The great contribution of Prospect Theory to expected utility theory and economic theory in general, was consideration of the reference point and the finding that "losses loom larger than gains”. It was found that humans weighed loses approximately twice as much as they did gains. A new psychological perspective considered the impact that emotions have …
Continue reading Thoughts about Prospect Theory and Cultural Differences
Based on the writings of Kahneman, D. (2011). Thinking Fast and Slow New York, NY: Farrar, Straus, and Giroux. Part 4 - Choices. Chapter 25: Bernoulli’s Errors (pp. 269 - 277). Daniel Kahneman's chapter 25, "Bernoulli’s Errors", was just basically supposed to be an introduction into how Prospect Theory was developed from a realization that the …
Continue reading Thoughts on Decisions, Risk, Wealth, and Needs
Kahneman’s 24th chapter, “The Engine of Capitalism” discusses five major themes: “Optimists”, “Entrepreneurial Delusions”, "Competition Neglect”, "Overconfidence”, and “The Premortem: A Partial Remedy”. In the last chapter we learned about how overconfidence was associated to the insider’s view and how an outside view of similar projects' past results are necessary to provide a baseline from which to predict the …
Kahneman, D. (2011). The Outside View. In Thinking Fast and Slow (pp. 245-254). New York, NY: Farrar, Straus and Giroux. The "outside view" and the "inside view" are terms coined by Daniel Kahneman and Amos Tversky referring to the processes people use in forecasting aspects of projects, such as, time to completion, likelihood of completion, and cost of project. …
Kahneman, D. (2011). Expert intuitions: When can we trust it? In Thinking Fast and Slow (pp. 234-244). New York, NY: Farrar, Straus and Giroux. As we wrapped up Chapter 21, "Intuitions vs. Formulas", we asked the question - what about all those instances we’ve heard of where expert cognition and behavior were remarkable and impressive? That …
Kahneman, D. (2011). Intuitions vs. Formulas. In Thinking Fast and Slow (pp. 222-233). New York, NY: Farrar, Straus and Giroux. In chapter 21, Intuitions vs. Formulas we explore the validity of expert intuition vs. statistical formulas for prediction. Kahneman began the chapter referencing Paul Meehl who he credits with one of his earliest accomplishments, an …
Kahneman, D. (2011). The Illusion of Validity. In Thinking Fast and Slow (pp. 209-221). New York, NY: Farrar, Straus and Giroux. In chapter 20, “The Illusion of Validity” we continue to explore "Overconfidence” with Daniel Kahneman’s book Thinking Fast and Slow (2011). Validity of a test or a measure, simply put, is testing what you think you are testing… …
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In "Part 3: Overconfidence” of Daniel Kahneman’s Thinking Fast and Slow we delve into chapter 19 - “The Illusion of Understanding”. Here we are introduced to Nassim Taleb’s Black Swan theory which describes human’s tendency to shape our world views based on rare and misinterpreted events of the past. Kahneman goes on to describe the …
Chapter 18, “Taming Intuitive Predictions” starts by clarifying the difference between those kind of instant “Blink” decisions that come from expertise (see Gladwell, 2005) and instant decisions that come from heuristics or intuition. The heuristics of intuition often come into play when a question is too hard to answer so people often, unconsciously, substitute an …
Chapter 17, "Regression to the mean”, (originally referred to as, regression to mediocrity”) illustrates how people mistakenly think that someone (e.g., athlete, interviewee, student, or trainee), or something (e.g., stocks, horses in a race, business or team performance ) that performed especially well will maintain that performance. And someone or something that performed especially poorly …
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