Monday, 19 December 2016

Thinking About Thinking

I've just finished reading a surprising book, and I'd like to share some notes with you. I was initially looking for something to improve the reasoning and logical flow during conversations. I found "Thinking, Fast and Slow", which is not really about that, but kept going for some pages and then couldn't stop.

I'm not using any kind of referral promotion, so if any reader of this post will buy the book I won't get a cent. And I'm not expert on psychology, sociology or economy.

It's just that "Thinking, Fast and Slow" has been a great reading experience. There are some insights on the way people think and decide that are worth analysing.

First of all the authors present two separate ways of "thinking": the first is intuitive, voluntary. It derives from millennia of evolution, where as animals we needed to decide in a fraction of second whether a situation was a danger or an opportunity. This is effortless and always active.

The second system is voluntary thinking. It requires an effort and it can't be always active during the day. This is strongly impacted by the first system: we may believe we are evaluating a problem coldly and rationally, but the intuitive system has already tagged it in a way or another, and energies need to be spent to fight that "first impression".

This model explains why often we understand something without really thinking about it, or we have a very different point of view on something after some proper analysis. The book is dense of information, and I'll just mention some psychological effects that surprised me particularly.

Loss aversion: People tent to evaluate losses more than gains. It seems the ratio is 2:1, i.e. losses weight double than gains. For example, to accept the risk of losing 100 euros most people would need to have an equal probability of gaining 200 euros. This is probably why people tend to leave things as they are, and defer changes: only rarely when comparing the current situation with a new one, gains seem double the losses.

Sunk-cost fallacy: Once somebody has invested (money, time) on something, they tend to evaluate the status in a better way than reality. Also people refrain from abandoning a project or investment if a large cost has already been faced, even though the forecast is not positive.

Competition neglect (and Planning fallacy): Once involved in an activity, our perception of competing factors tends to fade away. Similarly, when planning a task or project, we tend to be way more optimistic as we should given our own experience. I guess I saw this some times in software development...

Endowment effect (and Affect heuristic): People associate a higher value to things that they own. This is perhaps why we accept to buy something at a price, but would refuse to sell it for the same or only slightly higher price. Once we own it, there is an emotional value attached to it.

This book proves that humans are not very good in thinking in terms of probability, even, for example, when they are aware of the actual probability of an event. They'll tend to consider something more or less probable depending on various psychological factors.

Also we often believe that some events are a clear indication of a measurable reality, like the score of a football match, the performance of a company or a stockbroker, and like to ignore statistical fluctuations (which is called "Regression to the mean").


All these elements, and many more, are in contrast with the ideal economical mind, where values, durations, students, even probability of occurrence are always correctly estimated. People are less rational that they like to believe, and being aware of these psychological factors impacting rationality may be useful in our lives.

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