Which one of these choices would you take?
A. A guaranteed $900
B. A 95% at $1,000
I’m pretty sure you chose A. I would. But it’s the irrational choice. The truly rational person would see that choice B offers an expected win value of $950. So why don’t we make that choice? We think of ourselves as rational people but the truth is we make a lot of irrational decisions.
Thinking, Fast and Slow is the bible of Behavioral Economics. It is essentially the story of how we think and the two systems we use to do so. System 1 is fast and pretty accurate but it relies on patterns and heuristics to make decisions. System 2 is our rational system but it is slow to react and it’s lazy. Because System 1 dominates so much of our decision making we are prone to make “irrational” decisions. The biggest driver of irrational errors is our Loss Aversion. We hate losses more than we hate gains. It is why pro-golfers are better at putting for par than they are for birdie. It is why you chose scenario A above.
Knowing our biases and blunders will help us make slightly better decisions. It is very hard to stop our system 1. The true benefit is if you’re making a decision as a group. You can see the system 1 errors other are making and help the group make a better decision.
I can’t recommend this book enough. I’ve read it twice already and I’ll read it again next year.
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