Thinking, Fast and Slow (48 page)

A remarkable feature of libertarian paternalism is its appeal across a broad political spectrum. The flagship example of behavioral policy, called Save More Tomorrow, was sponsored in Congress by an unusual coalition that included extreme conservatives as well as liberals. Save More Tomorrow is a financial plan that firms can offer their employees. Those who sign on allow the employer to increa Syers liberalse their contribution to their saving plan by a fixed proportion whenever they receive a raise. The increased saving rate is implemented automatically until the employee gives notice that she wants to opt out of it. This brilliant innovation, proposed by Richard Thaler and Shlomo Benartzi in 2003, has now improved the savings rate and brightened the future prospects of millions of workers. It is soundly based in the psychological principles that readers of this book will recognize. It avoids the resistance to an immediate loss by requiring no immediate change; by tying increased saving to pay raises, it turns losses into foregone gains, which are much easier to bear; and the feature of automaticity aligns the laziness of System 2 with the long-term interests of the workers. All this, of course, without compelling anyone to do anything he does not wish to do and without any misdirection or artifice.

The appeal of libertarian paternalism has been recognized in many countries, including the UK and South Korea, and by politicians of many stripes, including Tories and the Democratic administration of President Obama. Indeed, Britain’s government has created a new small unit whose mission is to apply the principles of behavioral science to help the government better accomplish its goals. The official name for this group is the Behavioural Insight Team, but it is known both in and out of government simply as the Nudge Unit. Thaler is an adviser to this team.

In a storybook sequel to the writing of
Nudge
, Sunstein was invited by President Obama to serve as administrator of the Office of Information and Regulatory Affairs, a position that gave him considerable opportunity to encourage the application of the lessons of psychology and behavioral economics in government agencies. The mission is described in the 2010 Report of the Office of Management and Budget. Readers of this book will appreciate the logic behind specific recommendations, including encouraging “clear, simple, salient, and meaningful disclosures.” They will also recognize background statements such as “presentation greatly matters; if, for example, a potential outcome is framed as a loss, it may have more impact than if it is presented as a gain.”

The example of a regulation about the framing of disclosures concerning fuel consumption was mentioned earlier. Additional applications that have been implemented include automatic enrollment in health insurance, a new version of the dietary guidelines that replaces the incomprehensible Food Pyramid with the powerful image of a Food Plate loaded with a balanced diet, and a rule formulated by the USDA that permits the inclusion of messages such as “90% fat-free” on the label of meat products, provided that the statement “10% fat” is also displayed “contiguous to, in lettering of the same color, size, and type as, and on the same color background as, the statement of lean percentage.” Humans, unlike Econs, need help to make good decisions, and there are informed and unintrusive ways to provide that help.

Two Systems

This book has described the workings of the mind as an uneasy interaction between two fictitious characters: the automatic System 1 and the effortful System 2. You are now quite familiar with the personalities of the two systems and able to anticipate how they might respond in different situations. And of course you also remember that the two systems do not really exist in the brain or anywhere else. “System 1 does X” is a shortcut for “X occurs automatically.” And “System 2 is mobilized to do Y” is a shortcut for “arousal increases, pupils dilate, attention is fo Stenations,cused, and activity Y is performed.” I hope you find the language of systems as helpful as I do, and that you have acquired an intuitive sense of how they work without getting confused by the question of whether they exist. Having delivered this necessary warning, I will continue to use the language to the end.

The attentive System 2 is who we think we are. System 2 articulates judgments and makes choices, but it often endorses or rationalizes ideas and feelings that were generated by System 1. You may not know that you are optimistic about a project because something about its leader reminds you of your beloved sister, or that you dislike a person who looks vaguely like your dentist. If asked for an explanation, however, you will search your memory for presentable reasons and will certainly find some. Moreover, you will believe the story you make up. But System 2 is not merely an apologist for System 1; it also prevents many foolish thoughts and inappropriate impulses from overt expression. The investment of attention improves performance in numerous activities—think of the risks of driving through a narrow space while your mind is wandering—and is essential to some tasks, including comparison, choice, and ordered reasoning. However, System 2 is not a paragon of rationality. Its abilities are limited and so is the knowledge to which it has access. We do not always think straight when we reason, and the errors are not always due to intrusive and incorrect intuitions. Often we make mistakes because we (our System 2) do not know any better.

I have spent more time describing System 1, and have devoted many pages to errors of intuitive judgment and choice that I attribute to it. However, the relative number of pages is a poor indicator of the balance between the marvels and the flaws of intuitive thinking. System 1 is indeed the origin of much that we do wrong, but it is also the origin of most of what we do right—which is most of what we do. Our thoughts and actions are routinely guided by System 1 and generally are on the mark. One of the marvels is the rich and detailed model of our world that is maintained in associative memory: it distinguishes surprising from normal events in a fraction of a second, immediately generates an idea of what was expected instead of a surprise, and automatically searches for some causal interpretation of surprises and of events as they take place.

Memory also holds the vast repertory of skills we have acquired in a lifetime of practice, which automatically produce adequate solutions to challenges as they arise, from walking around a large stone on the path to averting the incipient outburst of a customer. The acquisition of skills requires a regular environment, an adequate opportunity to practice, and rapid and unequivocal feedback about the correctness of thoughts and actions. When these conditions are fulfilled, skill eventually develops, and the intuitive judgments and choices that quickly come to mind will mostly be accurate. All this is the work of System 1, which means it occurs automatically and fast. A marker of skilled performance is the ability to deal with vast amounts of information swiftly and efficiently.

When a challenge is encountered to which a skilled response is available, that response is evoked. What happens in the absence of skill? Sometimes, as in the problem 17 × 24 = ?, which calls for a specific answer, it is immediately apparent that System 2 must be called in. But it is rare for System 1 to be dumbfounded. System 1 is not constrained by capacity limits and is profligate in its computations. When engaged in searching for an answer to one question, it simultaneously generates the answers to related questions, and it may substitute a response that more easily comes to mind for the one that was requested. In this conception of heu Septtedristics, the heuristic answer is not necessarily simpler or more frugal than the original question—it is only more accessible, computed more quickly and easily. The heuristic answers are not random, and they are often approximately correct. And sometimes they are quite wrong.

System 1 registers the cognitive ease with which it processes information, but it does not generate a warning signal when it becomes unreliable. Intuitive answers come to mind quickly and confidently, whether they originate from skills or from heuristics. There is no simple way for System 2 to distinguish between a skilled and a heuristic response. Its only recourse is to slow down and attempt to construct an answer on its own, which it is reluctant to do because it is indolent. Many suggestions of System 1 are casually endorsed with minimal checking, as in the bat-and-ball problem. This is how System 1 acquires its bad reputation as the source of errors and biases. Its operative features, which include WYSIATI, intensity matching, and associative coherence, among others, give rise to predictable biases and to cognitive illusions such as anchoring, nonregressive predictions, overconfidence, and numerous others.

What can be done about biases? How can we improve judgments and decisions, both our own and those of the institutions that we serve and that serve us? The short answer is that little can be achieved without a considerable investment of effort. As I know from experience, System 1 is not readily educable. Except for some effects that I attribute mostly to age, my intuitive thinking is just as prone to overconfidence, extreme predictions, and the planning fallacy as it was before I made a study of these issues. I have improved only in my ability to recognize situations in which errors are likely: “This number will be an anchor…,” “The decision could change if the problem is reframed…” And I have made much more progress in recognizing the errors of others than my own.

The way to block errors that originate in System 1 is simple in principle: recognize the signs that you are in a cognitive minefield, slow down, and ask for reinforcement from System 2. This is how you will proceed when you next encounter the Müller-Lyer illusion. When you see lines with fins pointing in different directions, you will recognize the situation as one in which you should not trust your impressions of length. Unfortunately, this sensible procedure is least likely to be applied when it is needed most. We would all like to have a warning bell that rings loudly whenever we a
re about to make a serious error, but no such bell is available, and cognitive illusions are generally more difficult to recognize than perceptual illusions. The voice of reason
may be much fainter than the loud and clear voice of an erroneous intuition, and questioning your intuitions is unpleasant when you face the stress of a big decision. More doubt is the last thing you want when you are in trouble. The upshot is that it is much easier to identify a minefield when you observe others wandering into it than when you are about to do so. Observers are less cognitively busy and more open to information than actors. That was my reason for writing a book that is oriented to critics and gossipers rather than to decision makers.

Organizations are better than individuals when it comes to avoiding errors, because they naturally think more slowly and have the power to impose orderly procedures. Organizations can institute and enforce the application of useful checklists, as well as more elaborate exercises, such as reference-class forecasting and the premortem. At least in part by providing a distinctive vocabulary, organizations can also encourage a culture in which people watch out for one another as they approach minefields. Whatever else it produces, a St pof othersn organization is a factory that manufactures judgments and decisions. Every factory must have ways to ensure the quality of its products in the initial design, in fabrication, and in final inspections. The corresponding stages in the production of decisions are the framing of the problem that is to be solved, the collection of relevant information leading to a decision, and reflection and review. An organization that seeks to improve its decision product should routinely look for efficiency improvements at each of these stages. The operative concept is routine. Constant quality control is an alternative to the wholesale reviews of processes that organizations commonly undertake in the wake of disasters. There is much to be done to improve decision making. One example out of many is the remarkable absence of systematic training for the essential skill of conducting efficient meetings.

Ultimately, a richer language is essential to the skill of constructive criticism. Much like medicine, the identification of judgment errors is a diagnostic task, which requires a precise vocabulary. The name of a disease is a hook to which all that is known about the disease is attached, including vulnerabilities, environmental factors, symptoms, prognosis, and care. Similarly, labels such as “anchoring effects,” “narrow framing,” or “excessive coherence” bring together in memory everything we know about a bias, its causes, its effects, and what can be done about it.

There is a direct link from more precise gossip at the watercooler to better decisions. Decision makers are sometimes better able to imagine the voices of present gossipers and future critics than to hear the hesitant voice of their own doubts. They will make better choices when they trust their critics to be sophisticated and fair, and when they expect their decision to be judged by how it was made, not only by how it turned out.

Amos Tversky and Daniel Kahneman

Many decisions are based on beliefs concerning the likelihood of uncertain events such as the outcome of an election, the guilt of a defendant, or the future value of the dollar. These beliefs are usually expressed in statements such as “I think that…,” “chances are…,” “it is unlikely that…,” and so forth. Occasionally, beliefs concerning uncertain events are expressed in numerical form as odds or subjective probabilities. What determines such beliefs? How do people assess the probability of an uncertain event or the value of an uncertain quantity? This article shows that people rely on a limi
ted number of heuristic principles which reduce the complex tasks of assessing probabilities and predicting values to simpler judgmental operations. In general, these heuristics are quite useful, but sometimes they lead to severe and systematic errors.

The subjective assessment of probability resembles the subjective assessment of physical quantities such as distance or size. These judgments are all based on data of limited validity, which are processed according to heuristic rules. For example, the apparent distance of an object is determined in part by its clarity. The more sharply the object is seen, the closer it appears to be. This rule has some validity, because in any given scene the more distant objects are seen less sharply than Vt pofreak/>
stimated when visibility is good because the objects are seen sharply. Thus, the reliance on clarity as an indication of distance leads to common biases. Such biases are also found in the intuitive judgment of probability. This article describes three heuristics that are employed to assess probabilities and to predict values. Biases to which these heuristics lead are enumerated, and the applied and theoretical implications of these observations are discussed.

Representativeness

Many of the probabilistic questions with which people are concerned belong to one of the following types: What is the probability that object A belongs to class B? What is the probability that event A originates from process B? What is the probability that process B will generate event A? In answering such questions, people typically rely on the representativeness heuristic, in which probabilities are evaluated by the degree to which A is representative of B, that is, by the degree to which A resembles B. For example, when A is highly representative of B, the probability that A originates from B is judged to be high. On the other hand, if A is not similar to B, the probability that A originates from B is judged to be low.

For an illustration of judgment by representativeness, consider an individual who has been described by a former neighbor as follows: “Steve is very shy and withdrawn, invariably helpful, but with little interest in people, or in the world of reality. A meek and tidy soul, he has a need for order and structure, and a passion for detail.” How do people assess the probability that Steve is engaged in a particular occupation from a list of possibilities (for example, farmer, salesman, airline pilot, librarian, or physician)? How do people order these occupations from most to least likely? In the representativeness heuristic, the probability that Steve is a librarian, for example, is assessed by the degree to which he is representative of, or similar to, the stereotype of a librarian. Indeed, research with problems of this type has shown that people order the occupations by probability and by similarity in exactly the same way.
¹
This approach to the judgment of probability leads to serious errors, because similarity, or representativeness, is not influenced by several factors that should affect judgments of probability.

Insensitivity to prior probability of outcomes
. One of the factors that have no effect on representativeness but should have a major effect on probability is the prior probability, or base rate frequency, of the outcomes. In the case of Steve, for example, the fact
that there are many more farmers than librarians in the population should enter into any reasonable estimate of the probability that Steve is a librarian rather than a farmer. Considerations of base-rate frequency, however, do not affect the similarity of Steve to the stereotypes of librarians and farmers. If people evaluate probability by representativeness, therefore, prior probabilities will be neglected. This hypothesis was tested in an experiment where prior probabilities were manipulated.
²
Subjects were shown brief personality descriptions of several individuals, allegedly sampled at random from a group of 100 professionals—engineers and lawyers. The subjects were asked to assess, for each description, the probability that it belonged to an engineer rather than to a lawy [hanerser. In one experimental condition, subjects were told that the group from which the descriptions had been drawn consisted of 70 engineers and 30 lawyers. In another condition, subjects were told that the group consisted of 30 engineers and 70 lawyers. The odds that any particular de
scription belongs to an engineer rather than to a lawyer should be higher in the first condition, where there is a majority of engineers, than in the second condition, where there is a majority of lawyers. Specifically, it can be shown by applying Bayes’ rule that the ratio of these odds should be (.7/.3)
²
, or 5.44, for each description. In a sharp violation of Bayes’ rule, the subjects in the two conditions produced essentially the same probability judgments. Apparently, subjects evaluated the likelihood that a particular description belonged to an engineer rather than to a lawyer by the degree to which this description was representative of the two stereotypes, with little or no regard for the prior probabilities of the categories.

The subjects used prior probabilities correctly when they had no other information. In the absence of a personality sketch, they judged the probability that an unknown individual is an engineer to be .7 and .3, respectively, in the two base-rate conditions. However, prior probabilities were effectively ignored when a description was introduced, even when this description was totally uninformative. The responses to the following description illustrate this phenomenon:

This description was intended to convey no information relevant to the question of whether Dick is an engineer or a lawyer. Consequently, the probability that Dick is an engineer should equal the proportion of engineers in the group, as if no description had been given. The subjects, however, judged the probability of Dick being an engineer to be .5 regardless of whether the stated proportion of engineers in the group was .7 or .3. Evidently, people respond differently when given no evidence and when given worthless evidence. When no specific evidence is given, prior probabilities are properly utilized; when worthless evidence is given, prior probabilities are ignored.
³

Insensitivity to sample size
. To evaluate the probability of obtaining a particular result in a sample drawn from a specified population, people typically apply the representativeness heuristic. That is, they assess the likelihood of a sample result, for example, that the average height in a random sample often men will be 6 feet, by the similarity of this result to the corresponding parameter (that is, to the average height in the population of men). The similarity of a sample statistic to a population parameter does not depend on the size of the sample. Consequently, if probabilities are assessed by representativeness, then the judged probability of a sample statistic will be essentially independent of sample size. Indeed, when subjects assessed the distributions of average height for samples of various sizes, they produced identical distributions. For example, the probability of obtaining an average height greater than 6 feet was assigned the same value for samples of 1,000, 100, and 10 men.
⁴
Moreover, subjects failed to appreciate the role of sample size even when it was emphasized in the formulation of the
problem. Consider the following question:

The values in parentheses are the number of undergraduate students who chose each answer.

Most subjects judged the probability of obtaining more than 60% boys to be the same in the small and in the large hospital, presumably because these events are described by the same statistic and are therefore equally representative of the general population. In contrast, sampling theory entails that the expected number of days on which more than 60% of the babies are boys is much greater in the small hospital than in the large one, because a large sample is less likely to stray from 50%. This fundamental notion of statistics is evidently not part of people’s repertoire of intuitions.

A similar insensitivity to s
ample size has been reported in judgments of posterior probability, that is, of the probability that a sample has been drawn from one population rather than from another. Consider the following example:

In this problem, the correct posterior odds are 8 to 1 for the 4:1 sample and 16 to 1 for the 12:8 sample, assuming equal prior probabilities. However, most people feel that the first sample provides much stronger evidence for the hypothesis that the urn is predominantly red, because the proportion of red balls is larger in the first than in the second sample. Here again, intuitive judgments are dominated by the sample proportion and are essentially unaffected by the size of the sample, which plays a crucial role in the determination of the actual posterior odds.
⁵
In addition, intuitive estimates of posterior odds are far less extreme than the correct values. The underestimation of the impact of evidence has been observed repeatedly in problems of this type.
⁶
It has been labeled “conservatism.”

Misconceptions of chance
. People expect that a sequence of events generated by a random process will represent the essential characteristics of that process even when the sequence is short. In considering tosses of a coin for heads or tails, for example, people regard the sequence H-T-H-T-T-H to be more likely than the sequence H-H-H-T- [enc. IT-T, which does not appear random, and also more likely than the sequence H-H-H-H-T-H, which does not represent the fairness of the coin.
⁷
Thus, people expect that the essential characteristics of the process will be represented, not only globally in the entire sequence, but also locally in each of its parts. A locally representative sequence, however, deviates systematically from chance expectation: it contains too many alternations and too few runs. Another consequen
ce of the belief in local representativeness is the well-known gambler’s fallacy. After observing a long run of red on the roulette wheel, for example, most people erroneously believe that black is now due, presumably because the occurrence of black will result in a more representative sequence than the occurrence of an additional red. Chance is commonly viewed as a self-correcting process in which a deviation in one direction induces a deviation in the opposite direction to restore the equilibrium. In fact, deviations are not “corrected” as a chance process unfolds, they are merely diluted.

Misconceptions of chance are not limited to naive subjects. A study of the statistical intuitions of experienced research psychologists
⁸
revealed a lingering belief in what may be called the “law of small numbers,” according to which even small samples are highly representative of the populations from which they are drawn. The responses of these investigators reflected the expectation that a valid hypothesis about a population will be represented by a statistically significant result in a sample with little regard for its size. As a consequence, the researchers put too much faith in the results of small samples and grossly overestimated the replicability of such results. In the actual conduct of research, this bias leads to the selection of samples of inadequate size and to overinterpretation of findings.

Insensitivity to predictability
. People are sometimes called upon to make such numerical predictions as the future value of a stock, the demand for a commodity, or the outcome of a football game. Such predictions are often made by representativeness. For example, suppose one is given a description of a company and is asked to predict its future profit. If the description of the company is very favorable, a very high profit will appear most representative of that description; if the description is mediocre, a mediocre performance will appear most representative. The degree to which the description is favorable is unaffected by the reliability of that description or by the degree to which it permits accurate prediction. Hence, if people predict solely in terms of the favorableness of the description, their predictions will be insensitive to the reliability of the evidence and to the expected accuracy of the prediction.