Nudge - Chapter 1 - Biases and Blunders

Two systems of thinking:
1. Automatic System - Intuitive and automatic, uncontrolled, effortless, associative, fast, unconscious, skilled

2. Reflective System - Reflective and rational, controlled, effortful, deductive, slow, self-aware, rule-following.

Example: Most Americans have an automatic system reaction to a temperature in Fahrenheit and have to use their reflective system to process temperature in Celsius.

Rules of Thumb - We always use rules of thumb because they are quick and useful and we can't spend all our time thinking and analyzing everything - things like distance between 2 cities. Rules of thumb are useful but they lead to systematic biases. These emerge from the interplay between Automatic System and Reflective System. This work has been called "heuristics and biases".

3 heuristics:
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Anchoring - also called "anchoring and adjustment." Here we start with an anchor and adjust in the direction we think is appropriate. Example: If you are asked to guess the population of a place. Anchors can influence how you think your life is going.

Availability - People assess the likelihood of risks by asking how readily examples come to mind. So if someone has experienced flood, they are more likely to buy insurance of that than those who have not. Here the Automatic System is aware of the risks without looking at statistics. Reminding people of a bad outcome or good outcome can influence their "availability bias".

Representativeness - also known as "similarity heuristic". The idea is that when asked to judge how like it is that A belongs to B, people (especially their Automatic Systems) answer by asking themselves how similar A is to their image or stereotype of B - representative of B. The problem occurs primarily when events happen by chance and those who observe it do not think they could occur by chance. They thereby try to fit it into their pattern of representativeness.

Optimism and Overconfidence - Unrealistic optimism explains a lot of individual risk taking, especially in the domain of risks to life and health. People are unrealistically optimistic even when the stakes are high. When people overestimate their personal immunity from harm, they may fail to take sensible preventive steps.

Gains and Losses - No one likes losses. People are "loss averse". This helps produce inertia, meaning a strong desire to stick with the current holdings and not make changes even when those changes are in our interests.

Status Quo Bias - is another reason for inertia. Since the inertia is very high, a "default" option will attract a high market share. Default options thus act as powerful nudges.

Framing - is the idea of how a problem is stated. Many times peoples Reflective System does not do the work to check and see whether reframing the questions would produce a different answer.