True to my word, I have finished this month’s book, “Thinking Fast and Slow” by Daniel Kahneman, a Nobel Prize winner in economics.  The work is a tour-de-force that unifies the main findings of Kahneman’s long career studying the psychology of decision-making.  It reminds me somewhat of Douglas Hofstadter’s “Gödel, Escher, Bach” not only in its breadth and depth but how much it reveals the mind of its author.

Since the book is essentially a distillation of Kahneman’s life’s work, I recommend that you not put it down for long periods lest you lose the tenor of his story.  The book offers much food for thought and must be read at a moderate pace to allow it to be digested.  A lot of books wear out their welcome after the first few chapters, but this one is not front-loaded: the later sections are as interesting and informative as the earlier ones, so be patient.

I am not going to review the book but I do offer a few excerpts that intrigued me.

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For example, here is a simple puzzle.  Do not try to solve it but listen to your intuition:

A bat and ball cost $1.10.
The bat costs one dollar more than the ball.
How much does the ball cost?

A number came to your mind.  The number, of course, is 10 cents.  The distinctive mark of this easy puzzle is that it evokes an answer that is intuitive, appealing, and wrong.

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Anchoring effects explain why, for example, arbitrary rationing is an effective marketing ploy.  A few years ago, supermarket shoppers in Sioux City, Iowa, encountered a sales promotion for Campbell’s soup at about 10% off the regular price.  On some days, a sign on the shelf said LIMIT OF 12 PER PERSON. On other days, the sign said NO LIMIT PER PERSON. Shoppers purchased an average of 7 cans when the limit was in force, twice as many as they bought when the limit was removed.

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An experiment that Amos [Tversky] carried out … at Harvard Medical School is the classic example of emotional framing.  Physician participants were given statistics about the outcomes of two treatments for lung cancer: surgery and radiation.  [Long-term] survival rates clearly favor surgery, but in the short term surgery is riskier than radiation.  Half the participants read statistics about survival rates, [while] the others received the same information in terms of mortality rates.  The two descriptions of the short-term outcomes of surgery were:

The one-month survival rate is 90%.

There is 10% mortality in the first month.

You already know the results:  surgery was much more popular in the former [group] (84% of the physicians chose it) than in the latter (where 5o% favored [it]).  The logical equivalence of the two descriptions is transparent, and a reality-bound decision maker would make the same choice regardless of which version she saw.  But … 90% survival sounds encouraging whereas 10% mortality is frightening.  An important finding of the study is that physicians were just as susceptible to the framing effect as medically unsophisticated people (hospital patients and graduate students in a business school).  Medical training is, evidently, no defense against the power of framing.

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[The following excerpt has been condensed from a much longer discussion of the illusion of skill in the financial industry — the chapter is well worth reading in its entirety.]

Some years ago I had an unusual opportunity to examine the illusion of financial skill up close.  I had been invited to speak to a group of investment advisers in a firm that provided financial advice … to very wealthy clients.  I asked for some data to prepare my presentation and was granted a small treasure: a spreadsheet summarizing the investment outcomes of [twenty-five] advisers, for each of eight consecutive years.  Each adviser’s score for each year was his (most of them were men) main determinant of his year-end bonus.  It was a simple matter to … determine whether there were persistent differences in skill among them and whether the same advisers consistently achieved better returns for their clients year after year.

… I was surprised to find that …  consistent correlations that would indicate differences in skill were not to be found.  The results resembled what you would expect from a dice-rolling contest, not a game of skill.

… Our message to the executives was that, at least when it came to building portfolios, the firm was rewarding luck as if it were skill.  This should have been shocking news to them, but it was not… I have no doubt that both our findings and their implications were quickly swept under the rug and that life in the firm went on just as before.  The illusion of skill is not only an individual aberration; it is deeply ingrained in the culture of the industry… Given the professional culture of the financial community, it is not surprising that large numbers of individuals in that world believe themselves to be among the chosen few who can do what they believe others cannot.

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Here’s a man I’d like to meet.  If you decide to read his book, let me know what you think.