of Conflict Resolution, 2:51–60. attribute substitution Daniel Kahneman and Shane Frederick (2002), “Representativeness Revisited: Attribute Substitution in Intuitive Judgment,” in Thomas Gilovich, Dale Griffin, and Daniel Kahneman, eds., Heuristics and Biases: The Psychology of Intuitive Judgment, Cambridge University Press, 49–81. a lemons market George Akerlof (1970), “The Market for Lemons: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics, 83:488–500.

He wants to do a stereotypically male thing on Saturday night. She wants to do a stereotypically female thing. The dilemma comes from the fact that each would rather do either of the two things with the other than do the stereotypical thing alone. (6) In behavioral economics,Prospect Theory has tried to capture these complexities. Daniel Kahneman is the only psychologist to ever win a Nobel Prize, and he won it in economics. (7) Many of the criticisms of Hardin's original paper on the Tragedy of the Commons pointed out that, in the real world,systems of regulation were commonly established by users of commons. (8) Douglas Hofstadter calls this “superrationality.”


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Drive: The Surprising Truth About What Motivates Us by Daniel H. Pink

Abraham Maslow, affirmative action, behavioural economics, call centre, Daniel Kahneman / Amos Tversky, Dean Kamen, deliberate practice, Firefox, Frederick Winslow Taylor, functional fixedness, game design, George Akerlof, Isaac Newton, Jean Tirole, job satisfaction, knowledge worker, longitudinal study, performance metric, profit maximization, profit motive, Results Only Work Environment, scientific management, side project, TED Talk, the built environment, Tony Hsieh, transaction costs, zero-sum game

In 2002, the Nobel Foundation awarded its prize in economics to a guy who wasn't even an economist. And they gave him the field's highest honor largely for revealing that we weren't always rational calculators of our economic self-interest and that the parties often didn't bargain to a wealth-maximizing result. Daniel Kahneman, an American psychologist who won the Nobel Prize in economics that year for work he'd done with Israeli Amos Tversky, helped force a change in how we think about what we do. And one of the implications of this new way of thinking is that it calls into question many of the assumptions of Motivation 2.0. Kahneman and others in the field of behavioral economics agreed with my professor that economics was the study of human economic behavior.


Beautiful Data: The Stories Behind Elegant Data Solutions by Toby Segaran, Jeff Hammerbacher

23andMe, airport security, Amazon Mechanical Turk, bioinformatics, Black Swan, business intelligence, card file, cloud computing, computer vision, correlation coefficient, correlation does not imply causation, crowdsourcing, Daniel Kahneman / Amos Tversky, DARPA: Urban Challenge, data acquisition, data science, database schema, double helix, en.wikipedia.org, epigenetics, fault tolerance, Firefox, Gregor Mendel, Hans Rosling, housing crisis, information retrieval, lake wobegon effect, Large Hadron Collider, longitudinal study, machine readable, machine translation, Mars Rover, natural language processing, openstreetmap, Paradox of Choice, power law, prediction markets, profit motive, semantic web, sentiment analysis, Simon Singh, social bookmarking, social graph, SPARQL, sparse data, speech recognition, statistical model, supply-chain management, systematic bias, TED Talk, text mining, the long tail, Vernor Vinge, web application

In addition, this combination of choices does not maximize payoff: if we thought purely opportunistically about gains and losses, we’d pick B and C, for a total expected utility of $1,000 instead of –$1,000 (that is, we’d be up $2,000 compared with A+D). This experiment, first conducted by Daniel Kahneman and Amos Tversky in the 1970s, reveals that we don’t always think probabilistically: instead, we imagine the emotional outcomes associated with each single outcome. In fact, in a number of important ways, we don’t treat data as we assume we do. When Doesn’t Data Drive? The first section pointed out a couple of cognitive biases in the analysis of data.

Iyengar, S. S. and M. R. Lepper. “When choice is demotivating: can one desire too much of a good thing?” Journal of Personality and Social Psychology, 2000, vol. 79, no. 6, 995–1006. Jeng, M. “A selected history of expectation bias in physics.” American Journal of Physics, 2006. Kahneman, Daniel and Amos Tversky (1979). “Prospect Theory: An Analysis of Decision under Risk,” Econometrica, XLVII (1979), 263–291. Krumme, C. “Telling tales: the effects of narrative creation on decision-making with data,” working paper. Lo, A. W. and D. V. Repin. “The Psychophysiology of Real-Time Financial Risk Processing” Journal of Cognitive Neuroscience, April 1, 2002, vol. 14, no. 3, 323–339.

Given a positive diagnosis, the chances that you are in fact HIV-positive are 990/9,990, or 9.9%.) Doctors, at least apocryphally, fail in droves. In many situations, priors don’t disappear. When using data to answer a question, we don’t know what evidence to exclude and how to weight what we include. Daniel Kahneman— an indefatigable namer-of-concepts—names this one the “base rate fallacy.” 7. Probabilities Aren’t Intuitive Not only is probability theory difficult to grasp, individual probabilities are fleeting. In the absence of a causal explanation to tie an event to a set of outcomes, individuals rely on past observations to estimate probabilities.


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Trend Following: How Great Traders Make Millions in Up or Down Markets by Michael W. Covel

Albert Einstein, Alvin Toffler, Atul Gawande, backtesting, Bear Stearns, beat the dealer, Bernie Madoff, Black Swan, buy and hold, buy low sell high, California energy crisis, capital asset pricing model, Carl Icahn, Clayton Christensen, commodity trading advisor, computerized trading, correlation coefficient, Daniel Kahneman / Amos Tversky, delayed gratification, deliberate practice, diversification, diversified portfolio, Edward Thorp, Elliott wave, Emanuel Derman, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, fiat currency, fixed income, Future Shock, game design, global macro, hindsight bias, housing crisis, index fund, Isaac Newton, Jim Simons, John Bogle, John Meriwether, John Nash: game theory, linear programming, Long Term Capital Management, managed futures, mandelbrot fractal, margin call, market bubble, market fundamentalism, market microstructure, Market Wizards by Jack D. Schwager, mental accounting, money market fund, Myron Scholes, Nash equilibrium, new economy, Nick Leeson, Ponzi scheme, prediction markets, random walk, Reminiscences of a Stock Operator, Renaissance Technologies, Richard Feynman, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, shareholder value, Sharpe ratio, short selling, South Sea Bubble, Stephen Hawking, survivorship bias, systematic trading, Teledyne, the scientific method, Thomas L Friedman, too big to fail, transaction costs, upwardly mobile, value at risk, Vanguard fund, William of Occam, zero-sum game

Opponents hit .364 off Pedro this year after his 105th pitch—even Tony Clark could hit Pedro in the late innings.”26 The late, great Stephen Jay Gould, a numbers man (and lifelong baseball fan), offered some insight into the decision-making process that might have left Martinez in the game: “Everybody knows about hot hands. The only problem is that no such phenomenon exists. The Stanford psychologist Amos Tversky studied every basket made by the Philadelphia 76ers for more than a season. He found, first of all, that probabilities of making a second basket did not rise following a successful shot. Moreover, the number of ‘runs,’ or baskets in succession, was no greater than what a standard random, or coin-tossing, model would predict.

The Right Kind of Failure. Harvard Management Update. Gigerenzer, Gerd and Peter M. Todd. Simple Heuristics That Make Us Smart. Oxford: Oxford University Press, 1999. 425 426 Trend Following (Updated Edition): Learn to Make Millions in Up or Down Markets Gilovich, Thomas, Robert Valone, and Amos Tversky. The Hot Hand in Basketball: On the Misperception of Random Sequences. Cognitive Psychology, 17 (1985): 295–314. Ginyard, Johan. Position-Sizing Effects on Trader Performance: An Experimental Analysis. Uppsala University, Department of Psychology, 2001. Goldbaum, David. Technical Analysis, Price Trends, and Bubbles.

For example, seventeenth century speculators in the Netherlands drove up the prices of tulip bulbs to absurd levels. The inevitable crash followed. Since then, from the Great Depression to the dotcom implosion to October and November 2008, people can’t seem to steer clear from manias. They repeatedly make the same mistakes. Daniel Kahneman, a Princeton professor who was the first psychologist to win the Nobel Prize in Economics, attributed market manias to investors’ “illusion of control,” calling the illusion “prospect theory.” He studied the intellectual underpinnings of investing—how traders estimate odds and calculate risks—to prove 195 Chapter 6 • Human Behavior how often we act from the mistaken belief that we know more than we do.


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Range: Why Generalists Triumph in a Specialized World by David Epstein

Airbnb, Albert Einstein, Apollo 11, Apple's 1984 Super Bowl advert, Atul Gawande, Checklist Manifesto, Claude Shannon: information theory, Clayton Christensen, clockwork universe, cognitive bias, correlation does not imply causation, Daniel Kahneman / Amos Tversky, deep learning, deliberate practice, Exxon Valdez, fail fast, Flynn Effect, Freestyle chess, functional fixedness, game design, Gene Kranz, Isaac Newton, Johannes Kepler, knowledge economy, language acquisition, lateral thinking, longitudinal study, Louis Pasteur, Mark Zuckerberg, medical residency, messenger bag, meta-analysis, Mikhail Gorbachev, multi-armed bandit, Nelson Mandela, Netflix Prize, pattern recognition, Paul Graham, precision agriculture, prediction markets, premature optimization, pre–internet, random walk, randomized controlled trial, retrograde motion, Richard Feynman, Richard Feynman: Challenger O-ring, Silicon Valley, Silicon Valley billionaire, Stanford marshmallow experiment, Steve Jobs, Steve Wozniak, Steven Pinker, sunk-cost fallacy, systems thinking, Walter Mischel, Watson beat the top human players on Jeopardy!, Y Combinator, young professional

In a wicked world, relying upon experience from a single domain is not only limiting, it can be disastrous. * * * • • • The trouble with using no more than a single analogy, particularly one from a very similar situation, is that it does not help battle the natural impulse to employ the “inside view,” a term coined by psychologists Daniel Kahneman and Amos Tversky. We take the inside view when we make judgments based narrowly on the details of a particular project that are right in front of us. Kahneman had a personal experience with the dangers of the inside view when he assembled a team to write a high school curriculum on the science of decision making.

When he studied nonwartime naval commanders who were trying to avoid disasters, like mistaking a commercial flight for an enemy and shooting it down, he saw that they very quickly discerned potential threats. Ninety-five percent of the time, the commanders recognized a common pattern and chose a common course of action that was the first to come to mind. One of Klein’s colleagues, psychologist Daniel Kahneman, studied human decision making from the “heuristics and biases” model of human judgment. His findings could hardly have been more different from Klein’s. When Kahneman probed the judgments of highly trained experts, he often found that experience had not helped at all. Even worse, it frequently bred confidence but not skill.

Rose framed it more colloquially: “If you are conscientious and neurotic while driving today, it’s a pretty safe bet you will be conscientious and neurotic while driving tomorrow. At the same time . . . you may not be conscientious and neurotic when you are playing Beatles cover songs with your band in the context of the local pub.” Perhaps that is one reason Daniel Kahneman and his colleagues in the military (chapter 1) failed to predict who would be a leader in battle based on who had been a leader in an obstacle course exercise. When I was a college runner, I had teammates whose drive and determination seemed almost boundless on the track, and nearly absent in the classroom, and vice versa.


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Blitzscaling: The Lightning-Fast Path to Building Massively Valuable Companies by Reid Hoffman, Chris Yeh

"Susan Fowler" uber, activist fund / activist shareholder / activist investor, adjacent possible, Airbnb, Amazon Web Services, Andy Rubin, autonomous vehicles, Benchmark Capital, bitcoin, Blitzscaling, blockchain, Bob Noyce, business intelligence, Cambridge Analytica, Chuck Templeton: OpenTable:, cloud computing, CRISPR, crowdsourcing, cryptocurrency, Daniel Kahneman / Amos Tversky, data science, database schema, DeepMind, Didi Chuxing, discounted cash flows, Elon Musk, fake news, Firefox, Ford Model T, forensic accounting, fulfillment center, Future Shock, George Gilder, global pandemic, Google Hangouts, Google X / Alphabet X, Greyball, growth hacking, high-speed rail, hockey-stick growth, hydraulic fracturing, Hyperloop, initial coin offering, inventory management, Isaac Newton, Jeff Bezos, Joi Ito, Khan Academy, late fees, Lean Startup, Lyft, M-Pesa, Marc Andreessen, Marc Benioff, margin call, Mark Zuckerberg, Max Levchin, minimum viable product, move fast and break things, Network effects, Oculus Rift, oil shale / tar sands, PalmPilot, Paul Buchheit, Paul Graham, Peter Thiel, pre–internet, Quicken Loans, recommendation engine, ride hailing / ride sharing, Salesforce, Sam Altman, Sand Hill Road, Saturday Night Live, self-driving car, shareholder value, sharing economy, Sheryl Sandberg, Silicon Valley, Silicon Valley startup, Skype, smart grid, social graph, SoftBank, software as a service, software is eating the world, speech recognition, stem cell, Steve Jobs, subscription business, synthetic biology, Tesla Model S, thinkpad, three-martini lunch, transaction costs, transport as a service, Travis Kalanick, Uber for X, uber lyft, web application, winner-take-all economy, work culture , Y Combinator, yellow journalism

That includes anything from a stock market crash or outlandish expenses to an opportunity you couldn’t predict in a market that didn’t exist when you started out. The fact is, most entrepreneurs are far more likely to raise too little rather than too much money. Nobel Prize–winning economist Daniel Kahneman and his longtime collaborator, the late Amos Tversky, described this general phenomenon when they wrote about the “planning fallacy” in their 1979 paper “Intuitive Prediction: Biases and Corrective Procedures.” The planning fallacy is that you make a plan, which is usually a best-case scenario. Then you assume that the outcome will follow your plan, even when you should know better.

Thanks also to those who made a cameo on those episodes, including Umber Ahmad, Dominique Ansel, Greg Baldwin, Alexa Christon, Paulette Mae Cole, Chris Costa, Lisa Curtis, Susan Danziger, Angela Duckworth, Kara Goldin, Natasha Hastings, Margaret Heffernan, Drew Houston, Joi Ito, Leila Janah, Daniel Kahneman, Cheryl Kellond, Dara Khosrowshahi, Josh Kopelman, Omid Kordestani, Michelle Lee, Tim Lefler, Kristen Marhaver, Kathryn Minshew, Andrew Ng, Aubrie Pagano, Hadi Partovi, Robert Pasin, Juliana Rotich, Andrés Ruzo, Dick Stockton, Tony Tjan, Yossi Vardi, and Darryl Woodson. The authors of the Silicon Guild provided valuable feedback on earlier drafts, including Peter Sims, Jennifer Aaker, Nancy Duarte, Morten Hansen, Frans Johansson, Charlene Li, Tina Seelig, Chris Shipley, Anne-Marie Slaughter, and Caroline Webb.


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The Journey of Humanity: The Origins of Wealth and Inequality by Oded Galor

agricultural Revolution, Alfred Russel Wallace, Andrei Shleifer, Apollo 11, Berlin Wall, bioinformatics, colonial rule, Columbian Exchange, conceptual framework, COVID-19, creative destruction, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, deindustrialization, demographic dividend, demographic transition, Donald Trump, double entry bookkeeping, Easter island, European colonialism, Fall of the Berlin Wall, Francisco Pizarro, general purpose technology, germ theory of disease, income per capita, intermodal, invention of agriculture, invention of movable type, invention of the printing press, invention of the telegraph, James Hargreaves, James Watt: steam engine, Joseph-Marie Jacquard, Kenneth Arrow, longitudinal study, loss aversion, Louis Pasteur, means of production, out of africa, phenotype, rent-seeking, rising living standards, Robert Solow, Scramble for Africa, The Death and Life of Great American Cities, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thomas Malthus, Walter Mischel, Washington Consensus, wikimedia commons, women in the workforce, working-age population, World Values Survey

The fact that these second-generation migrants are affected by their ancestral geographic environments suggests that these attitudes towards gender roles have been transmitted intergenerationally, and that this historical legacy endures even when families migrate to places with different institutions and education systems (although, as noted earlier, views on women entering the workforce tend to converge more rapidly with those of the dominant culture than other cultural traits).[36] Loss Aversion The Nobel Prize laureate Daniel Kahneman and cognitive psychologist Amos Tversky uncovered a common tendency among humans to attach greater weight to a loss than to a gain of equal or comparable size.[37] ‘Loss aversion’, as they term it, is an important determinant of the level of entrepreneurial activity in a population, which is in turn a significant factor in the driving of economic growth in the modern world.

Forbis, Brian Hayden, Tim Ingold, Stephen M. Perlman, David L. Pokotylo, Peter Rowley-Conwy and David E. Stuart, ‘The Significance of Food Storage among Hunter-Gatherers: Residence Patterns, Population Densities, and Social Inequalities’, Current Anthropology 23, no. 5 (1982): 523–37. Tversky, Amos, and Daniel Kahneman, ‘Loss Aversion in Riskless Choice: A Reference-Dependent Model’, The Quarterly Journal of Economics 106, no. 4 (1991): 1039–61. United Nations, World Population Prospects, 2017. United Nations, Human Development Report, 2018. United States Bureau of the Census, and United States, Congress House, Historical Statistics of the United States, Colonial Times to 1970, no. 93, US Department of Commerce, Bureau of the Census, 1975.


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Bootstrapped: Liberating Ourselves From the American Dream by Alissa Quart

2021 United States Capitol attack, 3D printing, affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, Bernie Sanders, Black Lives Matter, Burning Man, Capital in the Twenty-First Century by Thomas Piketty, carried interest, coronavirus, COVID-19, critical race theory, crowdsourcing, Daniel Kahneman / Amos Tversky, David Graeber, defund the police, Donald Trump, Elon Musk, financial independence, fixed income, George Floyd, gig economy, glass ceiling, high net worth, housing justice, hustle culture, illegal immigration, impact investing, income inequality, independent contractor, invisible hand, Jeff Bezos, lockdown, longitudinal study, loss aversion, Lyft, Marc Benioff, Mark Zuckerberg, meta-analysis, microaggression, Milgram experiment, minimum wage unemployment, multilevel marketing, obamacare, Overton Window, payday loans, post-work, Ralph Waldo Emerson, ride hailing / ride sharing, Ronald Reagan, Salesforce, Scientific racism, sharing economy, Sheryl Sandberg, side hustle, Silicon Valley, Silicon Valley ideology, Snapchat, social distancing, Steve Jobs, Steve Wozniak, tech worker, TED Talk, Travis Kalanick, trickle-down economics, Uber and Lyft, uber lyft, union organizing, W. E. B. Du Bois, wealth creators, women in the workforce, working poor, Works Progress Administration

Before many of the steel plants started to shut down, said Kemper, these men “sat high, the head of your table, the family member who makes all this fucking money.” Scholars have called this a state of “loss aversion.” Studies by cognitive psychologists, including landmark scholarship in 1992 by Amos Tversky and Daniel Kahneman, have found that losing—money, status, or anything of value—is twice as powerful as the joy resulting from gaining something beneficial. This creates a bias against loss. And that fear of disappearance explains why some choose to avoid losing ground over making gains and why Trump supporters who earned an average of $72,000 a year in 2016—a middle-class income—still had a fear of evaporating social status.

A society as individualistic and economically punishing as our own can degrade people psychologically, so after I spoke to Glantz, I started to look at other studies that explained some of how these depredations worked. One was a 2020 analysis of US adults ages thirty and over, where J. M. Twenge and A. B. Cooper looked at the correlation between income and happiness over a forty-four-year period and found that the relationship only intensified over time. (A previous well-known 2010 study by Daniel Kahneman and Angus Deaton demonstrated that, for Americans, higher salaries were associated with increases in day-to-day satisfaction, with well-being tapering off at an income of about $75,000.) In another article, “Income Inequality and Depression,” the authors, led by Vikram Patel of the Department of Global Health and Social Medicine at Harvard Medical School, conclude that “nearly two-thirds of all studies and five out of six longitudinal studies reported a statistically significant positive relationship between income inequality and risk of depression.”


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Chaos Kings: How Wall Street Traders Make Billions in the New Age of Crisis by Scott Patterson

"World Economic Forum" Davos, 2021 United States Capitol attack, 4chan, Alan Greenspan, Albert Einstein, asset allocation, backtesting, Bear Stearns, beat the dealer, behavioural economics, Benoit Mandelbrot, Bernie Madoff, Bernie Sanders, bitcoin, Bitcoin "FTX", Black Lives Matter, Black Monday: stock market crash in 1987, Black Swan, Black Swan Protection Protocol, Black-Scholes formula, blockchain, Bob Litterman, Boris Johnson, Brownian motion, butterfly effect, carbon footprint, carbon tax, Carl Icahn, centre right, clean tech, clean water, collapse of Lehman Brothers, Colonization of Mars, commodity super cycle, complexity theory, contact tracing, coronavirus, correlation does not imply causation, COVID-19, Credit Default Swap, cryptocurrency, Daniel Kahneman / Amos Tversky, decarbonisation, disinformation, diversification, Donald Trump, Doomsday Clock, Edward Lloyd's coffeehouse, effective altruism, Elliott wave, Elon Musk, energy transition, Eugene Fama: efficient market hypothesis, Extinction Rebellion, fear index, financial engineering, fixed income, Flash crash, Gail Bradbrook, George Floyd, global pandemic, global supply chain, Gordon Gekko, Greenspan put, Greta Thunberg, hindsight bias, index fund, interest rate derivative, Intergovernmental Panel on Climate Change (IPCC), Jeff Bezos, Jeffrey Epstein, Joan Didion, John von Neumann, junk bonds, Just-in-time delivery, lockdown, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, Mark Spitznagel, Mark Zuckerberg, market fundamentalism, mass immigration, megacity, Mikhail Gorbachev, Mohammed Bouazizi, money market fund, moral hazard, Murray Gell-Mann, Nick Bostrom, off-the-grid, panic early, Pershing Square Capital Management, Peter Singer: altruism, Ponzi scheme, power law, precautionary principle, prediction markets, proprietary trading, public intellectual, QAnon, quantitative easing, quantitative hedge fund, quantitative trading / quantitative finance, Ralph Nader, Ralph Nelson Elliott, random walk, Renaissance Technologies, rewilding, Richard Thaler, risk/return, road to serfdom, Ronald Reagan, Ronald Reagan: Tear down this wall, Rory Sutherland, Rupert Read, Sam Bankman-Fried, Silicon Valley, six sigma, smart contracts, social distancing, sovereign wealth fund, statistical arbitrage, statistical model, stem cell, Stephen Hawking, Steve Jobs, Steven Pinker, Stewart Brand, systematic trading, tail risk, technoutopianism, The Chicago School, The Great Moderation, the scientific method, too big to fail, transaction costs, University of East Anglia, value at risk, Vanguard fund, We are as Gods, Whole Earth Catalog

After the lecture, the chairman of the conference told the audience there’d be no questions for the speaker. Taleb, walking away from the podium, looked around nervously, half-fearing the organizers might toss him from the building. Then the next speaker took the podium. It was Daniel Kahneman, a Princeton University psychologist who the previous year had won the Nobel Memorial Prize in Economic Sciences for his groundbreaking work, with Amos Tversky, showing a variety of curious biases in human decision-making under uncertainty. Kahneman’s work ran counter to the long-standing assumption in economics, going back to Adam Smith, that humans are rational decision-makers driven by self-interest.

The maverick French mathematician and inventor of fractal geometry The Mandelbrot lecture is based on a similar lecture he gave at MIT around the same time. According to Taleb, it is the same lecture he delivered at Courant. https://www.youtube.com/watch?v=ock9Gk_aqw4. Then the next speaker took the podium “Daniel Kahneman Changed the Way We Think About Thinking. But What Do Other Thinkers Think of Him?,” Guardian, February 16, 2014, https://www.theguardian.com/science/2014/feb/16/daniel-kahneman-thinking-fast-and-slow-tributes. Taleb had gotten a real-world look at a looming Black Swan Alex Berenson, “Fannie Mae’s Loss Risk Is Larger, Computers Show,” New York Times, August 7, 2003, https://www.nytimes.com/2003/08/07/business/fannie-mae-s-loss-risk-is-larger-computer-models-show.html.


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Machine, Platform, Crowd: Harnessing Our Digital Future by Andrew McAfee, Erik Brynjolfsson

"World Economic Forum" Davos, 3D printing, additive manufacturing, AI winter, Airbnb, airline deregulation, airport security, Albert Einstein, algorithmic bias, AlphaGo, Amazon Mechanical Turk, Amazon Web Services, Andy Rubin, AOL-Time Warner, artificial general intelligence, asset light, augmented reality, autism spectrum disorder, autonomous vehicles, backpropagation, backtesting, barriers to entry, behavioural economics, bitcoin, blockchain, blood diamond, British Empire, business cycle, business process, carbon footprint, Cass Sunstein, centralized clearinghouse, Chris Urmson, cloud computing, cognitive bias, commoditize, complexity theory, computer age, creative destruction, CRISPR, crony capitalism, crowdsourcing, cryptocurrency, Daniel Kahneman / Amos Tversky, data science, Dean Kamen, deep learning, DeepMind, Demis Hassabis, discovery of DNA, disintermediation, disruptive innovation, distributed ledger, double helix, driverless car, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, Ethereum, ethereum blockchain, everywhere but in the productivity statistics, Evgeny Morozov, fake news, family office, fiat currency, financial innovation, general purpose technology, Geoffrey Hinton, George Akerlof, global supply chain, Great Leap Forward, Gregor Mendel, Hernando de Soto, hive mind, independent contractor, information asymmetry, Internet of things, inventory management, iterative process, Jean Tirole, Jeff Bezos, Jim Simons, jimmy wales, John Markoff, joint-stock company, Joseph Schumpeter, Kickstarter, Kiva Systems, law of one price, longitudinal study, low interest rates, Lyft, Machine translation of "The spirit is willing, but the flesh is weak." to Russian and back, Marc Andreessen, Marc Benioff, Mark Zuckerberg, meta-analysis, Mitch Kapor, moral hazard, multi-sided market, Mustafa Suleyman, Myron Scholes, natural language processing, Network effects, new economy, Norbert Wiener, Oculus Rift, PageRank, pattern recognition, peer-to-peer lending, performance metric, plutocrats, precision agriculture, prediction markets, pre–internet, price stability, principal–agent problem, Project Xanadu, radical decentralization, Ray Kurzweil, Renaissance Technologies, Richard Stallman, ride hailing / ride sharing, risk tolerance, Robert Solow, Ronald Coase, Salesforce, Satoshi Nakamoto, Second Machine Age, self-driving car, sharing economy, Silicon Valley, Skype, slashdot, smart contracts, Snapchat, speech recognition, statistical model, Steve Ballmer, Steve Jobs, Steven Pinker, supply-chain management, synthetic biology, tacit knowledge, TaskRabbit, Ted Nelson, TED Talk, the Cathedral and the Bazaar, The Market for Lemons, The Nature of the Firm, the strength of weak ties, Thomas Davenport, Thomas L Friedman, too big to fail, transaction costs, transportation-network company, traveling salesman, Travis Kalanick, Two Sigma, two-sided market, Tyler Cowen, Uber and Lyft, Uber for X, uber lyft, ubercab, Vitalik Buterin, warehouse robotics, Watson beat the top human players on Jeopardy!, winner-take-all economy, yield management, zero day

But almost all of us also believe that we’re capable of delivering a great deal more than digital technologies can, even as they continue to profit from Moore’s law—the remarkably steady, remarkably fast growth over time in the amount of computing hardware available for the same dollar of spending—and become exponentially more powerful. Decades of research confirm the idea that we do, in fact, reason in two different ways. This groundbreaking work resulted in a Nobel prize for Daniel Kahneman who, alongside collaborator Amos Tversky, pioneered the field that has come to be called behavioral economics.§ The work of Kahneman and his colleagues showed that we all have two modes of thinking, which he labeled System 1 and System 2.¶ System 1 is fast, automatic, evolutionarily ancient, and requires little effort; it’s closely associated with what we call intuition.

Every company I talked to had middle and even senior managers who operated as player-coaches, tasked with both doing things and directing others.” We see the same phenomenon. We also see that after at least two decades, the standard division between mind and machine is giving way to something quite different. Second-machine-age companies are combining modern technologies with a better understanding of Daniel Kahneman’s System 1 and System 2 (discussed in Chapter 2), and of human abilities and biases, to change how they make and evaluate decisions, how they generate and refine new ideas, and how they move forward in a highly uncertain world. While new marketplaces are emerging and thriving, we see no evidence in the economic data to indicate that companies are becoming passé, or are going to be wholly replaced by any variety of technology-enabled distributed autonomous organizations.

. ** The title of their article intentionally echoed Oliver Williamson’s widely cited book Markets and Hierarchies, which built heavily on Coase’s insights. Oliver E. Williamson, Markets and Hierarchies, Analysis and Antitrust Implications: A Study in the Economics of Internal Organization (New York: Free Press, 1975). †† Like Daniel Kahneman, Ostrom was awarded the prize despite not being an economist. ‡‡ Within certain limits of law and morality. §§ Oliver Hart and John Moore, “Property Rights and the Nature of the Firm,” Journal of Political Economy 98, no. 6 (1990): 1119–58. ¶¶ For example, Oliver Hart and Bengt Holmstrom, The Theory of Contracts, MIT Department of Economics Working Paper 418 (March 1986), https://dspace.mit.edu/bitstream/handle/1721.1/64265/theoryofcontract00hart.pdf%3Bjsessionid%3DD2F89D14123801EBB5A616B328AB8CFC?


pages: 187 words: 62,861

The Penguin and the Leviathan: How Cooperation Triumphs Over Self-Interest by Yochai Benkler

Abraham Maslow, Alan Greenspan, behavioural economics, business process, California gold rush, citizen journalism, classic study, Daniel Kahneman / Amos Tversky, do well by doing good, East Village, Everything should be made as simple as possible, experimental economics, experimental subject, framing effect, Garrett Hardin, informal economy, invisible hand, jimmy wales, job satisfaction, Joseph Schumpeter, Kaizen: continuous improvement, Kenneth Arrow, knowledge economy, laissez-faire capitalism, loss aversion, Murray Gell-Mann, Nicholas Carr, peer-to-peer, prediction markets, Richard Stallman, scientific management, Scientific racism, Silicon Valley, social contagion, Steven Pinker, telemarketer, Toyota Production System, Tragedy of the Commons, twin studies, ultimatum game, Washington Consensus, Yochai Benkler, zero-sum game, Zipcar

Framing, quite simply, refers to our interpretation of a situation, relationship, context, or event. Anytime we make a decision to act, we have to first interpret the situation we’re in. Even economists have grudgingly admitted this; behavioral economics describes it as the framing effect. Amos Tversky and Daniel Kahneman, the fathers of behavioral economics, explain that people will make different decisions depending on how a situation is presented. For example, when making a bet, people will risk different amounts depending on whether the bet is described as risking a loss or aiming for a gain (behavioral economists have found that people display what is often called “loss aversion”: they will reject bets framed as potential losses, but accept that same bet when it is framed as potential gains).


pages: 354 words: 105,322

The Road to Ruin: The Global Elites' Secret Plan for the Next Financial Crisis by James Rickards

"World Economic Forum" Davos, Affordable Care Act / Obamacare, Alan Greenspan, Albert Einstein, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Bayesian statistics, Bear Stearns, behavioural economics, Ben Bernanke: helicopter money, Benoit Mandelbrot, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Black Monday: stock market crash in 1987, Black Swan, blockchain, Boeing 747, Bonfire of the Vanities, Bretton Woods, Brexit referendum, British Empire, business cycle, butterfly effect, buy and hold, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, cellular automata, cognitive bias, cognitive dissonance, complexity theory, Corn Laws, corporate governance, creative destruction, Credit Default Swap, cuban missile crisis, currency manipulation / currency intervention, currency peg, currency risk, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, disintermediation, distributed ledger, diversification, diversified portfolio, driverless car, Edward Lorenz: Chaos theory, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, fiat currency, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, Fractional reserve banking, G4S, George Akerlof, Glass-Steagall Act, global macro, global reserve currency, high net worth, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Isaac Newton, jitney, John Meriwether, John von Neumann, Joseph Schumpeter, junk bonds, Kenneth Rogoff, labor-force participation, large denomination, liquidity trap, Long Term Capital Management, low interest rates, machine readable, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, Minsky moment, Money creation, money market fund, mutually assured destruction, Myron Scholes, Naomi Klein, nuclear winter, obamacare, offshore financial centre, operational security, Paul Samuelson, Peace of Westphalia, Phillips curve, Pierre-Simon Laplace, plutocrats, prediction markets, price anchoring, price stability, proprietary trading, public intellectual, quantitative easing, RAND corporation, random walk, reserve currency, RFID, risk free rate, risk-adjusted returns, Robert Solow, Ronald Reagan, Savings and loan crisis, Silicon Valley, sovereign wealth fund, special drawing rights, stock buybacks, stocks for the long run, tech billionaire, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transfer pricing, value at risk, Washington Consensus, We are all Keynesians now, Westphalian system

But that belief does not withstand scrutiny outside the faculty lounge. Human behavior is not rational in the ways economists need it to be for their apparatus to work. Modern human irrationality (really rational if considered in an Ice Age context) has been demonstrated by sociologists Daniel Kahneman, Amos Tversky, Dan Ariely, and others over the past thirty years. People do not save enough. They buy on impulse. They react fearfully or exuberantly at different market stages. As a result, the theory of rational expectations is in shreds. Still, central bankers give the theory credence in their policy deliberations.

All three tools seem more inexact in their predictive power than current models used by central banks. Yet they offer a far better reflection of reality. It is better to be roughly right than exactly wrong. Behavioral psychology is understood and embraced by economists. The leading theorist in behavioral psychology, Daniel Kahneman, received the Nobel Prize in economics in 2002. The impediment to the use of psychology in economics is not appreciation, it’s application. Finance models such as VaR are still based on rational behavior and efficient markets, long after Kahneman and his colleagues proved that human behavior in markets is irrational and inefficient (as economists define these terms).

Busch, “Close-Up: Lord Keynes,” Life, September 17, 1945, accessed August 7, 2016, https://books.google.com/books?id=t0kEAAAAMBAJ&q=%22a+cable%22&hl=en#v=snippet&q=%22a%20cable%22&f=false. For example, Kahneman’s experiments show: This example illustrates a cognitive bias Kahneman called “risk aversion.” See Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Straus and Giroux, 2011), 434–36. CHAPTER 1: THIS IS THE END “Nice, nice, very nice”: Kurt Vonnegut, Cat’s Cradle (New York: Dial Press, 2010), 3. Under Larry Fink’s direction, BlackRock emerged: Some descriptions of Larry Fink’s management style and work habits in this material are from Carol J.


pages: 274 words: 93,758

Phishing for Phools: The Economics of Manipulation and Deception by George A. Akerlof, Robert J. Shiller, Stanley B Resor Professor Of Economics Robert J Shiller

Andrei Shleifer, asset-backed security, Bear Stearns, behavioural economics, Bernie Madoff, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carl Icahn, collapse of Lehman Brothers, compensation consultant, corporate raider, Credit Default Swap, Daniel Kahneman / Amos Tversky, dark matter, David Brooks, desegregation, en.wikipedia.org, endowment effect, equity premium, financial intermediation, financial thriller, fixed income, full employment, George Akerlof, greed is good, income per capita, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, junk bonds, Kenneth Arrow, Kenneth Rogoff, late fees, loss aversion, market bubble, Menlo Park, mental accounting, Michael Milken, Milgram experiment, money market fund, moral hazard, new economy, Pareto efficiency, Paul Samuelson, payday loans, Ponzi scheme, profit motive, publication bias, Ralph Nader, randomized controlled trial, Richard Thaler, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, short selling, Silicon Valley, stock buybacks, the new new thing, The Predators' Ball, the scientific method, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, theory of mind, Thorstein Veblen, too big to fail, transaction costs, Unsafe at Any Speed, Upton Sinclair, Vanguard fund, Vilfredo Pareto, wage slave

See “Predictions of the Year 2000 from The Ladies Home Journal of December 1900,” accessed December 1, 2014, http://yorktownhistory.org/wp-content/archives/homepages/1900_predictions.htm, for confirmation that the issue was for December. 11. Oxford English Dictionary, s.v. “phish,” accessed October 29, 2014, http://www.oed.com/view/Entry/264319?redirectedFrom=phish#eid. 12. It is no coincidence that early research of Daniel Kahneman and Amos Tversky, who were pioneers in the modern field of cognitive psychology, concerned optical illusion. Kahneman has told George that the distortions in thinking that underlie the field of behavioral economics can be seen as being like “optical illusion.” (Private conversation, some twenty-five years ago.) 13.

But, above all, the examples we shall explore will have grave implications for social policy, including the role of government as a complement rather than a hindrance to free markets—since, just as our computers need protection against malware, so too we need protection against phishing for phools more broadly defined. INTRODUCTION Expect to Be Manipulated: Phishing Equilibrium The psychologists have taught us over the course of more than a century—in voices ranging in style and content from Sigmund Freud to Daniel Kahneman—that people frequently make decisions that are not in their best interest. Put bluntly, they do not do what is really good for them; they do not choose what they really want. Such bad decisions make it possible for them to be phished for phools. This truth is so basic that it is critical to the first story of the Bible, where the serpent beguiles innocent Eve to make a phoolish decision that she will instantly, and forever, regret.1 The fundamental concept of economics is quite different: it is the notion of market equilibrium.2 For our explanation, we adapt the example of the checkout lane at the supermarket.3 When we arrive at the checkout at the supermarket, it usually takes at least a moment to decide which line to choose.

And for six weeks in May and June 2015, Madeleine Adams was the copy editor; almost everywhere, she added elegance and grace to the manuscript we had given her. The ideas in this book are a collage of what we have learned, and what we have listened to, over the course of our lives as economists. In this regard we owe special thanks to four others. Daniel Kahneman, yes that one, some twenty-five or thirty years ago, told us that the distinctive feature of psychology is that it views people as imperfect machines. The job of the psychologist, he said, was to figure out how and when those machines would be dysfunctional. In contrast, the basic concept of economics is equilibrium.


pages: 416 words: 112,268

Human Compatible: Artificial Intelligence and the Problem of Control by Stuart Russell

3D printing, Ada Lovelace, AI winter, Alan Turing: On Computable Numbers, with an Application to the Entscheidungsproblem, Alfred Russel Wallace, algorithmic bias, AlphaGo, Andrew Wiles, artificial general intelligence, Asilomar, Asilomar Conference on Recombinant DNA, augmented reality, autonomous vehicles, basic income, behavioural economics, Bletchley Park, blockchain, Boston Dynamics, brain emulation, Cass Sunstein, Charles Babbage, Claude Shannon: information theory, complexity theory, computer vision, Computing Machinery and Intelligence, connected car, CRISPR, crowdsourcing, Daniel Kahneman / Amos Tversky, data science, deep learning, deepfake, DeepMind, delayed gratification, Demis Hassabis, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, Ernest Rutherford, fake news, Flash crash, full employment, future of work, Garrett Hardin, Geoffrey Hinton, Gerolamo Cardano, Goodhart's law, Hans Moravec, ImageNet competition, Intergovernmental Panel on Climate Change (IPCC), Internet of things, invention of the wheel, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, John Nash: game theory, John von Neumann, Kenneth Arrow, Kevin Kelly, Law of Accelerating Returns, luminiferous ether, machine readable, machine translation, Mark Zuckerberg, multi-armed bandit, Nash equilibrium, Nick Bostrom, Norbert Wiener, NP-complete, OpenAI, openstreetmap, P = NP, paperclip maximiser, Pareto efficiency, Paul Samuelson, Pierre-Simon Laplace, positional goods, probability theory / Blaise Pascal / Pierre de Fermat, profit maximization, RAND corporation, random walk, Ray Kurzweil, Recombinant DNA, recommendation engine, RFID, Richard Thaler, ride hailing / ride sharing, Robert Shiller, robotic process automation, Rodney Brooks, Second Machine Age, self-driving car, Shoshana Zuboff, Silicon Valley, smart cities, smart contracts, social intelligence, speech recognition, Stephen Hawking, Steven Pinker, superintelligent machines, surveillance capitalism, Thales of Miletus, The Future of Employment, The Theory of the Leisure Class by Thorstein Veblen, Thomas Bayes, Thorstein Veblen, Tragedy of the Commons, transport as a service, trolley problem, Turing machine, Turing test, universal basic income, uranium enrichment, vertical integration, Von Neumann architecture, Wall-E, warehouse robotics, Watson beat the top human players on Jeopardy!, web application, zero-sum game

For an introduction to non-quantitative decision analysis, see Michael Wellman, “Fundamental concepts of qualitative probabilistic networks,” Artificial Intelligence 44 (1990): 257–303. 21. I will discuss the evidence for human irrationality further in Chapter 9. The standard references include the following: Allais, “Le comportement”; Daniel Ellsberg, Risk, Ambiguity, and Decision (PhD thesis, Harvard University, 1962); Amos Tversky and Daniel Kahneman, “Judgment under uncertainty: Heuristics and biases,” Science 185 (1974): 1124–31. 22. It should be clear that this is a thought experiment that cannot be realized in practice. Choices about different futures are never presented in full detail, and humans never have the luxury of minutely examining and savoring those futures before choosing.

Thus, Robbie cannot assume that Harriet’s actions reflect accurate knowledge of her own preferences: some may be thoroughly grounded in experience, while others may be based primarily on supposition, prejudice, fear of the unknown, or weakly supported generalizations.42 A suitably tactful Robbie could be very helpful to Harriet in alerting her to such situations. Experience and memory Some psychologists have called into question the very notion that there is one self whose preferences are sovereign in the way that Harsanyi’s principle of preference autonomy suggests. Most prominent among these psychologists is my former Berkeley colleague Daniel Kahneman. Kahneman, who won the 2002 Nobel Prize for his work in behavioral economics, is one of the most influential thinkers on the topic of human preferences. His recent book, Thinking, Fast and Slow,43 recounts in some detail a series of experiments that convinced him that there are two selves—the experiencing self and the remembering self—whose preferences are in conflict.

David Sirkin et al. (IEEE, 2019). 42. Eliezer Yudkowsky, in Coherent Extrapolated Volition (Singularity Institute, 2004), lumps all these aspects, as well as plain inconsistency, under the heading of muddle—a term that has not, unfortunately, caught on. 43. On the two selves who evaluate experiences: Daniel Kahneman, Thinking, Fast and Slow (Farrar, Straus & Giroux, 2011). 44. Edgeworth’s hedonimeter, an imaginary device for measuring happiness moment to moment: Francis Edgeworth, Mathematical Psychics: An Essay on the Application of Mathematics to the Moral Sciences (Kegan Paul, 1881). 45. A standard text on sequential decisions under uncertainty: Martin Puterman, Markov Decision Processes: Discrete Stochastic Dynamic Programming (Wiley, 1994). 46.


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Why Startups Fail: A New Roadmap for Entrepreneurial Success by Tom Eisenmann

Airbnb, Atul Gawande, autonomous vehicles, Ben Horowitz, Big Tech, bitcoin, Blitzscaling, blockchain, call centre, carbon footprint, Checklist Manifesto, clean tech, conceptual framework, coronavirus, corporate governance, correlation does not imply causation, COVID-19, crowdsourcing, Daniel Kahneman / Amos Tversky, data science, Dean Kamen, drop ship, Elon Musk, fail fast, fundamental attribution error, gig economy, growth hacking, Hyperloop, income inequality, initial coin offering, inventory management, Iridium satellite, Jeff Bezos, Jeff Hawkins, Larry Ellison, Lean Startup, Lyft, Marc Andreessen, margin call, Mark Zuckerberg, minimum viable product, Network effects, nuclear winter, Oculus Rift, PalmPilot, Paul Graham, performance metric, Peter Pan Syndrome, Peter Thiel, reality distortion field, Richard Thaler, ride hailing / ride sharing, risk/return, Salesforce, Sam Altman, Sand Hill Road, side project, Silicon Valley, Silicon Valley startup, Skype, social graph, software as a service, Solyndra, speech recognition, stealth mode startup, Steve Jobs, TED Talk, two-sided market, Uber and Lyft, Uber for X, uber lyft, vertical integration, We wanted flying cars, instead we got 140 characters, WeWork, Y Combinator, young professional, Zenefits

A propensity to “double down,” increasing one’s commitment in the wake of a bad outcome, is also consistent with the core tenet of prospect theory: that individuals tend to be risk averse in the domain of gains (i.e., when they’ve experienced good outcomes and have a lot to lose if a bet goes badly) and risk seeking in the domain of losses, as shown in Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision under Risk,” Econometrica 47, no. 2 (1979): 263–292. Likewise, escalation of commitment is broadly consistent with a threat-rigidity response: a tendency by individuals or organizations, when under duress, to revert to a familiar strategy rather than search for a new one, as described in Barry Staw, Lance Sandelands, and Jane Dutton, “Threat-Rigidity Effects in Organizational Behavior: A Multilevel Analysis,” Administrative Science Quarterly 26, no. 4 (1981): 501–524.

Under the pressure of bet-the-company decisions, your gut will be wracked by strong emotions—and that can obscure the right move. Sleep on these decisions—maybe for two nights. Then, write up your analysis of options and trade-offs, and share it with team members and investors. I truly believe that with crucial choices, what Nobel Prize–winning economist Daniel Kahneman calls “slow thinking” will boost your odds of survival. The fact that you’ve already committed to an entrepreneurial path, knowing full well that your odds of failure are high, suggests to me that you’ve come to terms with that possibility. You’re likely aware that while failure may be painful, the entrepreneurial path is, for many people, an irresistible draw—a career calling.

“What I have learned”: Eisenmann and Ma, “Baroo (B).” Shai Agassi founded: “Agassi Turns Environment Friendly Focus to Mass Transport,” Haaretz, Aug. 7, 2014. Letter to a First-Time Founder Y Combinator’s Paul Graham says: Graham, “Startup = Growth.” I truly believe: Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Strauss and Giroux, 2011). So, I wrote: Alumni founders’ responses are presented in Tom Eisenmann, “No Regrets (Mostly): Reflections from HBS MBA ’99 Entrepreneurs,” Launching Technology Ventures course blog, Mar. 28, 2011. Appendix: Early-Stage Startup Survey My multivariate analysis employs: My multinomial logistic regression model exhibits good fit with N = 470; chi square difference for likelihood ratio test of model fit = 198.1, with 92 degrees of freedom and significance level = .000; and Cox & Snell pseudo R-square = .344.


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What Patients Say, What Doctors Hear by Danielle Ofri

big-box store, Columbine, Daniel Kahneman / Amos Tversky, medical residency, meta-analysis, Nelson Mandela, placebo effect, randomized controlled trial, stem cell, sugar pill

When searching for a doctor, most patients still use word-of-mouth recommendations.1 There is a plethora of doctor rating sites, as well as the many “quality measures” that are published online, but most people have trouble making sense of this jumble of information. This is partly because the data are disjointed. But mainly this is because most of us don’t make decisions based on rational facts. Decades of research by psychologists Daniel Kahneman and Amos Tversky has shown that humans do not act in the rational way that logic would suggest.2 Patients may in fact research their prospective doctors’ board certifications or mortality rates or blood-pressure control rates, but they don’t necessarily use these numbers in choosing a doctor.3 They tend to go with a doctor whom they feel they can trust.

The names of the patients in this book have been changed to protect their identities, with the exception of Morgan Amanda Fritzlen and Tracey Pratt, who consented to have their real names used. Non-patient names are real. CHAPTER 2: FROM BOTH SIDES NOW 1. H. T. Tu and J. R. Lauer, “Word of Mouth and Physician Referrals Still Drive Health Care Provider Choice,” Research Briefs 9 (2008): 1–8. 2. Research of Kahneman and Tversky summarized in Daniel Kahneman, Thinking Fast and Slow (New York: Farrar, Straus and Giroux, 2011). 3. A. Victoor et al., “Determinants of Patient Choice of Healthcare Providers: A Scoping Review,” BMC Health Services Research 12 (2012): 272–88; K. M. Harris et al., “How Do Patients Choose Physicians? Evidence from a National Survey of Enrollees in Employment-Related Health Plans,” Health Services Research 38 (2003): 711–32. 4.


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Finance and the Good Society by Robert J. Shiller

Alan Greenspan, Alvin Roth, bank run, banking crisis, barriers to entry, Bear Stearns, behavioural economics, benefit corporation, Bernie Madoff, buy and hold, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, cognitive dissonance, collateralized debt obligation, collective bargaining, computer age, corporate governance, Daniel Kahneman / Amos Tversky, democratizing finance, Deng Xiaoping, diversification, diversified portfolio, Donald Trump, Edward Glaeser, eurozone crisis, experimental economics, financial engineering, financial innovation, financial thriller, fixed income, full employment, fundamental attribution error, George Akerlof, Great Leap Forward, Ida Tarbell, income inequality, information asymmetry, invisible hand, John Bogle, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, land reform, loss aversion, Louis Bachelier, Mahatma Gandhi, Mark Zuckerberg, market bubble, market design, means of production, microcredit, moral hazard, mortgage debt, Myron Scholes, Nelson Mandela, Occupy movement, passive investing, Ponzi scheme, prediction markets, profit maximization, quantitative easing, random walk, regulatory arbitrage, Richard Thaler, Right to Buy, road to serfdom, Robert Shiller, Ronald Reagan, selection bias, self-driving car, shareholder value, Sharpe ratio, short selling, Simon Kuznets, Skype, social contagion, Steven Pinker, tail risk, telemarketer, Thales and the olive presses, Thales of Miletus, The Market for Lemons, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, Vanguard fund, young professional, zero-sum game, Zipcar

Certainly it is that, but it is unique among entertainment forms in that it cultivates and ampli es to a considerable extent human risk-taking impulses, sometimes with disastrous consequences. The puzzle comes down to why one would be willing to place even one single bet at a casino. Research by psychologists Daniel Kahneman and Amos Tversky has shown that people exhibit a tendency toward loss aversion.1 They are pathologically avoidant of even small losses. If o ered an asymmetrical bet on a coin toss—to win $20 if it comes up heads, to lose $10 if it comes up tails—most people will turn down the bet, even though it has a positive expected return of $5.

., Xun Liu, Yang Jiang, Donald Lynam, and Thomas H. Kelly. 2008. “Neural Correlates of Emotional Reactivity in Sensation Seeking.” Psychological Science 20(2):215–23. Jung, Jeeman, and Robert J. Shiller. 2005. “A Simple Test of Samuelson’s Dictum for the Stock Market.” Economic Inquiry 43(2):263–92. Kahneman, Daniel, and Amos Tversky. 1979. “Prospect Theory: An Analysis of Decision under Risk.” Econometrica 47(2):263–92. Kamstra, Mark, and Robert J. Shiller. 2010. “Trills Instead of T-Bills: It’s Time to Replace Part of Government Debt with Shares in GDP.” The Economists’ Voice 7(3), Article 5, http://www.bepress.com/ev/vol7/iss3/art5.


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The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality by Brink Lindsey

Airbnb, Asian financial crisis, bank run, barriers to entry, Bernie Sanders, Build a better mousetrap, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, Carmen Reinhart, Cass Sunstein, collective bargaining, creative destruction, Credit Default Swap, crony capitalism, Daniel Kahneman / Amos Tversky, David Brooks, diversified portfolio, Donald Trump, Edward Glaeser, endogenous growth, experimental economics, experimental subject, facts on the ground, financial engineering, financial innovation, financial intermediation, financial repression, hiring and firing, Home mortgage interest deduction, housing crisis, income inequality, informal economy, information asymmetry, intangible asset, inventory management, invisible hand, Jones Act, Joseph Schumpeter, Kenneth Rogoff, Kevin Kelly, knowledge worker, labor-force participation, Long Term Capital Management, low skilled workers, Lyft, Mark Zuckerberg, market fundamentalism, mass immigration, mass incarceration, medical malpractice, Menlo Park, moral hazard, mortgage debt, Network effects, patent troll, plutocrats, principal–agent problem, regulatory arbitrage, rent control, rent-seeking, ride hailing / ride sharing, Robert Metcalfe, Robert Solow, Ronald Reagan, Savings and loan crisis, Silicon Valley, Silicon Valley ideology, smart cities, software patent, subscription business, tail risk, tech bro, too big to fail, total factor productivity, trade liberalization, tragedy of the anticommons, Tragedy of the Commons, transaction costs, tulip mania, Tyler Cowen, Uber and Lyft, uber lyft, Washington Consensus, white picket fence, winner-take-all economy, women in the workforce

Smith, and Abigail Wozniak, “Internal Migration in the United States,” Journal of Economic Perspectives 25, no. 3 (Summer 2011): 173–96. 27.Scott Winship, “When Moving Matters: Residential and Economic Mobility Trends in America, 1880–2010,” Manhattan Institute e21 Report no. 2, November 2015, https://www.manhattan-institute.org/html/when-moving-matters-residential-and-economic-mobility-trends-america-1880-2010-8048.html. 28.Matthew Rognlie, “Deciphering the Fall and Rise of the Net Capital Share,” Brookings Papers on Economic Activity (Spring 2015): 1–54, https://scholar.harvard.edu/files/shoag/files/why_has_regional_income_convergence_in_the_us_declined_01.pdf. Chapter 7 1.Mancur Olson, The Logic of Collective Action (Cambridge, MA: Harvard University Press, 1965). 2.On the psychological basis of risk aversion, see Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision under Risk,” Econometrica 47, no. 2 (March 1979): 263–92; on the impact of government policy on the growth of supportive interests, see Beth Leech, Frank Baumgartner, Timothy LaPira, and Nicholas Semanko, “Drawing Lobbyists to Washington: Government Activity and the Demand for Advocacy,” Political Research Quarterly 58, no. 1 (March 2005): 19–30. 3.Jonathan Rauch, Government’s End (New York: Public Affairs, 1999). 4.Joseph Bessette, The Mild Voice of Reason: Deliberative Democracy and American National Government (Chicago: University of Chicago Press, 1994). 5.Frank Baumgartner, Jeffrey Berry, Marie Hojnacki, David Kimball, and Beth Leech, Lobbying and Policy Change: Who Wins, Who Loses and Why (Chicago: University of Chicago Press, 2009). 6.Lee Drutman, “The Solution to Lobbying Is More Lobbying,” Washington Post, April 29, 2015, https://www.washingtonpost.com/blogs/monkey-cage/wp/2015/04/29/the-solution-to-lobbying-is-more-lobbying/. 7.Mark Smith, American Business and Political Power: Public Opinion, Elections and Democracy (Chicago: University of Chicago Press, 2000). 8.Frank Baumgarter and Bryan Jones, Agendas and Instability in American Politics (Chicago: University of Chicago Press, 1993); Bryan Jones and Frank Baumgartner, The Politics of Attention: How Government Prioritizes Problems (Chicago: University of Chicago Press, 2005). 9.Richard Hall and Frank Wayman find that money buys substantial influence over relatively lower-profile activities of members of Congress in committees, but relatively less in votes on the floor.


pages: 83 words: 7,274

Buyology by Martin Lindstrom

anti-work, antiwork, Apollo 11, Berlin Wall, Daniel Kahneman / Amos Tversky, driverless car, Kickstarter, Mikhail Gorbachev, mirror neurons, Neil Armstrong, Pepsi Challenge, Pepto Bismol, retail therapy, Saturday Night Live, Steve Jobs, Steven Pinker, Virgin Galactic

Athletes believe in the supernatural powers of “hot” streaks, too—those times when they just can’t seem to miss a single pitch, shot, goal, or basket. When a player shoots a string of good shots in a game, it’s generally believed he has the “hot hand.” The team then conspires to get him the ball because they believe he’s on some kind of roll. In 1985, two future Nobel Prize–winning economists, Daniel Kahneman and Amos Tversky, unsettled basketball fans across the United States when they disproved this myth, well known to both players and fans. To test whether or not these “hot streaks” actually exist, Kahneman and Tversky examined the statistics for a number of teams from 1980 to 1982. When they analyzed the Boston Celtics’ free-throw 08/08/2009 10:45 38 of 83 file:///D:/000004/Buy__ology.html ratio, they discovered that if a player made his first shot, he made the second shot 75 percent of the time.


pages: 231 words: 64,734

Safe Haven: Investing for Financial Storms by Mark Spitznagel

Albert Einstein, Antoine Gombaud: Chevalier de Méré, asset allocation, behavioural economics, bitcoin, Black Swan, blockchain, book value, Brownian motion, Buckminster Fuller, cognitive dissonance, commodity trading advisor, cryptocurrency, Daniel Kahneman / Amos Tversky, data science, delayed gratification, diversification, diversified portfolio, Edward Thorp, fiat currency, financial engineering, Fractional reserve banking, global macro, Henri Poincaré, hindsight bias, Long Term Capital Management, Mark Spitznagel, Paul Samuelson, phenotype, probability theory / Blaise Pascal / Pierre de Fermat, quantitative trading / quantitative finance, random walk, rent-seeking, Richard Feynman, risk free rate, risk-adjusted returns, Schrödinger's Cat, Sharpe ratio, spice trade, Steve Jobs, tail risk, the scientific method, transaction costs, value at risk, yield curve, zero-sum game

In basing decisions on the geometric average of expected wealth or returns, not on the arithmetic average, Bernoulli was showing us how we should view risk—not how we necessarily do view risk. And this is precisely where economists got it so wrong. In fact, in 1979 behavioral economists Daniel Kahneman and Amos Tversky developed a theory of decision‐making under uncertainty known as prospect theory. This theory implied that people have diminishing marginal utility with increasing gains, like the logarithmic function—as well as with increasing losses. The latter completely contradicts the logarithmic function's increasing marginal utility with increasing losses.


pages: 232 words: 71,237

Kill It With Fire: Manage Aging Computer Systems by Marianne Bellotti

anti-pattern, barriers to entry, business logic, cloud computing, cognitive bias, computer age, continuous integration, create, read, update, delete, Daniel Kahneman / Amos Tversky, data science, database schema, Dennis Ritchie, DevOps, fault tolerance, fear of failure, Google Chrome, Hans Moravec, iterative process, Ken Thompson, loose coupling, microservices, minimum viable product, Multics, no silver bullet, off-by-one error, platform as a service, pull request, QWERTY keyboard, Richard Stallman, risk tolerance, Schrödinger's Cat, side project, software as a service, Steven Levy, systems thinking, web application, Y Combinator, Y2K

Frederick Brooks, The Mythical Man-Month (Reading, MA: Addison-Wesley, 1995). 9. Joel Spolsky, “Things You Should Never Do, Part I,” Joel on Software, April 6, 2000, https://www.joelonsoftware.com/2000/04/06/things-you-should-never-do-part-i/. 10. Sidney Dekker, Drift into Failure (Abingdon-on-Thames, UK: Routledge, 2018). 11. See the work of Daniel Kahneman and Amos Tversky on the pseudocertainty effect for more detail, as well as their bestseller book Thinking, Fast and Slow (New York: Farrar, Straus and Giroux 2011). 8 Breaking Changes In government, we had a saying, “The only thing the government hates more than change is the way things are.”


pages: 416 words: 118,592

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing by Burton G. Malkiel

accounting loophole / creative accounting, Alan Greenspan, Albert Einstein, asset allocation, asset-backed security, backtesting, Bear Stearns, beat the dealer, Bernie Madoff, book value, BRICs, butter production in bangladesh, buy and hold, capital asset pricing model, compound rate of return, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, dogs of the Dow, Edward Thorp, Elliott wave, Eugene Fama: efficient market hypothesis, experimental subject, feminist movement, financial engineering, financial innovation, fixed income, framing effect, hindsight bias, Home mortgage interest deduction, index fund, invisible hand, Isaac Newton, Japanese asset price bubble, John Bogle, junk bonds, Long Term Capital Management, loss aversion, low interest rates, margin call, market bubble, Mary Meeker, money market fund, mortgage tax deduction, new economy, Own Your Own Home, PalmPilot, passive investing, Paul Samuelson, pets.com, Ponzi scheme, price stability, profit maximization, publish or perish, purchasing power parity, RAND corporation, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, stock buybacks, stocks for the long run, sugar pill, survivorship bias, The Myth of the Rational Market, the rule of 72, The Wisdom of Crowds, transaction costs, Vanguard fund, zero-coupon bond

And even if investors are irrational in a similar way, efficient-market theory believers assert that smart rational traders will correct any mispricings that might arise from the presence of irrational traders. Psychologists will have none of this economic claptrap. Two in particular—Daniel Kahneman and Amos Tversky—blasted economists’ views about how investors behave and in the process are credited with fathering a whole new economic discipline, called behavioral finance. The two argued quite simply that people are not as rational as economic models assume. Although this argument is obvious to the general public and non-economists, it took over twenty years for it to become widely accepted in academia.

Robert Shiller, in his best-selling book Irrational Exuberance, argues that the mania in Internet and high-tech stocks during the late 1990s can be explained only in terms of mass psychology. At universities, so-called behavioral theories of the stock market, stressing crowd psychology, gained favor during the early 2000s at leading economics departments and business schools across the developed world. The psychologist Daniel Kahneman won the Nobel Prize in Economics in 2002 for his seminal contributions to the field of “behavioral finance.” Earlier, Oskar Morgenstern was a leading champion. Morgenstern argued that the search for intrinsic value in stocks is a search for the will-o’-the-wisp. In an exchange economy the value of any asset depends on an actual or prospective transaction.

Even in judging athletic ability, an area where self-deception would seem more difficult, at least 60 percent of the male respondents ranked themselves in the top quartile. Even the klutziest deluded themselves about their athletic ability. Only 6 percent of male respondents believed that their athleticism was below average. Daniel Kahneman has argued that this tendency to overconfidence is particularly strong among investors. More than most other groups, investors tend to exaggerate their own skill and deny the role of chance. They overestimate their own knowledge, underestimate the risks involved, and exaggerate their ability to control events.


pages: 417 words: 103,458

The Intelligence Trap: Revolutionise Your Thinking and Make Wiser Decisions by David Robson

active measures, Affordable Care Act / Obamacare, Albert Einstein, Alfred Russel Wallace, Atul Gawande, autism spectrum disorder, availability heuristic, behavioural economics, classic study, cognitive bias, corporate governance, correlation coefficient, cuban missile crisis, Daniel Kahneman / Amos Tversky, dark matter, deep learning, deliberate practice, dematerialisation, Donald Trump, Dunning–Kruger effect, fake news, Flynn Effect, framing effect, fundamental attribution error, illegal immigration, Isaac Newton, job satisfaction, knowledge economy, Large Hadron Collider, lone genius, meta-analysis, Nelson Mandela, obamacare, Parler "social media", pattern recognition, post-truth, price anchoring, reality distortion field, Richard Feynman, risk tolerance, Silicon Valley, social intelligence, Steve Jobs, sunk-cost fallacy, tacit knowledge, TED Talk, the scientific method, theory of mind, traveling salesman, ultimatum game, Y2K, Yom Kippur War

‘As a rule, I have found that the greater brain a man has, and the better he is educated, the easier it has been to mystify him,’ he once told Conan Doyle.5 A true recognition of dysrationalia – and its potential for harm – has taken decades to blossom, but the roots of the idea can be found in the now legendary work of two Israeli researchers, Daniel Kahneman and Amos Tversky, who identified many cognitive biases and heuristics (quick-and-easy rules of thumb) that can skew our reasoning. One of their most striking experiments asked participants to spin a ‘wheel of fortune’, which landed on a number between 1 and 100, before considering general knowledge questions – such as estimating the number of African countries that are represented in the UN.

‘Because these cognitive biases are presented to them as essentially cognitive tasks, they expect to outperform on them as well.’ From my interactions with Stanovich, I get the impression that he is extremely cautious about promoting his findings, meaning he has not achieved the same kind of fame as Daniel Kahneman, say – but colleagues within his field believe that these theories could be truly game-changing. ‘The work he has done is some of the most important research in cognitive psychology – but it’s sometimes underappreciated,’ agreed Gordon Pennycook, a professor at the University of Regina, Canada, who has also specialised in exploring human rationality.


The Winner-Take-All Society: Why the Few at the Top Get So Much More Than the Rest of Us by Robert H. Frank, Philip J. Cook

accounting loophole / creative accounting, air freight, Alvin Roth, Apple's 1984 Super Bowl advert, business cycle, compensation consultant, Daniel Kahneman / Amos Tversky, delayed gratification, Garrett Hardin, global village, haute couture, income inequality, independent contractor, invisible hand, junk bonds, labor-force participation, longitudinal study, Marshall McLuhan, medical malpractice, Network effects, positional goods, prisoner's dilemma, rent-seeking, rising living standards, Ronald Reagan, school choice, Shoshana Zuboff, Stephen Hawking, stock buybacks, Tragedy of the Commons, transaction costs, trickle-down economics, winner-take-all economy

Consistent with this view, one study found that a sample of clinically depressed patients had remarkably accurate as­ sessments of their various abilities and social skills-this in sharp con­ trast to a group of ostensibly normal subjects, who had significantly inflated self-assessments. 1 3 But the Lake Wobegon bias clearly has cognitive dimensions as well. Thus psychologists Amos Tversky and Daniel Kahneman have shown that when people try to estimate the likelihood of an event, they often rely on how easily they can summon examples of similar events from memory. 14 Yet, although ease of recall does, in fact, rise with the frequency of similar events, it also depends on other factors. Events that are especially salient or vivid are easily recalled even if they happen only infrequently.

"The Impending Information Implosion, " Thaler, Richard, and H. M. Shefrin. "An Economic Theory of Self-Contro!''' Journal o/Political Economy 89, 2 ( 1981 ) : 392-406. Optimism. New York: Simon & Shuster, 1 979. Tobin, James. "On Limiting the Domain of Inequality." Journal 0/ Law and Economics 20 ( 1 970): 263-277. Tiger, Lione!. Tversky, Amos, and Daniel Kahneman. "Judgment Under Uncertainty: Heuristics and Biases." Science 1 85 ( 1974): 1 124-3 l . United States Tennis Association Yearbook. Lynn, Mass.: H. O. Zimman, 1992, 1993, 1994. U.S. Department of Education. Digest 0/ Education Statistics. Washington, D.C.: U.S. Government Printing Office, 1993.


pages: 370 words: 99,312

Can Democracy Work?: A Short History of a Radical Idea, From Ancient Athens to Our World by James Miller

Berlin Wall, Black Lives Matter, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, classic study, colonial rule, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Graeber, disinformation, Donald Trump, failed state, Fall of the Berlin Wall, Francis Fukuyama: the end of history, income inequality, Joseph Schumpeter, mass incarceration, means of production, Occupy movement, Plato's cave, public intellectual, Ralph Waldo Emerson, Republic of Letters, Steve Bannon, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, transatlantic slave trade, union organizing, upwardly mobile, Vilfredo Pareto

For the defects of public opinion were caused not just by biased newspapers, or blinkered reporters, or a lack of government-sponsored research institutes, or even by the growing number of secrets being kept by the American administrative state—the deepest problems were caused by the way people, all people, selected what they wanted to see and hear, filtering information through unavoidable “stereotypes,” a word that Lippmann introduced into the lexicon of American social science. Building on the work of Graham Wallas, and also aware of Freud’s findings, Lippmann in effect anticipated more recent research about “bounded rationality” (and the unavoidable cognitive errors that arise from what the psychologists Amos Tversky and Daniel Kahneman called “heuristics and biases”). In Public Opinion, published in 1922, Lippmann explored the implications of these limits to human rationality for what Woodrow Wilson had called “government by popular opinion.” Unlike Robert Michels, who focused on the institutional limits of modern democracy, Lippmann analyzed its psychological limits.

“the reliability of the news is the premise”: Ibid., 4. “all the testimony is uncertain”: Walter Lippmann, Liberty and the News (New York: Harcourt, 1920), 55. “establishment of more or less semi-official institutes”: Ibid., 91. Building on the work of Graham Wallas: Research summarized in Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Straus and Giroux, 2011). “government by popular opinion”: Wilson, “The Modern Democratic State,” in The Papers of Woodrow Wilson, 5:70. What follows suggests that the great majority: See Lippmann, Public Opinion, 36. “approach a condition in which everyone”: Condorcet, “The Sketch” (Esquisse d’un tableau historique des progrès de l’esprit humain, 1794), in Political Writings, ed.


No Slack: The Financial Lives of Low-Income Americans by Michael S. Barr

active measures, asset allocation, Bayesian statistics, behavioural economics, business cycle, Cass Sunstein, cognitive load, conceptual framework, Daniel Kahneman / Amos Tversky, financial exclusion, financial innovation, Home mortgage interest deduction, income inequality, information asymmetry, it's over 9,000, labor-force participation, late fees, London Interbank Offered Rate, loss aversion, low interest rates, machine readable, market friction, mental accounting, Milgram experiment, mobile money, money market fund, mortgage debt, mortgage tax deduction, New Urbanism, p-value, payday loans, race to the bottom, regulatory arbitrage, Richard Thaler, risk tolerance, Robert Shiller, search costs, subprime mortgage crisis, the payments system, transaction costs, unbanked and underbanked, underbanked

BPEA, no. 1: 177–85 (www.jstor.org/ stable/2534671). Holland, Paul W. 1986. “Statistics and Causal Inference.” Journal of the American Statistical Association 81, no. 396: 945–60 (www.jstor.org/stable/2289064). Internal Revenue Service. 2005. “Statistics of Income” (www.irs.gov/taxstats/index.html). Kahneman, Daniel, and Amos Tversky. 1979. “Prospect Theory: An Analysis of Decision under Risk.” Econometrica 47:263–291 (www.jstor.org/stable/1914185). Laibson, David. 1997. “Golden Eggs and Hyperbolic Discounting.” Quarterly Journal of Economics 112:443–77 (www.jstor.org/stable/2951242). ———. 1998. “Life-Cycle Consumption and Hyperbolic Discount Functions.”

In Insufficient Funds: Savings, Assets, Credit, and Banking among Low-Income Households, edited by Rebecca M. Blank and Michael S. Barr, 121–45. New York: Russell Sage Foundation. Schultz, Ellen. 1995. “Helpful or Confusing? Fund Choices Multiply for Many Retirement Plans.” Wall Street Journal, December 22. Shafir, Eldar, Itamar Simonson, and Amos Tversky. 1993. “Reason-Based Choice.” Cognition 49:11–36 (doi:10.1016/0010-0277(93)90034-S). Sherraden, Michael, and Michael S. Barr. 2005. “Institutions and Inclusion in Savings Policy.” In Building Assets, Building Credit: Creating Wealth in Low-Income Communities, edited by Nicolas P. Retsinas and Eric S.

Federal Reserve Bulletin 95 (February): A1–A56. Buehler, Roger, Dale Griffin, and Michael Ross. 2002. “Inside the Planning Fallacy: The Causes and Consequences of Optimistic Time Predictions.” In Heuristics and Biases: The Psychology of Intuitive Judgment, edited by Thomas Gilovich, Dale W. Griffin, and Daniel Kahneman, 250–70. Cambridge University Press. Cain, Daylian M., George Lowenstein, and Don A. Moore. 2005. “The Dirt on Coming Clean: Perverse Effects of Disclosing Conflicts of Interest.” Journal of Legal Studies 34:1–25 (doi:10.1086/426699). Edin, Kathryn, and Laura Lein. 1997. Making Ends Meet: How Single Mothers Survive Welfare and Low-Wage Work.


pages: 651 words: 180,162

Antifragile: Things That Gain From Disorder by Nassim Nicholas Taleb

"World Economic Forum" Davos, Air France Flight 447, Alan Greenspan, Andrei Shleifer, anti-fragile, banking crisis, Benoit Mandelbrot, Berlin Wall, biodiversity loss, Black Swan, business cycle, caloric restriction, caloric restriction, Chuck Templeton: OpenTable:, commoditize, creative destruction, credit crunch, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, discrete time, double entry bookkeeping, Emanuel Derman, epigenetics, fail fast, financial engineering, financial independence, Flash crash, flying shuttle, Gary Taubes, George Santayana, Gini coefficient, Helicobacter pylori, Henri Poincaré, Higgs boson, high net worth, hygiene hypothesis, Ignaz Semmelweis: hand washing, informal economy, invention of the wheel, invisible hand, Isaac Newton, James Hargreaves, Jane Jacobs, Jim Simons, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Arrow, knowledge economy, language acquisition, Lao Tzu, Long Term Capital Management, loss aversion, Louis Pasteur, mandelbrot fractal, Marc Andreessen, Mark Spitznagel, meta-analysis, microbiome, money market fund, moral hazard, mouse model, Myron Scholes, Norbert Wiener, pattern recognition, Paul Samuelson, placebo effect, Ponzi scheme, Post-Keynesian economics, power law, principal–agent problem, purchasing power parity, quantitative trading / quantitative finance, Ralph Nader, random walk, Ray Kurzweil, rent control, Republic of Letters, Ronald Reagan, Rory Sutherland, Rupert Read, selection bias, Silicon Valley, six sigma, spinning jenny, statistical model, Steve Jobs, Steven Pinker, Stewart Brand, stochastic process, stochastic volatility, synthetic biology, tacit knowledge, tail risk, Thales and the olive presses, Thales of Miletus, The Great Moderation, the new new thing, The Wealth of Nations by Adam Smith, Thomas Bayes, Thomas Malthus, too big to fail, transaction costs, urban planning, Vilfredo Pareto, Yogi Berra, Zipf's Law

But note here the mental bias that causes people to believe in the “power of” some technology and its ability to run the world. Another mental bias causing the overhyping of technology comes from the fact that we notice change, not statics. The classic example, discovered by the psychologists Daniel Kahneman and Amos Tversky, applies to wealth. (The pair developed the idea that our brains like minimal effort and get trapped that way, and they pioneered a tradition of cataloging and mapping human biases with respect to perception of random outcomes and decision making under uncertainty). If you announce to someone “you lost $10,000,” he will be much more upset than if you tell him “your portfolio value, which was $785,000, is now $775,000.”

Kahneman, D., 2011, Thinking, Fast and Slow. New York: Farrar, Straus and Giroux. Kahneman, D., 1982, “On the Study of Statistical Intuitions.” In D. Kahneman, P. Slovic, and A. Tversky, eds., Judgment Under Uncertainty: Heuristics and Biases. Cambridge: Cambridge University Press. Kahneman, D., and Amos Tversky, 1979, “Prospect Theory: An Analysis of Decision Under Risk.” Econometrica 46(2): 171–185. Kaiser, Jocelyn, 2003, “Hormesis: Sipping from a Poisoned Chalice.” Science 302 (5644): 376–379. Kantorovich, Aharon, 1993, Scientific Discovery: Logic and Tinkering. State University of New York Press.

“As little as feasible from the last twenty years, except history books that are not about the last fifty years,” I blurted out, with irritation as I hate such questions as “what’s the best book you’ve ever read,” or “what are the ten best books,”—my “ten best books ever” change at the end of every summer. Also, I have been hyping Daniel Kahneman’s recent book, because it is largely an exposition of his research of thirty-five and forty years ago, with filtering and modernization. My recommendation seemed impractical, but, after a while, the student developed a culture in original texts such as Adam Smith, Karl Marx, and Hayek, texts he believes he will cite at the age of eighty.


pages: 482 words: 121,672

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Eleventh Edition) by Burton G. Malkiel

accounting loophole / creative accounting, Alan Greenspan, Albert Einstein, asset allocation, asset-backed security, beat the dealer, Bernie Madoff, bitcoin, book value, butter production in bangladesh, buttonwood tree, buy and hold, capital asset pricing model, compound rate of return, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, Detroit bankruptcy, diversification, diversified portfolio, dogs of the Dow, Edward Thorp, Elliott wave, equity risk premium, Eugene Fama: efficient market hypothesis, experimental subject, feminist movement, financial engineering, financial innovation, financial repression, fixed income, framing effect, George Santayana, hindsight bias, Home mortgage interest deduction, index fund, invisible hand, Isaac Newton, Japanese asset price bubble, John Bogle, junk bonds, Long Term Capital Management, loss aversion, low interest rates, margin call, market bubble, Mary Meeker, money market fund, mortgage tax deduction, new economy, Own Your Own Home, PalmPilot, passive investing, Paul Samuelson, pets.com, Ponzi scheme, price stability, profit maximization, publish or perish, purchasing power parity, RAND corporation, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Salesforce, short selling, Silicon Valley, South Sea Bubble, stock buybacks, stocks for the long run, sugar pill, survivorship bias, Teledyne, the rule of 72, The Wisdom of Crowds, transaction costs, Vanguard fund, zero-coupon bond, zero-sum game

And even if investors are irrational in a similar way, efficient-market theory believers assert that smart rational traders will correct any mispricings that might arise from the presence of irrational traders. Psychologists will have none of this economic claptrap. Two in particular—Daniel Kahneman and Amos Tversky—blasted economists’ views about how investors behave and in the process are credited with fathering a whole new economic discipline, called behavioral finance. The two argued quite simply that people are not as rational as economic models assume. Although this argument is obvious to the general public and non-economists, it took over twenty years for it to become widely accepted in academia.

The Nobel laureate Robert Shiller, in his book Irrational Exuberance, argues that the mania in Internet and high-tech stocks during the late 1990s can be explained only in terms of mass psychology. At universities, so-called behavioral theories of the stock market, stressing crowd psychology, gained favor during the early 2000s at leading economics departments and business schools across the developed world. The psychologist Daniel Kahneman won the Nobel Prize in Economics in 2002 for his seminal contributions to the field of “behavioral finance.” Earlier, Oskar Morgenstern was a leading champion. Morgenstern argued that the search for intrinsic value in stocks is a search for the will-o’-the-wisp. In an exchange economy the value of any asset depends on an actual or prospective transaction.

Even in judging athletic ability, an area where self-deception would seem more difficult, at least 60 percent of the male respondents ranked themselves in the top quartile. Even the klutziest deluded themselves about their athletic ability. Only 6 percent of male respondents believed that their athleticism was below average. Daniel Kahneman has argued that this tendency to overconfidence is particularly strong among investors. More than most other groups, investors tend to exaggerate their own skill and deny the role of chance. They overestimate their own knowledge, underestimate the risks involved, and exaggerate their ability to control events.


pages: 476 words: 121,460

The Man From the Future: The Visionary Life of John Von Neumann by Ananyo Bhattacharya

Ada Lovelace, AI winter, Alan Turing: On Computable Numbers, with an Application to the Entscheidungsproblem, Albert Einstein, Alvin Roth, Andrew Wiles, Benoit Mandelbrot, business cycle, cellular automata, Charles Babbage, Claude Shannon: information theory, clockwork universe, cloud computing, Conway's Game of Life, cuban missile crisis, Daniel Kahneman / Amos Tversky, DeepMind, deferred acceptance, double helix, Douglas Hofstadter, Dr. Strangelove, From Mathematics to the Technologies of Life and Death, Georg Cantor, Greta Thunberg, Gödel, Escher, Bach, haute cuisine, Herman Kahn, indoor plumbing, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, Jacquard loom, Jean Tirole, John Conway, John Nash: game theory, John von Neumann, Kenneth Arrow, Kickstarter, linear programming, mandelbrot fractal, meta-analysis, mutually assured destruction, Nash equilibrium, Norbert Wiener, Norman Macrae, P = NP, Paul Samuelson, quantum entanglement, RAND corporation, Ray Kurzweil, Richard Feynman, Ronald Reagan, Schrödinger's Cat, second-price auction, side project, Silicon Valley, spectrum auction, Steven Levy, Strategic Defense Initiative, technological singularity, Turing machine, Von Neumann architecture, zero-sum game

In Nepal, for instance, she found that cattle belonging to farmers who had failed to follow rules for water usage were interned in a ‘cow jail’ until a fine was paid to secure their release.77 Questioning some of game theory’s fundamental precepts, as Ostrom did, has produced rich insights. Another economics Nobel laureate, psychologist Daniel Kahneman, challenged game theory’s assumption that humans are entirely rational and had preferences and tastes that never changed. An admirer of von Neumann, ‘one of the giant intellectual figures of the twentieth century’, Kahneman and his close collaborator, Amos Tversky, studied how real people actually make decisions and devised their own ‘prospect theory’ to explain findings that ran counter to some of utility theory’s predictions.78 Jean Tirole, the 2014 Nobel winner, used game theory to analyse industries dominated by a few powerful companies – an increasingly pertinent topic in the Internet economy.

A description of ‘rational behaviour’ then boils down to ‘a complete set of rules’ that tells a participant how to play in every situation that may arise in the game to achieve this aim.49 This simplifies the mathematics enormously because, thanks to utility theory, everything a player strives for is summarized by a single number. Von Neumann had achieved the supposedly impossible – a rigorous way to assign numbers to nebulous human desires and predilections. ‘To this day the most important theory in the social sciences’ was how Nobel laureate Daniel Kahneman described von Neumann’s accomplishment in 2011, more than sixty years after Theory of Games first appeared.50 The influence of utility theory and the notion of the rational calculating individual that is at its heart would quickly reach far beyond the ivory tower. Armed with utility theory, von Neumann begins his analysis of two-player games.

A utility score on one scale can be converted to a score on the other in the same way that a temperature measured in degrees Celsius can be converted into degrees Fahrenheit. 49. John von Neumann and Oskar Morgenstern, 1944, Theory of Games and Economic Behavior. Princeton University Press, Princeton. 50. Daniel Kahneman, 2011, Thinking, Fast and Slow, Farrar, Straus and Giroux, New York. 51. German logician Ernst Zermelo proved in 1912 that from a winning position either black or white can force a win. Unlike von Neumann, he allowed for games with infinitely many moves by ignoring the standard stopping rules of chess and did not use the method of backward induction for his proof.


pages: 254 words: 79,052

Evil by Design: Interaction Design to Lead Us Into Temptation by Chris Nodder

4chan, affirmative action, Amazon Mechanical Turk, cognitive dissonance, crowdsourcing, Daniel Kahneman / Amos Tversky, Donald Trump, drop ship, Dunning–Kruger effect, en.wikipedia.org, endowment effect, game design, gamification, haute couture, Ian Bogost, jimmy wales, Jony Ive, Kickstarter, late fees, lolcat, loss aversion, Mark Zuckerberg, meta-analysis, Milgram experiment, Monty Hall problem, Netflix Prize, Nick Leeson, Occupy movement, Paradox of Choice, pets.com, price anchoring, recommendation engine, Rory Sutherland, Silicon Valley, Stanford prison experiment, stealth mode startup, Steve Jobs, sunk-cost fallacy, TED Talk, telemarketer, Tim Cook: Apple, trickle-down economics, upwardly mobile

Scarcity and loss aversion Dollar bill experiment: Baba Shiv, George Loewenstein, Antoine Bechara, Hanna Damasio, and Antonio R. Damasio. “Investment behavior and the negative side of emotion.” Psychological Science 16.6 (2005): 435–439. It’s possible to “lose” (earn less than $20 after 20 rounds) only 13 percent of the time if you always gamble. Loss twice as “powerful” as gain: Daniel Kahneman and Amos Tversky. “Prospect Theory: An Analysis of Decision under Risk.” Econometrica: Journal of the Econometric Society 47 (1979): 263–291. The Tom Sawyer effect Tom Sawyer quotes: Mark Twain (Samuel Clemens). The Adventures of Tom Sawyer. The American Publishing Company, 1884. Instill doubt to prevent cancellations Statistics on BSE: Wikipedia en.wikipedia.org/wiki/Bovine_spongiform_encephalopathy.


pages: 290 words: 76,216

What's Wrong With Economics: A Primer for the Perplexed by Robert Skidelsky

additive manufacturing, agricultural Revolution, behavioural economics, Black Swan, Bretton Woods, business cycle, carbon tax, Cass Sunstein, central bank independence, cognitive bias, conceptual framework, Corn Laws, corporate social responsibility, correlation does not imply causation, creative destruction, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, degrowth, disruptive innovation, Donald Trump, Dr. Strangelove, full employment, George Akerlof, George Santayana, global supply chain, global village, Gunnar Myrdal, happiness index / gross national happiness, hindsight bias, Hyman Minsky, income inequality, index fund, inflation targeting, information asymmetry, Internet Archive, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, knowledge economy, labour market flexibility, loss aversion, Mahbub ul Haq, Mark Zuckerberg, market clearing, market friction, market fundamentalism, Martin Wolf, means of production, Modern Monetary Theory, moral hazard, paradox of thrift, Pareto efficiency, Paul Samuelson, Philip Mirowski, Phillips curve, precariat, price anchoring, principal–agent problem, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Solow, Ronald Coase, shareholder value, Silicon Valley, Simon Kuznets, sunk-cost fallacy, survivorship bias, technoutopianism, The Chicago School, The Market for Lemons, The Nature of the Firm, the scientific method, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, Thorstein Veblen, Tragedy of the Commons, transaction costs, transfer pricing, Vilfredo Pareto, Washington Consensus, Wolfgang Streeck, zero-sum game

Behavioural economics claims to have uncovered empirically systemic, and therefore predictable, deviations from rationality: situations where individuals consistently over- or underestimate benefits or costs. They behave like robots with restricted information. Behavioural economics came of age in 2002 when the psychologist Daniel Kahneman (b.1934) got a Nobel prize for the work he had done with Amos Tversky (1937–1996). It flourishes as a subset of economics only because the standard behavioural assumptions of economists have been so thoroughly unrealistic. Thinking fast and slow Kahneman and Tversky claimed that we make choices according to two mental systems, the first intuitive, the second calculating, which they label fast and slow thinking.


pages: 331 words: 104,366

Deep Thinking: Where Machine Intelligence Ends and Human Creativity Begins by Garry Kasparov

3D printing, Ada Lovelace, AI winter, Albert Einstein, AlphaGo, AltaVista, Apple Newton, barriers to entry, Berlin Wall, Bletchley Park, business process, call centre, Charles Babbage, Charles Lindbergh, clean water, computer age, cotton gin, Daniel Kahneman / Amos Tversky, David Brooks, DeepMind, Donald Trump, Douglas Hofstadter, driverless car, Drosophila, Elon Musk, Erik Brynjolfsson, factory automation, Freestyle chess, gamification, Gödel, Escher, Bach, Hans Moravec, job automation, Ken Thompson, Leonard Kleinrock, low earth orbit, machine translation, Max Levchin, Mikhail Gorbachev, move 37, Nate Silver, Nick Bostrom, Norbert Wiener, packet switching, pattern recognition, Ray Kurzweil, Richard Feynman, rising living standards, rolodex, Second Machine Age, self-driving car, Silicon Valley, Silicon Valley startup, Skype, speech recognition, stem cell, Stephen Hawking, Steven Pinker, technological singularity, The Coming Technological Singularity, The Signal and the Noise by Nate Silver, Turing test, Vernor Vinge, Watson beat the top human players on Jeopardy!, zero-sum game

You can see why computers have a certain advantage in games where streaks of lucky or unlucky cards or dice rolls can influence the decision making of humans. Machines don’t look for patterns in randomness, or least if they’re programmed to, they don’t find any the way our minds often do. The fascinating work of researchers like Daniel Kahneman, Amos Tversky, and Dan Ariely has demonstrated how terrible human beings can be at thinking logically. For all the immense power of the human mind, it is very easy to fool. I’m a firm believer in the power of human intuition and how we must cultivate it by relying on it, but I cannot deny that my faith has been shaken by reading books like Kahneman’s Thinking, Fast and Slow and Ariely’s Predictably Irrational.

Becoming aware of these fallacies and cognitive blind spots won’t prevent them entirely, but it’s a big step toward combating them. During my annual visit to Oxford in 2015, I gave a seminar on decision making to a group of students at the Saïd Business School. For one segment, I performed an experiment based on those described by Daniel Kahneman to test what cognitive psychologists call the “anchoring effect” in our decision making. Would it work on a group of MBA students even though they knew I was trying to trick them? I broke them into seven groups of five or six students each, and each group got a slightly different version of a handout containing six questions.


pages: 370 words: 107,983

Rage Inside the Machine: The Prejudice of Algorithms, and How to Stop the Internet Making Bigots of Us All by Robert Elliott Smith

"World Economic Forum" Davos, Ada Lovelace, adjacent possible, affirmative action, AI winter, Alfred Russel Wallace, algorithmic bias, algorithmic management, AlphaGo, Amazon Mechanical Turk, animal electricity, autonomous vehicles, behavioural economics, Black Swan, Brexit referendum, British Empire, Cambridge Analytica, cellular automata, Charles Babbage, citizen journalism, Claude Shannon: information theory, combinatorial explosion, Computing Machinery and Intelligence, corporate personhood, correlation coefficient, crowdsourcing, Daniel Kahneman / Amos Tversky, data science, deep learning, DeepMind, desegregation, discovery of DNA, disinformation, Douglas Hofstadter, Elon Musk, fake news, Fellow of the Royal Society, feminist movement, Filter Bubble, Flash crash, Geoffrey Hinton, Gerolamo Cardano, gig economy, Gödel, Escher, Bach, invention of the wheel, invisible hand, Jacquard loom, Jacques de Vaucanson, John Harrison: Longitude, John von Neumann, Kenneth Arrow, Linda problem, low skilled workers, Mark Zuckerberg, mass immigration, meta-analysis, mutually assured destruction, natural language processing, new economy, Northpointe / Correctional Offender Management Profiling for Alternative Sanctions, On the Economy of Machinery and Manufactures, p-value, pattern recognition, Paul Samuelson, performance metric, Pierre-Simon Laplace, post-truth, precariat, profit maximization, profit motive, Silicon Valley, social intelligence, statistical model, Stephen Hawking, stochastic process, Stuart Kauffman, telemarketer, The Bell Curve by Richard Herrnstein and Charles Murray, The Future of Employment, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Bayes, Thomas Malthus, traveling salesman, Turing machine, Turing test, twin studies, Vilfredo Pareto, Von Neumann architecture, warehouse robotics, women in the workforce, Yochai Benkler

, but on the way I passed a group of people talking in a circle of metal chairs in the main hall. They were discussing the ‘Linda Problem’. Dammit! The ‘Kill Decision’ session, sadly, would have to wait, as the ‘Linda Problem’ was one of my personal bug bears, and I couldn’t resist taking a chair. The ‘Linda Problem’ was introduced in 1983 by psychologists Daniel Kahneman and Amos Tversky,1 at the headwaters of the field of behavioural economics, which would eventually result in their Nobel Prize in Economics. The problem goes like this: 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 anti-nuclear demonstrations.

London: Hutchinson. 8Vacca is Latin for cow. 9Erin Wamsley, Karen Perry, Ina Djonlagic, Laura Babkes Reaven and Robert Stickgold, 2010, Cognitive Replay of Visuomotor Learning at Sleep Onset: Temporal Dynamics and Relationship to Task Performance. Sleep, 33: 59–68, www.researchgate.net/publication/41396065_Cognitive_Replay_of_Visuomotor_Learning_at_Sleep_Onset_Temporal_Dynamics_and_Relationship_to_Task_Performance Chapter 12 1Amos Tversky and Daniel Kahneman, 1983, Extension versus intuitive reasoning: The conjunction fallacy in probability judgment. Psychological Review, 90 (4): 293–315. 2Stuart Kauffman, 2010, Reinventing the Sacred: A New View of Science, Reason, and Religion. New York: Basic Books. 3Neil Stevenson, 1995, The Diamond Age: Or, a Young Lady’s Illustrated Primer.


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The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution by Gregory Zuckerman

affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, Albert Einstein, Andrew Wiles, automated trading system, backtesting, Bayesian statistics, Bear Stearns, beat the dealer, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black Monday: stock market crash in 1987, blockchain, book value, Brownian motion, butter production in bangladesh, buy and hold, buy low sell high, Cambridge Analytica, Carl Icahn, Claude Shannon: information theory, computer age, computerized trading, Credit Default Swap, Daniel Kahneman / Amos Tversky, data science, diversified portfolio, Donald Trump, Edward Thorp, Elon Musk, Emanuel Derman, endowment effect, financial engineering, Flash crash, George Gilder, Gordon Gekko, illegal immigration, index card, index fund, Isaac Newton, Jim Simons, John Meriwether, John Nash: game theory, John von Neumann, junk bonds, Loma Prieta earthquake, Long Term Capital Management, loss aversion, Louis Bachelier, mandelbrot fractal, margin call, Mark Zuckerberg, Michael Milken, Monty Hall problem, More Guns, Less Crime, Myron Scholes, Naomi Klein, natural language processing, Neil Armstrong, obamacare, off-the-grid, p-value, pattern recognition, Peter Thiel, Ponzi scheme, prediction markets, proprietary trading, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, Robert Mercer, Ronald Reagan, self-driving car, Sharpe ratio, Silicon Valley, sovereign wealth fund, speech recognition, statistical arbitrage, statistical model, Steve Bannon, Steve Jobs, stochastic process, the scientific method, Thomas Bayes, transaction costs, Turing machine, Two Sigma

Simons and his colleagues sensed the professors were wrong. They believed investors are prone to cognitive biases, the kinds that lead to panics, bubbles, booms, and busts. Simons didn’t realize it, but a new strain of economics was emerging that would validate his instincts. In the 1970s, Israeli psychologists Amos Tversky and Daniel Kahneman had explored how individuals make decisions, demonstrating how prone most are to act irrationally. Later, economist Richard Thaler used psychological insights to explain anomalies in investor behavior, spurring the growth of the field of behavioral economics, which explored the cognitive biases of individuals and investors.

When Simons eventually returned to work, his friends sensed he needed a distraction. Simons refocused on his team’s disappointing efforts to master stock trading, his last chance to build his firm into a power. For a while, it seemed Simons was wasting his time. CHAPTER NINE No one ever made a decision because of a number. They need a story. Daniel Kahneman, economist Jim Simons seemed to have discovered the perfect way to trade commodities, currencies, and bonds: predictive mathematical models. Yet, Simons knew, if he wanted Renaissance Technologies to amount to much of anything, he’d have to get his computers to make money in stocks. It wasn’t clear why Simons thought he had a chance of success.


pages: 698 words: 198,203

The Stuff of Thought: Language as a Window Into Human Nature by Steven Pinker

airport security, Albert Einstein, Bob Geldof, classic study, colonial rule, conceptual framework, correlation does not imply causation, Daniel Kahneman / Amos Tversky, David Brooks, Douglas Hofstadter, en.wikipedia.org, experimental subject, Ford Model T, fudge factor, George Santayana, language acquisition, Laplace demon, loss aversion, luminiferous ether, Norman Mailer, Philippa Foot, Plato's cave, Richard Feynman, Ronald Reagan, Sapir-Whorf hypothesis, science of happiness, social contagion, social intelligence, speech recognition, stem cell, Steven Pinker, Thomas Bayes, Thorstein Veblen, traffic fines, trolley problem, urban renewal, Yogi Berra

The preceding chapter teemed with examples: the choice of construction can determine whether listeners think of an event as causing water to move or causing a glass to become full, whether they think of it as merely having happened or as having been caused to happen, and so on. The ability of words to frame an event has long been used in rhetoric and persuasion (pro-choice and pro-life, redistribution versus confiscation, invading versus liberating), and its effects are easy to document. The psychologists Amos Tversky and Daniel Kahneman, for example, showed that doctors will opt for a cautious public-health program (as opposed to a risky one) when it is framed as saving the lives of 200 people out of 600 who are vulnerable, but will eschew the same program when it is framed as resulting in the deaths of 400 people out of the 600.68 Naturally it is fascinating to see how languages provide the means to frame events, and that is a major goal of this book.

One of the reasons I explained verb constructions in chapter 2 was that they show that even our most quotidian acts can be framed in different ways, such as the difference between spraying paint on the wall (cause the paint to go) and spraying the wall with paint (cause the wall to change). Within cognitive psychology the most famous example of the effects of framing (briefly mentioned in chapter 3) comes from an experiment by Amos Tversky and Daniel Kahneman, who posed the following problem to a sample of doctors:17 “A new strain of flu is expected to kill 600 people. Two programs to combat the disease have been proposed.” Some of the doctors were then presented with the following dilemma:If program A is adopted, 200 people will be saved.


EuroTragedy: A Drama in Nine Acts by Ashoka Mody

Alan Greenspan, Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, Basel III, Bear Stearns, Berlin Wall, book scanning, book value, Bretton Woods, Brexit referendum, call centre, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, credit crunch, currency risk, Daniel Kahneman / Amos Tversky, debt deflation, Donald Trump, eurozone crisis, Fall of the Berlin Wall, fear index, financial intermediation, floating exchange rates, forward guidance, George Akerlof, German hyperinflation, global macro, global supply chain, global value chain, hiring and firing, Home mortgage interest deduction, income inequality, inflation targeting, Irish property bubble, Isaac Newton, job automation, Johann Wolfgang von Goethe, Johannes Kepler, Kenneth Rogoff, Kickstarter, land bank, liberal capitalism, light touch regulation, liquidity trap, loadsamoney, London Interbank Offered Rate, Long Term Capital Management, low interest rates, low-wage service sector, Mikhail Gorbachev, mittelstand, money market fund, moral hazard, mortgage tax deduction, neoliberal agenda, offshore financial centre, oil shock, open borders, pension reform, precautionary principle, premature optimization, price stability, public intellectual, purchasing power parity, quantitative easing, rent-seeking, Republic of Letters, Robert Gordon, Robert Shiller, Robert Solow, short selling, Silicon Valley, subprime mortgage crisis, The Great Moderation, The Rise and Fall of American Growth, too big to fail, total factor productivity, trade liberalization, transaction costs, urban renewal, working-age population, Yogi Berra

Pompidou did not share de Gaulle’s disdain for Europe. And so Pompidou wondered if “more Europe” could solve France’s problems and help it catch up. True, the European integration process had reached a successful end. But the narrative of more integration as a solution for European problems was still alive. Psychologists Amos Tversky and Daniel Kahneman coined the phrase “availability heuristic” to explain that human beings instinctively believe the world will continue to work in the future as it has in the recent past.65 Europe’s infrastructure seemed “available” to take another leap. The Hague 1969: The Third Leap Georges Pompidou was elected president of France in June 1969.

Reprinted in The European Union: Readings on the Theory and Practice of European Integration, edited by Brent Nelsen and Alexander Stubb, Basingstoke: Macmillan. Schelling, Thomas. 1988. “The Mind as a Consuming Organ.” In Decision Making: Descriptive, Normative, and Prescriptive Interactions, edited by David E. Bell, Howard Raiffa, and Amos Tversky. Cambridge: Cambridge University Press. Schiller, Karl. 1971. “Statement by the Governor of the Bank for Germany.” Summary Proceedings of the Twenty-​Sixth Annual Meetings, September 27–​October 1, 1971. Washington, D.C.: International Monetary Fund. Schivardi, Fabiano, Enrico Sette, and Guido Tabellini. 2017.

Dyson and Featherstone 1999, 109. 135. Dyson and Featherstone 1999, 107. 136. Dyson and Featherstone 1999, 108–​109. 137. Dyson and Featherstone 1999, 110. 138. Marsh 2009, 61–​63 139. Campbell 2012, 337. 140. Gerth and Mills 1961, 280. 141. Janis 1972, 9–​10; see also psychologist and Nobel laureate Daniel Kahneman’s interview in Schrage 2003. 142. Sunstein and Hastie 2017, locations 217–​222. 143. Akerlof 2017; see also Janis 1972. 144. Krugman 1995, 36. 145. Rutherford 1971. 146. Schiller 1971, 195. 147. That theme persisted in German economic advocacy. On November 11, 1988, Helmut Schlesinger (1988, 1), then vice president of the Bundesbank, said that whenever there was a conflict between the fixed exchange rate and domestic policy goals, governments “usually decide in favor of their national priorities.”


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A Little History of Economics by Niall Kishtainy

Alvin Roth, behavioural economics, British Empire, Capital in the Twenty-First Century by Thomas Piketty, car-free, carbon tax, central bank independence, clean water, Corn Laws, Cornelius Vanderbilt, creative destruction, credit crunch, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, Dr. Strangelove, Eugene Fama: efficient market hypothesis, first-price auction, floating exchange rates, follow your passion, full employment, George Akerlof, Great Leap Forward, greed is good, Hyman Minsky, inflation targeting, invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, loss aversion, low interest rates, market clearing, market design, means of production, Minsky moment, moral hazard, Nash equilibrium, new economy, Occupy movement, Pareto efficiency, Paul Samuelson, Phillips curve, prisoner's dilemma, RAND corporation, rent-seeking, Richard Thaler, rising living standards, road to serfdom, Robert Shiller, Robert Solow, Ronald Reagan, sealed-bid auction, second-price auction, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, trade route, Vickrey auction, Vilfredo Pareto, washing machines reduced drudgery, wealth creators, Winter of Discontent

Partly you’ll judge it by how sharp and in-focus it looks. This often works fine, but sometimes you suffer from visual illusions: when it’s foggy, for instance, you might think that the tree is farther away than it really is. Daniel Kahneman (b. 1934) is an Israeli psychologist who studied the psychology of visual perception and later turned to economics. With a fellow psychologist, Amos Tversky (1937–96), he discovered that when people accept a job or buy a cup of coffee, a mental fog stops them from perceiving things logically. Economists have long believed that people are rational, that they accurately weigh the costs and benefits of the options facing them before acting.


pages: 257 words: 84,498

Admissions: A Life in Brain Surgery by Henry Marsh

cognitive dissonance, country house hotel, Daniel Kahneman / Amos Tversky, endowment effect, fear of failure, Google Earth, invisible hand, nocebo, placebo effect, profit motive, selective serotonin reuptake inhibitor (SSRI)

And even if the patient ‘does well’ and there are no complications after the operation, it can still be a mistake – it may well have been that the patient did not really need the operation in the first place and the surgeon, keen to operate, overestimated the risks of not operating. Over-treatment – unnecessary investigations and operations – is a growing problem in modern medicine. It is wrong, even if the patient comes to no obvious harm. Critical to this is to understand that other people are better at seeing our mistakes than we are. As the psychologists Daniel Kahneman and Amos Tversky have shown, our brains are hardwired to fail to judge probabilities consistently. We are subject to many ‘cognitive biases’, as psychologists call them, which distort our judgement. We are too biased in our own favour and, under pressure, as doctors often are, we make decisions too quickly.


pages: 301 words: 85,126

AIQ: How People and Machines Are Smarter Together by Nick Polson, James Scott

Abraham Wald, Air France Flight 447, Albert Einstein, algorithmic bias, Amazon Web Services, Atul Gawande, autonomous vehicles, availability heuristic, basic income, Bayesian statistics, Big Tech, Black Lives Matter, Bletchley Park, business cycle, Cepheid variable, Checklist Manifesto, cloud computing, combinatorial explosion, computer age, computer vision, Daniel Kahneman / Amos Tversky, data science, deep learning, DeepMind, Donald Trump, Douglas Hofstadter, Edward Charles Pickering, Elon Musk, epigenetics, fake news, Flash crash, Grace Hopper, Gödel, Escher, Bach, Hans Moravec, Harvard Computers: women astronomers, Higgs boson, index fund, information security, Isaac Newton, John von Neumann, late fees, low earth orbit, Lyft, machine translation, Magellanic Cloud, mass incarceration, Moneyball by Michael Lewis explains big data, Moravec's paradox, more computing power than Apollo, natural language processing, Netflix Prize, North Sea oil, Northpointe / Correctional Offender Management Profiling for Alternative Sanctions, p-value, pattern recognition, Pierre-Simon Laplace, ransomware, recommendation engine, Ronald Reagan, Salesforce, self-driving car, sentiment analysis, side project, Silicon Valley, Skype, smart cities, speech recognition, statistical model, survivorship bias, systems thinking, the scientific method, Thomas Bayes, Uber for X, uber lyft, universal basic income, Watson beat the top human players on Jeopardy!, young professional

McGrayne, The Theory That Would Not Die, 202. 12.  PBS Nova documentary, “Submarines, Secrets, and Spies.” 13.  McGrayne, The Theory That Would Not Die, 202. 14.  David M. Eddy, “Probabilistic Reasoning in Clinical Medicine: Problems and Opportunities,” in Judgment Under Uncertainty: Heuristics and Biases, ed. Daniel Kahneman, Paul Slovic, and Amos Tversky (Cambridge: Cambridge University Press, 1982), 249–67. 15.  It’s actually 99 false positives, but we’re rounding off to 100 to keep the numbers easier to work with. If you correct for our modest round-off error, the actual posterior probability P(cancer | positive test) is really 7.5%, not 7.4%. 16.  


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David and Goliath: Underdogs, Misfits, and the Art of Battling Giants by Malcolm Gladwell

affirmative action, Apollo 13, Berlin Wall, cuban missile crisis, Daniel Kahneman / Amos Tversky, delayed gratification, mass incarceration, medical residency, Menlo Park, meta-analysis, RAND corporation, school choice, Silicon Valley

It turns out he was a really good trader, and it turns out that learning how to deal with the possibility of failure is really good preparation for a career in the business world. Today he is the president of Goldman Sachs. 1 Actually, there’s an even shorter test. One of the most brilliant modern psychologists was a man named Amos Tversky. Tversky was so smart that his fellow psychologists devised the “Tversky Intelligence Test”: The faster you realized Tversky was smarter than you, the smarter you were. Adam Alter told me about the Tversky test. He would score very highly on it. 2 To make sure he was measuring intelligence and not something else, Frederick also correlated CRT scores with other factors.

For more discussion of class size, see Eric Hanushek, The Evidence on Class Size (University of Rochester Press, 1998); Eric Hanushek and Alfred Lindseth, Schoolhouses, Courthouses and Statehouses: Solving the Funding-Achievement Puzzle in America’s Public Schools (Princeton University Press, 2009), 272; and Ludger Wössmann and Martin R. West, “Class-Size Effects in School Systems Around the World: Evidence from Between-Grade Variation in TIMSS,” European Economic Review (March 26, 2002). For studies of money and happiness, see Daniel Kahneman and Angus Deaton, “High Income Improves Evaluation of Life but Not Emotional Well-Being,” Proceedings of the National Academy of Sciences 107, no. 38 (August 2010): 107. Barry Schwartz and Adam Grant discuss happiness in terms of an inverted-U curve in “Too Much of a Good Thing: The Challenge and Opportunity of the Inverted U,” Perspectives on Psychological Science 6, no. 1 (January 2011): 61–76.


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The Mind Is Flat: The Illusion of Mental Depth and the Improvised Mind by Nick Chater

Albert Einstein, battle of ideas, behavioural economics, classic study, computer vision, Daniel Kahneman / Amos Tversky, deep learning, double helix, Geoffrey Hinton, Henri Poincaré, Jacquard loom, lateral thinking, loose coupling, machine translation, speech recognition, tacit knowledge

It would be ridiculous to choose mostly apples in the first case (indicating that I prefer apples); and mostly to reject apples in the second case (indicating that I prefer oranges). Consistently deciding to choose, but also to reject, the very same thing seems to make a nonsense of the very idea of preference. Yet remarkably, psychologists Eldar Shafir and Amos Tversky found that this paradoxical pattern does indeed occur. They asked people to decide between extreme options (with both very good and very bad features) and neutral options (where all the features were middling).7 In one study, for example, people imagined making custody decisions between a ‘parent-of-extremes’ (good  : very close relationship with the child, extremely active social life; above-average income; bad  : lots of work-related travel, minor health problems) and a ‘typical parent’ (reasonable rapport with the child, relatively stable social life, and average income, working hours and health).

The nature of consciousness and of meaning are both fascinating and profound puzzles, but they are very distinct puzzles. 9 For example, dual process theories of reasoning, decision-making and social cognition take this viewpoint (see, for example, J. S. B. Evans and K. E. Frankish, In Two Minds: Dual Processes and Beyond (Oxford: Oxford University Press, 2009); S. A. Sloman (1996), ‘The empirical case for two systems of reasoning’, Psychological Bulletin, 119(1): 3–22. The Nobel Prize-winning psychologist Daniel Kahneman is often seen as exemplifying this viewpoint (e.g. D. Kahneman, Thinking, Fast and Slow (London: Penguin, 2011), although his perspective is rather more subtle. 10 For example, P. Dayan, ‘The role of value systems in decision making’, in C. Engel and W. Singer (eds), Better Than Conscious? Decision Making, the Human Mind, and Implications for Institutions (Cambridge, MA: MIT Press, 2008), pp. 51–70. 11 There is a small industry in psychology attempting to demonstrate the existence of ‘unconscious’ influences on our actions (see, for example, the excellent review by B.


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Naked Economics: Undressing the Dismal Science (Fully Revised and Updated) by Charles Wheelan

affirmative action, Alan Greenspan, Albert Einstein, Andrei Shleifer, barriers to entry, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, Boeing 747, Bretton Woods, business cycle, buy and hold, capital controls, carbon tax, Cass Sunstein, central bank independence, classic study, clean water, collapse of Lehman Brothers, congestion charging, creative destruction, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency risk, Daniel Kahneman / Amos Tversky, David Brooks, demographic transition, diversified portfolio, Doha Development Round, Exxon Valdez, financial innovation, fixed income, floating exchange rates, George Akerlof, Gini coefficient, Gordon Gekko, Great Leap Forward, greed is good, happiness index / gross national happiness, Hernando de Soto, income inequality, index fund, interest rate swap, invisible hand, job automation, John Markoff, Joseph Schumpeter, junk bonds, Kenneth Rogoff, libertarian paternalism, low interest rates, low skilled workers, Malacca Straits, managed futures, market bubble, microcredit, money market fund, money: store of value / unit of account / medium of exchange, Network effects, new economy, open economy, presumed consent, price discrimination, price stability, principal–agent problem, profit maximization, profit motive, purchasing power parity, race to the bottom, RAND corporation, random walk, rent control, Richard Thaler, rising living standards, Robert Gordon, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, Sam Peltzman, school vouchers, seminal paper, Silicon Valley, Silicon Valley startup, South China Sea, Steve Jobs, tech worker, The Market for Lemons, the rule of 72, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, transaction costs, transcontinental railway, trickle-down economics, urban sprawl, Washington Consensus, Yogi Berra, young professional, zero-sum game

Press release from The Royal Swedish Academy of Sciences, October 9, 2002. 14. Jonathan Gruber, “Smoking’s ‘Internalities,’” Regulation, vol. 25, no. 4 (Winter 2002/2003). 15. Annamaria Lusardi, “The Importance of Financial Literacy,” NBER Reporter: Research Summary, no. 2 (2009). 16. Thomas Gilovich, Robert Vallone, and Amos Tversky, “The Hot Hand in Basketball: On the Misperception of Random Sequences,” Cognitive Psychology 17 (1985). CHAPTER 2. INCENTIVES MATTER 1. Costa Rican Embassy, Washington, D.C. 2. Ian Fisher, “Victims of War: The Jungle Gorillas, and Tourism,” New York Times, March 31, 1999. 3. Daniel Yergin and Joseph Stanislaw, The Commanding Heights (New York: Simon & Schuster, 1998), pp. 216–17. 4.

., lose weight, stop smoking, or save for retirement), then society could conceivably make them better off by helping (or coercing) them to do things they otherwise would not or could not do—the public policy equivalent of taking the cashew bowl away. The field of behavioral economics has evolved as a marriage between psychology and economics that offers sophisticated insight into how humans really make decisions. Daniel Kahneman, a professor in both psychology and public affairs at Princeton, was awarded the Nobel Prize in Economics in 2002 for his studies of decision making under uncertainty, and, in particular, “how human decisions may systematically depart from those predicted by standard economic theory.”13 Kahneman and others have advanced the concept of “bounded rationality,” which suggests that most of us make decisions using intuition or rules of thumb, kind of like looking at the sky to determine if it will rain, rather than spending hours poring over weather forecasts.

Miriam Jordan, “Leprosy Remains a Foe in Country Winning the Fight Against AIDS,” Wall Street Journal, August 20, 2001. 4. Jane Spencer, “Why Beijing Is Trying to Tally the Hidden Costs of Pollution as China’s Economy Booms,” Wall Street Journal, October 2, 2006. 5. David Leonhardt, “If Richer Isn’t Happier, What Is?” New York Times, May 19, 2001. 6. Daniel Kahneman, Alan B. Krueger, David Schkade, Norbert Schwarz, and Arthur Stone, “Toward National Well-Being Accounts,” American Economic Review, vol. 94, no. 2 (May 2004). 7. “Economics Discovers Its Feelings,” The Economist, December 23, 2006. 8. Alexander Stille, “A Happiness Index with a Long Reach: Beyond GNP to Subtler Measures,” New York Times, May 20, 2000, p.


User Friendly by Cliff Kuang, Robert Fabricant

A Pattern Language, Abraham Maslow, Airbnb, anti-communist, Any sufficiently advanced technology is indistinguishable from magic, Apple II, augmented reality, autonomous vehicles, behavioural economics, Bill Atkinson, Brexit referendum, Buckminster Fuller, Burning Man, business logic, call centre, Cambridge Analytica, Chuck Templeton: OpenTable:, cognitive load, computer age, Daniel Kahneman / Amos Tversky, dark pattern, data science, Donald Trump, Douglas Engelbart, Douglas Engelbart, driverless car, Elaine Herzberg, en.wikipedia.org, fake it until you make it, fake news, Ford Model T, Frederick Winslow Taylor, frictionless, Google Glasses, Internet of things, invisible hand, James Dyson, John Markoff, Jony Ive, knowledge economy, Kodak vs Instagram, Lyft, M-Pesa, Mark Zuckerberg, mobile money, Mother of all demos, move fast and break things, Norbert Wiener, Paradox of Choice, planned obsolescence, QWERTY keyboard, randomized controlled trial, replication crisis, RFID, scientific management, self-driving car, seminal paper, Silicon Valley, skeuomorphism, Skinner box, Skype, smart cities, Snapchat, speech recognition, Steve Jobs, Steve Wozniak, tacit knowledge, Tesla Model S, three-martini lunch, Tony Fadell, Uber and Lyft, Uber for X, uber lyft, Vannevar Bush, women in the workforce

What both user-friendliness and behavioral economics shared was an overriding sense that our minds could never be perfected, and that our imperfections made us who we are. This embrace of human limitation was nursemaid to the idea that machines had to be bent around humans. Don Norman’s early papers are larded with references to the pathbreaking work of Amos Tversky and Daniel Kahneman, in which they laid the foundations of behavioral economics. Meanwhile, modern neuroscience was also beginning to discover that our brain wasn’t built like a clock either, with neatly functioning units. Rather, it was composed of many separate evolutionary adaptations kludged together.

Marc Levy, “3 Mile Island Owner Threatens to Close Ill-Fated Plant,” AP News, May 30, 2017, www.apnews.com/266b9aff54a14ab4a6bea903ac7ae603. 23. Gray and Rosen, Warning, 260. 24. Mitchell M. Waldrop, The Dream Machine: J.C.R. Licklider and the Revolution That Made Computing Personal (New York: Viking, 2001), 54–57. 25. Or, as the behavioral economist Daniel Kahneman writes, “The absence of definite information concerning the outcomes of actions one has not taken is probably the single most important factor that keeps regret in life within tolerable bounds. We can never be absolutely sure that we would have been happier had we chosen another profession or another spouse … Thus, we are often protected from painful knowledge concerning the quality of our decisions.”


pages: 335 words: 94,657

The Bogleheads' Guide to Investing by Taylor Larimore, Michael Leboeuf, Mel Lindauer

asset allocation, behavioural economics, book value, buy and hold, buy low sell high, corporate governance, correlation coefficient, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, endowment effect, estate planning, financial engineering, financial independence, financial innovation, high net worth, index fund, John Bogle, junk bonds, late fees, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, margin call, market bubble, mental accounting, money market fund, passive investing, Paul Samuelson, random walk, risk tolerance, risk/return, Sharpe ratio, statistical model, stocks for the long run, survivorship bias, the rule of 72, transaction costs, Vanguard fund, yield curve, zero-sum game

Although the customers or investors may be able to give you a sound, logical reason why they buy or invest in a certain way, more often than not, it's not the real reason. Moreover, many times they aren't even aware of the real reason. While many economists were busily assuming away the real world, a couple of psychologists working in Israel pioneered a field that became known as behavioral economics. In the late 1960s, Amos Tversky and Daniel Kahneman were at Hebrew University in Jerusalem performing psychological experiments to determine how people go about making economic choices. It didn't take Tversky and Kahneman long to realize that people don't always make rational choices in their own best interest. From their experiments they began to organize and classify the rules of thumb people used to make quick, economic decisions and named them judgmental heuristics.


pages: 383 words: 92,837

Incognito: The Secret Lives of the Brain by David Eagleman

Ada Lovelace, Albert Einstein, Any sufficiently advanced technology is indistinguishable from magic, Charles Babbage, Columbine, Daniel Kahneman / Amos Tversky, delayed gratification, endowment effect, facts on the ground, impulse control, invisible hand, Isaac Newton, Jeff Hawkins, Johann Wolfgang von Goethe, out of africa, Pierre-Simon Laplace, Ralph Waldo Emerson, Robert Shiller, Rodney Brooks, Saturday Night Live, selective serotonin reuptake inhibitor (SSRI), Steven Pinker, Stuart Kauffman, subprime mortgage crisis, Thales of Miletus, trolley problem

Your job is to hold on to them tightly, keeping them in check so you can continue down the middle of the road. The emotional and rational networks battle not only over immediate moral decisions, but in another familiar situation as well: how we behave in time. WHY THE DEVIL CAN SELL YOU FAME NOW FOR YOUR SOUL LATER Some years ago, the psychologists Daniel Kahneman and Amos Tversky posed a deceptively simple question: If I were to offer you $100 right now or $110 a week from now, which would you choose? Most subjects chose to take $100 right then. It just didn’t seem worthwhile to wait an entire week for another $10. Then the researchers changed the question slightly: If I were to offer you $100 fifty-two weeks from now, or $110 fifty-three weeks from now, which would you choose?


pages: 321 words: 92,828

Late Bloomers: The Power of Patience in a World Obsessed With Early Achievement by Rich Karlgaard

Airbnb, Albert Einstein, Amazon Web Services, Apple's 1984 Super Bowl advert, behavioural economics, Bernie Madoff, Bob Noyce, book value, Brownian motion, Captain Sullenberger Hudson, cloud computing, cognitive dissonance, Daniel Kahneman / Amos Tversky, David Sedaris, deliberate practice, Electric Kool-Aid Acid Test, Elon Musk, en.wikipedia.org, experimental economics, Fairchild Semiconductor, fear of failure, financial independence, follow your passion, Ford Model T, Frederick Winslow Taylor, Goodhart's law, hiring and firing, if you see hoof prints, think horses—not zebras, Internet of things, Isaac Newton, Jeff Bezos, job satisfaction, knowledge economy, labor-force participation, Larry Ellison, longitudinal study, low skilled workers, Mark Zuckerberg, meta-analysis, Moneyball by Michael Lewis explains big data, move fast and break things, pattern recognition, Peter Thiel, power law, reality distortion field, Sand Hill Road, science of happiness, scientific management, shareholder value, Silicon Valley, Silicon Valley startup, Snapchat, Steve Jobs, Steve Wozniak, sunk-cost fallacy, tech worker, TED Talk, theory of mind, Tim Cook: Apple, Toyota Production System, unpaid internship, upwardly mobile, women in the workforce, working poor

“it allows them to give themselves objective”: Bernstein, “ ‘Self Talk.’ ” “Persuasive boosts in perceived”: Bandura, “Self-Efficacy: Toward a Unifying Theory of Behavioral Change”; Bandura, “Self-Efficacy Mechanism in Human Agency.” according to Bandura: Ramachandran, Encyclopedia of Human Behavior. “framing”: Amy C. Edmondson, “Framing for Learning: Lessons in Successful Technology Implementation,” California Management Review 45, no. 2 (2003): 34–54. See also Amos Tversky and Daniel Kahneman, “The Framing of Decisions and the Psychology of Choice,” Science 211, no. 4481 (1981): 453–58. we can use cognitive frames to shape: Robert M. Entman, “Framing: Toward Clarification of a Fractured Paradigm,” Journal of Communication 43, no. 4 (1993): 51–58; Robert D. Benford and David A.


pages: 742 words: 137,937

The Future of the Professions: How Technology Will Transform the Work of Human Experts by Richard Susskind, Daniel Susskind

23andMe, 3D printing, Abraham Maslow, additive manufacturing, AI winter, Albert Einstein, Amazon Mechanical Turk, Amazon Robotics, Amazon Web Services, Andrew Keen, Atul Gawande, Automated Insights, autonomous vehicles, Big bang: deregulation of the City of London, big data - Walmart - Pop Tarts, Bill Joy: nanobots, Blue Ocean Strategy, business process, business process outsourcing, Cass Sunstein, Checklist Manifesto, Clapham omnibus, Clayton Christensen, clean water, cloud computing, commoditize, computer age, Computer Numeric Control, computer vision, Computing Machinery and Intelligence, conceptual framework, corporate governance, creative destruction, crowdsourcing, Daniel Kahneman / Amos Tversky, data science, death of newspapers, disintermediation, Douglas Hofstadter, driverless car, en.wikipedia.org, Erik Brynjolfsson, Evgeny Morozov, Filter Bubble, full employment, future of work, Garrett Hardin, Google Glasses, Google X / Alphabet X, Hacker Ethic, industrial robot, informal economy, information retrieval, interchangeable parts, Internet of things, Isaac Newton, James Hargreaves, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Khan Academy, knowledge economy, Large Hadron Collider, lifelogging, lump of labour, machine translation, Marshall McLuhan, Metcalfe’s law, Narrative Science, natural language processing, Network effects, Nick Bostrom, optical character recognition, Paul Samuelson, personalized medicine, planned obsolescence, pre–internet, Ray Kurzweil, Richard Feynman, Second Machine Age, self-driving car, semantic web, Shoshana Zuboff, Skype, social web, speech recognition, spinning jenny, strong AI, supply-chain management, Susan Wojcicki, tacit knowledge, TED Talk, telepresence, The Future of Employment, the market place, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tragedy of the Commons, transaction costs, Turing test, Two Sigma, warehouse robotics, Watson beat the top human players on Jeopardy!, WikiLeaks, world market for maybe five computers, Yochai Benkler, young professional

See Lieberman, The Tyranny of the Experts, 275. 79 Anthony Kenny, What I Believe (2006), 123. 80 <http://www.kpmg.com>. 81 Our thinking on asymmetry of knowledge aligns to some extent with that of Durkheim, Parsons, and Abbott. 82 Herbert Hart, The Concept of Law (1994), 197. Original emphasis. 83 On the distinction between ‘knowing that’ and ‘knowing how’, see Gilbert Ryle, The Concept of Mind (1949), 28–32. 84 On tacit knowledge, see Michael Polanyi, ‘The Logic of Tacit Inference’, Philosophy, 41: 155 (1966), 1–18. 85 See e.g. Amos Tversky and Daniel Kahneman, ‘Judgment under Uncertainty: Heuristics and Biases’, Science, 185: 4157 (1974), 1124–31. They explore the problems with some of these rules of thumb. 86 Note the correspondence here with philosophical and psychological concepts of practical reason and practical reasoning. See Joseph Raz, Practical Reason and Norms (1999). 87 We are alive to a sophisticated challenge to this conception of knowledge, namely, a concern over what might be called the objectification of knowledge.

Trefis Team, ‘eBay: The Year 2013 in Review’, 26 Dec. 2013 <http://www.forbes.com/sites/greatspeculations/2013/12/26/ebay-the-year-2013-in-review/> (accessed 24 March 2015). Tuck, Richard, Free Riding (Cambridge, Mass.: Harvard University Press, 2008). Turing, Alan, ‘Computing Machinery and Intelligence’, Mind, 59: 236 (1950), 433–60. Turkle, Sherry, Alone Together (New York: Basic Books, 2011). Tversky, Amos, and Daniel Kahneman, ‘Judgment under Uncertainty: Heuristics and Biases’, Science, 185: 4157 (1974), 1124–31. Twilley, Nicola, ‘Artificial Intelligence Goes to the Arcade’, New Yorker, 25 Feb. 2015. UK Architectural Education Review Group, ‘Pathways and Gateways: The Structure and Regulation of Architectural Education’, Apr. 2013 <http://people.bath.ac.uk/absaw/files/> (accessed 8 March 2015).


The Book of Why: The New Science of Cause and Effect by Judea Pearl, Dana Mackenzie

affirmative action, Albert Einstein, AlphaGo, Asilomar, Bayesian statistics, computer age, computer vision, Computing Machinery and Intelligence, confounding variable, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, data science, deep learning, DeepMind, driverless car, Edmond Halley, Elon Musk, en.wikipedia.org, experimental subject, Great Leap Forward, Gregor Mendel, Isaac Newton, iterative process, John Snow's cholera map, Loebner Prize, loose coupling, Louis Pasteur, Menlo Park, Monty Hall problem, pattern recognition, Paul Erdős, personalized medicine, Pierre-Simon Laplace, placebo effect, Plato's cave, prisoner's dilemma, probability theory / Blaise Pascal / Pierre de Fermat, randomized controlled trial, Recombinant DNA, selection bias, self-driving car, seminal paper, Silicon Valley, speech recognition, statistical model, Stephen Hawking, Steve Jobs, strong AI, The Design of Experiments, the scientific method, Thomas Bayes, Turing test

If we take into account that the probability of striking a match is much lower than that of having oxygen, we find quantitatively that for Match, both PN and PS are high, while for Oxygen, PN is high but PS is low. Is this why, intuitively, we blame the match and not the oxygen? Quite possibly, but it may be only part of the answer. In 1982, psychologists Daniel Kahneman and Amos Tversky investigated how people choose an “if only” culprit to “undo” an undesired outcome and found consistent patterns in their choices. One was that people are more likely to imagine undoing a rare event than a common one. For example, if we are undoing a missed appointment, we are more likely to say, “If only the train had left on schedule,” than “If only the train had left early.”

“He’s gotten overconfident,” they complain, or “the other players have figured out his weaknesses.” They may be right, but the sophomore slump does not need a causal explanation. It will happen more often than not by the laws of chance alone. The modern statistical explanation is quite simple. As Daniel Kahneman summarizes it in his book Thinking, Fast and Slow, “Success = talent + luck. Great success = a little more talent + a lot of luck.” A player who wins Rookie of the Year is probably more talented than average, but he also (probably) had a lot of luck. Next season, he is not likely to be so lucky, and his batting average will be lower.


All About Asset Allocation, Second Edition by Richard Ferri

activist fund / activist shareholder / activist investor, Alan Greenspan, asset allocation, asset-backed security, barriers to entry, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, book value, buy and hold, capital controls, commoditize, commodity trading advisor, correlation coefficient, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, equity premium, equity risk premium, estate planning, financial independence, fixed income, full employment, high net worth, Home mortgage interest deduction, implied volatility, index fund, intangible asset, inverted yield curve, John Bogle, junk bonds, Long Term Capital Management, low interest rates, managed futures, Mason jar, money market fund, mortgage tax deduction, passive income, pattern recognition, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, selection bias, Sharpe ratio, stock buybacks, stocks for the long run, survivorship bias, too big to fail, transaction costs, Vanguard fund, yield curve

A fledgling field of study in the early 1960s, behavioral finance has grown to be an important area of research at How Behavior Affects Asset Allocation Decisions 273 several influential institutions. Professors recognized as experts in the field include Daniel Kahneman (Princeton), Meir Statman (Santa Clara), Richard Thaler (University of Chicago), Robert J. Shiller (Yale), and Amos Tversky. Tversky is frequently cited as the forefather of the field. He died in 1996. The following list touches on a few observations made by behavioral finance researchers. Unfortunately, the list only scratches the surface. Much more information about this fascinating field is available on the Internet and in your local library: ● ● ● ● ● ● ● ● ● People tend to be more optimistic about stocks after the market goes up and more pessimistic after it goes down.


pages: 340 words: 97,723

The Big Nine: How the Tech Titans and Their Thinking Machines Could Warp Humanity by Amy Webb

"Friedman doctrine" OR "shareholder theory", Ada Lovelace, AI winter, air gap, Airbnb, airport security, Alan Turing: On Computable Numbers, with an Application to the Entscheidungsproblem, algorithmic bias, AlphaGo, Andy Rubin, artificial general intelligence, Asilomar, autonomous vehicles, backpropagation, Bayesian statistics, behavioural economics, Bernie Sanders, Big Tech, bioinformatics, Black Lives Matter, blockchain, Bretton Woods, business intelligence, Cambridge Analytica, Cass Sunstein, Charles Babbage, Claude Shannon: information theory, cloud computing, cognitive bias, complexity theory, computer vision, Computing Machinery and Intelligence, CRISPR, cross-border payments, crowdsourcing, cryptocurrency, Daniel Kahneman / Amos Tversky, data science, deep learning, DeepMind, Demis Hassabis, Deng Xiaoping, disinformation, distributed ledger, don't be evil, Donald Trump, Elon Musk, fail fast, fake news, Filter Bubble, Flynn Effect, Geoffrey Hinton, gig economy, Google Glasses, Grace Hopper, Gödel, Escher, Bach, Herman Kahn, high-speed rail, Inbox Zero, Internet of things, Jacques de Vaucanson, Jeff Bezos, Joan Didion, job automation, John von Neumann, knowledge worker, Lyft, machine translation, Mark Zuckerberg, Menlo Park, move fast and break things, Mustafa Suleyman, natural language processing, New Urbanism, Nick Bostrom, one-China policy, optical character recognition, packet switching, paperclip maximiser, pattern recognition, personalized medicine, RAND corporation, Ray Kurzweil, Recombinant DNA, ride hailing / ride sharing, Rodney Brooks, Rubik’s Cube, Salesforce, Sand Hill Road, Second Machine Age, self-driving car, seminal paper, SETI@home, side project, Silicon Valley, Silicon Valley startup, skunkworks, Skype, smart cities, South China Sea, sovereign wealth fund, speech recognition, Stephen Hawking, strong AI, superintelligent machines, surveillance capitalism, technological singularity, The Coming Technological Singularity, the long tail, theory of mind, Tim Cook: Apple, trade route, Turing machine, Turing test, uber lyft, Von Neumann architecture, Watson beat the top human players on Jeopardy!, zero day

This is particularly dangerous when it comes to AI, because students, professors, researchers, employees, and managers are making millions of decisions every day, from seemingly insignificant (what database to use) to profound (who gets killed if an autonomous vehicle needs to crash). Artificial intelligence might be inspired by our human brains, but humans and AI make decisions and choices differently. Princeton professor Daniel Kahneman and Hebrew University of Jerusalem professor Amos Tversky spent years studying the human mind and how we make decisions, ultimately discovering that we have two systems of thinking: one that uses logic to analyze problems, and one that is automatic, fast, and nearly imperceptible to us. Kahneman describes this dual system in his award-winning book Thinking, Fast and Slow.


pages: 324 words: 96,491

Messing With the Enemy: Surviving in a Social Media World of Hackers, Terrorists, Russians, and Fake News by Clint Watts

4chan, active measures, Affordable Care Act / Obamacare, barriers to entry, behavioural economics, Bellingcat, Berlin Wall, Bernie Sanders, Black Lives Matter, Cambridge Analytica, Chelsea Manning, Climatic Research Unit, crowdsourcing, Daniel Kahneman / Amos Tversky, disinformation, Donald Trump, drone strike, Edward Snowden, en.wikipedia.org, Erik Brynjolfsson, failed state, fake news, Fall of the Berlin Wall, false flag, Filter Bubble, global pandemic, Google Earth, Hacker News, illegal immigration, information security, Internet of things, Jacob Silverman, Julian Assange, loss aversion, Mark Zuckerberg, Mikhail Gorbachev, mobile money, mutually assured destruction, obamacare, Occupy movement, offshore financial centre, operational security, pre–internet, Russian election interference, Sheryl Sandberg, side project, Silicon Valley, Snapchat, Steve Bannon, the long tail, The Wisdom of Crowds, Turing test, University of East Anglia, Valery Gerasimov, WikiLeaks, Yochai Benkler, zero day

I needed to find foxes to get insights, and to do it, I decided to employ social engineering, the same techniques I’d used in West Point prank calls. I needed to trick respondents to reveal their true tendencies as either a fox or a hedgehog. Once I found the foxes in the pack, I’d investigate their responses as the outliers in a sea of predictions. Daniel Kahneman and Amos Tversky, two Israeli American behavioral psychologists, provided the social engineering tricks I needed to separate the foxes from the hedgehogs. Over many years of research, they identified a series of heuristics—mental rules people use to make decisions—and noted the circumstances where biases emerged that led to incorrect judgments.


pages: 306 words: 97,211

Value Investing: From Graham to Buffett and Beyond by Bruce C. N. Greenwald, Judd Kahn, Paul D. Sonkin, Michael van Biema

Andrei Shleifer, barriers to entry, Berlin Wall, book value, business cycle, business logic, capital asset pricing model, corporate raider, creative destruction, Daniel Kahneman / Amos Tversky, discounted cash flows, diversified portfolio, Eugene Fama: efficient market hypothesis, Fairchild Semiconductor, financial engineering, fixed income, index fund, intangible asset, junk bonds, Long Term Capital Management, naked short selling, new economy, place-making, price mechanism, quantitative trading / quantitative finance, Richard Thaler, risk free rate, search costs, shareholder value, short selling, Silicon Valley, stocks for the long run, Telecommunications Act of 1996, time value of money, tulip mania, Y2K, zero-sum game

O'Shaughnessy, What Works on Wall Street: A Guide to the BestPerforming Investment Strategies of All Time (New York: McGraw-Hill, 1994), p. 193. and the Fama and Lakonishok articles referred to in Chapter One. On cognitive biases, the starting point is the collection of papers: Daniel Kahneman, Paul Slovic, and Amos Tversky, editors, Judgment under Uncertainty (New York: Cambridge University Press, 1982). The consequences for investments form the relatively new field of behavioral finance. Books and articles to consult: Andrei Shleifer, Inefficient Markets: An Introduction to Behavioral Finance (Oxford: Oxford University Press, 2000).


Mindf*ck: Cambridge Analytica and the Plot to Break America by Christopher Wylie

4chan, affirmative action, Affordable Care Act / Obamacare, air gap, availability heuristic, Berlin Wall, Bernie Sanders, Big Tech, big-box store, Boris Johnson, Brexit referendum, British Empire, call centre, Cambridge Analytica, Chelsea Manning, chief data officer, cognitive bias, cognitive dissonance, colonial rule, computer vision, conceptual framework, cryptocurrency, Daniel Kahneman / Amos Tversky, dark pattern, dark triade / dark tetrad, data science, deep learning, desegregation, disinformation, Dominic Cummings, Donald Trump, Downton Abbey, Edward Snowden, Elon Musk, emotional labour, Etonian, fake news, first-past-the-post, gamification, gentleman farmer, Google Earth, growth hacking, housing crisis, income inequality, indoor plumbing, information asymmetry, Internet of things, Julian Assange, Lyft, Marc Andreessen, Mark Zuckerberg, Menlo Park, move fast and break things, Network effects, new economy, obamacare, Peter Thiel, Potemkin village, recommendation engine, Renaissance Technologies, Robert Mercer, Ronald Reagan, Rosa Parks, Sand Hill Road, Scientific racism, Shoshana Zuboff, side project, Silicon Valley, Skype, Stephen Fry, Steve Bannon, surveillance capitalism, tech bro, uber lyft, unpaid internship, Valery Gerasimov, web application, WikiLeaks, zero-sum game

Rather, they are systematic errors, meaning they create patterns in common forms of irrational thinking. In fact, thousands of cognitive biases have been identified in the field of psychology. Some biases are so common and seemingly intuitive that it can be hard for people to even recognize that they are actually irrational. For example, the psychologists Amos Tversky and Daniel Kahneman conducted a study that asked participants a very simple question: “Suppose you sample a word at random from an English text. Is it more likely that the word starts with a k, or that k is the third letter?” Most people responded with the former, that words that start with k (e.g., kitchen, kite, or kilometer) are more likely.


Reaper Force: The Inside Story of Britain’s Drone Wars by Dr Peter Lee

crew resource management, Daniel Kahneman / Amos Tversky, digital map, illegal immigration, job satisfaction, MITM: man-in-the-middle, no-fly zone, operational security, QWERTY keyboard, Skype

They might just have been using the wrong part of their brain: the part that increases their chances of Missing the Gorilla. There are several possible reasons as to why the brain fails to see things clearly in these extreme, high-pressure situations. One of the most influential of these explanations was developed by Daniel Kahneman and Amos Tversky, who wanted to understand the psychology of making choices and decisions. They identified two different ways of thinking: intuition (e.g. your instant impression of a politician you see on television) and reasoning (e.g. adding up your change in a shop). This approach to understanding how way the brain works was later described as System 1 and System 2.21 Most people rely on intuition a lot more than they realise.


pages: 518 words: 147,036

The Fissured Workplace by David Weil

"Friedman doctrine" OR "shareholder theory", accounting loophole / creative accounting, affirmative action, Affordable Care Act / Obamacare, banking crisis, barriers to entry, behavioural economics, business cycle, business process, buy and hold, call centre, Carmen Reinhart, Cass Sunstein, Clayton Christensen, clean water, collective bargaining, commoditize, company town, corporate governance, corporate raider, Corrections Corporation of America, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, declining real wages, employer provided health coverage, Frank Levy and Richard Murnane: The New Division of Labor, George Akerlof, global supply chain, global value chain, hiring and firing, income inequality, independent contractor, information asymmetry, intermodal, inventory management, Jane Jacobs, Kenneth Rogoff, law of one price, long term incentive plan, loss aversion, low skilled workers, minimum wage unemployment, moral hazard, Network effects, new economy, occupational segregation, Paul Samuelson, performance metric, pre–internet, price discrimination, principal–agent problem, Rana Plaza, Richard Florida, Richard Thaler, Ronald Coase, seminal paper, shareholder value, Silicon Valley, statistical model, Steve Jobs, supply-chain management, The Death and Life of Great American Cities, The Nature of the Firm, transaction costs, Triangle Shirtwaist Factory, ultimatum game, union organizing, vertical integration, women in the workforce, yield management

American Economic Review 87, no. 5: 993–1008. Kahneman, Daniel. 2011. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux. Kahneman, Daniel, Jack Knetsch, and Richard Thaler. 1986. “Fairness as a Constraint on Profit Seeking: Entitlements in the Market.” American Economic Review 76, no. 4: 728–741. Kahneman, Daniel, and Amos Tversky. 1984. “Choices, Values, and Frames.” American Psychologist 34, no.4: 341-350. Kalleberg, Arne. 2011. Good Jobs / Bad Jobs: The Rise of Polarized and Precarious Employment Systems in the United States, 1970s to 2000s. New York: Russell Sage Foundation. Kalleberg, Arne, and Peter Marsden. 2005.

Relationships are an intrinsic part of the workplace, and fairness perceptions are therefore basic to how decisions are made within it. The factors driving wage setting arise not just from an employer’s consideration of the additional output a worker might provide if given a higher wage, but on the worker’s perceptions of the fairness of that wage. For example, Daniel Kahneman, one of the pioneers of behavioral economics, showed that people’s perception of the fairness of a wage cut depends on why they feel it was done: cuts driven by increases in unemployment (and therefore more people looking for work) are viewed as unfair; a company that cuts wages because it is on the brink of bankruptcy is judged more favorably.

Thornton, Dorothy, Neil Gunningham, and Robert Kagan. 2005. “General Deterrence and Corporate Environmental Behavior.” Law and Policy 27, no. 2: 262–288. Torgler, Benno. 2006. “The Importance of Faith: Tax Morale and Religiosity,” Journal of Economic Behavior and Organization 61, no. 1: 81–109. Tversky, Amos, and Daniel Kahneman. 1974. “Judgment under Uncertainty: Heuristics and Biases.” Science 185, no. 4157: 1125–1131. U.S. Department of Commerce, Bureau of Economic Analysis. 2011. National Income and Product Accounts. http://www.bea.gov/national/index.htm#gdp. U.S. Department of Labor. 1998a. “Full Hot Goods Compliance Program Agreement.”


pages: 326 words: 106,053

The Wisdom of Crowds by James Surowiecki

Alan Greenspan, AltaVista, Andrei Shleifer, Apollo 13, asset allocation, behavioural economics, Cass Sunstein, classic study, congestion pricing, coronavirus, Daniel Kahneman / Amos Tversky, experimental economics, Frederick Winslow Taylor, George Akerlof, Great Leap Forward, Gregor Mendel, Howard Rheingold, I think there is a world market for maybe five computers, interchangeable parts, Jeff Bezos, John Bogle, John Meriwether, Joseph Schumpeter, knowledge economy, lone genius, Long Term Capital Management, market bubble, market clearing, market design, Monkeys Reject Unequal Pay, moral hazard, Myron Scholes, new economy, offshore financial centre, Picturephone, prediction markets, profit maximization, Richard Feynman, Richard Feynman: Challenger O-ring, Richard Thaler, Robert Shiller, Ronald Coase, Ronald Reagan, seminal paper, shareholder value, short selling, Silicon Valley, South Sea Bubble, tacit knowledge, The Nature of the Firm, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Toyota Production System, transaction costs, ultimatum game, vertical integration, world market for maybe five computers, Yogi Berra, zero-sum game

Karim Jamal and Shyam Sunder, “Bayesian Equilibrium in Double Auctions Populated by Biased Heuristic Traders,” Journal of Economic Behavior and Organization 31 (1996): 273–91. See also Richard H. Thaler, “The End of Behavioral Finance,” Financial Analysts’ Journal (November–December 1999): 12–17; and Daniel Kahneman, Paul Slovic, and Amos Tversky, Judgement Under Uncertainty: Heuristics and Biases (New York: Cambridge University Press, 1982), which is the jumping-off point for much of the work in behavioral finance. See George Akerlof’s Nobel lecture, “Behavioral Macroeconomics and Macroeconomic Behavior” (December 8, 2001), for a discussion of people’s problems saving.


pages: 403 words: 111,119

Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist by Kate Raworth

"Friedman doctrine" OR "shareholder theory", 3D printing, Alan Greenspan, Alvin Toffler, Anthropocene, Asian financial crisis, bank run, basic income, battle of ideas, behavioural economics, benefit corporation, Berlin Wall, biodiversity loss, bitcoin, blockchain, Branko Milanovic, Bretton Woods, Buckminster Fuller, business cycle, call centre, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, Cass Sunstein, choice architecture, circular economy, clean water, cognitive bias, collapse of Lehman Brothers, complexity theory, creative destruction, crowdsourcing, cryptocurrency, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, degrowth, dematerialisation, disruptive innovation, Douglas Engelbart, Douglas Engelbart, Easter island, en.wikipedia.org, energy transition, Erik Brynjolfsson, Ethereum, ethereum blockchain, Eugene Fama: efficient market hypothesis, experimental economics, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, Financial Instability Hypothesis, full employment, Future Shock, Garrett Hardin, Glass-Steagall Act, global supply chain, global village, Henri Poincaré, hiring and firing, Howard Zinn, Hyman Minsky, income inequality, Intergovernmental Panel on Climate Change (IPCC), invention of writing, invisible hand, Isaac Newton, it is difficult to get a man to understand something, when his salary depends on his not understanding it, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kickstarter, land reform, land value tax, Landlord’s Game, loss aversion, low interest rates, low skilled workers, M-Pesa, Mahatma Gandhi, market fundamentalism, Martin Wolf, means of production, megacity, Minsky moment, mobile money, Money creation, Mont Pelerin Society, Myron Scholes, neoliberal agenda, Network effects, Occupy movement, ocean acidification, off grid, offshore financial centre, oil shale / tar sands, out of africa, Paul Samuelson, peer-to-peer, planetary scale, price mechanism, quantitative easing, randomized controlled trial, retail therapy, Richard Thaler, Robert Solow, Ronald Reagan, Second Machine Age, secular stagnation, shareholder value, sharing economy, Silicon Valley, Simon Kuznets, smart cities, smart meter, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, statistical model, Steve Ballmer, systems thinking, TED Talk, The Chicago School, The Great Moderation, the map is not the territory, the market place, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, Torches of Freedom, Tragedy of the Commons, trickle-down economics, ultimatum game, universal basic income, Upton Sinclair, Vilfredo Pareto, wikimedia commons

From calculating to approximating Homo sapiens clearly can’t match the infallibility of rational economic man. That much has been agreed upon since the 1950s when Herbert Simon broke rank with his fellow economists and started to study how people actually behaved, finding their rationality to be severely ‘bounded’. His findings, augmented by those of psychologists Daniel Kahneman and Amos Tversky in the 1970s, gave birth to the field now known as behavioural economics, which studies the many kinds of ‘cognitive bias’ that systematically cause humans to deviate from the ideal model of rationality. Examples abound. We (the WEIRD ones, at least) typically exhibit: availability bias – making decisions on the basis of more recent and more accessible information; loss aversion – the strong preference to avoid a loss rather than to make an equivalent gain; selective cognition – taking on board facts and arguments that fit with our existing frames; and risk bias – underestimating the likelihood of extreme events, while overestimating our ability to cope with them.


pages: 397 words: 112,034

What's Next?: Unconventional Wisdom on the Future of the World Economy by David Hale, Lyric Hughes Hale

"World Economic Forum" Davos, affirmative action, Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, behavioural economics, Berlin Wall, biodiversity loss, Black Swan, Bretton Woods, business cycle, capital controls, carbon credits, carbon tax, Cass Sunstein, central bank independence, classic study, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, currency risk, Daniel Kahneman / Amos Tversky, debt deflation, declining real wages, deindustrialization, diversification, energy security, Erik Brynjolfsson, Fall of the Berlin Wall, financial engineering, financial innovation, floating exchange rates, foreign exchange controls, full employment, Gini coefficient, Glass-Steagall Act, global macro, global reserve currency, global village, high net worth, high-speed rail, Home mortgage interest deduction, housing crisis, index fund, inflation targeting, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), inverted yield curve, invisible hand, Just-in-time delivery, Kenneth Rogoff, Long Term Capital Management, low interest rates, Mahatma Gandhi, Martin Wolf, Mexican peso crisis / tequila crisis, Mikhail Gorbachev, military-industrial complex, Money creation, money market fund, money: store of value / unit of account / medium of exchange, mortgage tax deduction, Network effects, new economy, Nicholas Carr, oil shale / tar sands, oil shock, open economy, passive investing, payday loans, peak oil, Ponzi scheme, post-oil, precautionary principle, price stability, private sector deleveraging, proprietary trading, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, risk/return, Robert Shiller, Ronald Reagan, Savings and loan crisis, sovereign wealth fund, special drawing rights, subprime mortgage crisis, technology bubble, The Great Moderation, Thomas Kuhn: the structure of scientific revolutions, Tobin tax, too big to fail, total factor productivity, trade liberalization, Tragedy of the Commons, Washington Consensus, Westphalian system, WikiLeaks, women in the workforce, yield curve

Evidence suggests that most institutional investors were initially highly skeptical of the rebound, but then many decided to buy into the market, not wanting to miss an upturn—thus creating a positive feedback loop. Why Neuroeconomics Disproves the Theory of Rationality Since the 1970s, with the pioneering work of Daniel Kahneman and Amos Tversky, we have understood how heuristics distort our ability to make rational decisions. Kahneman and Tversky investigated the apparent anomalies in human behavior that lead to asymmetries in the choices we make. In particular, they investigated how the framing of an identical issue can lead to either risk-averse or risk-seeking behavior.


pages: 424 words: 114,905

Deep Medicine: How Artificial Intelligence Can Make Healthcare Human Again by Eric Topol

"World Economic Forum" Davos, 23andMe, Affordable Care Act / Obamacare, AI winter, Alan Turing: On Computable Numbers, with an Application to the Entscheidungsproblem, algorithmic bias, AlphaGo, Apollo 11, artificial general intelligence, augmented reality, autism spectrum disorder, autonomous vehicles, backpropagation, Big Tech, bioinformatics, blockchain, Cambridge Analytica, cloud computing, cognitive bias, Colonization of Mars, computer age, computer vision, Computing Machinery and Intelligence, conceptual framework, creative destruction, CRISPR, crowdsourcing, Daniel Kahneman / Amos Tversky, dark matter, data science, David Brooks, deep learning, DeepMind, Demis Hassabis, digital twin, driverless car, Elon Musk, en.wikipedia.org, epigenetics, Erik Brynjolfsson, fake news, fault tolerance, gamification, general purpose technology, Geoffrey Hinton, George Santayana, Google Glasses, ImageNet competition, Jeff Bezos, job automation, job satisfaction, Joi Ito, machine translation, Mark Zuckerberg, medical residency, meta-analysis, microbiome, move 37, natural language processing, new economy, Nicholas Carr, Nick Bostrom, nudge unit, OpenAI, opioid epidemic / opioid crisis, pattern recognition, performance metric, personalized medicine, phenotype, placebo effect, post-truth, randomized controlled trial, recommendation engine, Rubik’s Cube, Sam Altman, self-driving car, Silicon Valley, Skinner box, speech recognition, Stephen Hawking, techlash, TED Talk, text mining, the scientific method, Tim Cook: Apple, traumatic brain injury, trolley problem, War on Poverty, Watson beat the top human players on Jeopardy!, working-age population

In Superforecasting, Philip Tetlock observes, “If you don’t get feedback, your confidence grows much faster than your accuracy.”9 The lack of emphasis on diagnostic skills during and after medical school, however, seems to be overshadowed by the lack of appreciation of deep cognitive biases and distortions that can lead to diagnostic failure. They’re not even part of teaching diagnosis today in medical school. In The Undoing Project: A Friendship That Changed Our Minds, Michael Lewis wrote about Donald Redelmeier, a Canadian physician who as a teenager was inspired by Amos Tversky and Danny Kahneman.10 At Sunnybrook Hospital’s trauma center, he asked his fellow physicians to slow down, tame System 1 thinking, and try to avoid mental errors in judgment. “You need to be so careful when there is one simple diagnosis that instantly pops into your mind that beautifully explains everything all at once.

chapter three MEDICAL DIAGNOSIS To be a good diagnostician, a physician needs to acquire a large set of labels for diseases, each of which binds an idea of the illness and its symptoms, possible antecedents and causes, possible developments and consequences, and possible interventions to cure or mitigate the illness. —DANIEL KAHNEMAN Computing science will probably exert its major effects by augmenting and, in some cases, largely replacing the intellectual functions of the physician. —WILLIAM B. SCHWARTZ, 1970 IT WAS THE BEGINNING OF MY THIRD YEAR OF MEDICAL SCHOOL. I was in the Introduction to Clinical Medicine clerkship at Strong Memorial Hospital in Rochester, New York.


pages: 407 words: 114,478

The Four Pillars of Investing: Lessons for Building a Winning Portfolio by William J. Bernstein

Alan Greenspan, asset allocation, behavioural economics, book value, Bretton Woods, British Empire, business cycle, butter production in bangladesh, buy and hold, buy low sell high, carried interest, corporate governance, cuban missile crisis, Daniel Kahneman / Amos Tversky, Dava Sobel, diversification, diversified portfolio, Edmond Halley, equity premium, estate planning, Eugene Fama: efficient market hypothesis, financial engineering, financial independence, financial innovation, fixed income, George Santayana, German hyperinflation, Glass-Steagall Act, high net worth, hindsight bias, Hyman Minsky, index fund, invention of the telegraph, Isaac Newton, John Bogle, John Harrison: Longitude, junk bonds, Long Term Capital Management, loss aversion, low interest rates, market bubble, mental accounting, money market fund, mortgage debt, new economy, pattern recognition, Paul Samuelson, Performance of Mutual Funds in the Period, quantitative easing, railway mania, random walk, Richard Thaler, risk tolerance, risk/return, Robert Shiller, Savings and loan crisis, South Sea Bubble, stock buybacks, stocks for the long run, stocks for the long term, survivorship bias, Teledyne, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, the rule of 72, transaction costs, Vanguard fund, yield curve, zero-sum game

The two-point percentage is about 50%, meaning that your chance of winning is only 25%, since making the goal only serves to throw the game into overtime. A three-point shot wins the game and has a better success rate—about 33%. At about the same time in the early 1970s that Thaler and his friend were deciding whether or not to brave the snowstorm, two Israeli psychologists, Daniel Kahneman and Amos Tversky, were studying the imperfections in the human decision-making process in a far sunnier clime. They published a landmark paper in the prestigious journal Science, in which they outlined the basic errors made by humans in estimating probabilities. A typical riddle: “Steve is very shy and withdrawn, invariably helpful, but with little interest in people, or in the world of reality . . .”


pages: 354 words: 118,970

Transaction Man: The Rise of the Deal and the Decline of the American Dream by Nicholas Lemann

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, Abraham Maslow, Affordable Care Act / Obamacare, Airbnb, airline deregulation, Alan Greenspan, Albert Einstein, augmented reality, basic income, Bear Stearns, behavioural economics, Bernie Sanders, Black-Scholes formula, Blitzscaling, buy and hold, capital controls, Carl Icahn, computerized trading, Cornelius Vanderbilt, corporate governance, cryptocurrency, Daniel Kahneman / Amos Tversky, data science, deal flow, dematerialisation, diversified portfolio, Donald Trump, Elon Musk, Eugene Fama: efficient market hypothesis, Fairchild Semiconductor, financial deregulation, financial innovation, fixed income, future of work, George Akerlof, gig economy, Glass-Steagall Act, Henry Ford's grandson gave labor union leader Walter Reuther a tour of the company’s new, automated factory…, Ida Tarbell, index fund, information asymmetry, invisible hand, Irwin Jacobs, Joi Ito, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kickstarter, life extension, Long Term Capital Management, Mark Zuckerberg, Mary Meeker, mass immigration, means of production, Metcalfe’s law, Michael Milken, money market fund, Mont Pelerin Society, moral hazard, Myron Scholes, Neal Stephenson, new economy, Norman Mailer, obamacare, PalmPilot, Paul Samuelson, Performance of Mutual Funds in the Period, Peter Thiel, price mechanism, principal–agent problem, profit maximization, proprietary trading, prudent man rule, public intellectual, quantitative trading / quantitative finance, Ralph Nader, Richard Thaler, road to serfdom, Robert Bork, Robert Metcalfe, rolodex, Ronald Coase, Ronald Reagan, Sand Hill Road, Savings and loan crisis, shareholder value, short selling, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, Snow Crash, Social Responsibility of Business Is to Increase Its Profits, Steve Jobs, TaskRabbit, TED Talk, The Nature of the Firm, the payments system, the strength of weak ties, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, too big to fail, transaction costs, universal basic income, War on Poverty, white flight, working poor

The other was behavioral economics, which focused on the many ways the human mind was naturally prone to misperceive reality and how that would affect people’s interactions with economic markets. Both ideas, by positing that markets behaved imperfectly, were opening the door to a role for government in improving the way markets functioned, and this was a highly offensive idea to Jensen. The fathers of behavioral economics were two psychologists, Daniel Kahneman and Amos Tversky; their main link to economics was Richard Thaler, whose first job was as a junior faculty member at Rochester’s business school. Naturally, Jensen and Thaler quarreled constantly. Thaler eventually left for the University of Chicago’s business school, where he began to quarrel constantly with Eugene Fama.


pages: 447 words: 111,991

Exponential: How Accelerating Technology Is Leaving Us Behind and What to Do About It by Azeem Azhar

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, 23andMe, 3D printing, A Declaration of the Independence of Cyberspace, Ada Lovelace, additive manufacturing, air traffic controllers' union, Airbnb, algorithmic management, algorithmic trading, Amazon Mechanical Turk, autonomous vehicles, basic income, Berlin Wall, Bernie Sanders, Big Tech, Bletchley Park, Blitzscaling, Boeing 737 MAX, book value, Boris Johnson, Bretton Woods, carbon footprint, Chris Urmson, Citizen Lab, Clayton Christensen, cloud computing, collective bargaining, computer age, computer vision, contact tracing, contact tracing app, coronavirus, COVID-19, creative destruction, crowdsourcing, cryptocurrency, cuban missile crisis, Daniel Kahneman / Amos Tversky, data science, David Graeber, David Ricardo: comparative advantage, decarbonisation, deep learning, deglobalization, deindustrialization, dematerialisation, Demis Hassabis, Diane Coyle, digital map, digital rights, disinformation, Dissolution of the Soviet Union, Donald Trump, Double Irish / Dutch Sandwich, drone strike, Elon Musk, emotional labour, energy security, Fairchild Semiconductor, fake news, Fall of the Berlin Wall, Firefox, Frederick Winslow Taylor, fulfillment center, future of work, Garrett Hardin, gender pay gap, general purpose technology, Geoffrey Hinton, gig economy, global macro, global pandemic, global supply chain, global value chain, global village, GPT-3, Hans Moravec, happiness index / gross national happiness, hiring and firing, hockey-stick growth, ImageNet competition, income inequality, independent contractor, industrial robot, intangible asset, Jane Jacobs, Jeff Bezos, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, John Perry Barlow, Just-in-time delivery, Kickstarter, Kiva Systems, knowledge worker, Kodak vs Instagram, Law of Accelerating Returns, lockdown, low skilled workers, lump of labour, Lyft, manufacturing employment, Marc Benioff, Mark Zuckerberg, megacity, Mitch Kapor, Mustafa Suleyman, Network effects, new economy, NSO Group, Ocado, offshore financial centre, OpenAI, PalmPilot, Panopticon Jeremy Bentham, Peter Thiel, Planet Labs, price anchoring, RAND corporation, ransomware, Ray Kurzweil, remote working, RFC: Request For Comment, Richard Florida, ride hailing / ride sharing, Robert Bork, Ronald Coase, Ronald Reagan, Salesforce, Sam Altman, scientific management, Second Machine Age, self-driving car, Shoshana Zuboff, Silicon Valley, Social Responsibility of Business Is to Increase Its Profits, software as a service, Steve Ballmer, Steve Jobs, Stuxnet, subscription business, synthetic biology, tacit knowledge, TaskRabbit, tech worker, The Death and Life of Great American Cities, The Future of Employment, The Nature of the Firm, Thomas Malthus, TikTok, Tragedy of the Commons, Turing machine, Uber and Lyft, Uber for X, uber lyft, universal basic income, uranium enrichment, vertical integration, warehouse automation, winner-take-all economy, workplace surveillance , Yom Kippur War

A growth rate of around 40 per cent – roughly what Moore’s Law describes – would see around a 32,000-fold increase in that time. One peer-reviewed summary from 1975 summarises the issue: underestimation of exponential growth is a ‘general effect which [is] not reduced by daily experience with growing processes’.13 This blind spot has a close relative – the ‘anchoring bias’. The Nobel Prize-winning economists Daniel Kahneman and Amos Tversky have explored how people make decisions amid uncertainty. They found that, when presented with a numerical challenge, people tend to fix upon some readily available number and adjust their responses around it. It’s a trick salespeople use: by starting at a particular price, they anchor our expectations about what the real value of something might be.


pages: 468 words: 123,823

A People's History of Poverty in America by Stephen Pimpare

affirmative action, British Empire, car-free, clean water, cognitive dissonance, Columbine, Daniel Kahneman / Amos Tversky, deindustrialization, delayed gratification, dumpster diving, East Village, Frederick Winslow Taylor, George Gilder, green new deal, hedonic treadmill, hiring and firing, Howard Zinn, illegal immigration, impulse control, income inequality, index card, it's over 9,000, Jane Jacobs, low skilled workers, Mahatma Gandhi, mass incarceration, meta-analysis, moral panic, Naomi Klein, New Urbanism, payday loans, Ralph Waldo Emerson, Robert Solow, Ronald Reagan, San Francisco homelessness, subprime mortgage crisis, The Bell Curve by Richard Herrnstein and Charles Murray, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, Thomas Malthus, union organizing, urban renewal, W. E. B. Du Bois, War on Poverty, white flight, working poor, Works Progress Administration

Bremner, From the Depths: The Discovery of Poverty in the United States (New York: NYU Press, 1956 [1972]), 13. 26 Victoria Byerly, Hard Times Cotton Mill Girls: Personal Histories of Womanhood and Poverty in the South (Ithaca, NY: ILR Press, 1986), 6. 27 Richard Layard, Happiness: Lessons from a New Science (New York: Penguin, 2005), 48. 28 Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision Under Risk,” Econometrica 47, no. 2 (March 1979): 263–92. 29 Amartya Sen, Development as Freedom (New York: Anchor, 1999), 89. Emphasis in original. 30 Still, if 40 percent of all Americans were poor in 1900, that represents some 30,397,830 souls; but a 13.8 percent poverty rate in 1995 means that 36,317,184 people were poor.


pages: 755 words: 121,290

Statistics hacks by Bruce Frey

Bayesian statistics, Berlin Wall, correlation coefficient, Daniel Kahneman / Amos Tversky, distributed generation, en.wikipedia.org, feminist movement, G4S, game design, Hacker Ethic, index card, Linda problem, Milgram experiment, Monty Hall problem, p-value, place-making, reshoring, RFID, Search for Extraterrestrial Intelligence, SETI@home, Silicon Valley, statistical model, sugar pill, systematic bias, Thomas Bayes

., that list two separate "facts"), as if the listing of the "facts" together makes them more likely to be true. Even if, and maybe especially if, the second "fact" by itself seems unlikely. Conjunction Junction, What's Your Function? Why do our minds tend to work this way? In the 1970s, Nobel Prize winner Daniel Kahneman and his colleague Amos Tversky presented college students with several problems in which one option was highly representative of a given personality description, one option was incongruent with the description, and one option included both the highly similar and the incongruent options. Perhaps the most well-known problem that demonstrates the conjunction fallacy is the now-famous (at least in cognitive psychology circles) Linda Problem: Linda is 31 years old, single, outspoken, and very bright.


pages: 448 words: 117,325

Click Here to Kill Everybody: Security and Survival in a Hyper-Connected World by Bruce Schneier

23andMe, 3D printing, air gap, algorithmic bias, autonomous vehicles, barriers to entry, Big Tech, bitcoin, blockchain, Brian Krebs, business process, Citizen Lab, cloud computing, cognitive bias, computer vision, connected car, corporate governance, crowdsourcing, cryptocurrency, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Heinemeier Hansson, disinformation, Donald Trump, driverless car, drone strike, Edward Snowden, Elon Musk, end-to-end encryption, fault tolerance, Firefox, Flash crash, George Akerlof, incognito mode, industrial robot, information asymmetry, information security, Internet of things, invention of radio, job automation, job satisfaction, John Gilmore, John Markoff, Kevin Kelly, license plate recognition, loose coupling, market design, medical malpractice, Minecraft, MITM: man-in-the-middle, move fast and break things, national security letter, Network effects, Nick Bostrom, NSO Group, pattern recognition, precautionary principle, printed gun, profit maximization, Ralph Nader, RAND corporation, ransomware, real-name policy, Rodney Brooks, Ross Ulbricht, security theater, self-driving car, Seymour Hersh, Shoshana Zuboff, Silicon Valley, smart cities, smart transportation, Snapchat, sparse data, Stanislav Petrov, Stephen Hawking, Stuxnet, supply-chain attack, surveillance capitalism, The Market for Lemons, Timothy McVeigh, too big to fail, Uber for X, Unsafe at Any Speed, uranium enrichment, Valery Gerasimov, Wayback Machine, web application, WikiLeaks, Yochai Benkler, zero day

Maria Lamagna (26 Sep 2017), “After breach, Equifax CEO leaves with $18 million pension, and possibly more,” Market-Watch, https://www.marketwatch.com/story/equifax-ceo-leaves-with-18-million-pension-and-maybe-more-2017-09-26. 124His failed bet cost the company: Catalin Cimpanu (11 Nov 2017), “Hack cost Equifax only $87.5 million—for now,” Bleeping Computer, https://www.bleepingcomputer.com/news/business/hack-cost-equifax-only-87-5-million-for-now. 124The Deepwater Horizon disaster cost BP: Nathan Bomey (14 Jul 2016), “BP’s Deepwater Horizon costs total $62B,” USA Today, https://www.usatoday.com/story/money/2016/07/14/bp-deepwater-horizon-costs/87087056. 124We are biased towards preferring: Daniel Kahneman and Amos Tversky (Mar 1979), “Prospect theory: An analysis of decision under risk,” Econometrica 47, no. 2, https://www.princeton.edu/~kahneman/docs/Publications/prospect_theory.pdf. 125This doesn’t mean that no one ever: Bruce Schneier (Jul/Aug 2008), “How the human brain buys security,” IEEE Security & Privacy, https://www.schneier.com/essays/archives/2008/07/how_the_human_brain.html. 125Equifax learned about its 2017 hack in July: Dan Goodin (2 Oct 2017), “A series of delays and major errors led to massive Equifax breach,” Ars Technica, https://arstechnica.com/information-technology/2017/10/a-series-of-delays-and-major-errors-led-to-massive-equifax-breach. 125When Yahoo was hacked in 2014: Jamie Condliffe (15 Dec 2016), “A history of Yahoo hacks,” MIT Technology Review, https://www.technologyreview.com/s/603157/a-history-of-yahoo-hacks. 125Uber, for a year: Andy Greenberg (21 Nov 2017), “Hack brief: Uber paid off hackers to hide a 57-million user data breach,” Wired, https://www.wired.com/story/uber-paid-off-hackers-to-hide-a-57-million-user-data-breach. 125One study found that stock prices: Russell Lange and Eric W.


pages: 561 words: 120,899

The Theory That Would Not Die: How Bayes' Rule Cracked the Enigma Code, Hunted Down Russian Submarines, and Emerged Triumphant From Two Centuries of Controversy by Sharon Bertsch McGrayne

Abraham Wald, Alan Greenspan, Bayesian statistics, bioinformatics, Bletchley Park, British Empire, classic study, Claude Shannon: information theory, Daniel Kahneman / Amos Tversky, data science, double helix, Dr. Strangelove, driverless car, Edmond Halley, Fellow of the Royal Society, full text search, government statistician, Henri Poincaré, Higgs boson, industrial research laboratory, Isaac Newton, Johannes Kepler, John Markoff, John Nash: game theory, John von Neumann, linear programming, longitudinal study, machine readable, machine translation, meta-analysis, Nate Silver, p-value, Pierre-Simon Laplace, placebo effect, prediction markets, RAND corporation, recommendation engine, Renaissance Technologies, Richard Feynman, Richard Feynman: Challenger O-ring, Robert Mercer, Ronald Reagan, seminal paper, speech recognition, statistical model, stochastic process, Suez canal 1869, Teledyne, the long tail, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, traveling salesman, Turing machine, Turing test, uranium enrichment, We are all Keynesians now, Yom Kippur War

Harsanyi often used Bayes to study competitive situations where people have incomplete or uncertain information about each other or about the rules. Harsanyi also showed that Nash’s equilibrium for games with incomplete or imperfect information was a form of Bayes’ rule. In 2002 Bayes won perhaps not an entire Nobel Prize but certainly part of one. Psychologists Amos Tversky, who died before the prize was awarded, and Daniel Kahneman showed that people do not make decisions according to rational Bayesian procedures. People answer survey questions depending on their phrasing, and physicians choose surgery or radiation for cancer patients depending on whether the treatments are described in terms of mortality or survival rates.


pages: 624 words: 127,987

The Personal MBA: A World-Class Business Education in a Single Volume by Josh Kaufman

Albert Einstein, Alvin Toffler, Atul Gawande, Black Swan, Blue Ocean Strategy, business cycle, business process, buy low sell high, capital asset pricing model, Checklist Manifesto, cognitive bias, correlation does not imply causation, Credit Default Swap, Daniel Kahneman / Amos Tversky, David Heinemeier Hansson, David Ricardo: comparative advantage, Dean Kamen, delayed gratification, discounted cash flows, Donald Knuth, double entry bookkeeping, Douglas Hofstadter, Dunning–Kruger effect, en.wikipedia.org, Frederick Winslow Taylor, George Santayana, Gödel, Escher, Bach, high net worth, hindsight bias, index card, inventory management, iterative process, job satisfaction, Johann Wolfgang von Goethe, Kaizen: continuous improvement, Kevin Kelly, Kickstarter, Lao Tzu, lateral thinking, loose coupling, loss aversion, Marc Andreessen, market bubble, Network effects, Parkinson's law, Paul Buchheit, Paul Graham, place-making, premature optimization, Ralph Waldo Emerson, rent control, scientific management, side project, statistical model, stealth mode startup, Steve Jobs, Steve Wozniak, subscription business, systems thinking, telemarketer, the scientific method, time value of money, Toyota Production System, tulip mania, Upton Sinclair, Vilfredo Pareto, Walter Mischel, Y Combinator, Yogi Berra

The best way to help your customers Visualize is to expose them to as much sensory information as possible—the information their mind uses to conclude, “I want this.” SHARE THIS CONCEPT: http://book.personalmba.com/visualization/ Framing Everything we hear is an opinion, not a fact. Everything we see is a perspective, not the truth. —MARCUS AURELIUS, ROMAN EMPEROR AND PHILOSOPHER In a famous experiment conducted by psychologists Amos Tversky and Daniel Kahneman, participants were asked to make a decision about administering medical treatment to a sick population of six hundred people. Participants in the study were given two options: Treatment A would save two hundred lives. Treatment B had a 33 percent chance of saving all six hundred people and a 66 percent possibility of saving no one.


pages: 442 words: 130,526

The Billionaire Raj: A Journey Through India's New Gilded Age by James Crabtree

"World Economic Forum" Davos, accounting loophole / creative accounting, Asian financial crisis, behavioural economics, Big bang: deregulation of the City of London, Branko Milanovic, business climate, call centre, Capital in the Twenty-First Century by Thomas Piketty, centre right, colonial rule, commodity super cycle, Cornelius Vanderbilt, corporate raider, creative destruction, crony capitalism, Daniel Kahneman / Amos Tversky, Deng Xiaoping, Donald Trump, facts on the ground, failed state, fake news, Francis Fukuyama: the end of history, global supply chain, Gunnar Myrdal, income inequality, informal economy, Joseph Schumpeter, land bank, liberal capitalism, Mahatma Gandhi, McMansion, megacity, Meghnad Desai, middle-income trap, New Urbanism, offshore financial centre, open economy, Parag Khanna, Pearl River Delta, plutocrats, Ponzi scheme, post-truth, public intellectual, quantitative easing, rent-seeking, Rubik’s Cube, Shenzhen special economic zone , Silicon Valley, Simon Kuznets, smart cities, special economic zone, spectrum auction, tech billionaire, The Great Moderation, Thomas L Friedman, transaction costs, trickle-down economics, vertical integration, Washington Consensus, WikiLeaks, yellow journalism, young professional

Meanwhile the total debts of each tycoon, much of it taken on by creatively shifting funds around, had reached alarming levels. “We called this the layering of debt,” Gupta said. “And that was why it was called ‘House of Debt,’ because you had these industrial houses with debt everywhere, and no equity, ready to fall down.” The more charitable explanation was what economists Daniel Kahneman and Amos Tversky call the “planning fallacy,” a psychological bias in which those setting up projects use “forecasts that are unrealistically close to best-case scenarios.”9 In India, this meant that new steel mills were built on the assumption that steel demand would rise forever. In the same vein, power stations were planned on the basis that coal imports would always be cheaply available, hence why so many were built on India’s western coast, thousands of kilometers away from the country’s main coal supplies in the east.


pages: 436 words: 76

Culture and Prosperity: The Truth About Markets - Why Some Nations Are Rich but Most Remain Poor by John Kay

Alan Greenspan, Albert Einstein, Asian financial crisis, Barry Marshall: ulcers, behavioural economics, Berlin Wall, Big bang: deregulation of the City of London, Bletchley Park, business cycle, California gold rush, Charles Babbage, complexity theory, computer age, constrained optimization, corporate governance, corporate social responsibility, correlation does not imply causation, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, Donald Trump, double entry bookkeeping, double helix, Dr. Strangelove, Dutch auction, Edward Lloyd's coffeehouse, electricity market, equity premium, equity risk premium, Ernest Rutherford, European colonialism, experimental economics, Exxon Valdez, failed state, Fairchild Semiconductor, financial innovation, flying shuttle, Ford Model T, Francis Fukuyama: the end of history, George Akerlof, George Gilder, Goodhart's law, Great Leap Forward, greed is good, Gunnar Myrdal, haute couture, Helicobacter pylori, illegal immigration, income inequality, industrial cluster, information asymmetry, intangible asset, invention of the telephone, invention of the wheel, invisible hand, John Meriwether, John Nash: game theory, John von Neumann, junk bonds, Kenneth Arrow, Kevin Kelly, knowledge economy, Larry Ellison, light touch regulation, Long Term Capital Management, loss aversion, Mahatma Gandhi, market bubble, market clearing, market fundamentalism, means of production, Menlo Park, Michael Milken, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Naomi Klein, Nash equilibrium, new economy, oil shale / tar sands, oil shock, Pareto efficiency, Paul Samuelson, pets.com, Phillips curve, popular electronics, price discrimination, price mechanism, prisoner's dilemma, profit maximization, proprietary trading, purchasing power parity, QWERTY keyboard, Ralph Nader, RAND corporation, random walk, rent-seeking, Right to Buy, risk tolerance, road to serfdom, Robert Solow, Ronald Coase, Ronald Reagan, Savings and loan crisis, second-price auction, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, Steve Jobs, Stuart Kauffman, telemarketer, The Chicago School, The Market for Lemons, The Nature of the Firm, the new new thing, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, total factor productivity, transaction costs, tulip mania, urban decay, Vilfredo Pareto, Washington Consensus, women in the workforce, work culture , yield curve, yield management

On arriving at the theater, you find that you have lost the ticket. Would you buy a new ticket? You have decided to see a play for which tickets cost $50 and on your way to the theater lose a $50 note. Do you still buy a ticket to the play? This is one of a set of pairs of questions posed in the 1970s by two Israeli psychologists, Dan Kahnemann and Amos Tversky, who created the subject now called behavioral economics. Kahneman and Tversky found that practically all their subjects would still go to the play if they had lost $50, but less than half would still go if they had lost the $50 ticket. Kahneman and Tversky did not simply challenge the standard economic assumption of rationality, but began to identify patterns of "irrationality."

Fogel USA 1993 Quantitative economic history Milton Friedman USA 1976 Macroeconomics Ragnar Frisch Norway 1969 Economic dynamics CWJ Granger UK 2003 Time series analysis Trygve Haavelmo Norway 1989 Econometrics John C. Harsanyi USA 1994 Game theory Friedrich von Hayek Austria/ UK 1974 Economic systems James J. Heckman USA 2000 Econometrics John R. Hicks UK 1972 General equilibrium theory Daniel Kahneman USA 2002 Behavioral economics Leonid Vitaliyevich Kantorovich USSR 1975 Optimization modeling Lawrence R. Klein USA 1980 Econometrics Tjalling C. Koopmans USA Simon Kuznets USA 1975 Optimization modeling 1971 Empirical studies of economic growth Wassily Leontief USA 1973 Input-output analysis Appendix { 359} Name Country Year Subject Arthur Lewis UK 1979 Development economics Robert E.


pages: 437 words: 132,041

Alex's Adventures in Numberland by Alex Bellos

Andrew Wiles, Antoine Gombaud: Chevalier de Méré, beat the dealer, Black Swan, Black-Scholes formula, Claude Shannon: information theory, computer age, Daniel Kahneman / Amos Tversky, digital rights, Edward Thorp, family office, forensic accounting, game design, Georg Cantor, Henri Poincaré, Isaac Newton, Johannes Kepler, lateral thinking, Myron Scholes, pattern recognition, Paul Erdős, Pierre-Simon Laplace, probability theory / Blaise Pascal / Pierre de Fermat, random walk, Richard Feynman, Rubik’s Cube, SETI@home, Steve Jobs, The Bell Curve by Richard Herrnstein and Charles Murray, traveling salesman, two and twenty

‘Whenever they are not brutalized, but delicately handled by the higher methods, and are warily interpreted, their power of dealing with complicated phenomena is extraordinary.’ In 2002 the Nobel Prize in Economics was not won by an economist. It was won by the psychologist Daniel Kahneman, who had spent his career (much of it together with his colleague Amos Tversky) stdying the cognitive factors behind decision-making. Kahneman has said that understanding regression to the mean led to his most satisfying ‘Eureka moment’. It was in the mid 1960s and Kahneman was giving a lecture to Israeli air-force flight instructors.


Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals by David Aronson

Albert Einstein, Andrew Wiles, asset allocation, availability heuristic, backtesting, Black Swan, book value, butter production in bangladesh, buy and hold, capital asset pricing model, cognitive dissonance, compound rate of return, computerized trading, Daniel Kahneman / Amos Tversky, distributed generation, Elliott wave, en.wikipedia.org, equity risk premium, feminist movement, Great Leap Forward, hindsight bias, index fund, invention of the telescope, invisible hand, Long Term Capital Management, managed futures, mental accounting, meta-analysis, p-value, pattern recognition, Paul Samuelson, Ponzi scheme, price anchoring, price stability, quantitative trading / quantitative finance, Ralph Nelson Elliott, random walk, retrograde motion, revision control, risk free rate, risk tolerance, risk-adjusted returns, riskless arbitrage, Robert Shiller, Sharpe ratio, short selling, source of truth, statistical model, stocks for the long run, sugar pill, systematic trading, the scientific method, transfer pricing, unbiased observer, yield curve, Yogi Berra

The bad news is that human intelligence is maladapted to making accurate judgments in situations characterized by uncertainty. Under conditions of uncertainty, intuitive judgments and informally acquired knowledge are often wrong. Because financial market behavior is highly uncertain, erroneous knowledge in this domain is to be expected. The pioneering research of Daniel Kahneman, Paul Slovic, and Amos Tversky showed that illusory knowledge19 originates in two ways. First, people are plagued by various cognitive biases and illusions that distort what we experience and how we learn from that experience. Second, to compensate for the mind’s limited abilities to process information, human intelligence has evolved various mental shortcuts called judgment heuristics.

THE INTUITIVE JUDGMENT AND THE ROLE OF HEURISTICS “To simplify, there are basically two types of thought processes: automatic and controlled.”137 “Intuition is automatic. It is our capacity for direct knowledge, for immediate insight without observation or reason.”138 It is perception-like, rapid, and effortless, notes Princeton University psychologist Daniel Kahneman. In contrast, “deliberate or controlled thinking is reasoning-like, critical, and analytic.”139 The prototype of controlled thought is scientific reasoning. The prototype of intuition is the brilliant medical diagnostician who always seems to sniff the underlying disease. Subjective technicians rely primarily on intuition, and they do so to their detriment.


pages: 486 words: 148,485

Being Wrong: Adventures in the Margin of Error by Kathryn Schulz

affirmative action, Alan Greenspan, anti-communist, banking crisis, Bear Stearns, behavioural economics, Bernie Madoff, Boeing 747, car-free, Cass Sunstein, cognitive dissonance, colonial rule, conceptual framework, cosmological constant, cuban missile crisis, Daniel Kahneman / Amos Tversky, dark matter, David Sedaris, desegregation, Johann Wolfgang von Goethe, lake wobegon effect, longitudinal study, mandatory minimum, mirror neurons, Pierre-Simon Laplace, Ronald Reagan, six sigma, stem cell, Steven Pinker, subprime mortgage crisis, Tenerife airport disaster, the scientific method, The Wisdom of Crowds, theory of mind, Thomas Kuhn: the structure of scientific revolutions, trade route

Keeler’s The Problem of Error from Plato to Kant: A Historical and Critical Study (Apud Aedes Pontificiae Universitatis Gregorianae, 1934), 150: “We proceed wrongly in examining false judgments without first having first determined what knowledge is, for it is impossible to understand the former until the latter has been accurately defined.” “Mistakes may be defined.” James Reason, Human Error (Cambridge University Press, 1990), 9. Notwithstanding some dense prose, Reason does a deft and interesting job of ferreting out the practical applications of the insights of cognitive scientists (most famously Amos Tversky and Daniel Kahneman) about predictable failures of human cognition—so-called “cognitive illusions.” And he does so while recognizing that, even as such illusions make us err, they also make us swift and often reliable thinkers. See especially Chapter Five, “A Design for a Fallible Machine.” Iris Murdoch.


pages: 629 words: 142,393

The Future of the Internet: And How to Stop It by Jonathan Zittrain

A Declaration of the Independence of Cyberspace, algorithmic bias, Amazon Mechanical Turk, Andy Kessler, barriers to entry, behavioural economics, book scanning, Brewster Kahle, Burning Man, c2.com, call centre, Cass Sunstein, citizen journalism, Citizen Lab, Clayton Christensen, clean water, commoditize, commons-based peer production, corporate governance, Daniel Kahneman / Amos Tversky, digital divide, disruptive innovation, distributed generation, en.wikipedia.org, end-to-end encryption, Firefox, folksonomy, Free Software Foundation, game design, Hacker Ethic, Howard Rheingold, Hush-A-Phone, illegal immigration, index card, informal economy, information security, Internet Archive, jimmy wales, John Markoff, John Perry Barlow, license plate recognition, loose coupling, mail merge, Morris worm, national security letter, old-boy network, One Laptop per Child (OLPC), OSI model, packet switching, peer-to-peer, post-materialism, pre–internet, price discrimination, profit maximization, radical decentralization, Ralph Nader, RFC: Request For Comment, RFID, Richard Stallman, Richard Thaler, risk tolerance, Robert Bork, Robert X Cringely, SETI@home, Silicon Valley, Skype, slashdot, software patent, Steve Ballmer, Steve Jobs, Ted Nelson, Telecommunications Act of 1996, the Cathedral and the Bazaar, the long tail, The Nature of the Firm, The Wisdom of Crowds, Tragedy of the Commons, web application, wikimedia commons, Yochai Benkler, zero-sum game

Supp. 135, 139—40 (S.D.N.Y. 1991) (discussing the nature of CompuServe’s involvement in running the forums). 18. See ADVANCES IN BEHAVIORAL ECONOMICS (Colin F. Camerer, George Loewenstein & Matthew Rabin eds., 2003); Christine Jolls, Cass R. Sunstein & Richard Thaler, A Behavioral Approach to Law and Economics, 50 STAN. L. REV. 1471 (1998); Daniel Kahne-man & Amos Tversky, Prospect Theory: An Analysis of Decision Under Risk, 47 ECONO-METRICA 263 (1979). 19. See Cass R. Sunstein, INFOTOPIA 80 (2006). 20. Tim Wu, Wireless Carterfone, 1 INT’L. J. COMM. 389, 404—15 (2007), available at http://ijoc.org/ojs/index.php/ijoc/article/view/152/96. 21. See id. at 419. 22.


pages: 526 words: 160,601

A Generation of Sociopaths: How the Baby Boomers Betrayed America by Bruce Cannon Gibney

1960s counterculture, 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, AlphaGo, American Society of Civil Engineers: Report Card, Bear Stearns, Bernie Madoff, Bernie Sanders, Black Lives Matter, bond market vigilante , book value, Boston Dynamics, Bretton Woods, business cycle, buy and hold, carbon footprint, carbon tax, Charles Lindbergh, classic study, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate personhood, Corrections Corporation of America, currency manipulation / currency intervention, Daniel Kahneman / Amos Tversky, dark matter, DeepMind, Deng Xiaoping, Donald Trump, Downton Abbey, Edward Snowden, Elon Musk, ending welfare as we know it, equal pay for equal work, failed state, financial deregulation, financial engineering, Francis Fukuyama: the end of history, future of work, gender pay gap, gig economy, Glass-Steagall Act, Haight Ashbury, Higgs boson, high-speed rail, Home mortgage interest deduction, Hyperloop, illegal immigration, impulse control, income inequality, Intergovernmental Panel on Climate Change (IPCC), invisible hand, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Jane Jacobs, junk bonds, Kitchen Debate, labor-force participation, Long Term Capital Management, low interest rates, Lyft, Mark Zuckerberg, market bubble, mass immigration, mass incarceration, McMansion, medical bankruptcy, Menlo Park, Michael Milken, military-industrial complex, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, Neil Armstrong, neoliberal agenda, Network effects, Nixon triggered the end of the Bretton Woods system, obamacare, offshore financial centre, oil shock, operation paperclip, plutocrats, Ponzi scheme, price stability, prosperity theology / prosperity gospel / gospel of success, quantitative easing, Ralph Waldo Emerson, RAND corporation, rent control, ride hailing / ride sharing, risk tolerance, Robert Shiller, Ronald Reagan, Rubik’s Cube, Savings and loan crisis, school choice, secular stagnation, self-driving car, shareholder value, short selling, side project, Silicon Valley, smart grid, Snapchat, source of truth, stem cell, Steve Jobs, Stewart Brand, stock buybacks, survivorship bias, TaskRabbit, The Wealth of Nations by Adam Smith, Tim Cook: Apple, too big to fail, War on Poverty, warehouse robotics, We are all Keynesians now, white picket fence, Whole Earth Catalog, women in the workforce, Y2K, Yom Kippur War, zero-sum game

Regardless of the school, every variety of neoliberalism depends upon key and problematic assumptions: that individuals are rational, prudent, and informed, and that they therefore can be relied upon to meet their own needs. Most economic theories rely on these assumptions, but few to the degree that neoliberalism does. However, a large body of work, especially by Amos Tversky and Daniel Kahneman, shows that humans are not wholly rational agents, that we are susceptible to numerous cognitive biases that drive our thinking away from the rational idea. These biases lurk in normal people, but sociopaths operate at even greater remove from the rational ideal, prey to needs for immediate gratification, fond of risk, and unable to plan for the future.


pages: 741 words: 179,454

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", "there is no alternative" (TINA), "World Economic Forum" Davos, affirmative action, Alan Greenspan, Albert Einstein, algorithmic trading, Andy Kessler, AOL-Time Warner, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, book value, Bretton Woods, BRICs, British Empire, business cycle, buy the rumour, sell the news, capital asset pricing model, carbon credits, Carl Icahn, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, Daniel Kahneman / Amos Tversky, deal flow, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Dr. Strangelove, Dutch auction, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Fall of the Berlin Wall, financial engineering, financial independence, financial innovation, financial thriller, fixed income, foreign exchange controls, full employment, Glass-Steagall Act, global reserve currency, Goldman Sachs: Vampire Squid, Goodhart's law, Gordon Gekko, greed is good, Greenspan put, happiness index / gross national happiness, haute cuisine, Herman Kahn, high net worth, Hyman Minsky, index fund, information asymmetry, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", job automation, Johann Wolfgang von Goethe, John Bogle, John Meriwether, joint-stock company, Jones Act, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, low interest rates, margin call, market bubble, market fundamentalism, Market Wizards by Jack D. Schwager, Marshall McLuhan, Martin Wolf, mega-rich, merger arbitrage, Michael Milken, Mikhail Gorbachev, Milgram experiment, military-industrial complex, Minsky moment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, Naomi Klein, National Debt Clock, negative equity, NetJets, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, Paul Samuelson, pets.com, Philip Mirowski, Phillips curve, planned obsolescence, plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, proprietary trading, public intellectual, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, Reminiscences of a Stock Operator, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Thaler, Right to Buy, risk free rate, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, Satyajit Das, savings glut, shareholder value, Sharpe ratio, short selling, short squeeze, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, stock buybacks, survivorship bias, tail risk, Teledyne, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, the new new thing, The Predators' Ball, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, two and twenty, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond, zero-sum game

Former risk manager Barry Schacter offered an alternative definition of VAR: “a number invented by purveyors of panaceas for pecuniary peril intended to mislead senior management and regulators into false confidence that market risk is adequately understood and controlled.”22 Everything Is Just Noise The new theories required that everyone has rational expectations, that is, the population is correct on average even if no individual person is. Behavioral economist Amos Tversky summed it up: “When we talk about individuals, especially policy makers, they all make errors in their decisions. But in aggregate, they all get it right?”23 Exceptions and anomalies increasingly undermined the theory of efficient markets. There was the turn-of-the-year effect, where stocks seemed to rise in January each year.

There was the turn-of-the-year effect, where stocks seemed to rise in January each year. Small-size firms outperformed large stocks—the small-firm effect. In the loser effect, stocks that had fallen significantly outperformed stocks that performed well in previous periods. There was little relationship between beta (risk) and return. Behavioural economists, such as Tversky, Daniel Kahneman and Richard Thaler, argued that efficient financial markets were rife with cognitive biases and errors in reasoning and information processing, including overconfidence, overreaction, representative bias, information bias, and the use of linear reasoning. Cliff Asness, a student of Fama and founder of hedge fund AQR Capital Management, exploited these anomalies.


pages: 631 words: 177,227

The Secret of Our Success: How Culture Is Driving Human Evolution, Domesticating Our Species, and Making Us Smarter by Joseph Henrich

agricultural Revolution, capital asset pricing model, Climategate, cognitive bias, Daniel Kahneman / Amos Tversky, delayed gratification, demographic transition, disinformation, endowment effect, experimental economics, experimental subject, Flynn Effect, impulse control, language acquisition, Monkeys Reject Unequal Pay, Nash equilibrium, nocebo, out of africa, phenotype, placebo effect, profit maximization, randomized controlled trial, risk tolerance, side project, social intelligence, social web, Steven Pinker, sugar pill, sunk-cost fallacy, The Wisdom of Crowds, theory of mind, ultimatum game

I read books on cognitive psychology, decision-making, experimental economics, biology, and evolutionary psychology. Then I moved to journal articles. I read every article ever written on an economics experiment called the Ultimatum Game, which I’d used during my second and third summers with the Matsigenka. I also read a lot by the psychologists Daniel Kahneman and Amos Tversky, as well as by a political scientist named Elinor Ostrom. Kahneman and Ostrom would, years later, both receive Nobel Prizes in economics. Of course, along the way, I never stopped reading anthropological ethnographies (this was my “fun” reading). In many ways, that year was the first year of research on this book, and by the end of it, I had developed a murky vision for what I wanted to do.


pages: 1,261 words: 294,715

Behave: The Biology of Humans at Our Best and Worst by Robert M. Sapolsky

autism spectrum disorder, autonomous vehicles, behavioural economics, Bernie Madoff, biofilm, blood diamond, British Empire, Broken windows theory, Brownian motion, car-free, classic study, clean water, cognitive dissonance, cognitive load, corporate personhood, corporate social responsibility, Daniel Kahneman / Amos Tversky, delayed gratification, desegregation, different worldview, domesticated silver fox, double helix, Drosophila, Edward Snowden, en.wikipedia.org, epigenetics, Flynn Effect, framing effect, fudge factor, George Santayana, global pandemic, Golden arches theory, Great Leap Forward, hiring and firing, illegal immigration, impulse control, income inequality, intentional community, John von Neumann, Loma Prieta earthquake, long peace, longitudinal study, loss aversion, Mahatma Gandhi, meta-analysis, microaggression, mirror neurons, Mohammed Bouazizi, Monkeys Reject Unequal Pay, mouse model, mutually assured destruction, Nelson Mandela, Network effects, nocebo, out of africa, Peter Singer: altruism, phenotype, Philippa Foot, placebo effect, publication bias, RAND corporation, risk tolerance, Rosa Parks, selective serotonin reuptake inhibitor (SSRI), self-driving car, Silicon Valley, Skinner box, social contagion, social distancing, social intelligence, Stanford marshmallow experiment, Stanford prison experiment, stem cell, Steven Pinker, strikebreaker, theory of mind, Tragedy of the Commons, transatlantic slave trade, traveling salesman, trickle-down economics, trolley problem, twin studies, ultimatum game, Walter Mischel, wikimedia commons, zero-sum game, zoonotic diseases

Just an innocuous string of words. Words unconsciously shift thoughts and feelings. One person’s “terrorist” is another’s “freedom fighter”; politicians jockey to commandeer “family values,” and somehow you can’t favor both “choice” and “life.”*30 There are more examples. In Nobel Prize–winning research, Daniel Kahneman and Amos Tversky famously showed word framing altering decision making. Subjects decide whether to administer a hypothetical drug. If they’re told, “The drug has a 95 percent survival rate,” people, including doctors, are more likely to approve it than when told, “The drug has a 5 percent death rate.”*31 Embed “rude” or “aggressive” (versus “considerate” or “polite”) in word strings, and subjects interrupt people more immediately afterward.

For example, while people might accurately assess the risk of a behavior, they tend toward distortive optimism when assessing risk to themselves—“Nah, that couldn’t happen to me.” Irrational optimism can be great; it’s why only about 15 percent instead of 99 percent of humans get clinically depressed. But as emphasized by the Nobel Prize–winning psychologist Daniel Kahneman, irrational optimism in warfare is disastrous. This can range from the theologically optimistic conviction that God is on your side to the tendency of military strategists to overestimate their side’s capabilities and underestimate those of the opposition—“piece of cake, full steam ahead” becomes the logical conclusion.42 A final domain of irrationality that must be recognized concerns chapter 15’s “sacred values,” where purely symbolic acts can count for more than hard-nosed material concessions.

This might also be a way to frame the explanation for why, in that cross-cultural study of small-scale societies discussed above, those with the most market integration had the most prosocial game play—what markets and cash economies do is shift a world of reciprocal altruism from the realm of social intuition to social calculation. * These themes bear a strong resemblance to those of the economics Nobel laureate Daniel Kahneman, in his best seller, Thinking, Fast and Slow—rather than framing things in a moral arena, his analysis is of the differing strengths and weaknesses of fast intuitive thinking and slow analytical thinking in the realm of economics. * Although the neuroscientist Sam Harris, in his book Lying, argues that all lying—even white lies, lies to spare someone’s feelings, lies accomplishing the proverbial heroics of, say, hiding a runaway slave—are wrong


pages: 1,034 words: 241,773

Enlightenment Now: The Case for Reason, Science, Humanism, and Progress by Steven Pinker

3D printing, Abraham Maslow, access to a mobile phone, affirmative action, Affordable Care Act / Obamacare, agricultural Revolution, Albert Einstein, Alfred Russel Wallace, Alignment Problem, An Inconvenient Truth, anti-communist, Anton Chekhov, Arthur Eddington, artificial general intelligence, availability heuristic, Ayatollah Khomeini, basic income, Berlin Wall, Bernie Sanders, biodiversity loss, Black Swan, Bonfire of the Vanities, Brexit referendum, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, carbon tax, Charlie Hebdo massacre, classic study, clean water, clockwork universe, cognitive bias, cognitive dissonance, Columbine, conceptual framework, confounding variable, correlation does not imply causation, creative destruction, CRISPR, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, dark matter, data science, decarbonisation, degrowth, deindustrialization, dematerialisation, demographic transition, Deng Xiaoping, distributed generation, diversified portfolio, Donald Trump, Doomsday Clock, double helix, Eddington experiment, Edward Jenner, effective altruism, Elon Musk, en.wikipedia.org, end world poverty, endogenous growth, energy transition, European colonialism, experimental subject, Exxon Valdez, facts on the ground, fake news, Fall of the Berlin Wall, first-past-the-post, Flynn Effect, food miles, Francis Fukuyama: the end of history, frictionless, frictionless market, Garrett Hardin, germ theory of disease, Gini coefficient, Great Leap Forward, Hacker Conference 1984, Hans Rosling, hedonic treadmill, helicopter parent, Herbert Marcuse, Herman Kahn, Hobbesian trap, humanitarian revolution, Ignaz Semmelweis: hand washing, income inequality, income per capita, Indoor air pollution, Intergovernmental Panel on Climate Change (IPCC), invention of writing, Jaron Lanier, Joan Didion, job automation, Johannes Kepler, John Snow's cholera map, Kevin Kelly, Khan Academy, knowledge economy, l'esprit de l'escalier, Laplace demon, launch on warning, life extension, long peace, longitudinal study, Louis Pasteur, Mahbub ul Haq, Martin Wolf, mass incarceration, meta-analysis, Michael Shellenberger, microaggression, Mikhail Gorbachev, minimum wage unemployment, moral hazard, mutually assured destruction, Naomi Klein, Nate Silver, Nathan Meyer Rothschild: antibiotics, negative emissions, Nelson Mandela, New Journalism, Norman Mailer, nuclear taboo, nuclear winter, obamacare, ocean acidification, Oklahoma City bombing, open economy, opioid epidemic / opioid crisis, paperclip maximiser, Paris climate accords, Paul Graham, peak oil, Peter Singer: altruism, Peter Thiel, post-truth, power law, precautionary principle, precision agriculture, prediction markets, public intellectual, purchasing power parity, radical life extension, Ralph Nader, randomized controlled trial, Ray Kurzweil, rent control, Republic of Letters, Richard Feynman, road to serfdom, Robert Gordon, Rodney Brooks, rolodex, Ronald Reagan, Rory Sutherland, Saturday Night Live, science of happiness, Scientific racism, Second Machine Age, secular stagnation, self-driving car, sharing economy, Silicon Valley, Silicon Valley ideology, Simon Kuznets, Skype, smart grid, Social Justice Warrior, sovereign wealth fund, sparse data, stem cell, Stephen Hawking, Steve Bannon, Steven Pinker, Stewart Brand, Stuxnet, supervolcano, synthetic biology, tech billionaire, technological determinism, technological singularity, Ted Kaczynski, Ted Nordhaus, TED Talk, The Rise and Fall of American Growth, the scientific method, The Signal and the Noise by Nate Silver, The Spirit Level, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, total factor productivity, Tragedy of the Commons, union organizing, universal basic income, University of East Anglia, Unsafe at Any Speed, Upton Sinclair, uranium enrichment, urban renewal, W. E. B. Du Bois, War on Poverty, We wanted flying cars, instead we got 140 characters, women in the workforce, working poor, World Values Survey, Y2K

The peace researcher John Galtung pointed out that if a newspaper came out once every fifty years, it would not report half a century of celebrity gossip and political scandals. It would report momentous global changes such as the increase in life expectancy.10 The nature of news is likely to distort people’s view of the world because of a mental bug that the psychologists Amos Tversky and Daniel Kahneman called the Availability heuristic: people estimate the probability of an event or the frequency of a kind of thing by the ease with which instances come to mind.11 In many walks of life this is a serviceable rule of thumb. Frequent events leave stronger memory traces, so stronger memories generally indicate more-frequent events: you really are on solid ground in guessing that pigeons are more common in cities than orioles, even though you’re drawing on your memory of encountering them rather than on a bird census.

As soon as they do, they have committed themselves to reason—and the listeners they are trying to convince can hold their feet to the fire of coherence and accuracy. * * * By now many people have become aware of the research in cognitive psychology on human irrationality, explained in bestsellers like Daniel Kahneman’s Thinking Fast and Slow and Dan Ariely’s Predictably Irrational. I’ve alluded to these cognitive infirmities in earlier chapters: the way we estimate probability from available anecdotes, project stereotypes onto individuals, seek confirming and ignore disconfirming evidence, dread harms and losses, and reason from teleology and voodoo resemblance rather than mechanical cause and effect.5 But as important as these discoveries are, it’s a mistake to see them as refuting some Enlightenment tenet that humans are rational actors, or as licensing the fatalistic conclusion that we might as well give up on reasoned persuasion and fight demagoguery with demagoguery.


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Human Diversity: The Biology of Gender, Race, and Class by Charles Murray

23andMe, affirmative action, Albert Einstein, Alfred Russel Wallace, Asperger Syndrome, assortative mating, autism spectrum disorder, basic income, behavioural economics, bioinformatics, Cass Sunstein, correlation coefficient, CRISPR, Daniel Kahneman / Amos Tversky, dark triade / dark tetrad, domesticated silver fox, double helix, Drosophila, emotional labour, epigenetics, equal pay for equal work, European colonialism, feminist movement, glass ceiling, Gregor Mendel, Gunnar Myrdal, income inequality, Kenneth Arrow, labor-force participation, longitudinal study, meritocracy, meta-analysis, nudge theory, out of africa, p-value, phenotype, public intellectual, publication bias, quantitative hedge fund, randomized controlled trial, Recombinant DNA, replication crisis, Richard Thaler, risk tolerance, school vouchers, Scientific racism, selective serotonin reuptake inhibitor (SSRI), Silicon Valley, Skinner box, social intelligence, Social Justice Warrior, statistical model, Steven Pinker, The Bell Curve by Richard Herrnstein and Charles Murray, the scientific method, The Wealth of Nations by Adam Smith, theory of mind, Thomas Kuhn: the structure of scientific revolutions, twin studies, universal basic income, working-age population

Of the 39 articles that presented either survey data or quantitative experimental results, 33 were on topics for which polygenic scores would be directly relevant. In almost half (18 of the 39), the major topic of the article directly involved sex, ethnicity, or class.[31] Economics and political science. The role of psychological factors in economics goes back to Adam Smith’s Theory of Moral Sentiments. The work of Daniel Kahneman, Amos Tversky, and Paul Slovic on decision making under conditions of uncertainty and, more recently, the work of Cass Sunstein and Richard Thaler on “nudge” theory, are both rich fields of study that will be informed by genomic data.32 They are only part of the growing field of behavioral economics.


pages: 796 words: 223,275

The WEIRDest People in the World: How the West Became Psychologically Peculiar and Particularly Prosperous by Joseph Henrich

agricultural Revolution, Bartolomé de las Casas, behavioural economics, British Empire, charter city, cognitive dissonance, Columbian Exchange, correlation does not imply causation, cotton gin, Daniel Kahneman / Amos Tversky, dark matter, delayed gratification, discovery of the americas, Edward Glaeser, en.wikipedia.org, endowment effect, epigenetics, European colonialism, experimental economics, financial innovation, Flynn Effect, fundamental attribution error, glass ceiling, income inequality, invention of agriculture, Isaac Newton, James Hargreaves, James Watt: steam engine, Johannes Kepler, John Snow's cholera map, joint-stock company, knowledge economy, land reform, longitudinal study, Menlo Park, mental accounting, meta-analysis, New Urbanism, pattern recognition, Pearl River Delta, profit maximization, randomized controlled trial, Republic of Letters, rolodex, social contagion, social web, sparse data, spinning jenny, Spread Networks laid a new fibre optics cable between New York and Chicago, Stanford marshmallow experiment, tacit knowledge, The Wealth of Nations by Adam Smith, theory of mind, trade route, Tyler Cowen, ultimatum game, wikimedia commons, working-age population, World Values Survey, zero-sum game

Steve, whose research was (I suspect) often inspired by interactions with his Japanese wife, had been comparing how Canadians and Japanese think about themselves in relation to others and how that affects their motivations, decision-making, and sense of self. Independently, all three of us had noticed—within our separate domains of expertise—that Western populations were often unusual when compared to two or more other populations. Over Chinese takeout, in a basement food court where the famed psychologists Daniel Kahneman and Amos Tversky had purportedly hatched their plans to examine rational decision-making, we decided to compile all the cross-cultural studies that we could locate on important aspects of human psychology. After carefully reviewing all the research that we could locate, we arrived at three striking conclusions: Massively biased samples: Most of what was known experimentally about human psychology and behavior was based on studies with undergraduates from Western societies.


pages: 1,213 words: 376,284

Empire of Things: How We Became a World of Consumers, From the Fifteenth Century to the Twenty-First by Frank Trentmann

Abraham Maslow, Airbnb, Alan Greenspan, Anton Chekhov, Ayatollah Khomeini, behavioural economics, Berlin Wall, Big bang: deregulation of the City of London, bread and circuses, British Empire, Capital in the Twenty-First Century by Thomas Piketty, car-free, carbon footprint, Cass Sunstein, choice architecture, classic study, clean water, collaborative consumption, collective bargaining, colonial exploitation, colonial rule, Community Supported Agriculture, company town, critique of consumerism, cross-subsidies, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, deindustrialization, dematerialisation, Deng Xiaoping, deskilling, equity premium, Fall of the Berlin Wall, Fellow of the Royal Society, financial exclusion, fixed income, food miles, Ford Model T, full employment, gentrification, germ theory of disease, global village, Great Leap Forward, haute cuisine, Herbert Marcuse, high net worth, income inequality, index card, informal economy, Intergovernmental Panel on Climate Change (IPCC), Internet of things, it's over 9,000, James Watt: steam engine, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kitchen Debate, knowledge economy, labour mobility, Les Trente Glorieuses, libertarian paternalism, Livingstone, I presume, longitudinal study, mass immigration, McMansion, mega-rich, Michael Shellenberger, moral panic, mortgage debt, Murano, Venice glass, Naomi Klein, New Urbanism, Paradox of Choice, Pier Paolo Pasolini, planned obsolescence, pneumatic tube, post-industrial society, Post-Keynesian economics, post-materialism, postnationalism / post nation state, profit motive, prosperity theology / prosperity gospel / gospel of success, public intellectual, purchasing power parity, Ralph Nader, rent control, retail therapy, Richard Thaler, Right to Buy, Ronald Reagan, school vouchers, scientific management, Scientific racism, Scramble for Africa, seminal paper, sharing economy, Silicon Valley, Skype, stakhanovite, Ted Nordhaus, the built environment, the market place, The Spirit Level, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, Thorstein Veblen, trade liberalization, trade route, transatlantic slave trade, union organizing, upwardly mobile, urban planning, urban sprawl, Washington Consensus, women in the workforce, working poor, young professional, zero-sum game

See also: Michel de Certeau, The Practice of Everyday Life (Berkeley, CA, 1974/1984). For different academic approaches, see: Daniel Miller, ed., Acknowledging Consumption: A Review of New Studies (London, 1995); Martyn J. Lee, The Consumer Society Reader (Malden, MA, 1999); and Juliet B. Schor & Douglas B. Holt, eds., The Consumer Society Reader (New York, 2000). 11. Daniel Kahneman & Amos Tversky, eds., Choices, Values, and Frames (Cambridge, 2000). 12. John Kenneth Galbraith, The Affluent Society (New York, 1958), 203. 13. The Works of Aurelius Augustine, Vol. II : The City of God (Edinburgh, 1871), 518. 14. ‘History and Literature’, repr. in T. Roosevelt, History as Literature and Other Essays (New York, 1913), 27.

It is useful asking people how happy they feel overall, but everyday life is a mix of more or less pleasant activities. We can learn a lot from asking in addition how satisfying or annoying they find particular activities on a given day and then checking how much time they devoted to each. This, put crudely, is the day-reconstruction method developed by the Nobel Prize-winning psychologist Daniel Kahneman. It has been the basis of an innovative inquiry into time use and well-being in France and the United States led by Kahneman, his Princeton colleague Alan Krueger and four other experts. The team interviewed eight hundred women in middle America (Columbus, Ohio) and a similar sample in the middle of France (Rennes) in 2005.42 The result is a ‘U-index’, a misery index which measures the percentage of time spent in an unpleasant state.

According to the US Panel Study of Income Dynamics, 9% of all employees were downshifters who opted for lower earnings at some stage during the period 1983 to 1992; R. E. Dwyer, ‘Downward Earnings Mobility after Voluntary Employer Exits’, in: Work and Occupations 31, no. 1, 2004: 111–39. 39. Daniel Kahneman, Ed Diener & Norbert Schwarz, eds., Well-Being: The Foundations of Hedonic Psychology (New York, 1999); Richard Layard, Happiness: Lessons from a New Science (New York, 2005); and Luigino Bruni & Pier Luigi Porta, eds., Economics and Happiness: Framing the Analysis (New York, 2006). Of course, happiness extends beyond behavioural economics: for other approaches see: Dieter Thomä, Christoph Henning & Olivia Mitscherlich-Schönherr, eds., Glück: Ein interdisziplinäres Handbuch (Stuttgart, 2011). 40.


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The Blank Slate: The Modern Denial of Human Nature by Steven Pinker

affirmative action, Albert Einstein, Alfred Russel Wallace, anti-communist, behavioural economics, belling the cat, British Empire, clean water, cognitive dissonance, Columbine, conceptual framework, correlation coefficient, correlation does not imply causation, cuban missile crisis, Daniel Kahneman / Amos Tversky, Defenestration of Prague, desegregation, disinformation, Dutch auction, epigenetics, Exxon Valdez, George Akerlof, germ theory of disease, ghettoisation, glass ceiling, Gregor Mendel, Hobbesian trap, income inequality, invention of agriculture, invisible hand, Joan Didion, language acquisition, long peace, meta-analysis, More Guns, Less Crime, Murray Gell-Mann, mutually assured destruction, Norman Mailer, Oklahoma City bombing, PalmPilot, Peter Singer: altruism, phenotype, plutocrats, Potemkin village, prisoner's dilemma, profit motive, public intellectual, QWERTY keyboard, Richard Feynman, Richard Thaler, risk tolerance, Robert Bork, Rodney Brooks, Saturday Night Live, Skinner box, social intelligence, speech recognition, Stanford prison experiment, stem cell, Steven Pinker, tacit knowledge, The Bell Curve by Richard Herrnstein and Charles Murray, the new new thing, theory of mind, Thomas Malthus, Thorstein Veblen, Timothy McVeigh, twin studies, Tyler Cowen, ultimatum game, urban renewal, War on Poverty, women in the workforce, Yogi Berra, zero-sum game

Murray’s libertarianism leads him to oppose government programs that are more activist than that, but he and Herrnstein noted that a hereditarian left is a niche waiting to be filled. An important challenge to conservative political theory has come from behavioral economists such as Richard Thaler and George Akerlof, who were influenced by the evolutionary cognitive psychology of Herbert Simon, Amos Tversky, Daniel Kahneman, Gerd Gigerenzer, and Paul Slovic.54 These psychologists have argued that human thinking and decision making are biological adaptations rather than engines of pure rationality. These mental systems work with limited amounts of information, have to reach decisions in a finite amount of time, and ultimately serve evolutionary goals such as status and security.


pages: 913 words: 265,787

How the Mind Works by Steven Pinker

affirmative action, agricultural Revolution, Alfred Russel Wallace, Apple Newton, backpropagation, Buckminster Fuller, cognitive dissonance, Columbine, combinatorial explosion, complexity theory, computer age, computer vision, Computing Machinery and Intelligence, Daniel Kahneman / Amos Tversky, delayed gratification, disinformation, double helix, Dr. Strangelove, experimental subject, feminist movement, four colour theorem, Geoffrey Hinton, Gordon Gekko, Great Leap Forward, greed is good, Gregor Mendel, hedonic treadmill, Henri Poincaré, Herman Kahn, income per capita, information retrieval, invention of agriculture, invention of the wheel, Johannes Kepler, John von Neumann, lake wobegon effect, language acquisition, lateral thinking, Linda problem, Machine translation of "The spirit is willing, but the flesh is weak." to Russian and back, Mikhail Gorbachev, Murray Gell-Mann, mutually assured destruction, Necker cube, out of africa, Parents Music Resource Center, pattern recognition, phenotype, Plato's cave, plutocrats, random walk, Richard Feynman, Ronald Reagan, Rubik’s Cube, Saturday Night Live, scientific worldview, Search for Extraterrestrial Intelligence, sexual politics, social intelligence, Steven Pinker, Stuart Kauffman, tacit knowledge, theory of mind, Thorstein Veblen, Tipper Gore, Turing machine, urban decay, Yogi Berra

The founders of probability theory, like the founders of logic, assumed that they were just formalizing common sense. But then why do people often seem to be “probability-blind,” in the words of Massimo Piattelli-Palmarini? Many mathematicians and scientists have bemoaned the innumeracy of ordinary people when they reason about risk. The psychologists Amos Tversky and Daniel Kahneman have amassed ingenious demonstrations of how people’s intuitive grasp of chance appears to flout the elementary canons of probability theory. Here are some famous examples. • People gamble and buy state lottery tickets, sometimes called “the stupidity tax.” But since the house must profit, the players, on average, must lose


pages: 1,535 words: 337,071

Networks, Crowds, and Markets: Reasoning About a Highly Connected World by David Easley, Jon Kleinberg

Albert Einstein, AltaVista, AOL-Time Warner, Apollo 13, classic study, clean water, conceptual framework, Daniel Kahneman / Amos Tversky, Douglas Hofstadter, Dutch auction, Erdős number, experimental subject, first-price auction, fudge factor, Garrett Hardin, George Akerlof, Gerard Salton, Gerard Salton, Gödel, Escher, Bach, incomplete markets, information asymmetry, information retrieval, John Nash: game theory, Kenneth Arrow, longitudinal study, market clearing, market microstructure, moral hazard, Nash equilibrium, Network effects, Pareto efficiency, Paul Erdős, planetary scale, power law, prediction markets, price anchoring, price mechanism, prisoner's dilemma, random walk, recommendation engine, Richard Thaler, Ronald Coase, sealed-bid auction, search engine result page, second-price auction, second-price sealed-bid, seminal paper, Simon Singh, slashdot, social contagion, social web, Steve Jobs, Steve Jurvetson, stochastic process, Ted Nelson, the long tail, The Market for Lemons, the strength of weak ties, The Wisdom of Crowds, trade route, Tragedy of the Commons, transaction costs, two and twenty, ultimatum game, Vannevar Bush, Vickrey auction, Vilfredo Pareto, Yogi Berra, zero-sum game

In Proc. 8th ACM SIGKDD International Conference on Knowledge Discovery and Data Mining, pages 133–142, 2002. [225] Ramesh Johari and Sunil Kumar. The interaction of positive externalities and congestion effects, 2006. Working paper. [226] Steve Jurvetson. What exactly is viral marketing? Red Herring, 78:110–112, 2000. [227] Daniel Kahneman and Amos Tversky. On the psychology of prediction. Psychological Review, 80(4):237–251, 1973. [228] Sham M. Kakade, Michael J. Kearns, Luis E. Ortiz, Robin Pemantle, and Siddharth Suri. Economic properties of social networks. In Proc. 17th Advances in Neural Information Processing Systems, 2004. [229] Denise B.


pages: 1,351 words: 385,579

The Better Angels of Our Nature: Why Violence Has Declined by Steven Pinker

1960s counterculture, affirmative action, Alan Turing: On Computable Numbers, with an Application to the Entscheidungsproblem, Albert Einstein, availability heuristic, behavioural economics, Berlin Wall, Boeing 747, Bonfire of the Vanities, book value, bread and circuses, British Empire, Broken windows theory, business cycle, California gold rush, Cass Sunstein, citation needed, classic study, clean water, cognitive dissonance, colonial rule, Columbine, computer age, Computing Machinery and Intelligence, conceptual framework, confounding variable, correlation coefficient, correlation does not imply causation, crack epidemic, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Brooks, delayed gratification, demographic transition, desegregation, Doomsday Clock, Douglas Hofstadter, Dr. Strangelove, Edward Glaeser, en.wikipedia.org, European colonialism, experimental subject, facts on the ground, failed state, first-past-the-post, Flynn Effect, food miles, Francis Fukuyama: the end of history, fudge factor, full employment, Garrett Hardin, George Santayana, ghettoisation, Gini coefficient, global village, Golden arches theory, Great Leap Forward, Henri Poincaré, Herbert Marcuse, Herman Kahn, high-speed rail, Hobbesian trap, humanitarian revolution, impulse control, income inequality, informal economy, Intergovernmental Panel on Climate Change (IPCC), invention of the printing press, Isaac Newton, lake wobegon effect, libertarian paternalism, long peace, longitudinal study, loss aversion, Marshall McLuhan, mass incarceration, McMansion, means of production, mental accounting, meta-analysis, Mikhail Gorbachev, mirror neurons, moral panic, mutually assured destruction, Nelson Mandela, nuclear taboo, Oklahoma City bombing, open economy, Peace of Westphalia, Peter Singer: altruism, power law, QWERTY keyboard, race to the bottom, Ralph Waldo Emerson, random walk, Republic of Letters, Richard Thaler, Ronald Reagan, Rosa Parks, Saturday Night Live, security theater, Skinner box, Skype, Slavoj Žižek, South China Sea, Stanford marshmallow experiment, Stanford prison experiment, statistical model, stem cell, Steven Levy, Steven Pinker, sunk-cost fallacy, technological determinism, The Bell Curve by Richard Herrnstein and Charles Murray, the long tail, The Wealth of Nations by Adam Smith, theory of mind, Timothy McVeigh, Tragedy of the Commons, transatlantic slave trade, trolley problem, Turing machine, twin studies, ultimatum game, uranium enrichment, Vilfredo Pareto, Walter Mischel, WarGames: Global Thermonuclear War, WikiLeaks, women in the workforce, zero-sum game

So the death count of a war in 1600, for instance, would have to be multiplied by 4.5 for us to compare its destructiveness to those in the middle of the 20th century.9 The second illusion is historical myopia: the closer an era is to our vantage point in the present, the more details we can make out. Historical myopia can afflict both common sense and professional history. The cognitive psychologists Amos Tversky and Daniel Kahneman have shown that people intuitively estimate relative frequency using a shortcut called the availability heuristic: the easier it is to recall examples of an event, the more probable people think it is.10 People, for example, overestimate the likelihoods of the kinds of accidents that make headlines, such as plane crashes, shark attacks, and terrorist bombings, and they underestimate those that pile up unremarked, like electrocutions, falls, and drownings.11 When we are judging the density of killings in different centuries, anyone who doesn’t consult the numbers is apt to overweight the conflicts that are most recent, most studied, or most sermonized.