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Daniel Kahneman is a professor of behavioral & cognitive psychology at Princeton, winner of the 2002 Nobel Prize for economics, and author of the best-selling book on cognitive biases and heuristics: Thinking Fast & Slow.

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In fact, his story is so interesting and his work has been so important, that Daniel Kahneman and his long-time research partner Amos Tversky are actually the subject of Michael Lewis’s next book The Undoing Project: A Friendship that Changed Our Minds, which is due to be released on December 6th, 2016.

In an awesome recent “Masters in Business” podcast, Daniel Kahneman sits down with Barry Ritholz and discusses how he met Amos Tversky and how they first got started researching cognitive biases and heuristics. Kahneman also gives a great breakdown of 6 cognitive biases (or cognitive illusions, as he call them) that affect both our everyday lives and our investing success.

Here are the best excerpts from Kahneman’s interview:


Attribute substitution occurs when an individual has to make a judgment (of a target attribute) that is computationally complex, and instead substitutes a more easily calculated heuristic attribute.

“You ask someone a complicated question, like: What is the probability of an event? And they can’t answer it because it’s very difficult. But there are easier questions that are related to that one that they can answer. Such as: Is this a surprising event? That is something that people know right away. Is it a typical result of that kind of mechanism? And people can answer that right away.

So what happens is people take the answer to the easy question, they use it to answer the difficult question, and they think they have answered the difficult question. But in fact they haven’t – they’ve answered an easier one.

I call it attribute substitution – to substitute one question for another. So if I ask you: How happy are you these days? Now you know your mood right now – so you’re very likely to tell me your mood right now and think that you’ve answered the more general question of ‘how happy are youthese days?'”


The availability heuristic is a mental shortcut that relies on immediate examples that come to a given person’s mind when evaluating a specific topic, concept, method or decision.

“People are really not aware of information that they don’t have. The idea is that you take whatever information you have and you make the best story possible out of that information. And the information you don’t have – you don’t feel that it’s necessary.

I have an example that I think brings that out: I tell you about a national leader and that she is intelligent and firm. Now do you have an impression already whether she’s a good leader or a bad leader? You certainly do. She’s a good leader. But the third word that I was about to say is “corrupt.”

The point being that you don’t wait for information that you didn’t have. You formed an impression as we were going from the information that you did have. And this is “What You See Is All There Is” (WYSIATI).”


Anchoring describes the common human tendency to rely too heavily on the first piece of information offered (the “anchor”) when making decisions.

“I’ll give you an example. In the example of negotiation, many people think that you have an advantage if you go second. But actually the advantage is going first. And the reason is in something about the way the mind works. The mind tries to make sense out of whatever you put before it. So this built-in tendency that we have of trying to make sense of everything that we encounter, that is a mechanism for anchoring.”


Loss aversion refers to people’s tendency to prefer avoiding losses to acquiring equivalent gains: it is worse to lose one’s jacket than to find one. Some studies have suggested that losses are twice as powerful, psychologically, as gains.

“Losses loom larger than gains. And we have a pretty good idea of by how much they loom larger than gains, and it’s by about 2-to-1.

An example is: I’ll offer you a gamble on the toss of a coin. If it shows tails, you lose $100. And if it shows heads, you win X. What would X have to be for that gamble to become really attractive to you? Most people – and this has been well established – demand more than $200… Meaning it takes $200 of potential gain to compensate for $100 of potential loss when the chances of the two are equal. So that’s loss aversion. It turns out that loss aversion has enormous consequences.”

What is it about losses that makes them so much more painful than gains are pleasurable? In other words, why does this 2-to-1 loss aversion even exist?

“This is evolutionary. You would imagine in evolution that threats are more important than opportunities. And so it’s a very general phenomenon that bad things sort of preempt or are stronger than good things in our experience. So loss aversion is a special case of something much broader.”

So there’s always another opportunity coming along, another game, another deer coming by but an actual genuine loss – hey, that’s permanent and you don’t recover from that.

“That’s right. Anyway, you take it more seriously. So if there is a deer in your sights and a lion, you are going to be busy about the lion and not the deer.”

That leads to the obvious question: what can investors do to protect themselves against this hard-wired loss aversion?

“There are several things they can do. One is not to look at their results – not to look too often at how well they’re doing.”

And today you can look tick-by-tick, minute-by-minute, it’s the worst thing that could happen.

“It’s a very, very bad idea to look too often. When you look very often, you are tempted to make changes, and where individual investors lose money is when they make changes in their allocation. Virtually on average, whenever an investor makes a move, it’s likely to lose money. Because there are professionals on the other side betting against the kind of moves that individual investors make.”


Framing refers to the context in which a decision is made, or the context in which a decision is placed in order to influence that decision.

“If I ask a regular person in the street would you take a gamble that if you lose, you lose $100 and if you win, you win $180 on the toss of a coin… Most people don’t like it… Now when you ask the same people in the street, okay you don’t want this one [coin toss], would you take ten [coin tosses]? So we’ll toss ten coins, and every time if you lose, you lose $100 and if you win, you win $180, everybody wants the ten – nobody wants the one. In repeated play, when the game is repeated, then people

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