Thinking, Fast and Slow: Difference between revisions
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=== IV – Choices ===
🎲 '''25 – Bernoulli’s Errors.''' In 1738, Daniel Bernoulli published “Specimen theoriae novae de mensura sortis” at the Imperial Academy of Sciences in Saint Petersburg, proposing that people evaluate gambles by the expected utility of wealth rather than by expected monetary value. He modeled utility with a logarithmic curve to capture diminishing marginal value, a move that neatly tamed the St. Petersburg paradox while preserving risk aversion at higher wealth levels. Yet the scheme treated outcomes as final states of wealth and ignored how people experience changes relative to a personal baseline. Everyday choices reveal that small, favorable bets are often rejected because the sting of a potential loss outweighs the pleasure of a comparable gain. Framing the same result as a loss or a gain shifts preference in ways the original utility account cannot explain, because it has no place for reference points. Bernoulli’s approach also cannot accommodate the robust asymmetry that losses feel larger than symmetric gains. Nor does it predict the pattern that people’s risk attitudes flip between gains and losses, or that tiny probabilities are overweighted. These discrepancies forced a revision of the theory to match how judgments are formed in real time. The larger lesson is that subjective value depends on where one stands and how outcomes are framed, not only on end wealth. In the book’s terms, a fast, feeling‑driven response to gains and losses must be tempered by a slower accounting of context and evidence.
📈 '''26 – Prospect Theory.''' Building on experiments from the 1970s and a formal paper in *Econometrica* (1979), prospect theory replaces final‑wealth utility with a value function defined on gains and losses around a reference point. The function is concave for gains and convex for losses, and noticeably steeper for losses, capturing the empirical regularity that people dislike losses more than they like equivalent gains. The theory also swaps objective probabilities for decision weights that overweight small probabilities and underweight moderate to large ones. An “editing” stage—coding outcomes as gains or losses, simplifying combinations, and canceling common parts—helps explain framing reversals that leave expected values unchanged. Together these components account for insurance purchases, lottery play, and the tendency to accept sure gains while gambling to avoid sure losses. The framework unifies otherwise puzzling choices without assuming flawless calculation or stable utility over wealth. Its power comes from mirroring how judgments are formed with limited attention and strong feelings about change. Within the book’s theme, prospect theory formalizes the fast system’s pull toward reference points and vivid possibilities, while the slow system can use the framework to anticipate and correct predictable errors.
🪙 '''27 – The Endowment Effect.''' In a series of markets reported by Daniel Kahneman, Jack Knetsch, and Richard Thaler, an advanced undergraduate economics class at Cornell University traded goods after first succeeding in “induced value” token markets that verified a clean supply–demand mechanism. When the same procedure turned to Cornell‑branded coffee mugs priced at $6 in the bookstore (22 mugs in circulation), the predicted 11 trades failed to appear: across four mug markets, only 4, 1, 2, and 2 trades cleared. Reservation prices revealed the gap: median sellers would not part with a mug for less than about $5.25, while median buyers would pay only about $2.25–$2.75, with market prices between $4.25 and $4.75. Replications, including one with 77 students at Simon Fraser University using mugs and boxed pens, showed the same two‑to‑one ratio between willingness to accept and willingness to pay, even with chances to learn. A neutral “chooser” condition—deciding between a mug and money without initial ownership—behaved like buyers, implicating ownership itself rather than budgets or transaction costs. The asymmetry carried into field and survey evidence about fairness and status quo bias, where foregone gains are treated more lightly than out‑of‑pocket losses. The mechanism is reference dependence plus loss aversion: acquiring feels like a gain, but giving up a possession feels like a loss that weighs more. In the book’s architecture, a fast attachment to “mine” inflates value unless a slower, statistical view corrects for how ownership shifts the baseline.
💥 '''28 – Bad Events.'''
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