Written in 2016 by Michael, this book, “The Undoing Project: A Friendship That Changed Our Minds,” adeptly intertwines several narrative threads. It intricately blends the accounts of Tversky and Kahneman's intellectual evolution, their profound friendship, and the formulation of the groundbreaking theory that ultimately led to Kahneman being awarded the Nobel Prize. Simultaneously, it seamlessly incorporates the narrative of Israel's developmental trajectory.
Presented in a narrative format, the book delves into behavioral economics, uncovering the intricate web of biases and influences that shape decision-making. Within its pages, it references an array of concepts cultivated during this era, a tapestry woven not only by Tversky and Kahneman but also by their contemporaries. The following glossary outlines the essence of these concepts. For a more comprehensive exploration of the theory, delve into Kahneman's book "THINK FAST AND SLOW." This concise overview is a recommended read – a treasure for those immersed in knowledge management, economics enthusiasts, and individuals navigating the realm of human interaction. Essentially, a literary gem for all. Embark on this enriching journey...
Baseline
Our behavior is driven by purpose, guided by discernible patterns. Even our missteps adhere to these patterns instead of happening randomly. In times of uncertainty, we rely on these patterns to inform our decisions.
Enclosed here are the key terminologies elaborated within the book. Exploring and fully understanding these terms shed light on the fundamental principles of the concept at hand.
Gestalt Psychology: Originating in Germany, this branch of psychology sees an individual's actions, stemming from both the body and mind, as a unified whole. Its central inquiry revolves around how the brain constructs meaning.
Features of Similarity Theory
When individuals compare two entities, they assess the degree of divergence based on the number of distinct attributes that set them apart. Therefore, if Tel Aviv is similar to York, it doesn't imply mutual similarity, as the former may possess numerous traits absent in the latter. This aspect significantly impacts decision-making, as highlighting resemblances between the subject of choice and another entity can introduce a bias toward a preferred outcome influenced by the comparison. The act of classification perpetuates stereotypes. Opting not to classify helps avoid decisions rooted in stereotypes.
Prediction
A perception laden with uncertainty.
Importantly, when individuals engage in predictions and judgments amid an environment of uncertainty, they often veer away from the constraints of statistical forecasting.
Regression to the Mean
When an event or behavior significantly diverges from the norm, subsequent occurrences are highly likely to exhibit values closer to the average. Consider a pilot with an exceptionally successful flight; the following flight will likely show reduced success, regardless of any praise received.
Man versus Man Model of Man
By comparing an individual's performance to a model of themselves programmed to follow expert guidelines, the model takes precedence over the individual. This is because humans are inherently less reliable than machines. Human vulnerability to distractions, boredom, illness, fatigue, and other factors often leads to deviations from prescribed actions.
Law of Small Numbers
A cognitive bias affecting individuals, even skilled statisticians, in which they generalize from small samples – representing only a fraction of the entire dataset – as if these samples represent the whole. This tendency results in drawing sweeping conclusions from limited information, inherently offering restricted insights. For example, in the context of coin tosses, if a coin lands on one side multiple times in a row, most people are prone to believe that it will subsequently favor the opposite side to "even out." This inclination arises from a lack of statistical reasoning, ignoring that each toss independently holds equal probabilities for both outcomes, whether heads or tails.
Heuristics
Heuristics encapsulate behavioral templates. The following list encompasses diverse heuristics, categorized as effects, patterns, or biases (some of which are recognizable due to their inherent cognitive bias). Together, they exemplify distinct aspects of behavior that contribute to cognitive bias during decision-making.
The Lexicon
Representation Heuristic: In uncertain contexts and similar situations, the brain avoids inherent probabilistic calculations. Instead, it replaces probability principles with practical rules of thumb and forms judgments based on models that align with their perception of the situation. Interestingly, when a description is more complex, the observer perceives it as more representative.
Halo Effect
This phenomenon involves attributing a person's notable traits, whether positive or negative, to our overall perception of their identity.
Confirmation Bias
As individuals, we tend to examine and interpret situations in a way that aligns with our existing information, knowledge, and beliefs. We tend to notice events that match our expectations.
Availability Effect
The ease with which I can recall an event from memory directly affects the perceived likelihood of its occurrence. People's judgments are influenced by the information readily available to them.
Recency Bias
Recent events exert a more significant impact on us compared to others. This bias originates from the availability effect. For instance, envision subjecting someone to a certain level of suffering over an extended period and then introducing a brief moment of reduced suffering. This reduced suffering becomes etched in their memory, subsequently diminishing their perception of the entire duration of grief, even if the overall suffering has increased.
Useless Information Bias
When presented with inconsequential information, individuals react differently compared to receiving no information, often disregarding provided probabilities.
Hindsight Bias
People tend to greatly overestimate the likelihood they are initially assigned to actual events. The retrospective ability to elaborate on what occurred fosters an illusion of predicting the outcome.
Anchoring
A tendency to overly rely on the first piece of information that comes to mind.
Isolation Effect
When facing a risky decision, individuals assess it in isolation rather than within a broader context. For instance, physicians' decision-making differs when treating a single patient as opposed to devising a comprehensive policy for a larger group.
Framing Effect
The inclination to respond differently to the same issue based on whether it is presented as a potential gain or loss. Consider, for instance, the contrast between evaluating the likelihood of a successful surgery versus assessing the patient's chances of avoiding the procedure. Humans tend to make choices not between outcomes but between descriptions of products.
Loss Aversion
When faced with a choice between certainty and a gamble, the inclination to avoid loss often outweighs the desire to attain gain. For many individuals, the satisfaction of obtaining something desirable is overshadowed by the distress associated with loss.
Based on the systematic categorization of these biases, which center around available representation and framing, Tversky and Kahneman developed a theory of value. They showcased the malleability of loss aversion and the pursuit of profit. Notably, their findings indicated that people react more to changes than to absolute levels, with emotional attachment intensifying as the odds become slimmer. Thus, the subtleties at the margins hold heightened importance.
Considering the inherent bias in judgment during uncertain situations, Kahneman and Tversky proposed that judgment could be improved by creating methods to mitigate and address sources of bias. It's worth highlighting that despite their deep involvement with the topic, both scholars grew disillusioned with decision-making. Despite its reliance on judgment, they perceived decision-making as resistant to influence, even if individuals were educated in making sound judgments.
This theory laid the groundwork for an emerging research field
behavioral economics. The impact of Kahneman and Tversky's work reverberated widely, resulting in joint and separate invitations to apply their insights across various aspects of life. They astutely broadened the perspectives of policymakers and economists regarding the importance of psychology. Ultimately, Kahneman's outstanding contributions earned him the Nobel Prize in economics.
I highly recommend exploring the book above for those eager to delve further into bias. Additionally, a concise compilation of all these biases can be found on the HumanHow website, providing an enlightening overview.
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