Chapter 29 — The Fourfold Pattern

When evaluating a complex object, you weight characteristics without recognising it as part of System 1

Changing Chances

Expectation principle can be explained by saying, "if you have a 20% chance to win \$1000 and 75% chance to win \$100 then your expectation is $275” (1000 x .2 + 100 x .75)
Bernoulli applied expectation principle to psycology by saying "the utility of a gamble is the average of the utilities of its outcomes, each weighted by its probability".
Moving from a 0% to a 5% chance of winning something creates excitment at he possibility of something that did not exist earlier; this is the possibility effect.
An improvement from 95% to 100% displays the certainty effect.

Allais's Paradox

The probability and certainty effects cause anxiety near the probabilistic edges
When the probability is extreme (below 1% and above 99%), the decision weight can often be indistinguishable from the edge

I calculate the cost of \$520k at 98% vs \$500k at 100% as $10k or 2%. In a single roll, 2% is a small price to pay for certainty while, over many rolls, I might decide that 2% is a small price for income stability.

I think the inspect discussion does show that most people value certainty too highly. Removing a 0.05% risk is not worth 57% of the original cost

The Fourfold Pattern

People attach values to gains and losses rather than to wealth.

Chapter 30 — Rare Events

Terrorism is rare, however, it works because we think about it uncontrolably and feel the risk even if we know the probability is low

Overestimation and Overweighting

When asked to estimate the probability of something occuring, it can be common to consider all the unlikely events that could hinder the outcome and cause us to overestimate the risk

Vivid Outcomes

When you can vividly visualise the outcome, people become less sensitive to probability, meaning they might choose an option that is less rational

Vivid Probabilities

Denominator neglect: if your attention is drawn to the winning marbles, you do not assess the number of nonwinning marbles with the same care.
Low-probability events are much more heavily weighted when described in terms of relative frequencies (how many) than when stated in more abstract terms of “chances,” “risk,” or “probability” (how likely).
- “a vaccine that protects children from a fatal disease carries a 0.001% risk of permanent disability.”
- “One of 100,000 vaccinated children will be permanently disabled.”

Decisions from Global Impressions

When it comes to rare probabilities, our mind is not designed to get things quite right. For the residents of a planet that may be exposed to events no one has yet experienced, this is not good news.

Chapter 31 — Risk Policies

Samuelson's Problem

Accepting a bet that could lead to a loss on the basis that, over the long term, you will win from making such bets, remember:
- It works when the gambles are genuinely independent of each other; it does not apply to multiple investments in the same industry, which would all go bad together.
- It works only when the possible loss does not cause you to worry about your total wealth.
- It should not be applied to long shots, where the probability of winning is very small for each bet.

Risk Policies

It is important to use broad framing.
If 25 divisions of a business each take a risk that could lose a large amount of capital or double up, the result will likely be possible in aggregate while hard to stomach when looked at individually.

Chapter 32 — Keeping Score

We refuse to cut losses when doing so would admit failure

Mental Accounts

It is more gratifying to sell a stock that has provided great gains than one that is in a loss despite the fact it is likely to be a better investment strategy to sell the loser
If a poor business investment is made, it is common to sink more money into that project than into a new opportunity. Boards of directors often replace a CEO who is reluctant to cut losses. They know the new CEO will be better able to ignore the sunk costs of past investments in evaluating current opportunities.

Regret

Regret is an emotion, and it is also a punishment that we administer to ourselves.
People expect to have stronger emotional reactions to an outcome that is produced by action than to the same outcome when it is produced by inaction.

Responsibility

⅔ of parents would not accept a minute increase in risk to their child for a substancial savng in cost. "this attitude is incoherent and potentially damaging to the safety of those we wish to protect. Even the most loving parents have finite resources of time and money their child"
Is it reasonable to let your choices be influenced by the anticipation of regret?
Hindsight is worse when you think a little, just enough to tell yourself later, “I almost made a better choice.”

Discussion notes

@lachlanhardy: The point of the book isn't to stop you from feeling the effects, such as loss aversion, but create mitigation strategies.

@mcgain: Doesn't believe that the calculation for evaluating risk (return multiplied by probability) makes sense unless you get multiple attempts.

@lachlanhardy: Thanks to these chapters, he is now thinking of everything as a gamble. Even buying shaving cream can be a gamble. Should you try a cheaper one? You might save but you might also end up throwing it out. @elle: Always take the sure thing; wants to be certain of a win regardless of the probability. Everything you order at a restaurant is a gamble but those gambles make life exciting where the risk is tiny.

@HashNotAdam: When it is mentioned that if you take a certain \$500 over 98% chance of \$520k, you are "violating the rules of rational choice". Is there such a thing as The Rules of Rational Choice or is this his description? @lachlanhardy: The rules are defined by Rational Choice Theory. The original economic theory assumed that people were rational but the research behind the book showed this isn't the case. This comes back to Richard's earlier thought that if you get the option once, you should take certainty but if you get it many times you should take the risk. @HashNotAdam: Except that in chapter 31 the mantra states "you will do yourself a large financial favour if you are able to see each of these gambles as part of a bundle of small gambles". This is, of course, nonsensical given the examples because when are you going to be offered a free $500k again in your life‽

@antoinemacia: The recent chapters show how we are "beasts of emotion" and there are many businesses who's success is reliant upon our anxieties and emotions.

@elle mused that insurance costs are called "premiums" because we pay above the value of what is being insured.

The framing of so much of life as gambling is causing some distress.

@antoinemacia: Insurance provides protection from regret and so those who are in a healthy financial position might get a lot of insurance, despite their capacity to pay the cost of disaster, just to avoid that regret.

Interesting note: If you take two cows to the bank, they'll give you a horse.

@HashNotAdam: Take away from chapter 29 was that people assign too great a value on risk as evidenced by parents accepting an increase in cost of ~24% to reduce a tiny risk by ⅔ but ~81% to completely remove a tiny risk. It was later discussed that this could include elements of fear of regret or, as it was "delicately" put in the book, parents might be "motivated by a selfish fear of regret more than by a wish to optimize the child’s safety". @elle: In this particular case, "actual figures don't make sense... he should really give percentages". @lachlanhardy: The discussion of framing (0.05% vs 15 children in every thousand) from the next chapter gives this necessary context. "You literally go 'that's my child being poisoned, of course I'll pay $8 to fix it!'" @elle: "Our brains don't work well with statistics."

@lachlanhardy: Wanted to see a deeper analysis of the decision weights table. If charted, it makes an interesting snake pattern but with one end sharper than the other. @mcgain: Felt the decision weights matched his views perfectly.

@antoinemacia: How many times were you taken by surprise by an unexpected outcome of something you had visualised vividly? Is happy-path prioritisation a factor of cognitive ease? @mcgain: Rarely surprised by "bad things" because he is a pessimist who does disaster planning. If something fails, he may be surprised that it failed in a way he didn't see coming. Do optimists think about the happy path instead?

@antoinemacia: The discussion of vivid imagery and how it sways our decision-making process is reminiscent of the priming discussion.

@elle: The descriptions of items on a restaurant menu can have a big effect on popularity (e.g. adding menu descriptions). At one restaurant, simply calling a poorly performing item "Summertime Corn" made it a big selling item

@mcgain: When someone produces a document—let's say an RFC—that is long, there is a temptation to think the author must have a deep understanding of the subject matter while another person submitting a 1-page document must not have thought through the topic. This is related to the vivid effect rather than the reality of the document yet it's easy to fall for. @lachlanhardy: There are situations where it goes the other way; if you read a 1-page document that clearly outlines a discussion and then you receive a 10-page document on the same matter, you can think "could this really add more?" There is an anchoring effect. There could be overlap with Amazon's 6-page pre-meeting memo. It creates an expectation that you right a minimum amount of detail without writing too much which can remove some bias. @elle: And this is why your uni assignments have strict word-limits.

It was generally agreed that Adam has had his one big rant for the day.

@mcgain: "Money is keeping score"; it was important until that realisation. Because of this, money used to be a core value but that didn't align with the idea that "I don't care what people think of me". This also drove the question "why am I competing with my friends to make more money?".

@antoinemacia: Some people see money as a means to survival whereas the rest sees it as a proxy for points or achievement. When you come to the realisation that we spend much of our lives trying to avoid the emotional pressures that we put upon ourselves, you liberate yourself. The biggest lesson in these chapters is that the less you focus on money, the more you can avoid the effects mentioned in this book.

@antoinemacia: According to the Wikipedia page on regret, the greatest regret that most people have is that they have chosen the wrong path in education.

Blackmill / book-club

Thinking fast and slow: chapters 29–32: Tue 25th #53