Introduction

“The Undoing Project” gives lots of insights about the birth of heuristics, biases and behavioural psychology. It is a biography about the two psychologists and writers Daniel Kahneman (“Danny”) and Amos Tversky.

Danny Kahneman & Amos Tversky

  • Both were army psychologists — Kahneman developed a scoring system for early recruits to predict how successful they would be. They first taught and met at an Israeli university, then both moved to the US, but kept coming back to Israel to teach and fight in wars.
  • Danny — lots of emotional ups and downs and doubt; Amos — charming, clever and confident. Danny and Amos were inseparable for decades spending all day together. They first wrote journals in psychology then moved into other areas such as economics. Later in their lives they “broke up” as Danny was left in Amos’ shadow. In the end Amos died before Danny, and Danny received a Nobel prize.
  • Their work turned out to be a very powerful way of doing social science. That’s how Amos would begin: by undoing the mistakes of others. They coined the term Heuristics — rules of thumb we use to make quick approximate judgements. They undid much of what psychologists, experts, doctors, and economists believed in. Most prominently, experts are often wrong and humans are not rational but have systematic biases. They provided a language and a logic for articulating some of the pitfalls people encounter when they think.

Psychological Bias

Endowment Effect / Bias

Stuff you own, you value as more than if you didn’t own it. For example, we overvalue an employee just because a competitor makes a move to hire that person away. This loss of objectivity leads to throwing money at those you’d otherwise consider to be B-players (if even that).

Confirmation Bias

We look for data/examples which confirm our belief and turn a blind eye to stuff that contradicts it. It happens without us even realizing it, and it causes the brain to be bad at seeing the unexpected and too eager to confirm assumptions.

Present / Hindsight Bias

Present bias is “the tendency, when making a decision, to undervalue the future in relation to the present.” Hindsight bias occurs when we conclude outcomes were somehow predictable all along.

Framing Bias

It matters how you ask a question or make a statement — loss vs gain.

Recency Bias

We can think of something faster (it was most recent / bigger impact) so we think it is more likely / common than it really is.

Availability (Representativeness) Bias

We assume that the data we have been provided is representative of the entire data set.

Anchoring Bias

People estimate answers to new & novel problems with a bias towards reference points. Hearing / stating a random number before a challenge to estimate something is used as an anchor to work / negotiate / estimate from even if it is completely unrelated.

Other Topics Mentioned

Regression to the Mean

People have odd days doing well and less well, but they have an average they come back to.

Gambler’s Fallacy

Flip a coin heads five straight times and you may think the chance of coming up tails the next time increases. It doesn’t. Those odds are always 50:50.

Creeping Determinism

In hindsight we always think that stuff was bound to happen, but at the time it actually was unpredictable.

Regret

When people make a decision, they did not seek to maximize utility. They sought to minimize regret.

Truth Seeking

Kahneman is known to instruct his pupils to learn to ask not whether something is true, rather what it might be true of. The goal is to find meaning in everything we’re told in the spirit of making better overall judgments.

Mental Accounting

Money is fungible, but people put it into separate “mental accounts”, also known as “bucketing”. Example: Lost Movie Tickets vs. Found Money.

Prospect Theory: Loss Aversion

The prospect theory starts with the concept of loss aversion, an asymmetric form of risk aversion, from the observation that people react differently between potential losses and potential gains. Thus, people make decisions based on the potential gain or losses relative to their specific situation (the reference point) rather than in absolute terms; this is referred to as reference dependence:

  • Faced with a risky choice leading to gains, individuals are risk-averse, preferring solutions that lead to a lower expected utility but with a higher certainty (concave value function).
  • Faced with a risky choice leading to losses, individuals are risk-seeking, preferring solutions that lead to a lower expected utility as long as it has the potential to avoid losses (convex value function).