Daniel Kahneman - Mastering The 4 BIGGEST BIASES [w/ Nassim Taleb, Naval Ravikant]
by Julio Froment
Hey friend!
In today’s newsletter, I bring you some interesting nuggets taken from Daniel Kahneman’s speech at Google (and expanded with examples from Nassim Taleb and Naval Ravikant) on the 4 core biases that distorts our perception of reality and lead us to bad decisions.
Hope you find it valuable :)
Bias #1 — Context-Dependence
The Experiment…
Many people will read that as “ABC”.
Many people will read that as “12 13 14”.
Reality…
The “B” and the “13” are exactly the same!!
Conclusion…
What happened is that we have a tendency to produce coherence from the context, and this leads to errors in our judgment.
Another important conclusion is that we automatically and subconsciously suppressed the ambiguity, so we are not even aware of the possible confusion!
[Nassim Taleb on the Context-Dependence]
Nassim illustrates this tendency with an observation from people who take the elevator to go to the Gym to then exercise on the “Stair-master” (a machine to do steps). They don’t realize that the natural stairs (such as the one in the building) is essentially the same thing as the “Stair-master”.
In his book Antifragile, he wrote:
“This lack of translation is a mental handicap that comes with being a human; and we will only start to attain wisdom or rationality when we make an effort to overcome and break through it.”
Another story from his book Antifragile:
“
In business, people pay for the option when it is identified and mapped in a contract, so explicit options tend to be expensive to purchase, much like insurance contracts. They are often overhyped. But because of the domain dependence of our minds, we don’t recognize it in other places, where these options tend to remain underpriced or not priced at all.
I learned about the asymmetry of the option in class at the Wharton School, in the lecture on financial options that determined my career, and immediately realized that the professor did not himself see the implications. Simply, he did not understand nonlinearities and the fact that the optionality came from some asymmetry! Domain dependence: he missed it in places where the textbook did not point to the asymmetry —he understood optionality mathematically, but not really outside the equation. He did not think of trial and error as options. He did not think of model error as negative options. And, thirty years later, little has changed in the understanding of the asymmetries by many who, ironically, teach the subject of options.
”
Bias #2 — Judgment based on Preconceived Knowledge
The Experiment…
A person hears an upper class male British voice saying, “I have large tattoos all down my back”.
Reaction from the person…
He gets surprised by this statement. Kahneman argues that if you think about it, this is astonishing… Because the person had to classify that voice as coming from an upper-class British male, and then based on that assumption the person deduces that this individual don’t have tattoos (as it would contradict the construct of a typical upper-class British male). Thus, when he hears the statement from this individual “I have large tattoos all down my back”, he gets surprised because it opposes his preconceived knowledge on that individual, he didn’t expect it at all.
Conclusion…
“System 1 (our brains’ automatic and effortless response) holds a world-knowledge and uses it to classify situations as normal/abnormal. And it does this at top speed.”
Bias #3 — Fast Creation of New Norms
Daniel Kahneman explains this phenomenon with a personal story (on his speech at Google and on his book “Thinking Fast and Slow”). He was with his wife in a 40-villa Resort in Australia, when suddenly he met Jon (a peer psychologist from Stanford). 2 weeks later, Daniel and his wife found Jon again in a theater in London!
They draw 2 conclusions from it:
From System 2 (the effortful/rational part of the brain): “It was a more remarkable coincidence than the first meeting”
From System 1 (the effortless/automatic part of the brain): “We were distinctly less surprised to meet Jon on the second occasion than we had been on the first”
So even though they were aware that the second time was a more remarkable coincidence, they were less surprised because they (subconsciously) created a new norm: “He was now the psychologist who shows up when we travel abroad”.
“It takes very little time to create a norm” (Speech at Google)
“A single incident may make a recurrence less surprising.” (Book: Thinking, Fast and Slow)
“By any measure of probability, meeting Jon in the theater was no more likely than meeting any one of our hundreds of acquaintances—yet meeting Jon seemed more normal.” (Book: Thinking, Fast and Slow)
Story from Naval Ravikant
A common and important consequence of this bias is the so called “Hedonic Adaptation” — Getting used to positive/negative life changes.
In the Tim Ferriss Podcast, Naval said the following:
“
When I achieved those material and social successes, or at least beyond the point where they didn't matter as much to me anymore, I realized that my peer group and a lot of the people who were around me and the people who had achieved the similar successes were on their way to achieving more and more successes just didn't seem all that happy!
And in my case there was definitely hedonic adaptation — I'd very quickly get used to anything.
So [this] led me to the conclusion that happiness is internal. And so then that set me on a path of starting to work more on my internal self and realizing that all real success is internal and has very little to do with external circumstances.
”
"If you can’t be happy with a coffee, you won’t be happy with a yacht."
- Naval Ravikant
Bias #4 — Causal Reasoning
The Experiment…
Which is more probable?
A. “That a mother has blue eyes if her daughter has blue eyes”
B. “That a daughter has blue eyes if her mother has blue eyes”
Common Reaction…
The latter (option B) is perceived more probable.
Reality…
“If you stop to do the math, on the assumption that the incidence of blue eyes is the same two generations, the probabilities are strictly equal.”
Conclusion…
“Your reasoning flows along causal lines. This happens intuitively.”
Why? → “It feels more coherent”
Outcome → The event is perceived to be more likely.
Story from Nassim Taleb’s The Black Swan
“
One day in December 2003, when Saddam Hussein was captured, Bloomberg News flashed the following headline at 13:01: U.S. TREASURIES RISE; HUSSEIN CAPTURE MAY NOT CURB TERRORISM. Whenever there is a market move, the news media feel obligated to give the “reason.” Half an hour later, they had to issue a new headline. As these U.S. Treasury bonds fell in price, Bloomberg News had a new reason for the fall: Saddam’s capture (the same Saddam).
At 13:31 they issued the next bulletin: U.S. TREASURIES FALL; HUSSEIN CAPTURE BOOSTS ALLURE OF RISKY ASSETS. So it was the same capture (the cause) explaining one event and its exact opposite. Clearly, this can’t be; these two facts cannot be linked.
It happens all the time: a cause is proposed to make you swallow the news and make matters more concrete. Any conceivable cause can do.
”
Daniel Kahneman also talked about this in his book “Thinking, Fast and Slow”. He wrote…
“
Hussein’s capture was the major event of the day and because of the way the automatic search for causes shapes our thinking, that event was destined to be the explanation of whatever happened in the market on that day….
All headlines do is satisfy our need for coherence!
”
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Until next time :)
Julio xx
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