Horizon (1964–…): Season 50, Episode 10 - How You Really Make Decisions - full transcript
We like to think that as a species,
we are pretty smart.
We like to think we are wise,
rational creatures.
I think we all like to think of
ourselves as Mr Spock to some degree.
You know, we make rational,
conscious decisions.
But we may have to think again.
It's mostly delusion, and we should
just wake up to that fact.
In every decision you make,
there's a battle in your mind
between intuition and logic.
It's a conflict that plays
out in every aspect of your life.
What you eat.
What you believe.
Who you fall in love with.
And most powerfully,
in decisions you make about money.
The moment money enters the picture,
the rules change.
Scientists now have a new way
to understand this battle
in your mind,
how it shapes the decisions
you take, what you believe...
And how it has transformed
our understanding
of human nature itself.
Sitting in the back of this New York
cab is Professor Danny Kahneman.
He's regarded as one of the most
influential psychologists
alive today.
Over the last 40 years,
he's developed some extraordinary
insights
into the way
we make decisions.
I think it can't hurt to have
a realistic view of human nature
and of how the mind works.
His insights come
largely from puzzles.
Take, for instance, the curious
puzzle of New York cab drivers
and their highly illogical
working habits.
Business varies
according to the weather.
On rainy days, everyone wants a cab.
But on sunny days, like today,
fares are hard to find.
Logically, they should spend
a lot of time driving on rainy days,
because it's very easy to find
passengers on rainy days,
and if they are going to take
leisure, it should be on sunny days
but it turns out this is not
what many of them do.
Many do the opposite, working long
hours on slow, sunny days
and knocking off early
when it's rainy and busy.
Instead of thinking logically,
the cabbies are driven by an urge
to earn a set amount of cash
each day, come rain or shine.
Once they hit that target,
they go home.
They view being
below the target as a loss
and being above the target
as a gain, and they care
more about preventing the loss
than about achieving the gain.
So when they reach their goal
on a rainy day, they stop...
..which really doesn't make sense.
If they were trying to maximise
their income,
they would take their leisure
on sunny days
and they would drive all day
on rainy days.
It was this kind of glitch
in thinking
that Kahneman realised could reveal
something profound
about the inner workings
of the mind.
Anyone want to take
part in an experiment?
And he began to devise
a series of puzzles and questions
which have become
classic psychological tests.
It's a simple experiment.
It's a very attractive game...
Don't worry, sir. Nothing strenuous.
..Posing problems where you can
recognise in yourself
that your intuition is going
the wrong way.
The type of puzzle where the answer
that intuitively springs to mind,
and that seems obvious, is,
in fact, wrong.
Here is one that I think
works on just about everybody.
I want you to imagine a guy
called Steve.
You tell people that Steve,
you know, is a meek and tidy soul
with a passion for detail
and very little interest in people.
He's got a good eye for detail.
And then you tell people
he was drawn at random.
From a census of the American
population.
What's the probability that he is
a farmer or a librarian?
So do you think it's more likely
that Steve's going to end up
working as a librarian or a farmer?
What's he more likely to be?
Maybe a librarian.
Librarian.
Probably a librarian.
A librarian.
Immediately, you know,
the thought pops to mind
that it's a librarian, because he
resembled the prototype of librarian.
Probably a librarian.
In fact, that's probably
the wrong answer,
because, at least in
the United States,
there are 20 times as many male
farmers as male librarians.
Librarian. Librarian.
So there are probably more meek
and tidy souls you know
who are farmers than meek
and tidy souls who are librarians.
This type of puzzle seemed to reveal
a discrepancy
between intuition and logic.
Another example is...
Imagine a dictionary. I'm going to
pull a word out of it at random.
Which is more likely,
that a word that you pick
out at random has the letter
R in the first position or has
the letter R in the third position?
Erm, start with the letter R. OK.
People think the first position,
because it's easy to
think of examples.
Start with it. First.
In fact, there are nearly three
times as many words with
R as the third letter,
than words that begin with R,
but that's not
what our intuition tells us.
So we have examples like that.
Like, many of them.
Kahneman's interest in human error
was first sparked in the 1970s
when he and his colleague,
Amos Taverski,
began looking at their own mistakes.
It was all in ourselves.
That is, all the mistakes that we
studied were mistakes
that we were prone to make.
In my hand here, I've got £100.
Kahneman and Taverski found
a treasure trove of these puzzles.
Which would you prefer?
They unveiled
a catalogue of human error.
Would you rather go to Rome with
a free breakfast?
And opened a Pandora's Box
of mistakes.
A year and a day.
25?
But the really interesting
thing about these mistakes is,
they're not accidents.
75?
They have a shape, a structure.
I think Rome.
Skewing our judgment.
20.
What makes them interesting
is that they are not random errors.
They are biases,
so the difference between a bias
and a random error is that
a bias is predictable.
It's a systematic error that is
predictable.
Kahneman's puzzles prompt
the wrong reply again.
More likely.
And again.
More likely. More likely?
And again.
Probably more likely?
It's a pattern of human error that
affects every single one of us.
On their own, they may seem small.
Ah, that seems to be
the right drawer.
But by rummaging
around in our everyday mistakes...
That's very odd.
..Kahneman started a revolution in
our understanding of human thinking.
A revolution so profound
and far-reaching that he was
awarded a Nobel prize.
So if you want to see the medal,
that's what it looks like.
That's it.
Psychologists have long strived
to pick apart the moments
when people make decisions.
Much of the focus has been
on our rational mind,
our capacity for logic.
But Kahneman
saw the mind differently.
He saw a much more powerful role
for the other side of our minds,
intuition.
And at the heart of human thinking,
there's a conflict between logic and
intuition that leads to mistakes.
Kahneman and Taverski started this
trend
of seeing the mind
differently.
They found these
decision-making illusions,
these spots where our intuitions
just make us decide
these things
that just don't make any sense.
The work of Kahneman and Taverski
has really been revolutionary.
It kicked off a flurry
of experimentation
and observation to understand
the meaning of these mistakes.
People didn't really appreciate,
as recently as 40 years ago,
that the mind didn't really
work like a computer.
We thought that we were very
deliberative, conscious creatures
who weighed up the costs
and benefits of action,
just like Mr Spock would do.
By now, it's a fairly coherent
body of work
about ways in which
intuition departs from the rules,
if you will.
And the body of evidence is growing.
Some of the best clues to
the working of our minds come not
when we get things right,
but when we get things wrong.
In a corner of this otherwise
peaceful campus,
Professor Chris Chabris
is about to start a fight.
All right, so what I want you guys to
do is stay in this area over here.
The two big guys grab you
and sort of like start pretending to
punch you, make some sound effects.
All right, this looks good.
All right,
that seemed pretty good to me.
It's part of an experiment
that shows a pretty shocking mistake
that any one of us could make.
A mistake where you don't notice
what's happening right in front of
your eyes.
As well as a fight, the experiment
also involves a chase.
It was inspired by an incident
in Boston in 1995,
when a young police officer,
Kenny Conley,
was in hot pursuit
of a murder suspect.
It turned out that this
police officer,
while he was chasing the suspect,
had run right past some other
police officers
who were beating up another suspect,
which, of course,
police officers are not supposed
to do under any circumstances.
When the police tried to investigate
this case of police brutality,
he said, "I didn't see anything
going on there,
"all I saw was the suspect
I was chasing."
And nobody could believe this
and he was prosecuted for perjury
and obstruction of justice.
Everyone was convinced that
Conley was lying.
We don't want you
to be, like, closer than about...
Everyone, that is,
apart from Chris Chabris.
He wondered
if our ability to pay attention
is so limited that any one of us
could run past a vicious fight
without even noticing.
And it's
something he's putting to the test.
Now, when you see someone
jogging across the footbridge,
then you should get started.
Jackie, you can go.
In the experiment,
the subjects are asked to focus
carefully on a cognitive task.
They must count the number of times
the runner taps her head with
each hand.
Would they, like the Boston
police officer,
be so blinded by their
limited attention
that they would
completely fail to notice the fight?
About 45 seconds or a minute into
the run, there was the fight.
And they could actually
see the fight from a ways away,
and it was about 20 feet away from
them when they got closest to them.
The fight is
right in their field of view,
and at least partially visible
from as far back as the footbridge.
It seems incredible that anyone
would fail to notice something
so apparently obvious.
They completed the three-minute
course
and then we said, "Did you notice
anything unusual?"
Yes.
What was it?
It was a fight.
Sometimes they would have noticed
the fight and they would say,
"Yeah, I saw some guys fighting", but
a large percentage of people said
"We didn't see anything unusual
at all."
And when we asked them specifically
about whether they saw anybody
fighting, they still said no.
In fact, nearly 50% of people
in the experiment
completely failed
to notice the fight.
Did you see anything
unusual during the run?
No.
OK. Did you see some people fighting?
No.
We did at night time
and we did it in the daylight.
Even when we did it in daylight,
many people ran right past the fight
and didn't notice it at all.
Did you see anything
unusual during the run?
No, not really.
OK, did you see some people
fighting?
No.
You really didn't see anyone
fighting? No.
Does it surprise you that you
would have missed that?
They were about 20
feet off the path.
Oh!
You ran right past them.
Completely missed that, then. OK.
Maybe what happened to Conley was,
when you're really paying
attention to one thing
and focusing a lot of mental energy
on it, you can miss things
that other people are going to think
are completely obvious, and in fact,
that's what the jurors said
after Conley's trial.
They said "We couldn't believe that
he could miss something like that".
It didn't make any sense.
He had to have been lying.
It's an unsettling phenomenon
called inattentional blindness
that can affect us all.
Some people have said things like
"This shatters my faith in my own
mind",
or, "Now I don't know
what to believe",
or, "I'm going to be confused from
now on."
But I'm not sure that that feeling
really stays with them very long.
They are going to go
out from the experiment, you know,
walk to the next place they're going
or something like that
and they're going to have
just as much inattentional blindness
when they're walking down the street
that afternoon as they did before.
This experiment reveals a powerful
quandary about our minds.
We glide through the world
blissfully unaware
of most of what we do and
how little we really know our minds.
For all its brilliance,
the part of our mind we call
ourselves is extremely limited.
So how do we manage to
navigate our way through
the complexity of daily life?
Every day, each one of us
makes somewhere between two
and 10,000 decisions.
When you think about our daily
lives,
it's really a long, long
sequence of decisions.
We make decisions probably
at a frequency
that is close to the frequency
we breathe.
Every minute, every second, you're
deciding where to move your legs,
and where to move your eyes,
and where to move your limbs,
and when you're eating a meal,
you're making all kinds of
decisions.
And yet the vast
majority of these decisions,
we make without even realising.
It was Danny Kahneman's
insight that we have two systems
in the mind for making decisions.
Two ways of thinking:
fast and slow.
You know, our mind has really two
ways of operating,
and one is sort of fast-thinking,
an automatic effortless mode,
and that's the one
we're in most of the time.
This fast, automatic mode
of thinking, he called System 1.
It's powerful, effortless and
responsible for most of what we do.
And System 1 is, you know,
that's what happens most of the time.
You're there, the world around you
provides all kinds of stimuli
and you respond to them.
Everything that you see and that you
understand, you know,
this is a tree,
that's a helicopter back there,
that's the Statue of Liberty.
All of this visual perception,
all of this comes through System 1.
The other mode is slow, deliberate,
logical and rational.
This is System 2 and it's the bit
you think of as you,
the voice in your head.
The simplest example of the two
systems is
really two plus two is on one side,
and 17 times 24 is on the other.
What is two plus two?
Four. Four. Four.
Fast System 1 is always in gear,
producing instant answers.
And what's two plus two? Four.
A number comes to your mind.
Four. Four. Four.
It is automatic.
You do not intend for it to happen.
It just happens to you.
It's almost like a reflex.
And what's 22 times 17?
That's a good one.
But when we have to pay attention
to a tricky problem,
we engage slow-but-logical System 2.
If you can do that in your head,
you'll have to follow some rules
and to do it sequentially.
And that is not automatic at all.
That involves work, it involves
effort, it involves concentration.
22 times 17?
There will be physiological
symptoms.
Your heart rate will accelerate,
your pupils will dilate,
so many changes will occur while
you're performing this computation.
Three's...oh, God!
That's, so...
220 and seven times 22 is...
..54. 374?
OK. And can I get you to just walk
with me for a second? OK.
Who's the current...?
System 2 may be clever, but
it's also slow, limited and lazy.
I live in Berkeley during summers
and I walk a lot.
And when I walk very fast,
I cannot think.
Can I get you to count backwards
from 100 by 7? Sure.
193, 80...
It's hard when you're walking.
It takes up, interestingly enough,
the same kind of executive
function as...as thinking.
Fourty...four?
If you are expected to do something
that demands a lot of effort,
you will stop even walking.
Eighty...um...six?
51.
Uh....
16,
9, 2?
Everything that you're aware of
in your own mind
is part of this slow, deliberative
System 2.
As far as you're concerned,
it is the star of the show.
Actually, I describe System 2
as not the star.
I describe it as, as a minor
character who thinks he is the star,
because, in fact,
most of what goes on
in our mind is automatic.
You know, it's in the domain
that I call System 1.
System 1 is an old, evolved bit
of our brain, and it's remarkable.
We couldn't survive without it
because System 2 would explode.
If Mr Spock had to make every
decision for us,
it would be very slow and effortful
and our heads would explode.
And this vast, hidden domain
is responsible
for far more than
you would possibly believe.
Having an opinion,
you have an opinion immediately,
whether you like it or not,
whether you like something or not,
whether you're for something or not,
liking someone or not liking them.
That, quite often, is something
you have no control over.
Later, when you're asked for reasons,
you will invent reasons.
And a lot of what System 2 does
is, it provides reason.
It provides rationalisations which
are not necessarily the true reasons
for our beliefs and our emotions
and our intentions and what we do.
You have two systems of thinking
that steer you through life...
Fast, intuitive System 1
that is incredibly powerful
and does most of the driving.
And slow, logical System 2
that is clever, but a little lazy.
Trouble is, there's a bit
of a battle between them
as to which one is
driving your decisions.
And this is where
the mistakes creep in,
when we use the wrong system
to make a decision.
Just going to ask you
a few questions.
We're interested in what you think.
This question concerns this nice
bottle of champagne I have here.
Millesime 2005, it's a good year,
genuinely nice, vintage bottle.
These people think they're about
to use slow, sensible System 2
to make a rational decision
about how much they would pay
for a bottle of champagne.
But what they don't know
is that their decision
will actually be taken totally
without their knowledge by their
hidden, fast auto-pilot, System 1.
And with the help of a bag
of ping-pong balls,
we can influence that decision.
I've got a set of numbered balls
here from 1 to 100 in this bag.
I'd like you to reach in
and draw one out at random for me,
if you would.
First, they've got to choose a ball.
The number says ten. Ten. Ten. Ten.
They think it's a random number,
but in fact, it's rigged.
All the balls are marked
with the low number ten.
This experiment is all about
the thoughtless creation of habits.
It's about how we make one decision,
and then other decisions follow it
as if the first decision
was actually meaningful.
What we do is purposefully,
we give people a first decision
that is clearly meaningless.
Ten. Ten, OK. Would you be willing
to pay ten pounds
for this nice bottle
of vintage champagne?
I would, yes.
No. Yeah, I guess. OK.
This first decision is meaningless,
based as it is on
a seemingly random number.
But what it does do is lodge
the low number ten in their heads.
Would you buy it for ten pounds?
Yes, I would. Yes. You would? OK.
Now for the real question
where we ask them
how much they'd actually pay
for the champagne.
What's the maximum amount you think
you'd be willing to pay?
20? OK.
Seven pounds. Seven pounds, OK.
Probably ten pound.
A range of fairly low offers.
But what happens if we prime people
with a much higher number,
65 instead of 10?
What does that one say? 65. 65, OK.
65. OK.
It says 65.
How will this affect the price
people are prepared to pay?
What's the maximum you would be
willing to pay for this
bottle of champagne?
40? £45. 45, OK.
50.
40 quid? OK.
£50? £50?
Yeah, I'd pay between 50 and £80.
Between 50 and 80? Yeah.
Logic has gone out of the window.
The price people are prepared to pay
is influenced by nothing more
than a number written
on a ping-pong ball.
It suggests that
when we can't make decisions,
we don't evaluate
the decision in itself.
Instead what we do is,
we try to look at other similar
decisions we've made in the past
and we take those decisions
as if they were good decisions
and we say to ourselves,
"Oh, I've made
this decision before.
"Clearly, I don't need to go ahead
and solve this decision.
"Let me just use what
I did before and repeat it,
"maybe with some modifications."
This anchoring effect comes
from the conflict
between our two systems of thinking.
Fast System 1 is a master
of taking short cuts
to bring about
the quickest possible decision.
What happens is,
they ask you a question
and if the question is difficult
but there is a related question that
is a lot...that is somewhat simpler,
you're just going to answer
the other question and...
and not even notice.
So the system does all kinds
of short cuts to feed us
the information in a faster way
and we can make actions,
and the system is accepting
some mistakes.
We make decisions using
fast System 1
when we really should be using
slow System 2.
And this is why we make the mistakes
we do,
systematic mistakes
known as cognitive biases.
Nice day.
Since Kahneman
first began investigating
the glitches in our thinking,
more than 150 cognitive biases
have been identified.
We are riddled with these
systematic mistakes
and they affect every
aspect of our daily lives.
Wikipedia has a very big list
of biases
and we are finding new ones
all the time.
One of the biases that I think is
the most important
is what's called
the present bias focus.
It's the fact that we focus on now
and don't think very much
about the future.
That's the bias that causes things
like overeating and smoking,
and texting and driving,
and having unprotected sex.
Another one is called
the halo effect,
and this is the idea
that if you like somebody
or an organisation,
you're biased to think that
all of its aspects are good,
that everything is good about it.
If you dislike it,
everything is bad.
People really are quite
uncomfortable, you know,
by the idea that Hitler
loved children, you know.
He did.
Now, that doesn't make him
a good person,
but we feel uncomfortable to see
an attractive trait
in a person that we consider,
you know, the epitome of evil.
We are prone to think that
what we like is all good
and what we dislike is all bad.
That's a bias.
Another particular favourite of mine
is the bias to get attached
to things that we ourselves
have created.
We call it the IKEA effect.
Well, you've got loss aversion,
risk aversion, present bias.
Spotlight effect, and the spotlight
effect is the idea
that we think that other people pay
a lot of attention to us
when in fact, they don't.
Confirmation bias.
Overconfidence is a big one.
But what's clear is that
there's lots of them.
There's lots of ways for us
to get things wrong.
You know, there's one way to do
things right
and many ways to do things wrong,
and we're capable of many of them.
These biases explain
so many things that we get wrong.
Our impulsive spending.
Trusting the wrong people.
Not seeing
the other person's point of view.
Succumbing to temptation.
We are so riddled with these biases,
it's hard to believe
we ever make a rational decision.
But it's not just our everyday
decisions that are affected.
What happens if you're an expert,
trained in making decisions
that are a matter of life and death?
Are you still destined to make
these systematic mistakes?
On the outskirts of Washington DC,
Horizon has been granted access
to spy on the spooks.
Welcome to
Analytical Exercise Number Four.
Former intelligence analyst
Donald Kretz
is running an ultra-realistic
spy game.
This exercise will take place in
the fictitious city of Vastopolis.
Taking part are a mixture
of trained intelligence analysts
and some novices.
Due to an emerging threat...
..a terrorism taskforce
has been stood up.
I will be the terrorism
taskforce lead
and I have recruited all of you
to be our terrorism analysts.
The challenge facing the analysts
is to thwart a terrorist
threat against a US city.
The threat at this point
has not been determined.
It's up to you to figure out
the type of terrorism...
..and who's responsible
for planning it.
The analysts face a number of tasks.
They must first investigate
any groups who may pose a threat.
Your task is to write a report.
The subject in this case
is the Network of Dread.
The mayor has asked for this
15 minutes from now.
Just like in the real world,
the analysts have access
to a huge amount of data streaming
in, from government agencies,
social media, mobile phones
and emergency services.
The Network of Dread turns out to be
a well-known international
terror group.
They have the track record,
the capability
and the personnel
to carry out an attack.
The scenario that's emerging
is a bio-terror event,
meaning
it's a biological terrorism attack
that's going to take place
against the city.
If there is an emerging threat,
they are the likely candidate.
We need to move onto the next task.
It's now 9th April.
This is another request
for information,
this time on something or someone
called the Masters of Chaos.
The Masters of Chaos are
a group of cyber-hackers,
a local bunch of misfits
with no history of violence.
And while the analysts continue
to sift through the incoming data,
behind the scenes, Kretz is
watching their every move.
In this room, we're able to
monitor what the analysts are doing
throughout the entire exercise.
We have set up a knowledge base
into which we have been inserting
data
throughout the course
of the day.
Some of them are related
to our terrorist threat,
many of them are not.
Amidst the wealth of data
on the known terror group,
there's also evidence coming in
of a theft at a university biology
lab
and someone has hacked into the
computers of a local freight firm.
Each of these messages represents,
essentially, a piece of the puzzle,
but it's a puzzle that you don't
have the box top to,
so you don't have the picture
in advance,
so you don't know what pieces
go where.
Furthermore, what we have is
a bunch of puzzle pieces that don't
even go with this puzzle.
The exercise is part of a series
of experiments to investigate
whether expert intelligence agents
are just as prone to mistakes from
cognitive bias as the rest of us,
or whether their training
and expertise makes them immune.
I have a sort of insider's
point of view of this problem.
I worked a number of years
as an intelligence analyst.
The stakes are incredibly high.
Mistakes can often be life
and death.
We roll ahead now.
The date is 21st May.
If the analysts are able
to think rationally,
they should be able
to solve the puzzle.
But the danger is, they will fall
into the trap set by Kretz
and only pay attention
to the established terror group,
the Network of Dread.
Their judgment may be clouded
by a bias called confirmation bias.
Confirmation bias is
the most prevalent bias of all,
and it's where we tend to search
for information
that supports
what we already believe.
Confirmation bias can easily lead
people
to ignore
the evidence in front of their eyes.
And Kretz is able to monitor
if the bias kicks in.
We still see that they're searching
for Network of Dread.
That's an indication that we may have
a confirmation bias operating.
The Network of Dread
are the big guys -
they've done it before, so you
would expect they'd do it again.
And I think we're starting to see
some biases here.
Analysts desperately want
to get to the correct answer,
but they're affected by the same
biases as the rest of us.
So far, most of our analysts
seem to believe
that the Network of Dread is
responsible for planning this attack,
and that is completely wrong.
How are we doing?
It's time for the analysts
to put themselves on the line
and decide who the terrorists are
and what they're planning.
So what do you think?
It was a bio-terrorist attack.
I had a different theory.
What's your theory?
Cos I may be missing something here,
too.
They know that the Network of Dread
is a terrorist group.
They know that the Masters of Chaos
is a cyber-hacking group.
Either to the new factory
or in the water supply.
Lots of dead fish floating
up in the river.
The question is, did any
of the analysts manage to dig out
the relevant clues
and find the true threat?
In this case, the actual threat
is due to the cyber-group,
the Masters of Chaos,
who become increasingly radicalised
throughout the scenario
and decide to take out their anger
on society, essentially.
Who convinced them to switch
from cyber-crime to bio-terrorism?
Or did they succumb
to confirmation bias
and simply pin the blame
on the usual suspects?
Will they make that connection?
Will they process that evidence
and assess it accordingly,
or will their confirmation bias
drive them
to believe that it's a more
traditional type of terrorist group?
I believe that the Masters of Chaos
are actually the ones behind it.
It's either a threat or not a
threat, but the Network of Dread?
And time's up. Please go ahead
and save those reports.
At the end of the exercise,
Kretz reveals the true identity
of the terrorists.
We have a priority message
from City Hall.
The terrorist attack was thwarted,
the planned bio-terrorist attack
by the Masters of Chaos
against Vastopolis was thwarted.
The mayor expresses his thanks
for a job well done.
Show of hands, who...who got it?
Yeah.
Out of 12 subjects,
11 of them got the wrong answer.
The only person to spot the true
threat was in fact a novice.
All the trained experts fell prey
to confirmation bias.
It is not typically the case
that simply being trained
as an analyst
gives you the tools
you need to overcome cognitive bias.
You can learn techniques
for memory improvement.
You can learn techniques
for better focus,
but techniques to eliminate
cognitive bias
just simply don't work.
And for intelligence analysts
in the real world,
the implications of making mistakes
from these biases are drastic.
Government reports and studies
over the past decade or so
have cited experts as believing
that cognitive bias
may have played a role
in a number of very significant
intelligence failures,
and yet it remains
an understudied problem.
Heads.
Heads.
But the area of our lives
in which these systematic mistakes
have the most explosive impact
is in the world of money.
The moment money enters the picture,
the rules change.
Many of us think that
we're at our most rational
when it comes to decisions
about money.
We like to think we know how to spot
a bargain, to strike a good deal,
sell our house at the right time,
invest wisely.
Thinking about money the right way
is one of the most
challenging things for human nature.
But if we're not as rational as we
like to think,
and there is a hidden
force at work shaping our decisions,
are we deluding ourselves?
Money brings with it
a mode of thinking.
It changes the way
we react to the world.
When it comes to money,
cognitive biases play havoc
with our best intentions.
There are many mistakes that people
make when it comes to money.
Kahneman's insight into our mistakes
with money
were to revolutionise our
understanding of economics.
It's all about a crucial difference
in how we feel
when we win or lose
and our readiness to take a risk.
I would like to take a risk.
Take a risk, OK?
Let's take a risk.
Our willingness to take a gamble
is very different depending on
whether we are faced
with a loss or a gain.
Excuse me, guys,
can you spare two minutes to help us
with a little experiment? Try and
win as much money as you can, OK?
OK. OK?
In my hands here I have £20, OK?
Here are two scenarios.
And I'm going to give you ten.
In the first case,
you are given ten pounds.
That's now yours.
Put it in your pocket, take it away,
spend it on a drink
on the South Bank later.
OK. OK?
OK.
Then you have to make a choice
about how much more you could gain.
You can either take
the safe option, in which case,
I give you an additional five,
or you can take a risk.
If you take a risk,
I'm going to flip this coin.
If it comes up heads, you win ten,
but if it comes up tails,
you're not going to win any more.
Would you choose the safe option
and get an extra five pounds
or take a risk and maybe win
an extra ten or nothing?
Which is it going to be?
I'd go safe.
Safe, five? Yeah.
Take five. You'd take five?
Yeah, man. Sure? There we go.
Most people presented
with this choice
go for the certainty
of the extra fiver.
Thank you very much.
Told you it was easy.
In a winning frame of mind, people
are naturally rather cautious.
That's yours, too.
That was it?
That was it. Really? Yes. Eh?
But what about losing?
Are we similarly cautious
when faced with a potential loss?
In my hands, I've got £20
and I'm going to give that to you.
That's now yours.
OK. You can put it in your handbag.
This time, you're given £20.
And again, you must make a choice.
Would you choose to accept a safe
loss of £5 or would you take a risk?
If you take a risk,
I'm going to flip this coin.
If it comes up heads,
you don't lose anything,
but if it comes up tails,
then you lose ten pounds.
In fact, it's exactly
the same outcome.
In both cases, you face a choice
between ending up with
a certain £15 or tossing a coin
to get either ten or twenty.
I will risk losing ten or nothing.
OK.
But the crucial surprise here
is that when the choice is framed
in terms of a loss,
most people take a risk.
Take a risk. Take a risk, OK.
I'll risk it. You'll risk it? OK.
Our slow System 2 could probably
work out
that the outcome is
the same in both cases.
And that's heads, you win.
But it's too limited and too lazy.
That's the easiest £20
you'll ever make.
Instead, fast System 1 makes
a rough guess based on change.
And that's all there is to it,
thank you very much. Oh, no! Look.
And System 1 doesn't like losing.
If you were to lose £10
in the street today
and then find £10 tomorrow,
you would be financially unchanged
but actually we respond to changes,
so the pain of the loss of £10 looms
much larger, it feels more painful.
In fact, you'd probably have to find
£20
to offset the pain that
you feel by losing ten.
Heads.
At the heart of this,
is a bias called loss aversion,
which affects
many of our financial decisions.
People think in terms of gains
and losses.
Heads. It's tails. Oh!
And in their thinking, typically,
losses loom larger than gains.
We even have an idea by...by
how much,
by roughly a factor of two
or a little more than two.
That is loss aversion,
and it certainly was
the most important thing
that emerged from our work.
It's a vital insight into
human behaviour,
so important that it led
to a Nobel prize
and the founding of an entirely
new branch of economics.
When we think we're winning,
we don't take risks.
But when we're faced with a loss,
frankly, we're a bit reckless.
But loss aversion
doesn't just affect people
making casual five pound bets.
It can affect anyone at any time,
including those who work in
the complex system of high finance,
in which trillions
of dollars are traded.
In our current complex environments,
we now have the means
as well as the motive
to make very serious mistakes.
The bedrock of economics
is that people think rationally.
They calculate risks,
rewards and decide accordingly.
But we're not always rational.
We rarely behave like Mr Spock.
For most of our decisions,
we use fast, intuitive,
but occasionally unreliable
System 1.
And in a global financial market,
that can lead
to very serious problems.
I think what the financial crisis
did was, it simply said,
"You know what?
"People are a lot more vulnerable
to psychological pitfalls
"than we really understood before."
Basically, human psychology
is just too flawed
to expect that we could avert
a crisis.
Understanding these pitfalls has led
to a new branch of economics.
Behavioural economics.
Thanks to psychologists
like Hersh Shefrin,
it's beginning to establish
a toehold in Wall Street.
It takes account of the way
we actually make decisions
rather than how we say we do.
Financial crisis, I think,
was as large a problem as it was
because certain psychological
traits like optimism,
over-confidence and confirmation bias
played a very large role
among a part of the economy
where serious mistakes could be made,
and were.
But for as long as our financial
system assumes we are rational,
our economy will remain vulnerable.
I'm quite certain
that if the regulators listened
to behavioural economists early on,
we would have designed
a very different financial system
and we wouldn't have had
the incredible increase
in housing market and we wouldn't
have this financial catastrophe.
And so when Kahneman collected
his Nobel prize,
it wasn't for psychology,
it was for economics.
The big question is, what can we do
about these systematic mistakes?
Can we hope to find a way
round our fast-thinking biases
and make better decisions?
To answer this,
we need to know the evolutionary
origins of our mistakes.
Just off the coast of Puerto Rico
is probably the best place
in the world to find out.
The tiny island of Cayo Santiago.
So we're now in the boat,
heading over to Cayo Santiago.
This is an island filled
with a thousand rhesus monkeys.
Once you pull in, it looks
a little bit like you're going
to Jurassic Park. You're not sure
what you're going to see.
Then you'll see your first monkey,
and it'll be comfortable, like,
"Ah, the monkeys are here,
everything's great."
It's an island devoted
to monkey research.
You see the guys hanging
out on the cliff up there?
Pretty cool.
The really special thing about
Cayo Santiago
is that the animals here,
because they've grown up over the
last seven years around humans,
they're completely habituated,
and that means we can get
up close to them, show them stuff,
look at how they make decisions.
We're able to do this here
in a way that we'd never be able
to do it anywhere else, really.
It's really unique.
Laurie Santos is here to find out
if monkeys make the same mistakes
in their decisions that we do.
Most of the work we do is comparing
humans and other primates,
trying to ask what's special
about humans.
But really,
what we want to understand is,
what's the evolutionary origin
of some of our dumber strategies,
some of those spots
where we get things wrong?
If we could understand
where those came from,
that's where we'll get some insight.
If Santos can show us
that monkeys have the same cognitive
biases as us,
it would suggest that
they evolved a long time ago.
And a mental strategy that old would
be almost impossible to change.
We started this work around the time
of the financial collapse.
So, when we were thinking about
what dumb strategies could we look at
in monkeys, it was pretty obvious
that some
of the human economic strategies
which were in the news
might be the first thing to look at.
And one of the particular things
we wanted to look at was
whether or not
the monkeys are loss averse.
But monkeys, smart as they are,
have yet to start using money.
And so that was
kind of where we started.
We said, "Well, how can
we even ask this question
"of if monkeys
make financial mistakes?"
And so we decided to do it
by introducing the monkeys
to their own new currency
and just let them buy their food.
So I'll show you some of this stuff
we've been up to with the monkeys.
Back in her lab at Yale,
she introduced a troop of monkeys
to their own market,
giving them round shiny tokens
they could exchange for food.
So here's Holly.
She comes in, hands over a token
and you can see, she just gets
to grab the grape there.
One of the first things we wondered
was just,
can they in some sense learn
that a different store sells
different food at different prices?
So what we did was, we presented
the monkeys with situations
where they met traders who sold
different goods at different rates.
So what you'll see in this clip is
the monkeys meeting a new trader.
She's actually selling grapes
for three grapes per one token.
And what we found is that
in this case,
the monkeys are pretty rational.
so when they get a choice of a guy
who sells, you know,
three goods for one token,
they actually shop more at that guy.
Having taught the monkeys
the value of money,
the next step was to see if monkeys,
like humans,
suffer from that most crucial bias,
loss aversion.
And so what we did was, we introduced
the monkeys to traders
who either gave out losses or gains
relative to what they should.
So I could make the monkey think
he's getting a bonus
simply by having him trade
with a trader who's starting
with a single grape
but then when the monkey
pays this trader,
she actually gives him an extra,
so she gives him a bonus.
At the end, the monkey gets two,
but he thinks
he got that second one as a bonus.
We can then compare what the monkeys
do with that guy
versus a guy
who gives the monkey losses.
This is a guy who shows up,
who pretends he's going to sell
three grapes,
but then when the monkey actually
pays this trader,
he'll take one of the grapes away
and give the monkeys only two.
The big question then
is how the monkeys react
when faced with a choice
between a loss and a gain.
So she'll come in,
she's met these two guys before.
You can see she goes
with the bonus option,
even waits patiently for her
additional piece to be added here,
and then takes the bonus, avoiding
the person who gives her losses.
So monkeys hate losing
just as much as people.
And crucially, Santos found
that monkeys, as well,
are more likely to take risks
when faced with a loss.
This suggests to us
that the monkeys seem to frame
their decisions
in exactly the same way we do.
They're not thinking just
about the absolute,
they're thinking relative to what
they expect.
And when they're getting
less than they expect,
when they're getting losses,
they too become more risk-seeking.
The fact that we share this bias
with these monkeys suggests
that it's an ancient strategy etched
into our DNA
more than 35 million years ago.
And what we learn
from the monkeys is that
if this bias is really that old,
if we really have had this strategy
for the last 35 million years,
simply deciding to overcome it
is just not going to work.
We need better ways to make ourselves
avoid some of these pitfalls.
Making mistakes, it seems, is just
part of what it is to be human.
We are stuck
with our intuitive inner stranger.
The challenge this poses
is profound.
If it's human nature to make
these predictable mistakes
and we can't change that,
what, then, can we do?
We need to accept
ourselves as we are.
The cool thing about being
a human versus a monkey
is that we have a deliberative self
that can reflect on our biases.
System 2 in us has for the first time
realised
that there's a System 1,
and with that realisation,
we can shape the way
we set up policies.
We can shape the way we set up
situations to allow ourselves
to make better decisions.
This is the first time in evolution
that this has happened.
If we want to avoid mistakes,
we have to reshape the environment
we've built around us rather
than hope to change ourselves.
We've achieved
a lot despite all of these biases.
If we are aware of them,
we can probably do things
like design our institutions
and our regulations
and our own personal environments
and working lives to minimise
the effect of those biases
and help us think
about how to overcome them.
We are limited, we're not perfect.
We're irrational in all kinds
of ways,
but we can build a world
that is compatible with this
and get us to make better decisions
rather than worse decisions.
That's my hope.
And by accepting our inner stranger,
we may come to a better
understanding of our own minds.
I think it is important, in general,
to be aware of where beliefs
come from.
And if we think that we
have reasons for what
we believe,
that is often a mistake,
that our beliefs and our wishes
and our hopes
are not always anchored
in reasons.
They're anchored in something else
that comes from within
and is different.
we are pretty smart.
We like to think we are wise,
rational creatures.
I think we all like to think of
ourselves as Mr Spock to some degree.
You know, we make rational,
conscious decisions.
But we may have to think again.
It's mostly delusion, and we should
just wake up to that fact.
In every decision you make,
there's a battle in your mind
between intuition and logic.
It's a conflict that plays
out in every aspect of your life.
What you eat.
What you believe.
Who you fall in love with.
And most powerfully,
in decisions you make about money.
The moment money enters the picture,
the rules change.
Scientists now have a new way
to understand this battle
in your mind,
how it shapes the decisions
you take, what you believe...
And how it has transformed
our understanding
of human nature itself.
Sitting in the back of this New York
cab is Professor Danny Kahneman.
He's regarded as one of the most
influential psychologists
alive today.
Over the last 40 years,
he's developed some extraordinary
insights
into the way
we make decisions.
I think it can't hurt to have
a realistic view of human nature
and of how the mind works.
His insights come
largely from puzzles.
Take, for instance, the curious
puzzle of New York cab drivers
and their highly illogical
working habits.
Business varies
according to the weather.
On rainy days, everyone wants a cab.
But on sunny days, like today,
fares are hard to find.
Logically, they should spend
a lot of time driving on rainy days,
because it's very easy to find
passengers on rainy days,
and if they are going to take
leisure, it should be on sunny days
but it turns out this is not
what many of them do.
Many do the opposite, working long
hours on slow, sunny days
and knocking off early
when it's rainy and busy.
Instead of thinking logically,
the cabbies are driven by an urge
to earn a set amount of cash
each day, come rain or shine.
Once they hit that target,
they go home.
They view being
below the target as a loss
and being above the target
as a gain, and they care
more about preventing the loss
than about achieving the gain.
So when they reach their goal
on a rainy day, they stop...
..which really doesn't make sense.
If they were trying to maximise
their income,
they would take their leisure
on sunny days
and they would drive all day
on rainy days.
It was this kind of glitch
in thinking
that Kahneman realised could reveal
something profound
about the inner workings
of the mind.
Anyone want to take
part in an experiment?
And he began to devise
a series of puzzles and questions
which have become
classic psychological tests.
It's a simple experiment.
It's a very attractive game...
Don't worry, sir. Nothing strenuous.
..Posing problems where you can
recognise in yourself
that your intuition is going
the wrong way.
The type of puzzle where the answer
that intuitively springs to mind,
and that seems obvious, is,
in fact, wrong.
Here is one that I think
works on just about everybody.
I want you to imagine a guy
called Steve.
You tell people that Steve,
you know, is a meek and tidy soul
with a passion for detail
and very little interest in people.
He's got a good eye for detail.
And then you tell people
he was drawn at random.
From a census of the American
population.
What's the probability that he is
a farmer or a librarian?
So do you think it's more likely
that Steve's going to end up
working as a librarian or a farmer?
What's he more likely to be?
Maybe a librarian.
Librarian.
Probably a librarian.
A librarian.
Immediately, you know,
the thought pops to mind
that it's a librarian, because he
resembled the prototype of librarian.
Probably a librarian.
In fact, that's probably
the wrong answer,
because, at least in
the United States,
there are 20 times as many male
farmers as male librarians.
Librarian. Librarian.
So there are probably more meek
and tidy souls you know
who are farmers than meek
and tidy souls who are librarians.
This type of puzzle seemed to reveal
a discrepancy
between intuition and logic.
Another example is...
Imagine a dictionary. I'm going to
pull a word out of it at random.
Which is more likely,
that a word that you pick
out at random has the letter
R in the first position or has
the letter R in the third position?
Erm, start with the letter R. OK.
People think the first position,
because it's easy to
think of examples.
Start with it. First.
In fact, there are nearly three
times as many words with
R as the third letter,
than words that begin with R,
but that's not
what our intuition tells us.
So we have examples like that.
Like, many of them.
Kahneman's interest in human error
was first sparked in the 1970s
when he and his colleague,
Amos Taverski,
began looking at their own mistakes.
It was all in ourselves.
That is, all the mistakes that we
studied were mistakes
that we were prone to make.
In my hand here, I've got £100.
Kahneman and Taverski found
a treasure trove of these puzzles.
Which would you prefer?
They unveiled
a catalogue of human error.
Would you rather go to Rome with
a free breakfast?
And opened a Pandora's Box
of mistakes.
A year and a day.
25?
But the really interesting
thing about these mistakes is,
they're not accidents.
75?
They have a shape, a structure.
I think Rome.
Skewing our judgment.
20.
What makes them interesting
is that they are not random errors.
They are biases,
so the difference between a bias
and a random error is that
a bias is predictable.
It's a systematic error that is
predictable.
Kahneman's puzzles prompt
the wrong reply again.
More likely.
And again.
More likely. More likely?
And again.
Probably more likely?
It's a pattern of human error that
affects every single one of us.
On their own, they may seem small.
Ah, that seems to be
the right drawer.
But by rummaging
around in our everyday mistakes...
That's very odd.
..Kahneman started a revolution in
our understanding of human thinking.
A revolution so profound
and far-reaching that he was
awarded a Nobel prize.
So if you want to see the medal,
that's what it looks like.
That's it.
Psychologists have long strived
to pick apart the moments
when people make decisions.
Much of the focus has been
on our rational mind,
our capacity for logic.
But Kahneman
saw the mind differently.
He saw a much more powerful role
for the other side of our minds,
intuition.
And at the heart of human thinking,
there's a conflict between logic and
intuition that leads to mistakes.
Kahneman and Taverski started this
trend
of seeing the mind
differently.
They found these
decision-making illusions,
these spots where our intuitions
just make us decide
these things
that just don't make any sense.
The work of Kahneman and Taverski
has really been revolutionary.
It kicked off a flurry
of experimentation
and observation to understand
the meaning of these mistakes.
People didn't really appreciate,
as recently as 40 years ago,
that the mind didn't really
work like a computer.
We thought that we were very
deliberative, conscious creatures
who weighed up the costs
and benefits of action,
just like Mr Spock would do.
By now, it's a fairly coherent
body of work
about ways in which
intuition departs from the rules,
if you will.
And the body of evidence is growing.
Some of the best clues to
the working of our minds come not
when we get things right,
but when we get things wrong.
In a corner of this otherwise
peaceful campus,
Professor Chris Chabris
is about to start a fight.
All right, so what I want you guys to
do is stay in this area over here.
The two big guys grab you
and sort of like start pretending to
punch you, make some sound effects.
All right, this looks good.
All right,
that seemed pretty good to me.
It's part of an experiment
that shows a pretty shocking mistake
that any one of us could make.
A mistake where you don't notice
what's happening right in front of
your eyes.
As well as a fight, the experiment
also involves a chase.
It was inspired by an incident
in Boston in 1995,
when a young police officer,
Kenny Conley,
was in hot pursuit
of a murder suspect.
It turned out that this
police officer,
while he was chasing the suspect,
had run right past some other
police officers
who were beating up another suspect,
which, of course,
police officers are not supposed
to do under any circumstances.
When the police tried to investigate
this case of police brutality,
he said, "I didn't see anything
going on there,
"all I saw was the suspect
I was chasing."
And nobody could believe this
and he was prosecuted for perjury
and obstruction of justice.
Everyone was convinced that
Conley was lying.
We don't want you
to be, like, closer than about...
Everyone, that is,
apart from Chris Chabris.
He wondered
if our ability to pay attention
is so limited that any one of us
could run past a vicious fight
without even noticing.
And it's
something he's putting to the test.
Now, when you see someone
jogging across the footbridge,
then you should get started.
Jackie, you can go.
In the experiment,
the subjects are asked to focus
carefully on a cognitive task.
They must count the number of times
the runner taps her head with
each hand.
Would they, like the Boston
police officer,
be so blinded by their
limited attention
that they would
completely fail to notice the fight?
About 45 seconds or a minute into
the run, there was the fight.
And they could actually
see the fight from a ways away,
and it was about 20 feet away from
them when they got closest to them.
The fight is
right in their field of view,
and at least partially visible
from as far back as the footbridge.
It seems incredible that anyone
would fail to notice something
so apparently obvious.
They completed the three-minute
course
and then we said, "Did you notice
anything unusual?"
Yes.
What was it?
It was a fight.
Sometimes they would have noticed
the fight and they would say,
"Yeah, I saw some guys fighting", but
a large percentage of people said
"We didn't see anything unusual
at all."
And when we asked them specifically
about whether they saw anybody
fighting, they still said no.
In fact, nearly 50% of people
in the experiment
completely failed
to notice the fight.
Did you see anything
unusual during the run?
No.
OK. Did you see some people fighting?
No.
We did at night time
and we did it in the daylight.
Even when we did it in daylight,
many people ran right past the fight
and didn't notice it at all.
Did you see anything
unusual during the run?
No, not really.
OK, did you see some people
fighting?
No.
You really didn't see anyone
fighting? No.
Does it surprise you that you
would have missed that?
They were about 20
feet off the path.
Oh!
You ran right past them.
Completely missed that, then. OK.
Maybe what happened to Conley was,
when you're really paying
attention to one thing
and focusing a lot of mental energy
on it, you can miss things
that other people are going to think
are completely obvious, and in fact,
that's what the jurors said
after Conley's trial.
They said "We couldn't believe that
he could miss something like that".
It didn't make any sense.
He had to have been lying.
It's an unsettling phenomenon
called inattentional blindness
that can affect us all.
Some people have said things like
"This shatters my faith in my own
mind",
or, "Now I don't know
what to believe",
or, "I'm going to be confused from
now on."
But I'm not sure that that feeling
really stays with them very long.
They are going to go
out from the experiment, you know,
walk to the next place they're going
or something like that
and they're going to have
just as much inattentional blindness
when they're walking down the street
that afternoon as they did before.
This experiment reveals a powerful
quandary about our minds.
We glide through the world
blissfully unaware
of most of what we do and
how little we really know our minds.
For all its brilliance,
the part of our mind we call
ourselves is extremely limited.
So how do we manage to
navigate our way through
the complexity of daily life?
Every day, each one of us
makes somewhere between two
and 10,000 decisions.
When you think about our daily
lives,
it's really a long, long
sequence of decisions.
We make decisions probably
at a frequency
that is close to the frequency
we breathe.
Every minute, every second, you're
deciding where to move your legs,
and where to move your eyes,
and where to move your limbs,
and when you're eating a meal,
you're making all kinds of
decisions.
And yet the vast
majority of these decisions,
we make without even realising.
It was Danny Kahneman's
insight that we have two systems
in the mind for making decisions.
Two ways of thinking:
fast and slow.
You know, our mind has really two
ways of operating,
and one is sort of fast-thinking,
an automatic effortless mode,
and that's the one
we're in most of the time.
This fast, automatic mode
of thinking, he called System 1.
It's powerful, effortless and
responsible for most of what we do.
And System 1 is, you know,
that's what happens most of the time.
You're there, the world around you
provides all kinds of stimuli
and you respond to them.
Everything that you see and that you
understand, you know,
this is a tree,
that's a helicopter back there,
that's the Statue of Liberty.
All of this visual perception,
all of this comes through System 1.
The other mode is slow, deliberate,
logical and rational.
This is System 2 and it's the bit
you think of as you,
the voice in your head.
The simplest example of the two
systems is
really two plus two is on one side,
and 17 times 24 is on the other.
What is two plus two?
Four. Four. Four.
Fast System 1 is always in gear,
producing instant answers.
And what's two plus two? Four.
A number comes to your mind.
Four. Four. Four.
It is automatic.
You do not intend for it to happen.
It just happens to you.
It's almost like a reflex.
And what's 22 times 17?
That's a good one.
But when we have to pay attention
to a tricky problem,
we engage slow-but-logical System 2.
If you can do that in your head,
you'll have to follow some rules
and to do it sequentially.
And that is not automatic at all.
That involves work, it involves
effort, it involves concentration.
22 times 17?
There will be physiological
symptoms.
Your heart rate will accelerate,
your pupils will dilate,
so many changes will occur while
you're performing this computation.
Three's...oh, God!
That's, so...
220 and seven times 22 is...
..54. 374?
OK. And can I get you to just walk
with me for a second? OK.
Who's the current...?
System 2 may be clever, but
it's also slow, limited and lazy.
I live in Berkeley during summers
and I walk a lot.
And when I walk very fast,
I cannot think.
Can I get you to count backwards
from 100 by 7? Sure.
193, 80...
It's hard when you're walking.
It takes up, interestingly enough,
the same kind of executive
function as...as thinking.
Fourty...four?
If you are expected to do something
that demands a lot of effort,
you will stop even walking.
Eighty...um...six?
51.
Uh....
16,
9, 2?
Everything that you're aware of
in your own mind
is part of this slow, deliberative
System 2.
As far as you're concerned,
it is the star of the show.
Actually, I describe System 2
as not the star.
I describe it as, as a minor
character who thinks he is the star,
because, in fact,
most of what goes on
in our mind is automatic.
You know, it's in the domain
that I call System 1.
System 1 is an old, evolved bit
of our brain, and it's remarkable.
We couldn't survive without it
because System 2 would explode.
If Mr Spock had to make every
decision for us,
it would be very slow and effortful
and our heads would explode.
And this vast, hidden domain
is responsible
for far more than
you would possibly believe.
Having an opinion,
you have an opinion immediately,
whether you like it or not,
whether you like something or not,
whether you're for something or not,
liking someone or not liking them.
That, quite often, is something
you have no control over.
Later, when you're asked for reasons,
you will invent reasons.
And a lot of what System 2 does
is, it provides reason.
It provides rationalisations which
are not necessarily the true reasons
for our beliefs and our emotions
and our intentions and what we do.
You have two systems of thinking
that steer you through life...
Fast, intuitive System 1
that is incredibly powerful
and does most of the driving.
And slow, logical System 2
that is clever, but a little lazy.
Trouble is, there's a bit
of a battle between them
as to which one is
driving your decisions.
And this is where
the mistakes creep in,
when we use the wrong system
to make a decision.
Just going to ask you
a few questions.
We're interested in what you think.
This question concerns this nice
bottle of champagne I have here.
Millesime 2005, it's a good year,
genuinely nice, vintage bottle.
These people think they're about
to use slow, sensible System 2
to make a rational decision
about how much they would pay
for a bottle of champagne.
But what they don't know
is that their decision
will actually be taken totally
without their knowledge by their
hidden, fast auto-pilot, System 1.
And with the help of a bag
of ping-pong balls,
we can influence that decision.
I've got a set of numbered balls
here from 1 to 100 in this bag.
I'd like you to reach in
and draw one out at random for me,
if you would.
First, they've got to choose a ball.
The number says ten. Ten. Ten. Ten.
They think it's a random number,
but in fact, it's rigged.
All the balls are marked
with the low number ten.
This experiment is all about
the thoughtless creation of habits.
It's about how we make one decision,
and then other decisions follow it
as if the first decision
was actually meaningful.
What we do is purposefully,
we give people a first decision
that is clearly meaningless.
Ten. Ten, OK. Would you be willing
to pay ten pounds
for this nice bottle
of vintage champagne?
I would, yes.
No. Yeah, I guess. OK.
This first decision is meaningless,
based as it is on
a seemingly random number.
But what it does do is lodge
the low number ten in their heads.
Would you buy it for ten pounds?
Yes, I would. Yes. You would? OK.
Now for the real question
where we ask them
how much they'd actually pay
for the champagne.
What's the maximum amount you think
you'd be willing to pay?
20? OK.
Seven pounds. Seven pounds, OK.
Probably ten pound.
A range of fairly low offers.
But what happens if we prime people
with a much higher number,
65 instead of 10?
What does that one say? 65. 65, OK.
65. OK.
It says 65.
How will this affect the price
people are prepared to pay?
What's the maximum you would be
willing to pay for this
bottle of champagne?
40? £45. 45, OK.
50.
40 quid? OK.
£50? £50?
Yeah, I'd pay between 50 and £80.
Between 50 and 80? Yeah.
Logic has gone out of the window.
The price people are prepared to pay
is influenced by nothing more
than a number written
on a ping-pong ball.
It suggests that
when we can't make decisions,
we don't evaluate
the decision in itself.
Instead what we do is,
we try to look at other similar
decisions we've made in the past
and we take those decisions
as if they were good decisions
and we say to ourselves,
"Oh, I've made
this decision before.
"Clearly, I don't need to go ahead
and solve this decision.
"Let me just use what
I did before and repeat it,
"maybe with some modifications."
This anchoring effect comes
from the conflict
between our two systems of thinking.
Fast System 1 is a master
of taking short cuts
to bring about
the quickest possible decision.
What happens is,
they ask you a question
and if the question is difficult
but there is a related question that
is a lot...that is somewhat simpler,
you're just going to answer
the other question and...
and not even notice.
So the system does all kinds
of short cuts to feed us
the information in a faster way
and we can make actions,
and the system is accepting
some mistakes.
We make decisions using
fast System 1
when we really should be using
slow System 2.
And this is why we make the mistakes
we do,
systematic mistakes
known as cognitive biases.
Nice day.
Since Kahneman
first began investigating
the glitches in our thinking,
more than 150 cognitive biases
have been identified.
We are riddled with these
systematic mistakes
and they affect every
aspect of our daily lives.
Wikipedia has a very big list
of biases
and we are finding new ones
all the time.
One of the biases that I think is
the most important
is what's called
the present bias focus.
It's the fact that we focus on now
and don't think very much
about the future.
That's the bias that causes things
like overeating and smoking,
and texting and driving,
and having unprotected sex.
Another one is called
the halo effect,
and this is the idea
that if you like somebody
or an organisation,
you're biased to think that
all of its aspects are good,
that everything is good about it.
If you dislike it,
everything is bad.
People really are quite
uncomfortable, you know,
by the idea that Hitler
loved children, you know.
He did.
Now, that doesn't make him
a good person,
but we feel uncomfortable to see
an attractive trait
in a person that we consider,
you know, the epitome of evil.
We are prone to think that
what we like is all good
and what we dislike is all bad.
That's a bias.
Another particular favourite of mine
is the bias to get attached
to things that we ourselves
have created.
We call it the IKEA effect.
Well, you've got loss aversion,
risk aversion, present bias.
Spotlight effect, and the spotlight
effect is the idea
that we think that other people pay
a lot of attention to us
when in fact, they don't.
Confirmation bias.
Overconfidence is a big one.
But what's clear is that
there's lots of them.
There's lots of ways for us
to get things wrong.
You know, there's one way to do
things right
and many ways to do things wrong,
and we're capable of many of them.
These biases explain
so many things that we get wrong.
Our impulsive spending.
Trusting the wrong people.
Not seeing
the other person's point of view.
Succumbing to temptation.
We are so riddled with these biases,
it's hard to believe
we ever make a rational decision.
But it's not just our everyday
decisions that are affected.
What happens if you're an expert,
trained in making decisions
that are a matter of life and death?
Are you still destined to make
these systematic mistakes?
On the outskirts of Washington DC,
Horizon has been granted access
to spy on the spooks.
Welcome to
Analytical Exercise Number Four.
Former intelligence analyst
Donald Kretz
is running an ultra-realistic
spy game.
This exercise will take place in
the fictitious city of Vastopolis.
Taking part are a mixture
of trained intelligence analysts
and some novices.
Due to an emerging threat...
..a terrorism taskforce
has been stood up.
I will be the terrorism
taskforce lead
and I have recruited all of you
to be our terrorism analysts.
The challenge facing the analysts
is to thwart a terrorist
threat against a US city.
The threat at this point
has not been determined.
It's up to you to figure out
the type of terrorism...
..and who's responsible
for planning it.
The analysts face a number of tasks.
They must first investigate
any groups who may pose a threat.
Your task is to write a report.
The subject in this case
is the Network of Dread.
The mayor has asked for this
15 minutes from now.
Just like in the real world,
the analysts have access
to a huge amount of data streaming
in, from government agencies,
social media, mobile phones
and emergency services.
The Network of Dread turns out to be
a well-known international
terror group.
They have the track record,
the capability
and the personnel
to carry out an attack.
The scenario that's emerging
is a bio-terror event,
meaning
it's a biological terrorism attack
that's going to take place
against the city.
If there is an emerging threat,
they are the likely candidate.
We need to move onto the next task.
It's now 9th April.
This is another request
for information,
this time on something or someone
called the Masters of Chaos.
The Masters of Chaos are
a group of cyber-hackers,
a local bunch of misfits
with no history of violence.
And while the analysts continue
to sift through the incoming data,
behind the scenes, Kretz is
watching their every move.
In this room, we're able to
monitor what the analysts are doing
throughout the entire exercise.
We have set up a knowledge base
into which we have been inserting
data
throughout the course
of the day.
Some of them are related
to our terrorist threat,
many of them are not.
Amidst the wealth of data
on the known terror group,
there's also evidence coming in
of a theft at a university biology
lab
and someone has hacked into the
computers of a local freight firm.
Each of these messages represents,
essentially, a piece of the puzzle,
but it's a puzzle that you don't
have the box top to,
so you don't have the picture
in advance,
so you don't know what pieces
go where.
Furthermore, what we have is
a bunch of puzzle pieces that don't
even go with this puzzle.
The exercise is part of a series
of experiments to investigate
whether expert intelligence agents
are just as prone to mistakes from
cognitive bias as the rest of us,
or whether their training
and expertise makes them immune.
I have a sort of insider's
point of view of this problem.
I worked a number of years
as an intelligence analyst.
The stakes are incredibly high.
Mistakes can often be life
and death.
We roll ahead now.
The date is 21st May.
If the analysts are able
to think rationally,
they should be able
to solve the puzzle.
But the danger is, they will fall
into the trap set by Kretz
and only pay attention
to the established terror group,
the Network of Dread.
Their judgment may be clouded
by a bias called confirmation bias.
Confirmation bias is
the most prevalent bias of all,
and it's where we tend to search
for information
that supports
what we already believe.
Confirmation bias can easily lead
people
to ignore
the evidence in front of their eyes.
And Kretz is able to monitor
if the bias kicks in.
We still see that they're searching
for Network of Dread.
That's an indication that we may have
a confirmation bias operating.
The Network of Dread
are the big guys -
they've done it before, so you
would expect they'd do it again.
And I think we're starting to see
some biases here.
Analysts desperately want
to get to the correct answer,
but they're affected by the same
biases as the rest of us.
So far, most of our analysts
seem to believe
that the Network of Dread is
responsible for planning this attack,
and that is completely wrong.
How are we doing?
It's time for the analysts
to put themselves on the line
and decide who the terrorists are
and what they're planning.
So what do you think?
It was a bio-terrorist attack.
I had a different theory.
What's your theory?
Cos I may be missing something here,
too.
They know that the Network of Dread
is a terrorist group.
They know that the Masters of Chaos
is a cyber-hacking group.
Either to the new factory
or in the water supply.
Lots of dead fish floating
up in the river.
The question is, did any
of the analysts manage to dig out
the relevant clues
and find the true threat?
In this case, the actual threat
is due to the cyber-group,
the Masters of Chaos,
who become increasingly radicalised
throughout the scenario
and decide to take out their anger
on society, essentially.
Who convinced them to switch
from cyber-crime to bio-terrorism?
Or did they succumb
to confirmation bias
and simply pin the blame
on the usual suspects?
Will they make that connection?
Will they process that evidence
and assess it accordingly,
or will their confirmation bias
drive them
to believe that it's a more
traditional type of terrorist group?
I believe that the Masters of Chaos
are actually the ones behind it.
It's either a threat or not a
threat, but the Network of Dread?
And time's up. Please go ahead
and save those reports.
At the end of the exercise,
Kretz reveals the true identity
of the terrorists.
We have a priority message
from City Hall.
The terrorist attack was thwarted,
the planned bio-terrorist attack
by the Masters of Chaos
against Vastopolis was thwarted.
The mayor expresses his thanks
for a job well done.
Show of hands, who...who got it?
Yeah.
Out of 12 subjects,
11 of them got the wrong answer.
The only person to spot the true
threat was in fact a novice.
All the trained experts fell prey
to confirmation bias.
It is not typically the case
that simply being trained
as an analyst
gives you the tools
you need to overcome cognitive bias.
You can learn techniques
for memory improvement.
You can learn techniques
for better focus,
but techniques to eliminate
cognitive bias
just simply don't work.
And for intelligence analysts
in the real world,
the implications of making mistakes
from these biases are drastic.
Government reports and studies
over the past decade or so
have cited experts as believing
that cognitive bias
may have played a role
in a number of very significant
intelligence failures,
and yet it remains
an understudied problem.
Heads.
Heads.
But the area of our lives
in which these systematic mistakes
have the most explosive impact
is in the world of money.
The moment money enters the picture,
the rules change.
Many of us think that
we're at our most rational
when it comes to decisions
about money.
We like to think we know how to spot
a bargain, to strike a good deal,
sell our house at the right time,
invest wisely.
Thinking about money the right way
is one of the most
challenging things for human nature.
But if we're not as rational as we
like to think,
and there is a hidden
force at work shaping our decisions,
are we deluding ourselves?
Money brings with it
a mode of thinking.
It changes the way
we react to the world.
When it comes to money,
cognitive biases play havoc
with our best intentions.
There are many mistakes that people
make when it comes to money.
Kahneman's insight into our mistakes
with money
were to revolutionise our
understanding of economics.
It's all about a crucial difference
in how we feel
when we win or lose
and our readiness to take a risk.
I would like to take a risk.
Take a risk, OK?
Let's take a risk.
Our willingness to take a gamble
is very different depending on
whether we are faced
with a loss or a gain.
Excuse me, guys,
can you spare two minutes to help us
with a little experiment? Try and
win as much money as you can, OK?
OK. OK?
In my hands here I have £20, OK?
Here are two scenarios.
And I'm going to give you ten.
In the first case,
you are given ten pounds.
That's now yours.
Put it in your pocket, take it away,
spend it on a drink
on the South Bank later.
OK. OK?
OK.
Then you have to make a choice
about how much more you could gain.
You can either take
the safe option, in which case,
I give you an additional five,
or you can take a risk.
If you take a risk,
I'm going to flip this coin.
If it comes up heads, you win ten,
but if it comes up tails,
you're not going to win any more.
Would you choose the safe option
and get an extra five pounds
or take a risk and maybe win
an extra ten or nothing?
Which is it going to be?
I'd go safe.
Safe, five? Yeah.
Take five. You'd take five?
Yeah, man. Sure? There we go.
Most people presented
with this choice
go for the certainty
of the extra fiver.
Thank you very much.
Told you it was easy.
In a winning frame of mind, people
are naturally rather cautious.
That's yours, too.
That was it?
That was it. Really? Yes. Eh?
But what about losing?
Are we similarly cautious
when faced with a potential loss?
In my hands, I've got £20
and I'm going to give that to you.
That's now yours.
OK. You can put it in your handbag.
This time, you're given £20.
And again, you must make a choice.
Would you choose to accept a safe
loss of £5 or would you take a risk?
If you take a risk,
I'm going to flip this coin.
If it comes up heads,
you don't lose anything,
but if it comes up tails,
then you lose ten pounds.
In fact, it's exactly
the same outcome.
In both cases, you face a choice
between ending up with
a certain £15 or tossing a coin
to get either ten or twenty.
I will risk losing ten or nothing.
OK.
But the crucial surprise here
is that when the choice is framed
in terms of a loss,
most people take a risk.
Take a risk. Take a risk, OK.
I'll risk it. You'll risk it? OK.
Our slow System 2 could probably
work out
that the outcome is
the same in both cases.
And that's heads, you win.
But it's too limited and too lazy.
That's the easiest £20
you'll ever make.
Instead, fast System 1 makes
a rough guess based on change.
And that's all there is to it,
thank you very much. Oh, no! Look.
And System 1 doesn't like losing.
If you were to lose £10
in the street today
and then find £10 tomorrow,
you would be financially unchanged
but actually we respond to changes,
so the pain of the loss of £10 looms
much larger, it feels more painful.
In fact, you'd probably have to find
£20
to offset the pain that
you feel by losing ten.
Heads.
At the heart of this,
is a bias called loss aversion,
which affects
many of our financial decisions.
People think in terms of gains
and losses.
Heads. It's tails. Oh!
And in their thinking, typically,
losses loom larger than gains.
We even have an idea by...by
how much,
by roughly a factor of two
or a little more than two.
That is loss aversion,
and it certainly was
the most important thing
that emerged from our work.
It's a vital insight into
human behaviour,
so important that it led
to a Nobel prize
and the founding of an entirely
new branch of economics.
When we think we're winning,
we don't take risks.
But when we're faced with a loss,
frankly, we're a bit reckless.
But loss aversion
doesn't just affect people
making casual five pound bets.
It can affect anyone at any time,
including those who work in
the complex system of high finance,
in which trillions
of dollars are traded.
In our current complex environments,
we now have the means
as well as the motive
to make very serious mistakes.
The bedrock of economics
is that people think rationally.
They calculate risks,
rewards and decide accordingly.
But we're not always rational.
We rarely behave like Mr Spock.
For most of our decisions,
we use fast, intuitive,
but occasionally unreliable
System 1.
And in a global financial market,
that can lead
to very serious problems.
I think what the financial crisis
did was, it simply said,
"You know what?
"People are a lot more vulnerable
to psychological pitfalls
"than we really understood before."
Basically, human psychology
is just too flawed
to expect that we could avert
a crisis.
Understanding these pitfalls has led
to a new branch of economics.
Behavioural economics.
Thanks to psychologists
like Hersh Shefrin,
it's beginning to establish
a toehold in Wall Street.
It takes account of the way
we actually make decisions
rather than how we say we do.
Financial crisis, I think,
was as large a problem as it was
because certain psychological
traits like optimism,
over-confidence and confirmation bias
played a very large role
among a part of the economy
where serious mistakes could be made,
and were.
But for as long as our financial
system assumes we are rational,
our economy will remain vulnerable.
I'm quite certain
that if the regulators listened
to behavioural economists early on,
we would have designed
a very different financial system
and we wouldn't have had
the incredible increase
in housing market and we wouldn't
have this financial catastrophe.
And so when Kahneman collected
his Nobel prize,
it wasn't for psychology,
it was for economics.
The big question is, what can we do
about these systematic mistakes?
Can we hope to find a way
round our fast-thinking biases
and make better decisions?
To answer this,
we need to know the evolutionary
origins of our mistakes.
Just off the coast of Puerto Rico
is probably the best place
in the world to find out.
The tiny island of Cayo Santiago.
So we're now in the boat,
heading over to Cayo Santiago.
This is an island filled
with a thousand rhesus monkeys.
Once you pull in, it looks
a little bit like you're going
to Jurassic Park. You're not sure
what you're going to see.
Then you'll see your first monkey,
and it'll be comfortable, like,
"Ah, the monkeys are here,
everything's great."
It's an island devoted
to monkey research.
You see the guys hanging
out on the cliff up there?
Pretty cool.
The really special thing about
Cayo Santiago
is that the animals here,
because they've grown up over the
last seven years around humans,
they're completely habituated,
and that means we can get
up close to them, show them stuff,
look at how they make decisions.
We're able to do this here
in a way that we'd never be able
to do it anywhere else, really.
It's really unique.
Laurie Santos is here to find out
if monkeys make the same mistakes
in their decisions that we do.
Most of the work we do is comparing
humans and other primates,
trying to ask what's special
about humans.
But really,
what we want to understand is,
what's the evolutionary origin
of some of our dumber strategies,
some of those spots
where we get things wrong?
If we could understand
where those came from,
that's where we'll get some insight.
If Santos can show us
that monkeys have the same cognitive
biases as us,
it would suggest that
they evolved a long time ago.
And a mental strategy that old would
be almost impossible to change.
We started this work around the time
of the financial collapse.
So, when we were thinking about
what dumb strategies could we look at
in monkeys, it was pretty obvious
that some
of the human economic strategies
which were in the news
might be the first thing to look at.
And one of the particular things
we wanted to look at was
whether or not
the monkeys are loss averse.
But monkeys, smart as they are,
have yet to start using money.
And so that was
kind of where we started.
We said, "Well, how can
we even ask this question
"of if monkeys
make financial mistakes?"
And so we decided to do it
by introducing the monkeys
to their own new currency
and just let them buy their food.
So I'll show you some of this stuff
we've been up to with the monkeys.
Back in her lab at Yale,
she introduced a troop of monkeys
to their own market,
giving them round shiny tokens
they could exchange for food.
So here's Holly.
She comes in, hands over a token
and you can see, she just gets
to grab the grape there.
One of the first things we wondered
was just,
can they in some sense learn
that a different store sells
different food at different prices?
So what we did was, we presented
the monkeys with situations
where they met traders who sold
different goods at different rates.
So what you'll see in this clip is
the monkeys meeting a new trader.
She's actually selling grapes
for three grapes per one token.
And what we found is that
in this case,
the monkeys are pretty rational.
so when they get a choice of a guy
who sells, you know,
three goods for one token,
they actually shop more at that guy.
Having taught the monkeys
the value of money,
the next step was to see if monkeys,
like humans,
suffer from that most crucial bias,
loss aversion.
And so what we did was, we introduced
the monkeys to traders
who either gave out losses or gains
relative to what they should.
So I could make the monkey think
he's getting a bonus
simply by having him trade
with a trader who's starting
with a single grape
but then when the monkey
pays this trader,
she actually gives him an extra,
so she gives him a bonus.
At the end, the monkey gets two,
but he thinks
he got that second one as a bonus.
We can then compare what the monkeys
do with that guy
versus a guy
who gives the monkey losses.
This is a guy who shows up,
who pretends he's going to sell
three grapes,
but then when the monkey actually
pays this trader,
he'll take one of the grapes away
and give the monkeys only two.
The big question then
is how the monkeys react
when faced with a choice
between a loss and a gain.
So she'll come in,
she's met these two guys before.
You can see she goes
with the bonus option,
even waits patiently for her
additional piece to be added here,
and then takes the bonus, avoiding
the person who gives her losses.
So monkeys hate losing
just as much as people.
And crucially, Santos found
that monkeys, as well,
are more likely to take risks
when faced with a loss.
This suggests to us
that the monkeys seem to frame
their decisions
in exactly the same way we do.
They're not thinking just
about the absolute,
they're thinking relative to what
they expect.
And when they're getting
less than they expect,
when they're getting losses,
they too become more risk-seeking.
The fact that we share this bias
with these monkeys suggests
that it's an ancient strategy etched
into our DNA
more than 35 million years ago.
And what we learn
from the monkeys is that
if this bias is really that old,
if we really have had this strategy
for the last 35 million years,
simply deciding to overcome it
is just not going to work.
We need better ways to make ourselves
avoid some of these pitfalls.
Making mistakes, it seems, is just
part of what it is to be human.
We are stuck
with our intuitive inner stranger.
The challenge this poses
is profound.
If it's human nature to make
these predictable mistakes
and we can't change that,
what, then, can we do?
We need to accept
ourselves as we are.
The cool thing about being
a human versus a monkey
is that we have a deliberative self
that can reflect on our biases.
System 2 in us has for the first time
realised
that there's a System 1,
and with that realisation,
we can shape the way
we set up policies.
We can shape the way we set up
situations to allow ourselves
to make better decisions.
This is the first time in evolution
that this has happened.
If we want to avoid mistakes,
we have to reshape the environment
we've built around us rather
than hope to change ourselves.
We've achieved
a lot despite all of these biases.
If we are aware of them,
we can probably do things
like design our institutions
and our regulations
and our own personal environments
and working lives to minimise
the effect of those biases
and help us think
about how to overcome them.
We are limited, we're not perfect.
We're irrational in all kinds
of ways,
but we can build a world
that is compatible with this
and get us to make better decisions
rather than worse decisions.
That's my hope.
And by accepting our inner stranger,
we may come to a better
understanding of our own minds.
I think it is important, in general,
to be aware of where beliefs
come from.
And if we think that we
have reasons for what
we believe,
that is often a mistake,
that our beliefs and our wishes
and our hopes
are not always anchored
in reasons.
They're anchored in something else
that comes from within
and is different.