Heuristics & Biases - On Investment

Thinking, Fast and Slow was probably the best book I have read in the first half of 2020. Here are some of the notes I took after reading and worth sharing.This is the part IV.

If interested, can also check on:

Two Systems -On Investment (33)

Choices & Decision Making - On Investment (34)

Two Selves -On Investment (35)

Availability heuristic

instances of the class will be retrieved from memory, and if retrieval is easy and fluent, the category will be judged to be large. We defined the availability heuristic as the process of judging frequency by “the ease with which instances come to mind.”

The availability heuristic, like other heuristics of judgment, substitutes one question for another: you wish to estimate the size of a category or the frequency of an event, but you report an impression of the ease with which instances come to mind. Substitution of questions inevitably produces systematic errors. You can discover how the heuristic leads to biases by following a simple procedure: list factors other than frequency that make it easy to come up with instances. Each factor in your list will be a potential source of bias.

Resisting this large collection of potential availability biases is possible, but tiresome. Maintaining one’s vigilance against biases is a chore—but the chance to avoid a costly mistake is sometimes worth the effort.

Self- ratings were dominated by the ease with which examples had come to mind. The experience of fluent retrieval of instances trumped the number retrieved.

The conclusion is that the ease with which instances come to mind is a System 1 heuristic, which is replaced by a focus on content when System 2 is more engaged. Multiple lines of evidence converge on the conclusion that people who let themselves be guided by System 1 are more strongly susceptible to availability biases than others who are in a state of higher vigilance. The following are some conditions in which people “go with the flow” and are affected more strongly by ease of retrieval than by the content they retrieved:

• when they are engaged in another effortful task at the same time when they are in a good mood

• because they just thought of a happy episode in their life

• if they score low on a depression scale

• if they are knowledgeable novices on the topic of the task, in contrast to true experts

• when they score high on a scale of faith in intuition

• if they are (or are made to feel) powerful

Anchors

You will be influenced by the asking price. The same house will appear more valuable if its listing price is high than if it is low, even if you are determined to resist the influence of this number; and so on—the list of anchoring effects is endless.

Two different mechanisms produce anchoring effects—one for each system. There is a form of anchoring that occurs in a deliberate process of adjustment, an operation of System 2. And there is anchoring that occurs by a priming effect, an automatic manifestation of System 1.

Anchoring as adjustment

Amos liked the idea of an adjust-and-anchor heuristic as a strategy for estimating uncertain quantities: start from an anchoring number, assess whether it is too high or too low, and gradually adjust your estimate by mentally “moving” from the anchor.

Adjustment is a deliberate attempt to find reasons to move away from the anchor.

People adjust less (stay closer to the anchor) when their mental resources are depleted, either because their memory is loaded with dighdth=igits or because they are slightly drunk. Insufficient adjustment is a failure of a weak or lazy System 2.

Anchoring as priming effect

Adjustment is a deliberate and conscious activity, but in most cases of anchoring there is no corresponding subjective experience.

Anchoring is a case of suggestion.

Suggestion is a priming effect, which selectively evokes compatible evidence.

System 1 tries its best to construct a world in which the anchor is the true number. This is one of the manifestations of associative coherence.

By now you should be convinced that anchoring effects—sometimes due to priming, sometimes to insufficient adjustment—are everywhere. The psychological mechanisms that produce anchoring make us far more suggestible than most of us would want to be.

System 2 works on data that is retrieved from memory, in an automatic and involuntary operation of System 1. System 2 is therefore susceptible to the biasing influence of anchors that make some information easier to retrieve.

A message, unless it is immediately rejected as a lie, will have the same effect on the associative system regardless of its reliability.

The bewildering variety of priming effects, in which your thoughts and behavior may be influenced by stimuli to which you pay no attention at all, and even by stimuli of which you are completely unaware. The main moral of priming research is that our thoughts and our behavior are influenced, much more than we know or want, by the environment of the moment. Many people find the priming results unbelievable, because they do not correspond to subjective experience. Many others find the results upsetting, because they threaten the subjective sense of agency and autonomy. If the content of a screen saver on an irrelevant computer can affect your willingness to help strangers without your being aware of it, how free are you? Anchoring effects are threatening in a similar way. You are always aware of the anchor and even pay attention to it, but you do not know how it guides and constrains your thinking, because you cannot imagine how you would have thought if the anchor had been different (or absent). However, you should assume that any number that is on the table has had an anchoring effect on you, and if the stakes are high you should mobilize yourself (your System 2) to combat the effect.

Causes trump statisticsA

mind that is hungry for causal stories finds nothing to chew on: How does the number of Green and Blue cabs in the city cause this cab driver to hit and run?

• Statistical base rates are generally underweighted, and sometimes neglected altogether, when specific information about the case at hand is available.

• Causal base rates are treated as information about the individual case and are easily combined with other case-specific information.

Stereotyping is a bad word in our culture, but in my usage it is neutral. One of the basic characteristics of System 1 is that it represents categories as norms and prototypical exemplars. This is how we think of horses, refrigerators, and New York police officers; we hold in memory a representation of one or more “normal” members of each of these categories. When the categories are social, these representations are called stereotypes. Some stereotypes are perniciously wrong, and hostile stereotyping can have dreadful consequences, but the psychological facts cannot be avoided: stereotypes, both correct and false, are how we think of categories.

Subjects’ unwillingness to deduce the particular from the general was matched only by their willingness to infer the general from the particular.

This is a profoundly important conclusion. People who are taught surprising statistical facts about human behavior may be impressed to the point of telling their friends about what they have heard, but this does not mean that their understanding of the world has really changed. The test of learning psychology is whether your understanding of situations you encounter has changed, not whether you have learned a new fact. There is a deep gap between our thinking about statistics and our thinking about individual cases. Statistical results with a causal interpretation have a stronger effect on our thinking than noncausal information. But even compelling causal statistics will not change long-held beliefs or beliefs rooted in personal experience. On the other hand, surprising individual

cases have a powerful impact and are a more effective tool for teaching psychology because the incongruity must be resolved and embedded in a causal story. That is why this book contains questions that are addressed personally to the reader. You are more likely to learn something by finding surprises in your own behavior than by hearing surprising facts about people in general.

Availabity and affect

public perceptions of risks, including a survey that has become the standard example of an availability bias.

The lesson is clear: estimates of causes of death are warped by media coverage. The coverage is itself biased toward novelty and poignancy. The media do not just shape what the public is interested in, but also are shaped by it. Editors cannot ignore the public’s demands that certain topics and viewpoints receive extensive coverage. Unusual events (such as botulism) attract disproportionate attention and are consequently perceived as less unusual than they really are. The world in our heads is not a precise replica of reality; our expectations about the frequency of events are distorted by the prevalence and emotional intensity of the messages to which we are exposed.

The notion of an affect heuristic, in which people make judgments and decisions by consulting their emotions: Do I like it? Do I hate it? How strongly do I feel about it? In many domains of life, Slovic said, people form opinions and make choices that directly express their feelings and their basic tendency to approach or avoid, often without knowing that they are doing so.

The affect heuristic is an instance of substitution, in which the answer to an easy question (How do I feel about it?) serves as an answer to a much harder question (What do I think about it?). People’s emotional evaluations of outcomes, and the bodily states and the approach and avoidance tendencies associated with them, all play a central role in guiding decision making.

An inability to be guided by a “healthy fear” of bad consequences is a disastrous flaw.

The striking finding was that people who had received a message extolling the benefits of a technology also changed their beliefs about its risks. Although they had received no relevant evidence, the technology they now liked more than before was also perceived as less risky. Similarly, respondents who were told only that the risks of a technology were mild developed a more favorable view of its benefits. The implication is clear: as the psychologist Jonathan Haidt said in another context, “The emotional tail wags the rational dog.” The affect heuristic simplifies our lives by creating a world that is much tidier than reality. Good technologies have few costs in the imaginary world we inhabit, bad technologies have no benefits, and all decisions are easy. In the real world, of course, we often face painful tradeoffs between benefits and costs.

The public and the experts

Mr. and Ms. Citizen that is far from flattering: guided by emotion rather than by reason, easily swayed by trivial details, and inadequately sensitive to differences between low and negligibly low probabilities.

These legitimate distinctions are often ignored in statistics that merely count cases. Slovic argues from such observations that the public has a richer conception of risks than the experts do.

“Risk” does not exist “out there,” independent of our minds and culture, waiting to be measured. Human beings have invented the concept of “risk” to help them understand and cope with the dangers and uncertainties of life. Although these dangers are real, there is no such thing as “real risk” or “objective risk.”

the availability cascade. They comment that in the social context, “all heuristics are equal, but availability is more equal than the others.” They have in mind an expand Uned notion of the heuristic, in which availability provides a heuristic for judgments other than frequency. In particular, the importance of an idea is often judged by the fluency (and emotional charge) with which that idea comes to mind.

The cycle is sometimes sped along deliberately by “availability entrepreneurs,” individuals or organizations who work to ensure a continuous flow of worrying news. The danger is increasingly exaggerated as the media compete for attention- grabbing headlines. Scientists and others who try to dampen the increasing fear and revulsion attract little attention, most of it hostile: anyone who claims that the danger is overstated is suspected of association with a “heinous cover-up.”

The issue becomes politically important because it is on everyone’s mind, and the response of the political system is guided by the intensity of public sentiment. The availability cascade has now reset priorities. Other risks, and other ways that resources could be applied for the public good, all have faded into the background.

The Alar tale illustrates a basic limitation in the ability of our mind to deal with small risks: we either ignore them altogether or give them far too much weight—nothing in between. Every parent who has stayed up waiting for a teenage daughter who is late from a party will recognize the feeling. You may know that there is really (almost) nothing to worry about, but you cannot help images of disaster from coming to mind. As Slovic has argued, the amount of concern is not adequately sensitive to the probability of harm; you are imagining the numerator—the tragic story you saw on the news—and not thinking about the denominator. Sunstein has coined the phrase “probability neglect” to describe the pattern. The combination of probability neglect with the social mechanisms of availability cascades inevitably leads to gross exaggeration of minor threats, sometimes with important consequences.

Rational or not, fear is painful and debilitating, and policy makers must endeavor to protect the public from fear, not only from real dangers.

Democracy is inevitably messy, in part because the availability and affect heuristics that guide citizens’ beliefs and attitudes are inevitably biased, even if they generally point in the right direction. Psychology should inform the design of risk policies that combine the experts’ knowledge with the public’s emotions and intuitions.