Thinking, Fast and Slow (40 page)

The results are clear-cut: 8% of respondents say Paul, 92% say George.

This is curious, because the situations of the two investors are objectively identical. They both now own stock A and both would have been better off by the same amount if they owned stock B. The only difference is that George got to where he is by acting, whereas Paul got to the same place by failing to act. This short example illustrates a broad story: people expect to have stronger emotional reactions (including regret) to an outcome that is produced by action than to the same outcome when it is produced by inaction. This has been verified in the context of gambling: people expect to be happier if they gamble and win than if they refrain from gambling and get the same amount. The asymmetry is at least as strong for losses, and it applies to blame as well as to regret. The key is not the difference between commission and omission but the distinction between default options and actions that deviate from the default. When you deviate from the default, you can easily imagine the norm—and if the default is associated with bad consequences, the discrepancy between the two can be the source of painful emotions. The default option when you own a stock is not to sell it, but the default option when you meet your colleague in the morning is to greet him. Selling a stock and failing to greet your coworker are both departures from the default option and natural candidates for regret or blame.

In a compelling demonstration of the power of default options, participants played a computer simulation of blackjack. Some players were asked “Do you wish to hit?” while others were asked “Do you wish to stand?” Regardless of the question, saying yes was associated with much more regret than saying no if the outcome was bad! The question evidently suggests a default response, which is, “I don’t have a strong wish to do it.” It is the departure from the default that produces regret. Another situation in which action is the default is that of a coach whose team lost badly in their last game. The coach is expected to make a change of personnel or strategy, and a failure to do so will produce blame and regret.

The asymmetry in the risk of regret favors conventional and risk-averse choices. The bias appears in many contexts. Consumers who are reminded that they may feel regret as a result of their choices show an increased preference for conventional options, favoring brand names over generics. The behavior of the managers of financial funds as the year approaches its end also shows an effect of anticipated evaluation: they tend to clean up their portfolios of unconventional and otherwise questionable stocks. Even life-or-death decisions can be affected. Imagine a physician with a gravely ill patient. One treatment fits the normal standard of care; another is unusual. The physician has some reason to believe that the unconventional treatment improves the patient’s chances, but the evidence is inconclusive. The physician who prescribes the unusual treatment faces a substantial risk of regret, blame, and perhaps litigation. In hindsight, it will be easier to imagine the normal choice; the abnormal choice will be easy to undo. True, a good outcome will contribute to the reputation of the physician who dared, but the potential benefit is smaller than the potential cost because success is generally a more normal outcome than is failure.

Responsib B Th5onche potenility

Losses are weighted about twice as much as gains in several contexts: choice between gambles, the endowment effect, and reactions to price changes. The loss-aversion coefficient is much higher in some situations. In particular, you may be more loss averse for aspects of your life that are more important than money, such as health. Furthermore, your reluctance to “sell” important endowments increases dramatically when doing so might make you responsible for an awful outcome. Richard Thaler’s early classic on consumer behavior included a compelling example, slightly modified in the following question:

Most people are willing to pay a significant but limited amount. Facing the possibility of death is unpleasant, but the risk is small and it seems unreasonable to ruin yourself to avoid it. Now consider a slight variation:

As you might expect, the fee that volunteers set is far higher than the price they were willing to pay for the vaccine. Thaler reported informally that a typical ratio is about 50:1. The extremely high selling price reflects two features of this problem. In the first place, you are not supposed to sell your health; the transaction is not considered legitimate and the reluctance to engage in it is expressed in a higher price. Perhaps most important, you will be responsible for the outcome if it is bad. You know that if you wake up one morning with symptoms indicating that you will soon be dead, you will feel more regret in the second case than in the first, because you could have rejected the idea of selling your health without even stopping to consider the price. You could have stayed with the default option and done nothing, and now this counterfactual will haunt you for the rest of your life.

The survey of parents’ reactions to a potentially hazardous insecticide mentioned earlier also included a question about the willingness to accept increased risk. The respondents were told to imagine that they used an insecticide where the risk of inhalation and child poisoning was 15 per 10,000 bottles. A less expensive insecticide was available, for which the risk rose from 15 to 16 per 10,000 bottles. The parents were asked for the discount that would induce them to switch to the less expensive (and less safe) product. More than two-thirds of the parents in the survey responded that they would not purchase the new product at any price! They were evidently revolted by the very idea of trading the safety of their child for money. The minority who found a discount they could accept demanded an amount that was significantly higher than the amount they were willing to pay for a far larger improvement in the safety of the product.

Anyone can understand and sympathize with the reluctance of parents to trade even a minute increase of risk to their child for money. It is worth noting, however, that this attitude is incoherent and potentially damaging to the safety of t B Th5ry tance ofhose we wish to protect. Even the most loving parents have finite resources of time and money to protect their child (the keeping-my-child-safe mental account has a limited budget), and it seems reasonable to deploy these resources in a way that puts them to best use. Money that could be saved by accepting a minute increase in the risk of harm from a pesticide could certainly be put to better use in reducing the child’s exposure to other harms, perhaps by purchasing a safer car seat or covers for electric sockets. The
taboo tradeoff
against accepting any increase in risk is not an efficient way to use the safety budget. In fact, the resistance may be motivated by a selfish fear of regret more than by a wish to optimize the child’s safety. The what-if? thought that occurs to any parent who deliberately makes such a trade is an image of the regret and shame he or she would feel in the event the pesticide caused harm.

The intense aversion to trading increased risk for some other advantage plays out on a grand scale in the laws and regulations governing risk. This trend is especially strong in Europe, where the precautionary principle, which prohibits any action that might cause harm, is a widely accepted doctrine. In the regulatory context, the precautionary principle imposes the entire burden of proving safety on anyone who undertakes actions that might harm people or the environment. Multiple international bodies have specified that the absence of scientific evidence of potential damage is not sufficient justification for taking risks. As the jurist Cass Sunstein points out, the precautionary principle is costly, and when interpreted strictly it can be paralyzing. He mentions an impressive list of innovations that would not have passed the test, including “airplanes, air conditioning, antibiotics, automobiles, chlorine, the measles vaccine, open-heart surgery, radio, refrigeration, smallpox vaccine, and X-rays.” The strong version of the precautionary principle is obviously untenable. But
enhanced loss aversion
is embedded in a strong and widely shared moral intuition; it originates in System 1. The dilemma between intensely loss-averse moral attitudes and efficient risk management does not have a simple and compelling solution.

We spend much of our day anticipating, and trying to avoid, the emotional pains we inflict on ourselves. How seriously should we take these intangible outcomes, the self-administered punishments (and occasional rewards) that we experience as we score our lives? Econs are not supposed to have them, and they are costly to Humans. They lead to actions that are detrimental to the wealth of individuals, to the soundness of policy, and to the welfare of society. But the emotions of regret and moral responsibility are real, and the fact that Econs do not have them may not be relevant.

Is it reasonable, in particular, to let your choices be influenced by the anticipation of regret? Susceptibility to regret, like susceptibility to fainting spells, is a fact of life to which one must adjust. If you are an investor, sufficiently rich and cautious at heart, you may be able to afford the
luxury of a portfolio that minimizes the expectation of regret even if it does not maximize the accrual of wealth.

You can also take precautions that will inoculate you against regret. Perhaps the most useful is to be explicit about the anticipation of regret. If you can remember when things go badly that you considered the possibility of regret carefully before deciding, you are likely to experience less of it. You should also know that regret and hindsight bias will come together, so anything you can do to preclude hindsight is likely to be helpful. My personal hindsight-avoiding B Th5he ything policy is to be either very thorough or completely casual when making a decision with long-term consequences. Hindsight is worse when you think a little, just enough to tell yourself later, “I almost made a better choice.”

Daniel Gilbert and his colleagues provocatively claim that people generally anticipate more regret than they will actually experience, because they underestimate the efficacy of the psychological defenses they will deploy—which they label the “psychological immune system.” Their recommendation is that you should not put too much weight on regret; even if you have some, it will hurt less than you now think.

Speaking of Keeping Score

You made your judgment in joint evaluation, where you consider two scenarios at the same time and make a comparison. You can apply a rule. If you think that the second scenario deserves higher compensation, you should assign it a higher dollar value.

There is almost universal agreement on the answer: compensation should be the same in both situations. The compensation is for the crippling injury, so why should the location in which it occurred make any diff Cmakerence? The joint evaluation of the two scenarios gave you a chance to examine your moral principles about the factors that are relevant to victim compensation. For most people, location is not one of these factors. As in other situations that require an explicit comparison, thinking was slow and System 2 was involved.

The psychologists Dale Miller and Cathy McFarland, who originally designed the two scenarios, presented them to different people for single evaluation. In their between-subjects experiment, each participant saw only one scenario and assigned a dollar value to it. They found, as you surely guessed, that the victim was awarded a much larger sum if he was shot in a store he rarely visited than if he was shot in his regular store. Poignancy (a close cousin of regret) is a counterfactual feeling, which is evoked because the thought “if only he had shopped at his regular store…” comes readily to mind. The familiar System 1 mechanisms of substitution and intensity matching translate the strength of the emotional reaction to the story onto a monetary scale, creating a large difference in dollar awards.

The comparison of the two experiments reveals a sharp contrast. Almost everyone who sees both scenarios together (within-subject) endorses the principle that poignancy is not a legitimate consideration. Unfortunately, the principle becomes relevant only when the two scenarios are seen together, and this is not how life usually works. We normally experience life in the between-subjects mode, in which contrasting alternatives that might change your mind are absent, and of course WYSIATI. As a consequence, the beliefs that you endorse when you reflect about morality do not necessarily govern your emotional reactions, and the moral intuitions that come to your mind in different situations are not internally consistent.

The discrepancy between single and joint evaluation of the burglary scenario belongs to a broad family of reversals of judgment and choice. The first preference reversals were discovered in the early 1970s, and many reversals of other kinds were reported over the years.

Challenging Economics

Preference reversals have an important place in the history of the conversation between psychologists and economists. The reversals that attracted attention were reported by Sarah Lichtenstein and Paul Slovic, two psychologists who had done their graduate work at the University of Michigan at the same time as Amos. They conducted an experiment on preferences between bets, which I show in a slightly simplified version.

You are asked to choose between a safe bet and a riskier one: an almost certain win of a modest amount, or a small chance to win a substantially larger amount and a high probability of losing. Safety prevails, and B is clearly the more popular choice.

Now consider each bet separately: If you owned that bet, what is the lowest price at which you would sell it? Remember that you are not negotiating with anyone—your task is to determine the lowest price at which you would truly be willing to give up the bet. Try it. You may find that the prize that can be won is Bmaktweare notsalient in this task, and that your evaluation of what the bet is worth is anchored on that value. The results support this conjecture, and the selling price is higher for bet A than for bet B. This is a preference reversal: people choose B over A, but if they imagine owning only one of them, they set a higher value on A than on B. As in the burglary scenarios, the preference reversal occurs because joint evaluation focuses attention on an aspect of the situation—the fact that bet A is much less safe than bet B—which was less salient in single evaluation. The features that caused the difference between the judgments of the options in single evaluation—the poignancy of the victim being in the wrong grocery store and the anchoring on the prize—are suppressed or irrelevant when the options are evaluated jointly. The emotional reactions of System 1 are much more likely to determine single evaluation; the comparison that occurs in joint evaluation always involves a more careful and effortful assessment, which calls for System 2.

The preference reversal can be confirmed in a within-subject experiment, in which subjects set prices on both sets as part of a long list, and also choose between them. Participants are unaware of the inconsistency, and their reactions when confronted with it can be entertaining. A 1968 interview of a participant in the experiment, conducted by Sarah Lichtenstein, is an enduring classic of the field. The experimenter talks at length with a bewildered participant, who chooses one bet over another but is then willing to pay money to exchange the item he just chose for the one he just rejected, and goes through the cycle repeatedly.

Rational Econs would surely not be susceptible to preference reversals, and the phenomenon was therefore a challenge to the rational-agent model and to the economic theory that is built on this model. The challenge could have been ignored, but it was not. A few years after the preference reversals were reported, two respected economists, David Grether and Charles Plott, published an article in the prestigious
American Economic Review
, in which they reported their own studies of the phenomenon that Lichtenstein and Slovic had described. This was probably the first finding by experimental psychologists that ever attracted the attention of economists. The introductory paragraph of Grether and Plott’s article was unusually dramatic for a scholarly paper, and their intent was clear: “A body of data and theory has been developing within psychology which should be of interest to economists. Taken at face value the data are simply inconsistent with preference theory and have broad implications about research priorities within economics…. This paper reports the results of a series of experiments designed to discredit the psychologists’ works as applied to economics.”

Grether and Plott listed thirteen theories that could explain the original findings and reported carefully designed experiments that tested these theories. One of their hypotheses, which—needless to say—psychologists found patronizing, was that the results were due to the experiment being carried out by psychologists! Eventually, only one hypothesis was left standing: the psychologists were right. Grether and Plott acknowledged that this hypothesis is the least satisfactory from the point of view of standard preference theory, because “it allows individual choice to depend on the context in which the choices are made”—a clear violation of the coherence doctrine.

You might think that this surprising outcome would cause much anguished soul-searching among economists, as a basic assumption of their theory had been successfully challenged. But this is not the way things work in social science, including both psychol Bmak/p>ished soogy and economics. Theoretical beliefs are robust, and it takes much more than one embarrassing finding for established theories to be seriously questioned. In fact, Grether and Plott’s admirably forthright report had little direct effect on the convictions of economists, probably including Grether and Plott. It contributed, however, to a greater willingness of the community of economists to take psychological research seriously and thereby greatly advanced the conversation across the boundaries of the disciplines.

Categories

“How tall is John?” If John is 5' tall, your answer will depend on his age; he is very tall if he is 6 years old, very short if he is 16. Your System 1 automatically retrieves the relevant norm, and the meaning of the scale of tallness is adjusted automatically. You are also able to match intensities across categories and answer the question, “How expensive is a restaurant meal that matches John’s height?” Your answer will depend on John’s age: a much less expensive meal if he is 16 than if he is 6.

But now look at this:

In single evaluations, everyone will agree that John is very tall and Jim is not, because they are compared to different norms. If you are asked a directly comparative question, “Is John as tall as Jim?” you will answer that he is not. There is no surprise here and little ambiguity. In other situations, however, the process by which objects and events recruit their own context of comparison can lead to incoherent choices on serious matters.

You should not form the impression that single and joint evaluations are always inconsistent, or that judgments are completely chaotic. Our world is broken into categories for which we have norms, such as six-year-old boys or tables. Judgments and preferences are coherent within categories but potentially incoherent when the objects that are evaluated belong to different categories. For an example, answer the following three questions:

The first and the second questions refer to items that belong to the same category, and you know immediately which you like more. Furthermore, you would have recovered the same ranking from single evaluation (“How much do you like apples?” and “How much do you like peaches?”) because apples and peaches both evoke fruit. There will be no preference reversal because different fruits are compared to the same norm and implicitly compared to each other in single as well as in joint evaluation. In contrast to the within-category questions, there is no stable answer for the comparison of apples and steak. Unlike apples and peaches, apples and steak are not natural substitutes and they do not fill the same need. You sometimes want steak and sometimes an apple, but you rarely say that either one will do just as well as the other.

Imagine receiving an e-mail from an organization that you generally trust, requesting a Bmak

What associations did this question evoke? Whether or not you were fully aware of them, ideas and memories of related causes came to your mind. Projects intended to preserve endangered species were especially likely to be recalled. Evaluation on the GOOD–BAD dimension is an automatic operation of System 1, and you formed a crude impression of the ranking of the dolphin among the species that came to mind. The dolphin is much more charming than, say, ferrets, snails, or carp—it has a highly favorable rank in the set of species to which it is spontaneously compared.

The question you must answer is not whether you like dolphins more than carp; you have been asked to come up with a dollar value. Of course, you may know from the experience of previous solicitations that you never respond to requests of this kind. For a few minutes, imagine yourself as someone who does contribute to such appeals.

Like many other difficult questions, the assessment of dollar value can be solved by substitution and intensity matching. The dollar question is difficult, but an easier question is readily available. Because you like dolphins, you will probably feel that saving them is a good cause. The next step, which is also automatic, generates a dollar number by translating the intensity of your liking of dolphins onto a scale of contributions. You have a sense of your scale of previous contributions to environmental causes, which may differ from the scale of your contributions to politics or to the football team of your alma mater. You know what amount would be a “very large” contribution for you and what amounts are “large,” “modest,” and “small.” You also have scales for your attitude to species (from “like very much” to “not at all”). You are therefore able to translate your attitude onto the dollar scale, moving automatically from “like a lot” to “fairly large contribution” and from there to a number of dollars.

On another occasion, you are approached with a different appeal:

Is this an urgent problem? Which category did it evoke as a norm when you assessed urgency? If you automatically categorized the problem as a public-health issue, you probably found that the threat of skin cancer in farmworkers does not rank very high among these issues—almost certainly lower than the rank of dolphins among endangered species. As you translated your impression of the relative importance of the skin cancer issue into a dollar amount, you might well have come up with a smaller contribution than you offered to protect an endearing animal. In experiments, the dolphins attracted somewhat larger contributions in single evaluation than did the farmworkers.