Thinking Fast and Slow

Ongoing comments - Part 4 - Choices

Chapter 25 - Bernoulli's Errors.

Modified utility theory into prospect theory - great example - what would you chose toss a coin - win 100 dollars heads or 0 dollars tails or a sure thing - 46 dollars.

Bernoulli argues that diminishing marginal utility to wealth leads to risk aversion.

Flaw outlined with Jack and Jill example on page 275 is the reference point and expected utility lasted due to theory induced blindness.


Chapter 26 - Prospect Theory

Risk averse between good choices and risk seeking between bad choices. 280

System 1 282

Evaluation relative to a "neutral" reference point

Diminishing sensitivity

Loss aversion - see page 285



Chapter 27 - The Endowment Effect - American Pickers and the guy who had the peddle car. Trade a 57 t-bird for it, but would not accept a cash offer in excess. With Thaler used the Vernon Smith market experiment to look for endowment.


Indifference curves with Ben and Albert

Chapter 28 Bad Events

Very interesting chapter - negativity and escape dominate positivity and approach. Fight or flight and we tend to flee.

Bad dominates good - page 302 - stable relationship needs 5 times positive to negative interactions

Great example - gold and putting for par (avoid a bogey) v putting for birdie.

Chapter 29 - The Fourfold Pattern - great line - 310 - we are just an observer to a global evaluation that system 1 delivers
page 317

Chapter 30 - Rare Events

Over estimation and over weighting
Focused attention
confirmation bias
cognitive ease


Choice from experience and choice from description - Black Swans

Choice from experience in rare events (neglect) will be underweighted

Chapter 31 - Risk Policies

Chapter 32 - Keeping Score

Responsibility - losses weighted twice as gains in many contexts - choice between gambles, endowment effect, reactions to price changes.

Chapter 33 - Reversals

Preference reversal - value of a bet - 355. Issues of joint v single evaluation.

Chapter 34 - Frames and Realities

Neuroeconomics - page 366 How a choice is framed influences consideration, judgment and choice therefore "most of use accept decision problmes as they are framed and therefore rarely have an opportunity to discover the extent to which our preferences are frame bound rather than reality bound."(367). This is due to the fact that system 2 is lazy and system 1 moves intuitively and quickly and tends to accept questions as framed. Great example - Thomas Schelling and the rich/poor tax code decision - page 370.

Great framing example - Adam and Beth and the gas guzzler and efficient car - page 372. This is interesting - Nudge and Sunstein and Thaler.