Prospect Theory

When it comes to decision-making, there is a distinction between two idealized "species" of people:

• Humans - Beings with flaws and feelings, susceptible to each of the biases presented here
• Econs - Beings that are always able to think rationall...

People tend to like or dislike everything about a person, thing, event or idea because it is easier for System 1 to work like that. Careful analysis of good and bad sides is much more mentally taxing.

The remembering self leverages System 1 and, when it comes to experiences, it cares about:

• The peak intensity (be it negative or positive);
• The way they end;
• To some extent, the average experience but not the duration, because System 1 deals with averag...

Given all the previous information, you can guide people to a decision based on the framing of the problem.

Take loss aversion into account - try to disguise the decision as a win (or loss if you prefer them not to take it).

Think about the reference point and exercis...

Because of AYSIATI, people will attribute larger weight to things they are thinking about the moment.

An easy way of making predictions by taking into account uncertainty and the natures of the 2 systems:

• Start with an estimate of the average answer;
• Determine your estimate (performed by System 1);
• Estimate the correlation between your evidence and the target (performed...

People can associate intensity across subjects that are completely unrelated.

For example: if crimes could be represented in colors, then murder would be a deeper shade than robbery.

• Asking somebody whether he thinks an environment tax of 20% is too high or too low. If it is higher than what he/she had in mind, the answer will still be lower, but closer to 20% than it would have been before. Same for when it is higher.
• Telling a judge how many years ago you came ...

People (through System 1) are more sensitive to formulations like "12 out of 1,000" and will sometimes think it's more likely than a risk of 2%. Why? The image is more vivid and it is easier for System 1 to think in terms of individual cases as opposed to percentages.

Additionally, people (...

Experimentally speaking, intuition is less likely to come to a better conclusion than simple formulas, that are not influenced by human nature.

For example: you will find more success in hiring candidates if you use a pre-determined checklist instead of relying on your inte...

The degree of "utility" as perceived by people decreases gradually. $1,000 is perceived wildly different for somebody with a net worth of $10,000 vs. $1,000,000. Similarly, an increase from $1,000 to $2,000 is perceived as much better than one from $10,000 to $11,000 despite the ...

The brain by default prefers using System 1 to answer questions. When the actual question can't be answered this way, it aims to answer a proxy question that can be.

For example: When faced with the question "How much would you donate for a humanitarian cause?", the brain automatically turn...

People will regress to the mean and the happiness they experience will always turn back to an average value. For most of us, this average value is 7 on a scale from 1 to 10.

People become more unwilling to let go of the things or benefits they already own. They will only sell them for more than they would be willing to buy them for, even if some time ago they were indifferent to them. In short, they grow attached.

Finally, along with the two systems and the two species, humans also have two selves:

• Experiencing Self - the self that experiences things in the moment;
• Remembering Self - the self that remembers experiences, remembers them, a...

The previous result makes sense because people tend to answer harder questions like "Which would you rather repeat?" with easier questions like "Which did you like more?"

This way they can be convinced to repeat a worse experience just because it ended slightly better or had a lower peak in...

The neglect of experiencing self and the appeal of remembering self (even though both selves constitute us) leads people to like stories more than anything else.

This is why we tend to ignore details that do not fit our view of the story, whatever it is: relationship, career, trips, etc.

Not all domains are equal in nature. Some are more reliant on skill (e.g. surgery), while others are on luck (e.g. stock trading). People can be tricked into thinking that their success is actually based on skill despite the nature of their activity.

Success or failure are typically outliers due to luck and people/things regress to their usual performance (the mean, or the prior).

For example: in a sports competition, an athlete that does much better than the rest on the first day will most likely perform worse on the following ones, be...

When faced with a gamble or chance event, before declining it because of other biases (e.g. loss aversion), think not about the single instance where you win or lose, but rather about your whole life as a series of such gambles and whether the total number will lead to consistent gains. Think lik...

People tend to overestimate the probability of rare events and then overweight them in their decisions.

An event is more likely to be preferred if its image is more vivid (e.g. receiving $100 in a blue envelope as opposed to only receiving $100).

When answering a question, the brain tends to only focus on the available information, disregarding the one missing.

For example: if you are told somebody is intelligent and strong you automatically think they are a good leader.

This leads people to jump to conclusions.

You can reach more sensible decisions when you have a broader context.

In real life, judges are asked not to consult more than the case given to them and, thus, lack the broader context, leading to worse decisions regarding penalties.

The human brain is controlled by two separate systems:

• System 1 - Very fast, it works on intuition and evolves as we encounter common situations;
• System 2 - Slower. We tend to avoid using it too much, but it is mandatory for complex problems th...

Experiments with a low sample (N) are much more likely to have extreme results than ones with a high N. Conversely, experimenting with large samples is more precise than with small samples.

This can make us have a skewed view of reality by jumping to conclusions where evidence is not suffic...

Thus, there are 3 cognitive features in prospect theory:

• Evaluation based on a reference point
• Diminishing sensitivity (borrowed from Bernoulli)
• Loss aversion

The theory does not take into account human feelings of disappointment when failin...

An answer to a number question can be influenced by previous information (even if it is completely unrelated to it). Using this strategy to influence decisions is called priming.

It acts as an anchoring effect, the human starts from the real answer he/she would give and goe...

Depending on the situation, people can be either risk averse or risk seeking. It is all about the probability of events happening and whether the end result will be positive or negative. For instance, when the chances are very much in favor and the result is posi...

Predicting the future from current circumstances, heavily influenced by emotion (e.g. how your marriage will go based on your wedding day) is not ideal.

Acting differently from the default option has the downside of bringing regret if the decision turned out to be wrong and defaulting was the best course of action.

Example: you will feel better if you are injured at the convenience store you always go to, as opposed to getting injured at a ...

Think about the different mental accounts that are not, in fact, separate (e.g. gains on stocks vs. crypto) and imagine they were merged.

Make the default option the one you want and the differences will be huge. For instance, in the case of governmental systems, the percentage of the popul...

People change their opinion about something based on the ease that they retrieve arguments and examples for it.

For example: you will think a course you're attending is better if you are asked to find 10 improvements rather than 5, because you will have a harder time finding them all.

Due to the halo effect and the fact that System 1 deals in averages, not sums, people tend to view things that have higher overall quality as better than ones with lower overall quality, even though the latter may be, in fact, strictly better.

For example: 16 perfect-condit...

"Thinking, Fast and Slow" is an extensive introduction to the biases and inner mechanisms of the human brain.

While primarily a behavioral economics book, you will also find out about your limitations, how to more efficiently convince people, and understand why people make certain decisions...