Thinking Fast and Slow in 30 Minutes by The 30 Minute Expert Series

Author:The 30 Minute Expert Series
Language: eng
Format: epub
Publisher: Callisto Media

Examples from Thinking, Fast and Slow

• Loss aversion can lead to poor decisions. Optimists, on the other hand, can be too willing to gamble. When individuals and organizations face decisions involving financial risks, it’s advisable to find the middle ground between these two extremes. Kahneman recommends combining the outside view with a risk policy (e.g., never buying extended warranties). The outside view shifts one’s focus from the immediate situation to the statistical outcomes of similar situations. Adopting a risk policy helps the overly cautious through broad framing—a general strategy that accepts occasional losses alongside occasional gains. Adjusting one’s stock portfolio quarterly instead of tinkering with it every day is another example of broad framing.

• Kahneman discusses two common features of intuitive decision making: the possibility effect—weighting highly unlikely outcomes more than they deserve, and the certainty effect—giving near-certain outcomes less weight than their probability justifies. These effects are features of the fourfold pattern:

1. When a gain is probable, the certainty effect makes most people risk averse. They’ll pay a premium for certainty (e.g., they’ll accept a settlement in a lawsuit they were likely to win).

2. When a loss is probable and a bad outcome almost certain, the certainty effect makes people willing to take a risk to avoid it (e.g., they’ll refuse to pay a settlement in a lawsuit they’re likely to lose).

3. When a gain is unlikely, the possibility effect kicks in, and most people are willing to take a risk (e.g., buy a lottery ticket).

4. When a loss is unlikely, the possibility effect now makes people risk averse, and most will pay to avoid it (e.g., they’ll buy insurance).

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