Stoicism in Thinking Fast and Slow

Stoicism in Thinking Fast and Slow

“We spend much of our day anticipating, and trying to avoid, the emotional pains we inflict on ourselves,” writes Daniel Kahneman in his book Thinking Fast and Slow. “How seriously should we take these intangible outcomes, the self-administered punishments (and occasional rewards) that we experience as we score our lives?”


Kahneman’s point is that emotions such as regret greatly influence the decisions we make. We are so afraid of loss that we go out of our way to minimize risk, to the point where we may be limiting ourselves so much that we experience costs that are actually greater than the potential loss we wanted to avoid. Kahneman is pointing to something that stoic thinkers, dating back to Marcus Aurelius and Seneca, addressed – our ability to be captured by our emotions and effectively held hostage by fears of the future and pain from the past.


In Letters from a Stoic, Seneca writes, “Why, indeed, is it necessary to summon trouble – which must be endured soon enough when it has once arrived, or to anticipate trouble and ruin the present through fear of the future? It is foolish to be unhappy now because you may be unhappy at some future time.” I think Kahneman would agree with Seneca’s mindset. In his book, Kahneman write that we should accept some level of risk and some level of regret in our lives. We know we will face regret if we experience some type of failure. We can prepare for regret and accept it without having to ruin our lives by taking every possible precaution to try to avoid the potential for failure, pain, and loss. It is inevitable that we are going to lose loved ones and have unfortunate accidents. We can’t prepare and shield ourselves from every danger, unless we want to completely withdrawal from all that makes us human.


Ryan Holiday wrote about the importance of feeling and accepting our emotions in his book The Obstacle is the Way. He wrote, “Real strength lies in the control or, as Nassim Taleb put it, the domestication of one’s emotions, not in pretending they don’t exist.” Kahneman would also agree with Holiday and Taleb. Econs, the term Kahneman and other economists use to refer to theoretical humans who act purely rationally, are not pulled by emotions and cognitive biases. However, Econs are not human. We experience emotions when investments don’t pan out, when bets go the wrong way, and when we face multiple choices and are unsure if we truly made the best decision. We have to live with our emotions and the weight of failure or poor investments. Somehow, we have to work with these emotions and learn to continue even though we know things can go wrong. Holiday would suggest that we must be present, but acknowledge that things wont always go well and learn to recognize and express emotions in a healthy way when things don’t go well.


Kahneman continues, “Perhaps the most useful is to be explicit about the anticipation of regret. If you can remember when things go badly that you considered the possibility of regret carefully before deciding, you are less likely to experience less of it.” In this way, our emotions can be tools to help us make more thoughtful decisions, rather than anchors we are tethered to and hopelessly unable to escape. A thoughtful consideration of emotions, a return to the present moment, and acceptance of the different emotions we may feel after a decision are all helpful in allowing us to live and exist with some level of risk, some level of uncertainty, and some less of loss. These are ideas that stoic thinkers wrote about frequently, and they show up for Kahneman when he considers how we should live with our mental biases and cognitive errors.
Risk Averse and Risk Seeking - Joe Abittan

Risk Averse and Risk Seeking

I would generally categorize myself as somewhat risk averse, but studies from Daniel Kahneman in Thinking Fast and Slow might suggest that I’m not really any different than anyone else. I might just be responding to the set of circumstances that I typically experience, similar to anyone else, and I might just be more aware of times when I am risk averse rather than times when I am more risk seeking. In particular, I might be risk averse in certain situations and categorize those situations correctly, but risk seeking in other situations without recognizing it.


Kahneman uses examples throughout his book to demonstrate to the audience that common cognitive errors and psychological tendencies are shared with even the most savvy readers who would pick up a book like Thinking Fast and Slow. Kahneman even uses anecdotes from his own life and his own thoughts to demonstrate how deep knowledge of cognitive biases and errors doesn’t make one immune. After demonstrating how our minds can lead us to be risk averse in some settings and risk seeking in others, Kahneman cautions us against a typical pattern that many of us will find ourselves in. “It is costly to be risk averse for gains and risk seeking for losses.”


On its own, this quote doesn’t seem to reveal anything to interesting, but in the context of Kahneman’s experiments and examples, it reveals a lot about the way we behave whether we are risk seeking or risk averse. When we are offered a flat sum or a gamble with the potentially win more than the flat sum, we often won’t be willing to take the gamble. The guaranteed money is more appealing to us than the prospects of a higher winning with a small chance of gaining nothing. When it comes to gains, we are often risk averse, preferring the sure thing rather than the possibility of getting more with the risk of getting nothing or facing a cost.


However, we become risk seeking when we stand to lose something. As long as there is a small outside chance that we won’t lose anything, we will avoid a certain loss, risk a larger loss, and take a gamble. In Kahneman’s example he demonstrates how people will quickly turn down a sure loss of $750 for a 25% chance of losing nothing, even when there is a 75% chance of losing $1000.


When you do the math over numerous trials, you see that taking the loss at $750 is better. However, our minds don’t perceive things this way. When we stand to win something, we tend to become conservative and risk averse, but if we stand to lose something, we suddenly become more risk seeking. Combining these two tendencies can be dangerous. It means we can stand to gain much less than we might if we flipped our biases around, and it also means we are more likely to face greater losses with greater frequency than if we had been less risk seeking with regard to losses.


If we think about this in the context of our lives more generally, we can see that categorizing ourselves and most of our friends as either risk averse or risk seeking doesn’t necessarily make sense. When you are young, you really don’t have anything that you will be worried about losing. It makes sense that you might be more risk seeking, more willing to take on behaviors and ideas that are risky, but might have a big upside. You might procrastinate with important homework, retirement savings, and household chores because you know you will lose time (the only thing you may have if you are really young), and you can gamble on the consequences. As you get older, once you are established in a career, own a home, have a 401K, and move through life in general, you stand to lose more. Gains throughout your life become less significant due to Tyler Cowen‘s favorite idea, diminishing marginal returns. It becomes harder to give up the guaranteed gains because the marginal increase in a potential gain through a gamble is less appealing. You become risk averse as you get older and in more situations as you grow to have more things to worry about losing. Therefore, categorizing people as generally risk averse or generally risk seeking is meaningless. You need to look at the circumstances of their lives to understand where they find themselves in terms of social status, what material possessions they have, what their family structure is like, and you will start to understand why they make generally more risk averse or generally more risk seeking decisions. There is probably some variability across people, but I would expect the structures and systems in place around us shape our behavior more than any genetic or inherent factors.
Desperate Gambles

Desperate Gambles

Daniel Kahneman worked with Amos Tversky to develop many of the concepts that today create the principle of Prospect Theory. Many people are familiar with the psychological and economic principle of Game Theory, and Prospect Theory is a similar psychological and economic theory of how people behave when faced with uncertainty. In his book Thinking Fast and Slow, Kahneman shares one of the early surprises of Prospect Theory that he and Tversky uncovered.


Prospect Theory gets its name from the way people behave when faced with different prospects, that is different potential outcomes with different potential likelihoods attached. This is similar to Game Theory, but instead of making decisions while another actor makes decisions that impact your final outcome, in prospect theory you generally are making a choice between a sure thing and an alternative minimal chance outcome. From the theory comes the fourfold pattern, which Kahneman uses to explain why large legal settlements are common, why people participate in lotteries, and why we buy insurance. What was surprising from Prospect Theory was the fourth block in the fourfold pattern, and it describes why some people are willing to take desperate gambles that have incredibly small likelihoods of paying off.


Kahneman writes, “when you consider a choice between a sure loss and a gamble with a high probability of a larger loss, diminishing sensitivity makes the sure loss more aversive, and the certainty effect reduces the aversiveness of the gamble.”


If you are suing a large corporation for damages, you are likely to accept a settlement far below what you are suing for. So, if you are suing the company for $1 million with a small chance of winning (say 5% or less), and the company offers you $95,000, you are likely to feel pressure to take the settlement to make sure you walk away with something. A guaranteed $95,000 is likely to be preferable to the tiny chance that you might actually win your lawsuit and walk away with $1 million. This is one square in the fourfold pattern that fit with Kahneman and Tversky’s prior expectations.


What surprised the pair was the tendencies of individuals when the tables are turned. Say you face the prospect of a large loss of $100,000 with a fringe legal possibility of getting off without facing any losses.  If you are offered a settlement where your costs will be $10,000 instead of $100,000, you are likely to feel pressure to turn down the settlement if there still exists some possibility of getting away without any losses. When we look at the expected value we find that accepting the settlement is the risk averse option, but few of us will be content taking the settlement.


We see this with politicians who take an “I’ll risk burning it all down to stay in power” approach, with poker players who get in too deep and misread an opponent or a hand, and with hockey teams who pull the goalie knowing that a sure loss is coming if they don’t take a big risk and get another offensive player on the ice while leaving their net open. When the sure loss is severe enough, then even large gambles with a minimal chance of success are worth the risk.


Kahneman and Tversky were surprised by this because it seems to violate  our normal pattern of acting based on expected value. We don’t consciously calculate the expected value of an event, but we usually do act in accordance to expected value. However, in these desperate situations, we actually choose the option with the worse expected value. We become less sensitive to the very likely large loss, and are unwilling to take the sure loss, violating expectations of risk aversion.
Subjective Gains and Losses

Subjective Gains and Losses

“Outcomes that are better than the reference points are gains. Below the reference point they are losses.”


Daniel Kahneman writes extensively about our subjective experiences of the world in his book Thinking Fast and Slow and about how those subjective experiences can have very serious consequences in our decisions, political stances, and beliefs about the world. One area he focuses on are reference points, our baseline beliefs and expectations about the world. As it turns out, our expectations can influence whether we think things are going well or going poorly, regardless of what the actual outcomes are. On top of that, we will make adjustments to our behavior based on what we expect in regard to those outcomes.


Kahneman continues, “When directly compared or weighted against each other, losses loom larger than gains. This asymmetry between the power of positive and negative expectations or experiences has an evolutionary history. Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce.”


Without diving into the evolutionary psychology component of Kahneman’s quote (something that I normally would love to do) I want to focus on how complex our reality and decision making becomes when we predict outcomes, shape our behavior in response to those predictions, and bias those predictions based on personal reference points.


In the United States, two major economic indicators that are used by banks, economists, and the media for deciding whether we have a good economy or a poor economy are GDP growth and interest rates. Both of these measures are represented as percentages, both have specific targets that we have decided are good, and from both follow a set of decisions that we hope will improve the numbers in the direction we want to see. What is interesting, is that we have reference points for the numbers in terms of what percentages we believe reflect a strong and growing economy, and our subjective experience of the economy can be changed by those outcomes.


A 1% increase in GDP growth is growth in overall GDP, but to an economist, that growth is abysmal, and actions need to be taken to get that growth rate closer to 3 to 4%. At the same time, if expectations for GDP growth are only .8% and we hit the same 1% outcome, we might be very happy. In both situations, our decisions and behaviors might change based on the delta from our expected reference point and the final reference point. A gain can feel like a gain, but it can similarly feel like a loss depending on where exactly we placed our reference point.


Interest rates reflect similar dynamics, and might be even more complicated by more clear competing interests and desires in terms of interest rates. Banks might want to see higher interest rates, to earn more money, while people taking out loans may love the low interest rates. A 2% interest rate might feel like a huge loss to one entity, while simultaneously feel like a gain to another.


This creates strange competitive dynamics, because our brains hate losses. We generally need an expected or realized gain to be 2 times larger than a potential or realized loss before we will risk money or accept an outcome. If we have a certain reference point in mind for the outcome we want or would be happy with, we may need to see a large skew in a positive direction for us to be happy, while even a minor loss will feel disastrous.  (At this very moment in the United States this is what is taking place with the presidential election. Several journalists have noted that in December of 2019, the Democrats would be thrilled with the election outcome we have today, but many adjusted their reference point to a Biden landslide win, so a close win feels like a tragic loss – and somewhat of a win for Trump).


Reference points feel like a simple idea, but what I hope this post shows is that they can be hugely consequential, and incredibly complex, especially when we have multiple actors with multiple reference points all interacting on small and large issues. Choose your reference point carefully, and try to recognize when you are operating with a certain refence point in mind and be willing to adjust or discard it when necessary. Don’t let a win get wiped away because it ended up being slightly smaller than your reference point expectation.


“The most disgraceful kind of loss, however, is that due to carelessness,” Seneca wrote in a letter to his friend Lucilius almost 2,000 years ago. Seneca’s Letters from a Stoic is a collection of short passages written from Seneca to Lucilius full of interesting reflections on life. His quick quote about carelessness seems to be as fitting as can be for our times today.


We live in a time where great possibilities are open to most of us. On a given weekend we can volunteer our time for a meaningful cause, go snowboarding, go to the beach, visit family, or work on an art project, or try to finally get the garage cleaned. Often, however, we might find ourselves in a position where our time slips past us, and our weekends are lost to Netflix and squandered on meaningless activities. I often look forward to the promises of the weekend on Friday with excitement, but end up looking around my place on Sunday night reflecting on everything I planned to do but never managed to get to. We don’t need to pack every minute of our free time with interesting, fun, and engaging activities, but what I feel on some Sunday nights, is the pain of a loss due to carelessness.


Much more seriously, our world faces very extreme consequences from global warming as we continue to put more carbon dioxide into the atmosphere. We face dangerous consequences from the  bioaccumulation of plastics in fish and wildlife species that eat our garbage. Millions of people in the deserts of the United States rely on water sources that are becoming depleted, yet water waste from leaks and unwise water usage persist. Our world faces various ecological crises that result more or less from our own carelessness. Just as I feel terrible some Sunday nights about the way I wasted my time during the weekend, we will look back at where we are today and feel extreme regret for the carelessness with which we wasted resources and allowed our planet to degrade.


Solving my problem on Sunday nights is not impossible. It just requires that I be more considerate about my time. It requires that I think about what I am doing and why I am doing it to ask myself if there are other things I should be doing and if I am going to look back and be glad that I spent my time engaging with any given activity. With some planning going into the weekend, I can be successful in engaging with the world in a meaningful way on my days away from the office. The same is true for our climate crisis. If we ask ourselves what we are doing and how our actions contribute to the overall sustainability of our planet, we can start to make small changes to live better on our planet. We won’t individually make much of a difference, but collectively we will start to make changes and we can all contribute to a consciousness about the importance of using our resources wisely. That mindset will eventually translate into smart decisions globally to help us mitigate our impact on the way things are going and prevent us from a disgraceful loss of a habitable planet due to our own carelessness.