Sunday, June 24, 2012

Thinking, Fast and Slow: Chapters 22, 23 and 24

Nobel Prize recipient Daniel Kahneman authors this book on the behavioural sciences. Combining his own lifelong research with that of many other leaders in the field, he discusses some of the systematic mental glitches we experience that cause us to stray from rationality, often completely unbeknownst to us. Thinking, Fast and Slow is full of illustrative experiments and examples that you can even try on yourself!

There are times, however, when the intuition of experts can be trusted. Intuition can be learned, through practice and feedback. Therefore what's required to develop the ability to predict is an environment sufficiently regular as to be predictable, and the opportunity to learn these regularities through prolonged practice.

Certain fields lend themselves to meet these conditions more than others. For example, firefighters and chess players have well-developed, predictive intuitions. They have learned from a multitude of scenarios such that they would appear to have magic intuition to laymen.

At the other end of the spectrum are stock market prognosticators and political scientists who make long-term predictions. They operate in zero-validity environments, and as such they are not given the opportunity to hone their skills through feedback.

Kahneman also tackles optimism in these chapters. Many of us are more optimistic than others (this is largely inherited). Such optimists see the bright side of everything, are normally happy, are at lower risk for depression, and even live longer. But optimists also take more risks, underestimating the odds they face.

For example, the chance that a new business in the US will survive for five years is only 35%, but individuals who open businesses do not believe these statistics apply to them. In fact, people achieve higher average returns by selling their skills to employers rather than setting out on their own. Optimism is thus costly.

And yet where would we be without the successful businesses? These businesses have improved our standards of living by innovating new products or processes that have increased the wealth of the global citizenry. We thus ought to be thankful for such irrational behaviour (by those who go against the odds).

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