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Human Nature

This is a good book for anyone interested in decision theory

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In 1974, Amos Tversky and Daniel Kahneman published a paper in the Science journal titled ‘Judgement Under Uncertainty: Heuristics and Biases’. The article ?talks about how decisions are frequently based on beliefs concerning the likelihood of certain outcomes such as election results, guilt of a defendant and so on. Sometimes these ?beliefs ?take the form of qualitative assessment?s. A member of the jury ?holding an opinion : “?I think ?he is guilty”. Sometimes ?these are expressed as subjective probabilities (numerical form). The paper ?proposes that people rely on “a limited set of heuristic principles” that (over)simplify the tasks of assessing probabilities and predicting outcomes to simple judgemental opera-
tions that can many times? be just plain wrong! ?The paper discussed three cognitive biases? that affect decision making: representativeness, availability of instances/scenarios and adjustment from an anchor, ?the last one, typically employed in numerical predictions. They made the case that a better understanding of these ?biases ?would lead to improved ?decision-making in uncertain situations.

Further? ?in 1979, Amos Tversky  and Kahneman, published a paper on prospect theory? as an alternative to? the? expected utility theory to explain decision making under uncertainty.? ?They noted that ?when deciding under risk, people tend to underweight outcomes? which are probable,? as opposed to  outcomes which? are certain. They called this the “certainty effect”. ?To explain how people decide under uncertainty, they proposed an alternative theory of choice based on “decision weights” that would normally be lower than? the? corresponding probabilities? except in the range of low probabilities ?of occurrence ?(overweighting of low probability may contribute to attractiveness of ?car ?insurance or the lottery)?.

The Undoing Project (Penguin)is a biographical account of? the lives of? Tversky and Kahneman?,? interwoven with a primer on their work??:? where do cognitive biases come from?,? how do cognitive biases and “heuristics” cause mental errors and how do they? ?affect ?peoples’ ?decision-making under uncertainty. The book tells the story well. The baseball section at the beginning of the book is ?a bit ?fluffy and tedious for non-American readers. Once you get past that, it is fascinating to read about the lives of Tversky  and Kahneman, the former an extrovert with an impressive career in the Israeli military and the Israeli university, the latter? a fugitive from Nazis in his early childhood? and despite an equally impressive career, an introvert often assailed by self-doubt??. How the unlikely pair got together ??and how their personalities played perfect foil for each other in creating a collective body of work that challenged and changed the hitherto held theories on human behaviour, makes for a compelling read.

Lewis is a gifted story-teller. This is a good book for anyone interested in decision theory.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Magazine 24 June 2017 book review

Shyam Ramamurthy

The author is an entrepreneur and mentors product startups

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