maps of bounded rationality: psychology for …...maps of bounded rationality: psychology for...

Maps of Bounded Rationality Psychology for Behavioral Economics

by Daniel Kahneman

The American Economic Review 93(5) pp 1449-1475 December 2003

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Maps of Bounded Rationality

Psychology for Behavioral Economicsdagger

By DANIEL KAHNEMAN

The work cited by the Nobel committee wasdone jointly with Amos Tversky (1937ndash1996)during a long and unusually close collaborationTogether we explored the psychology of intu-itive beliefs and choices and examined theirbounded rationality Herbert A Simon (19551979) had proposed much earlier that decisionmakers should be viewed as boundedly rationaland had offered a model in which utility maxi-mization was replaced by satis cing Our re-search attempted to obtain a map of boundedrationality by exploring the systematic biasesthat separate the beliefs that people have and thechoices they make from the optimal beliefs andchoices assumed in rational-agent models Therational-agent model was our starting point andthe main source of our null hypotheses butTversky and I viewed our research primarily asa contribution to psychology with a possiblecontribution to economics as a secondary ben-e t We were drawn into the interdisciplinaryconversation by economists who hoped thatpsychology could be a useful source of assump-tions for economic theorizing and indirectly asource of hypotheses for economic research(Richard H Thaler 1980 1991 1992) These

hopes have been realized to some extent givingrise to an active program of research by behav-ioral economists (Thaler 2000 Colin Camereret al forthcoming for other examples seeKahneman and Tversky 2000)

My work with Tversky comprised three sep-arate programs of research some aspects ofwhich were carried out with other collaboratorsThe rst explored the heuristics that people useand the biases to which they are prone in vari-ous tasks of judgment under uncertainty includ-ing predictions and evaluations of evidence(Kahneman and Tversky 1973 Tversky andKahneman 1974 Kahneman et al 1982) Thesecond was concerned with prospect theory amodel of choice under risk (Kahneman andTversky 1979 Tversky and Kahneman 1992)and with loss aversion in riskless choice (Kah-neman et al 1990 1991 Tversky and Kahne-man 1991) The third line of research dealt withframing effects and with their implications forrational-agent models (Tversky and Kahneman1981 1986) The present essay revisits thesethree lines of research in light of recent ad-vances in the psychology of intuitive judgmentand choice Many of the ideas presented herewere anticipated informally decades ago butthe attempt to integrate them into a coherentapproach to judgment and choice is recent

Economists often criticize psychological re-search for its propensity to generate lists oferrors and biases and for its failure to offer acoherent alternative to the rational-agent modelThis complaint is only partly justi ed psycho-logical theories of intuitive thinking cannotmatch the elegance and precision of formal nor-mative models of belief and choice but this isjust another way of saying that rational modelsare psychologically unrealistic Furthermorethe alternative to simple and precise models isnot chaos Psychology offers integrative con-cepts and mid-level generalizations which gaincredibility from their ability to explain ostensi-bly different phenomena in diverse domains Inthis spirit the present essay offers a uni ed

dagger This article is a revised version of the lecture DanielKahneman delivered in Stockholm Sweden on December8 2002 when he received the Bank of Sweden Prize inEconomic Sciences in Memory of Alfred Nobel The articleis copyright copy The Nobel Foundation 2002 and is publishedhere with the permission of the Nobel Foundation

Woodrow Wilson School Princeton UniversityPrinceton NJ 08544 (e-mail Kahnemanprincetonedu)This essay revisits problems that Amos Tversky and Istudied together many years ago and continued to discuss ina conversation that spanned several decades It builds on ananalysis of judgment heuristics that was developed in col-laboration with Shane Frederick (Kahneman and Frederick2002) A different version was published in American Psy-chologist in September 2003 For detailed comments on thisversion I am grateful to Angus Deaton David LaibsonMichael Rothschild and Richard Thaler The usual caveatsapply Geoffrey Goodwin Amir Goren and Kurt Schoppeprovided helpful research assistance

1449

treatment of intuitive judgment and choicewhich builds on an earlier study of the relation-ship between preferences and attitudes (Kahne-man et al 1999) and extends a model ofjudgment heuristics recently proposed by Kah-neman and Shane Frederick (2002) The guid-ing ideas are (i) that most judgments and mostchoices are made intuitively (ii) that the rulesthat govern intuition are generally similar to therules of perception Accordingly the discussionof the rules of intuitive judgments and choiceswill rely extensively on visual analogies

Section I introduces a distinction betweentwo generic modes of cognitive function corre-sponding roughly to intuition and reasoningSection II describes the factors that determinethe relative accessibility of different judgmentsand responses Section III relates prospect the-ory to the general proposition that changes anddifferences are more accessible than absolutevalues Section IV explains framing effects interms of differential salience and accessibilitySection V reviews an attribute substitutionmodel of heuristic judgment Section VI de-scribes a particular family of heuristics calledprototype heuristics Section VII discusses theinteractions between intuitive and deliberatethought Section VIII concludes

I The Architecture of Cognition Two Systems

The present treatment distinguishes twomodes of thinking and deciding which corre-spond roughly to the everyday concepts of rea-soning and intuition Reasoning is what we dowhen we compute the product of 17 by 258 llan income tax form or consult a map Intuitionis at work when we read the sentence ldquoBillClinton is a shy manrdquo as mildly amusing orwhen we nd ourselves reluctant to eat a pieceof what we know to be chocolate that has beenformed in the shape of a cockroach (Paul Rozinand Carol Nemeroff 2002) Reasoning is donedeliberately and effortfully but intuitive thoughtsseem to come spontaneously to mind withoutconscious search or computation and withouteffort Casual observation and systematic re-search indicate that most thoughts and actionsare normally intuitive in this sense (Daniel TGilbert 1989 2002 Timothy D Wilson 2002Seymour Epstein 2003)

Although effortless thought is the normsome monitoring of the quality of mental oper-

ations and overt behavior also goes on We donot express every passing thought or act onevery impulse But the monitoring is normallylax and allows many intuitive judgments to beexpressed including some that are erroneous(Kahneman and Frederick 2002) Ellen JLanger et al (1978) provided a well-knownexample of what she called ldquomindless behav-iorrdquo In her experiment a confederate tried tocut in line at a copying machine using variouspreset ldquoexcusesrdquo The conclusion was that state-ments that had the form of an unquali ed re-quest were rejected (eg ldquoExcuse me may I usethe Xerox machinerdquo) but almost any statementthat had the general form of an explanation wasaccepted including ldquoExcuse me may I use theXerox machine because I want to make cop-iesrdquo The super ciality is striking

Frederick (2003 personal communication)has used simple puzzles to study cognitive self-monitoring as in the following example ldquoA batand a ball cost $110 in total The bat costs $1more than the ball How much does the ballcostrdquo Almost everyone reports an initial ten-dency to answer ldquo10 centsrdquo because the sum$110 separates naturally into $1 and 10 centsand 10 cents is about the right magnitude Fred-erick found that many intelligent people yield tothis immediate impulse 50 percent (4793) of agroup of Princeton students and 56 percent(164293) of students at the University of Mich-igan gave the wrong answer Clearly these re-spondents offered their response without rstchecking it The surprisingly high rate of errorsin this easy problem illustrates how lightly theoutput of effortless associative thinking is mon-itored people are not accustomed to thinkinghard and are often content to trust a plausiblejudgment that quickly comes to mind Re-markably Frederick has found that errors inthis puzzle and in others of the same typewere signi cant predictors of high discountrates

In the examples discussed so far intuitionwas associated with poor performance but in-tuitive thinking can also be powerful and accu-rate High skill is acquired by prolongedpractice and the performance of skills is rapidand effortless The proverbial master chessplayer who walks past a game and declaresldquowhite mates in threerdquo without slowing is per-forming intuitively (Simon and William GChase 1973) as is the experienced nurse who

1450 THE AMERICAN ECONOMIC REVIEW DECEMBER 2003

detects subtle signs of impending heart failure(Gary Klein 1998 Atul Gawande 2002)

The distinction between intuition and reason-ing has recently been a topic of considerableinterest to psychologists (see eg ShellyChaiken and Yaacov Trope 1999 Gilbert2002 Steven A Sloman 2002 Keith EStanovich and Richard F West 2002) There issubstantial agreement on the characteristics thatdistinguish the two types of cognitiveprocessesfor which Stanovich and West (2000) proposedthe neutral labels of System 1 and System 2The scheme shown in Figure 1 summarizesthese characteristics The operations of System1 are fast automatic effortless associative andoften emotionally charged they are also gov-erned by habit and are therefore dif cult tocontrol or modify The operations of System 2are slower serial effortful and deliberatelycontrolled they are also relatively exible andpotentially rule-governed

The difference in effort provides the mostuseful indications of whether a given mentalprocess should be assigned to System 1 or Sys-tem 2 Because the overall capacity for mentaleffort is limited effortful processes tend to dis-rupt each other whereas effortless processes

neither cause nor suffer much interference whencombined with other tasks For example a driv-errsquos ability to conduct a conversation is a sen-sitive indicator of the amount of attentioncurrently demanded by the driving task Dualtasks have been used in hundreds of psycholog-ical experiments to measure the attentional de-mands of different mental activities (for areview see Harold E Pashler 1998) Studiesusing the dual-task method suggest that the self-monitoring function belongs with the effortfuloperations of System 2 People who are occu-pied by a demanding mental activity (eg at-tempting to hold in mind several digits) aremuch more likely to respond to another task byblurting out whatever comes to mind (Gilbert1989) The phrase that ldquoSystem 2 monitors theactivities of System 1rdquo will be used here asshorthand for a hypothesis about what wouldhappen if the operations of System 2 were dis-rupted For example it is safe to predict that thepercentage of errors in the bat-and-ball questionwill increase if the respondents are asked thisquestion while attempting to keep a list ofwords in their active memory

In the language that will be used here theperceptual system and the intuitive operations

FIGURE 1 THREE COGNITIVE SYSTEMS

1451VOL 93 NO 5 KAHNEMAN MAPS OF BOUNDED RATIONALITY

of System 1 generate impressions of the at-tributes of objects of perception and thoughtThese impressions are not voluntary and neednot be verbally explicit In contrast judgmentsare always explicit and intentional whether ornot they are overtly expressed Thus System 2is involved in all judgments whether they orig-inate in impressions or in deliberate reasoningThe label ldquointuitiverdquo is applied to judgmentsthat directly re ect impressions

Figure 1 illustrates an idea that guided theresearch that Tversky and I conducted from itsearly days that intuitive judgments occupy apositionmdashperhaps corresponding to evolution-ary historymdashbetween the automatic operationsof perception and the deliberate operations ofreasoning All the characteristics that studentsof intuition have attributed to System 1 are alsoproperties of perceptual operations Unlike per-ception however the operations of System 1are not restricted to the processing of currentstimulation Like System 2 the operations ofSystem 1 deal with stored concepts as well aswith percepts and can be evoked by languageThis view of intuition suggests that the vaststore of scienti c knowledge available aboutperceptual phenomena can be a source of usefulhypotheses about the workings of intuition Thestrategy of drawing on analogies from percep-tion is applied in the following section

II The Accessibility Dimension

A de ning property of intuitive thoughts isthat they come to mind spontaneously like per-cepts The technical term for the ease withwhich mental contents come to mind is acces-sibility (E Tory Higgins 1996) To understandintuition we must understand why somethoughts are accessible and others are not Theremainder of this section introduces the conceptof accessibility by examples drawn from visualperception

Consider Figures 2a and 2b As we look atthe object in Figure 2a we have immediateimpressions of the height of the tower the areaof the top block and perhaps the volume of thetower Translating these impressions into unitsof height or volume requires a deliberate oper-ation but the impressions themselves are highlyaccessible For other attributes no perceptualimpression exists For example the total areathat the blocks would cover if the tower were

dismantled is not perceptually accessiblethough it can be estimated by a deliberate pro-cedure such as multiplying the area of a blockby the number of blocks Of course the situa-tion is reversed with Figure 2b Now the blocksare laid out and an impression of total area isimmediately accessible but the height of thetower that could be constructed with theseblocks is not

Some relational properties are accessibleThus it is obvious at a glance that Figures 2aand 2c are different but also that they are moresimilar to each other than either is to Figure2b And some statistical properties of ensemblesare accessible while others are not For anexample consider the question ldquoWhat is theaverage length of the lines in Figure 3rdquo Thisquestion is easy When a set of objects of thesame general kind is presented to an observermdashwhether simultaneously or successivelymdasha rep-resentation of the set is computed automaticallywhich includes quite precise information aboutthe average (Dan Ariely 2001 Sang-ChulChong and Anne Treisman 2003) The repre-sentation of the prototype is highly accessibleand it has the character of a percept we form animpression of the typical line without choosingto do so The only role for System 2 in this taskis to map the impression of typical length ontothe appropriate scale In contrast the answer tothe question ldquoWhat is the total length of thelines in the displayrdquo does not come to mindwithout considerable effort

As the example of averages and sums illus-trates some attributes are more accessible thanothers both in perception and in judgment At-tributes that are routinely and automaticallyproduced by the perceptual system or by System

FIGURE 2 EXAMPLES OF DIFFERENTIAL ACCESSIBILITY


1 without intention or effort have been callednatural assessments (Tversky and Kahneman1983) Kahneman and Frederick (2002) com-piled a partial list of these natural assessmentsIn addition to physical properties such as sizedistance and loudness the list includes moreabstract properties such as similarity causalpropensity surprisingness affective valenceand mood

The evaluation of stimuli as good or bad is aparticularly important natural assessment Theevidence both behavioral (John A Bargh1997 Robert B Zajonc 1998) and neurophys-iological (eg Joseph E LeDoux 2000) isconsistent with the idea that the assessment ofwhether objects are good (and should be ap-proached) or bad (should be avoided) is carriedout quickly and ef ciently by specialized neuralcircuitry A remarkable experiment reported byBargh (1997) illustrates the speed of the evalu-ation process and its direct link to approach andavoidance Participants were shown a series ofstimuli on a screen and instructed to respond toeach stimulus as soon as it appeared by movinga lever that blanked the screen The stimuli wereaffectively charged words some positive (egLOVE) and some aversive (eg VOMIT) butthis feature was irrelevant to the participantrsquostask Half the participants responded by pullingthe lever toward themselves half responded bypushing the lever away Although the response

was initiated within a fraction of a second wellbefore the meaning of the stimulus was con-sciously registered the emotional valence of theword had a substantial effect Participants wererelatively faster in pulling a lever toward them-selves (approach) for positive words and rela-tively faster pushing the lever away when theword was aversive The tendencies to approachor avoid were evoked by an automatic processthat was not under conscious voluntary controlSeveral psychologists have commented on thein uence of this primordial evaluative system(here included in System 1) on the attitudes andpreferences that people adopt consciously anddeliberately (Zajonc 1998 Kahneman et al1999 Paul Slovic et al 2002 Epstein 2003)

The preceding discussion establishes a di-mension of accessibility At one end of thisdimension we nd operations that have thecharacteristics of perception and of the intuitiveSystem 1 they are rapid automatic and effort-less At the other end are slow serial andeffortful operations that people need a specialreason to undertake Accessibility is a contin-uum not a dichotomy and some effortful op-erations demand more effort than others Someof the determinants of accessibility are probablygenetic others develop through experience Theacquisition of skill gradually increases the ac-cessibility of useful responses and of productiveways to organize information until skilled per-formance becomes almost effortless This effectof practice is not limited to motor skills Amaster chess player does not see the same boardas the novice and visualizing the tower in anarray of blocks would also become virtuallyeffortless with prolonged practice

The impressions that become accessible inany particular situation are mainly determinedof course by the actual properties of the objectof judgment it is easier to see a tower in Figure2a than in Figure 2b because the tower in thelatter is only virtual Physical salience also de-termines accessibility if a large green letter anda small blue letter are shown at the same timeldquogreenrdquo will come to mind rst However sa-lience can be overcome by deliberate attentionan instruction to look for the small object willenhance the accessibility of all its features

Analogous effects of salience and of sponta-neous and voluntary attention occur with moreabstract stimuli For example the statementsldquoTeam A beat team Brdquo and ldquoTeam B lost to

FIGURE 3 DIFFERENTIAL ACCESSIBILITY

OF STATISTICAL PROPERTIES


team Ardquo convey the same information but be-cause each sentence draws attention to its gram-matical subject they make different thoughtsaccessible Accessibility also re ects temporarystates of associative activation For example themention of a familiar social category temporarilyincreases the accessibility of the traits associatedwith the category stereotype as indicated by alowered threshold for recognizing behaviors asindications of these traits (Susan T Fiske 1998)

As designers of billboards know well moti-vationally relevant and emotionally arousingstimuli spontaneously attract attention Bill-boards are useful to advertisers because payingattention to an object makes all its featuresaccessiblemdashincluding those that are not linkedto its primary motivational or emotional signif-icance The ldquohotrdquo states of high emotional andmotivational arousal greatly increase the acces-sibility of thoughts that relate to the immediateemotion and to the current needs and reduce theaccessibility of other thoughts (George Loe-wenstein 1996 2000 Jon Elster 1998) Aneffect of emotional signi cance on accessibilitywas demonstrated in an important study by Yu-val Rottenstreich and Christopher K Hsee(2001) which showed that people are less sen-sitive to variations of probability when valuingchances to receive emotionally loaded out-comes (kisses and electric shocks) than whenthe outcomes are monetary

Figure 4 (adapted from Jerome S Bruner andA Leigh Minturn 1955) includes a standarddemonstration of the effect of context on acces-sibility An ambiguous stimulus that is per-ceived as a letter within a context of letters is

instead seen as a number when placed within acontext of numbers More generally expecta-tions (conscious or not) are a powerful determi-nant of accessibility

Another important point that Figure 4 illus-trates is the complete suppression of ambiguityin conscious perception This aspect of the dem-onstration is spoiled for the reader who sees thetwo versions in close proximity but when thetwo lines are shown separately observers willnot spontaneously become aware of the alterna-tive interpretation They ldquoseerdquo the interpretationof the object that is the most likely in its con-text but have no subjective indication that itcould be seen differently Ambiguity and uncer-tainty are suppressed in intuitive judgment aswell as in perception Doubt is a phenomenon ofSystem 2 an awareness of onersquos ability to thinkincompatible thoughts about the same thingThe central nding in studies of intuitive deci-sions as described by Klein (1998) is thatexperienced decision makers working underpressure (eg re ghting company captains)rarely need to choose between options becausein most cases only a single option comes to mind

The compound cognitive system that hasbeen sketched here is an impressive computa-tional device It is well-adapted to its environ-ment and has two ways of adjusting to changesa short-term process that is exible and effort-ful and a long-term process of skill acquisitionthat eventually produces highly effective re-sponses at low cost The system tends to seewhat it expects to seemdasha form of Bayesianadaptationmdashand it is also capable of respondingeffectively to surprises However this marvel-ous creation differs in important respects fromanother paragon the rational agent assumed ineconomic theory Some of these differences areexplored in the following sections which reviewseveral familiar results as effects of accessibilityPossible implications for theorizing in behavioraleconomics are explored along the way

III Changes or States Prospect Theory

A general property of perceptual systems isthat they are designed to enhance the accessi-bility of changes and differences Perception isreference-dependent the perceived attributesof a focal stimulus re ect the contrast betweenthat stimulus and a context of prior and con-current stimuli This section will show that

FIGURE 4 AN EFFECT OF CONTEXT ON ACCESSIBILITY


intuitive evaluations of outcomes are alsoreference-dependent

The role of prior stimulation is familiar in thedomain of temperature Immersing the hand inwater at 20degC will feel pleasantly warm afterprolonged immersion in much colder water andpleasantly cool after immersion in muchwarmer water Figure 5 illustrates reference-dependence in vision The two enclosed squareshave the same luminance but they do not ap-pear equally bright The point of the demonstra-tion is that the brightness of an area is not asingle-parameter function of the light energythat reaches the eye from that area just as theexperience of temperature is not a single-param-eter function of the temperature to which one iscurrently exposed An account of perceivedbrightness or temperature also requires a param-eter for a reference value (often called adapta-tion level) which is in uenced by the context ofcurrent and prior stimulation

From the vantage point of a student of per-ception it is quite surprising that in standardeconomic analyses the utility of decision out-comes is assumed to be determined entirely bythe nal state of endowment and is thereforereference-independent In the context of riskychoice this assumption can be traced to thebrilliant essay that rst de ned a theory of ex-pected utility (Daniel Bernoulli 1738) Ber-noulli assumed that states of wealth have aspeci ed utility and proposed that the decisionrule for choice under risk is to maximize the

expected utility of wealth (the moral expecta-tion) The language of Bernoullirsquos essay is pre-scriptivemdashit speaks of what is sensible orreasonable to domdashbut the theory was also in-tended as a description of the choices of reason-able men (Gerd Gigerenzer et al 1989) As inmost modern treatments of decision-makingBernoullirsquos essay does not acknowledge anytension between prescription and descriptionThe proposition that decision makers evaluateoutcomes by the utility of nal asset positionshas been retained in economic analyses for al-most 300 years This is rather remarkable be-cause the idea is easily shown to be wrong Icall it Bernoullirsquos error

Tversky and I constructed numerous thoughtexperiments when we began the study of riskychoice that led to the formulation of prospecttheory (Kahneman and Tversky 1979) Exam-ples such as Problems 1 and 2 below convincedus of the inadequacy of the utility function forwealth as an explanation of choice

Problem 1Would you accept this gamble

50 chance to win $15050 chance to lose $100

Would your choice change if youroverall wealth were lower by $100

FIGURE 5 REFERENCE-DEPENDENCE IN THE PERCEPTION OF BRIGHTNESS


There will be few takers of the gamble in Prob-lem 1 The experimental evidence shows thatmost people will reject a gamble with evenchances to win and lose unless the possible winis at least twice the size of the possible loss(eg Tversky and Kahneman 1992) The an-swer to the second question is of course neg-ative Next consider Problem 2

Problem 2Which would you choose

lose $100 with certaintyor


Would your choice change if youroverall wealth were higher by $100

In Problem 2 the gamble appears much moreattractive than the sure loss Experimental re-sults indicate that risk-seeking preferences areheld by a large majority of respondents in prob-lems of this kind (Kahneman and Tversky1979) Here again the idea that a change of$100 in total wealth would affect preferencescannot be taken seriously

We examined many choice pairs of thistype in our early explorations and concludedthat the very abrupt switch from risk aversionto risk seeking could not plausibly be ex-plained by a utility function for wealth Pref-erences appeared to be determined byattitudes to gains and losses de ned relativeto a reference point but Bernoullirsquos theoryand its successors did not incorporate a ref-erence point We therefore proposed an alter-native theory of risk in which the carriers ofutility are gains and lossesmdashchanges ofwealth rather than states of wealth One nov-elty of prospect theory was that it was explic-itly presented as a formal descriptive theoryof the choices that people actually make notas a normative model This was a departurefrom a long history of choice models thatserved double duty as normative logics and asidealized descriptive models

The distinctive predictions of prospect the-ory follow from the shape of the value func-tion which is shown in Figure 6 The valuefunction is de ned on gains and losses and is

characterized by three features (1) it is con-cave in the domain of gains favoring riskaversion (2) it is convex in the domain oflosses favoring risk seeking (3) most impor-tant the function is sharply kinked at thereference point and loss-aversemdashsteeper forlosses than for gains by a factor of about2ndash25 (Kahneman et al 1991 Tversky andKahneman 1992)

If Bernoullirsquos formulation is transparentlyincorrect as a descriptive model of riskychoices as has been argued here whyhas this model been retained for so longThe answer appears to be that the assign-ment of utility to wealth is an aspect of ra-tionality and therefore compatible with thegeneral assumption of rationality in economictheorizing (Kahneman 2003a) ConsiderProblem 3

Problem 3Two persons get their monthly report

from a brokerA is told that her wealth went from

4M to 3MB is told that her wealth went from

1M to 11M

Who of the two individuals has morereason to be satis ed with her nancialsituation

Who is happier today

FIGURE 6 A SCHEMATIC VALUE FUNCTION FOR CHANGES


Problem 3 highlights the contrasting interpre-tations of utility in theories that de ne outcomesas states or as changes In Bernoullirsquos analysisonly the rst of the two questions of Problem 3is relevant and only long-term consequencesmatter Prospect theory in contrast is con-cerned with short-term outcomes and the valuefunction presumably re ects an anticipation ofthe valence and intensity of the emotions thatwill be experienced at moments of transitionfrom one state to another (Kahneman 2000a bBarbara Mellers 2000) Which of these con-cepts of utility is more useful The culturalnorm of reasonable decision-making favors thelong-term view over a concern with transient emo-tions Indeed the adoption of a broad perspectiveand a long-term view is an aspect of the meaningof rationality in everyday language The nal-states interpretation of the utility of outcomes istherefore a good t for a rational-agent model

These considerations support the normativeand prescriptive status of the Bernoullian de -nition of outcomes On the other hand an ex-clusive concern with the long term may beprescriptively sterile because the long term isnot where life is lived Utility cannot be di-vorced from emotion and emotions are trig-gered by changes A theory of choice thatcompletely ignores feelings such as the pain oflosses and the regret of mistakes is not onlydescriptively unrealistic it also leads to pre-scriptions that do not maximize the utility ofoutcomes as they are actually experiencedmdashthat is utility as Bentham conceived it (Kahne-man 1994 2000a Kahneman et al 1997)

Bernoullirsquos errormdashthe idea that the carriersof utility are nal statesmdashis not restricted todecision-making under risk Indeed the incor-rect assumption that initial endowments do notmatter is the basis of Coasersquos theorem and of itsmultiple applications (Kahneman et al 1990)The error of reference-independence is builtinto the standard representation of indifferencemaps It is puzzling to a psychologist that thesemaps do not include a representation of thedecision makerrsquos current holdings of variousgoodsmdashthe counterpart of the reference point inprospect theory The parameter is not includedof course because consumer theory assumesthat it does not matter

The core idea of prospect theorymdashthat thevalue function is kinked at the reference pointand loss aversemdashbecame useful to economics

when Thaler (1980) used it to explain risklesschoices In particular loss aversion explained aviolationof consumer theory that Thaler identi edand labeled the ldquoendowment effectrdquo the sellingprice for consumption goods is much higher thanthe buying price often by a factor of 2 or moreThe value of a good to an individualappears to behigher when the good is viewed as something thatcould be lost or given up than when the same goodis evaluated as a potential gain (Kahneman et al1990 1991 Tversky and Kahneman 1991)

When half the participants in an experimentalmarket were randomly chosen to be endowedwith a good (a mug) and trade was allowed thevolume of trade was about half the amount thatwould be predicted by assuming that value wasindependent of initial endowment (Kahnemanet al 1990) Transaction costs did not explainthis counterexample to the Coase theorem be-cause the same institution produced no indica-tion of reluctance to trade when the objects oftrade were money tokens The results suggestthat the participants in these experiments did notvalue the mug as an object they could have andconsume but as something they could get orgive up Interestingly John A List (2003a b)found that the magnitude of the endowmenteffect was substantially reduced for participantswith intense experience in the trading of sports-cards Experienced traders (who are also con-sumers) showed less reluctance to trade onegood for anothermdashnot only sportscards but alsomugs and other goodsmdashas if they had learned tobase their choice on long-term value rather thanon the immediate emotions associated with get-ting or giving up objects

Reference-dependence and loss aversion helpaccount for several phenomena of choice Thefamiliar observation that out-of-pocket lossesare valued much more than opportunity costs isreadily explained if these outcomes are evalu-ated on different limbs of the value functionThe distinction between ldquoactualrdquo losses andlosses of opportunities is recognized in manyways in the law (David Cohen and Jack LKnetsch 1992) and in lay intuitions about rulesof fairness in the market (Kahneman et al1986) Loss aversion also contributes to thewell-documented status-quo bias (WilliamSamuelson and Richard Zeckhauser 1988) Be-cause the reference point is usually the statusquo the properties of alternative options areevaluated as advantages or disadvantages


relative to the current situation and the disad-vantages of the alternatives loom larger thantheir advantages Other applications of the con-cept of loss aversion are documented in severalchapters in Kahneman and Tversky (2000)

IV Framing Effects

In the display of blocks in Figure 2 the sameproperty (the total height of a set of blocks) washighly accessible in one display and not in an-other although both displays contained thesame information This observation is entirelyunremarkablemdashit does not seem shocking thatsome attributes of a stimulus are automaticallyperceived while others must be computed orthat the same attribute is perceived in one dis-play of an object but must be computed inanother In the context of decision-makinghowever similar observations raise a signi cantchallenge to the rational-agent model

The assumption that preferences are not af-fected by inconsequential variations in thedescription of outcomes has been called exten-sionality (Kenneth J Arrow 1982) and invari-ance (Tversky and Kahneman 1986) and isconsidered an essential aspect of rationalityInvariance is violated in framing effects whereextensionally equivalent descriptions lead todifferent choices by altering the relative salienceof different aspects of the problem Tversky andKahneman (1981) introduced their discussion offraming effects with the following problem

The Asian diseaseImagine that the United States is pre-

paring for the outbreak of an unusualAsian disease which is expected to kill600 people Two alternative programs tocombat the disease have been proposedAssume that the exact scientic estimatesof the consequences of the programs areas follows

If Program A is adopted 200 peoplewill be saved

If Program B is adopted there is aone-third probability that 600 people willbe saved and a two-thirds probability thatno people will be saved

In this version of the problem a substantialmajority of respondents favor Program A indi-cating risk aversion Other respondents se-lected at random receive a question in whichthe same cover story is followed by a differentdescription of the options

If Program A9 is adopted 400 people willdie

If Program B9 is adopted there is a one-third probability that nobody will die anda two-thirds probability that 600 peoplewill die

A substantial majority of respondents nowfavor Program B9 the risk-seeking option Al-though there is no substantive difference be-tween the versions they evoke differentassociations and evaluations This is easiest tosee in the certain option because outcomes thatare certain are overweighted relative to out-comes of high or intermediate probability (Kah-neman and Tversky 1979) Thus the certaintyof saving people is disproportionatelyattractivewhile accepting the certain death of people isdisproportionately aversive These immediateaffective responses respectively favor A over Band B9 over A9 As in Figures 2a and 2b thedifferent representations of the outcomes high-light some features of the situation and maskothers

In an essay about the ethics of policyThomas C Schelling (1984) presented a com-pellingly realistic example of the dilemmasraised by framing Schelling reports asking hisstudents to evaluate a tax policy that wouldallow a larger child exemption to the rich thanto the poor Not surprisingly his students foundthis proposal outrageous Schelling then pointedout that the default case in the standard tax tableis a childless family with special adjustmentsfor families with children and led his class toagree that the existing tax schedule could berewritten with a family with two children as thedefault case In this formulation childless fam-ilies would pay a surcharge Should this sur-charge be as large for the poor as for the richOf course not The two versions of the questionabout how to treat the rich and the poor bothtrigger an intuitive preference for protecting the


poor but these preferences are incoherentSchellingrsquos problem highlights an importantpoint Framing effects are not a laboratory cu-riosity but a ubiquitous reality The tax tablemust be framed one way or another and eachframe will increase the accessibility of someresponses and make other responses less likely

There has been considerable interest amongbehavioral economists in a particular type offraming effect where a choice between twooptions A and B is affected by designatingeither A or B as a default option The optiondesignated as the default has a large advantagein such choices even for decisions that haveconsiderable signi cance Eric J Johnson et al(1993) described a compelling example Thestates of Pennsylvania and New Jersey bothoffer drivers a choice between an insurancepolicy that allows an unconstrained right to sueand a less expensive policy that restricts theright to sue The unconstrained right to sue isthe default in Pennsylvania the opposite is thedefault in New Jersey and the takeup of fullcoverage is 79 percent and 30 percent in the twostates respectively Johnson and Daniel GGoldstein (2003) estimate that Pennsylvaniadrivers spend 450 million dollars annually onfull coverage that they would not purchase iftheir choice were framed as it is for New Jerseydrivers

Johnson and Goldstein (2003) also comparedthe proportions of the population enrolled inorgan donation programs in seven Europeancountries in which enrollment was the defaultand four in which nonenrollment was the de-fault Averaging over countries enrollment indonor programs was 974 percent when thiswas the default option 18 percent otherwiseThe passive acceptance of the formulationgiven has signi cant consequences in thiscase as it does in other recent studies wherethe selection of the default on the form thatworkers completed to set their 401(k) contri-butions dominated their ultimate choice(Brigitte Madrian and Dennis Shea 2001James J Choi et al 2002)

The basic principle of framing is the passiveacceptance of the formulation given Because ofthis passivity people fail to construct a canon-ical representation for all extensionally equiva-lent descriptions of a state of affairs They donot spontaneously compute the height of atower that could be built from an array of

blocks and they do not spontaneously trans-form the representation of puzzles or decisionproblems Obviously no one is able to recog-nize ldquo137 3 24rdquo and ldquo3288rdquo as ldquothe samerdquonumber without going through some elaboratecomputations Invariance cannot be achieved bya nite mind

The impossibility of invariance raises signif-icant doubts about the descriptive realism ofrational-choice models (Tversky and Kahne-man 1986) Absent a system that reliably gen-erates appropriate canonical representationsintuitive decisions will be shaped by the factorsthat determine the accessibility of different fea-tures of the situation Highly accessible featureswill in uence decisions while features of lowaccessibility will be largely ignoredmdashand thecorrelation between accessibility and re ectivejudgments of relevance in a state of completeinformation is not necessarily high

A particularly unrealistic assumption of therational-agent model is that agents make theirchoices in a comprehensively inclusive contextwhich incorporates all the relevant details of thepresent situation as well as expectations aboutall future opportunities and risks Much evi-dence supports the contrasting claim that peo-plersquos views of decisions and outcomes arenormally characterized by ldquonarrow framingrdquo(Kahneman and Daniel Lovallo 1993) and bythe related notions of ldquomental accountingrdquo(Thaler 1985 1999) and ldquodecision bracketingrdquo(Daniel Read et al 1999)

The following are some examples of theprevalence of narrow framing The decision ofwhether or not to accept a gamble is normallyconsidered as a response to a single opportunitynot as an occasion to apply a general policy(Gideon Keren and Willem A Wagenaar 1987Tversky and Donald A Redelmeier 1992 Kah-neman and Lovallo 1993 Shlomo Benartzi andThaler 1999) Investorsrsquo decisions about partic-ular investments appear to be considered inisolation from the remainder of the investorrsquosportfolio (Nicholas Barberis et al 2003) Thetime horizon that investors adopt for evaluatingtheir investments appears to be unreasonablyshortmdashan observation that helps explain theequity-premium puzzle (Benartzi and Thaler1995) Finally the prevalence of the gainlossframing of outcomes over the wealth framewhich was discussed in the previous sec-tion can now be seen as an instance of narrow


framing A shared feature of all these examplesis that decisions made in narrow frames departfar more from risk neutrality than decisions thatare made in a more inclusive context

The prevalence of narrow frames is an effectof accessibility which can be understood byreferring to the displays of blocks in Figure2 The same set of blocks is framed as a towerin Figure 2a and as a at array in Figure 2b Al-though it is possible to ldquoseerdquo a tower in Figure2b it is much easier to do so in Figure 2a Nar-row frames generally re ect the structure of theenvironment in which decisions are made Thechoices that people face arise one at a time andthe principle of passive acceptance suggests thatthey will be considered as they arise The prob-lem at hand and the immediate consequences ofthe choice will be far more accessible than allother considerations and as a result decisionproblems will be framed far more narrowly thanthe rational model assumes

V Attribute Substitution A Model of JudgmentHeuristics

The rst research program that Tversky and Iundertook together consisted of a series of stud-ies of various types of judgment about uncertainevents including numerical predictions and as-sessments of the probabilities of hypothesesOur conclusion in a review of this work was thatldquopeople rely on a limited number of heuristicprinciples which reduce the complex tasks ofassessing probabilities and predicting values tosimpler judgmental operations In general theseheuristics are quite useful but sometimes theylead to severe and systematic errorsrdquo (Tverskyand Kahneman 1974 p 1124) The article in-troduced three heuristicsmdashrepresentativenessavailability and anchoringmdashthat were used toexplain a dozen systematic biases in judgmentunder uncertainty including nonregressive pre-diction neglect of base-rate information over-con dence and overestimates of the frequencyof events that are easy to recall Some of thebiases were identi ed by systematic errors inestimates of known quantities and statisticalfacts Other biases were de ned by discrep-ancies between the regularities of intuitivejudgments and the principles of probabilitytheory Bayesian inference and regressionanalysis

Kahneman and Frederick (2002) recently re-visited the early studies of judgment heuristicsand proposed a formulation in which the reduc-tion of complex tasks to simpler operations isachieved by an operation of attribute substitu-tion ldquoJudgment is said to be mediated by aheuristic when the individual assesses a speci- ed target attribute of a judgment object bysubstituting another property of that objectmdashtheheuristic attributemdashwhich comes more readilyto mindrdquo (p 53) Unlike the early work Kah-neman and Frederickrsquos conception of heuristicsis not restricted to the domain of judgmentunder uncertainty

For a perceptual example of attribute substi-tution consider the question ldquoWhat are thesizes of the two horses in Figure 7 as they aredrawn on the pagerdquo The images are in factidentical in size but the gure produces a com-pelling illusion The target attribute that observ-ers intend to evaluate is objective two-dimensional size but they are unable to do thisveridically Their judgments map an impressionof three-dimensional size (the heuristic at-tribute) onto units of length that are appropriateto the target attribute and scaled to the sizeof the page This illusion is caused by thedifferential accessibility of competing interpreta-tions of the image An impression of three-

FIGURE 7 AN ILLUSION OF ATTRIBUTE SUBSTITUTION

Source Photo by Lenore Shoham 2003


dimensional size is the only impression of sizethat comes to mind for naDaggerve observersmdashpaint-ers and experienced photographers are able todo bettermdashand it produces an illusion in theperception of picture size

A study by Fritz Strack et al (1988) illus-trates the role of attribute substitution in a dif-ferent context College students responded to asurvey which included the two following ques-tions in immediate succession ldquoHow happy areyou with your life in generalrdquo and ldquoHow manydates did you have last monthrdquo The correlationbetween the two questions was 012 when theyappeared in the order shown Among respon-dents who received the same questions in re-verse order the correlation was 066 Thepsychological interpretation of the high correla-tion1 is inferential but straightforward The dat-ing question undoubtedly evoked in manyrespondents an emotionally charged evaluationof their romantic life This evaluation washighly accessible when the question abouthappiness was encountered next and it wasmapped onto the scale of general happinessIn the interpretation offered here the respon-dents answered the happiness question by re-porting what came to their mind and failed tonotice that they were answering a questionthat had not been askedmdasha cognitive illusionthat is analogous to the visual illusion ofFigure 7

The most direct evidence for attribute substi-tution was reported by Kahneman and Tversky(1973) in a task of categorical prediction Therewere three experimental groups in their experi-ment Participants in a base-rate group evalu-ated the relative frequencies of graduatestudents in nine categories of specialization2

Mean estimates ranged from 20 percent for Hu-manities and Education to 3 percent for LibraryScience

Two other groups of participants were shownthe same list of areas of graduate specializationand the following description of a ctitiousgraduate student

Tom W is of high intelligence althoughlacking in true creativity He has a needfor order and clarity and for neat andtidy systems in which every detail ndsits appropriate place His writing israther dull and mechanical occasion-ally enlivened by somewhat corny punsand by ashes of imagination of thesci- type He has a strong drive forcompetence He seems to have little feeland little sympathy for other people anddoes not enjoy interacting with othersSelf-centered he nonetheless has a deepmoral sense

Participants in a similarity group ranked thenine elds by the degree to which Tom Wldquoresembles a typical graduate studentrdquo (in that eld) The description of Tom W was deliber-ately constructed to make him more representa-tive of the less populated elds and thismanipulation was successful the correlation be-tween the averages of representativeness rank-ings and of estimated base rates was 2062Participants in the probability group ranked thenine elds according to the likelihood that TomW would have specialized in each The respon-dents in the latter group were graduate studentsin psychology at major universities They weretold that the personality sketch had been writtenby a psychologist when Tom W was in highschool on the basis of personality tests of du-bious validity This information was intended todiscredit the description as a source of validinformation

The statistical logic is straightforward A de-scription based on unreliable information mustbe given little weight and predictions made inthe absence of valid evidence must revert tobase rates This reasoning implies that judg-ments of probability should be highly correlatedwith the corresponding base rates in the TomW problem

The psychology of the task is also straight-forward The similarity of Tom W to variousstereotypes is a highly accessible natural assess-ment whereas judgments of probability are dif- cult The respondents are therefore expected tosubstitute a judgment of similarity (representa-tiveness) for the required judgment of probabil-ity The two instructionsmdashto rate similarity or

1 The observed value of 066 underestimates the truecorrelation between the variables of interest because ofmeasurement error in all variables

2 The categories were Business Administration Com-puter Science Engineering Humanities and EducationLaw Library Science Medicine Physical and Life Sci-ences Social Sciences and Social Work


probabilitymdashshould therefore elicit similarjudgments

The scatterplot of the mean judgments of thetwo groups is presented in Figure 8a As the gure shows the correlation between judg-ments of probability and similarity is nearlyperfect (098) The correlation between judg-ments of probability and base rates is 2063The results are in perfect accord with the hy-pothesis of attribute substitutionThey also con- rm a bias of base-rate neglect in thisprediction task The results are especially com-pelling because the responses were rankingsThe large variability of the average rankings ofboth attributes indicates highly consensual re-sponses and nearly total overlap in the system-atic variance

Figure 8b shows the results of another studyin the same design in which respondents wereshown the description of a woman namedLinda and a list of eight possible outcomesdescribing her present employment and activi-ties The two critical items in the list were 6(ldquoLinda is a bank tellerrdquo) and the conjunctionitem 8 (ldquoLinda is a bank teller and active inthe feminist movementrdquo) The other six pos-sibilities were unrelated and miscellaneous(eg elementary school teacher psychiatricsocial worker) As in the Tom W problemsome respondents ranked the eight outcomes

by the similarity of Linda to the categoryprototypes others ranked the same outcomesby probability

Linda is 31 years old single outspokenand very bright She majored in philoso-phy As a student she was deeply con-cerned with issues of discrimination andsocial justice and also participated in an-tinuclear demonstrations

As might be expected 85 percent of respon-dents in the similarity group ranked the con-junction item (8) higher than its constituentindicating that Linda resembles the image of afeminist bank teller more than she resembles astereotypical bank teller This ordering of thetwo items is quite reasonable for judgments ofsimilarity However it is much more problem-atic that 89 percent of respondents in the prob-ability group also ranked the conjunction higherthan its constituent This pattern of probabilityjudgments violates monotonicity and has beencalled the ldquoconjunction fallacyrdquo (Tversky andKahneman 1983)

The observation that biases of judgment aresystematic was quickly recognized as relevantto the debate about the assumption of rationality

FIGURE 8 TWO TESTS OF ATTRIBUTE SUBSTITUTION IN A PREDICTION TASK


in economics (see eg Peter A Diamond1977 David M Grether 1978 Howard Kun-reuther 1979 Arrow 1982) There has alsobeen some discussion of the role of speci cjudgment biases in economic phenomena espe-cially in nance (eg Werner F M De Bondtand Thaler 1985 Robert J Shiller 2000 An-drei Shleifer 2000 Matthew Rabin 2002) Re-cent extensions of the notion of heuristics to thedomain of affect may be of particular relevanceto the conversation between psychology andeconomics because they bear on the core con-cept of a preference As was noted earlier af-fective valence is a natural assessment which isautomatically computed and always accessibleThis basic evaluative attribute (goodbad likedislike approachavoid) is therefore a candidatefor substitution in any task that calls for a fa-vorable or unfavorable response Slovic and hiscolleagues (see eg Slovic et al 2002) intro-duced the concept of an affect heuristic Theyshowed that affect (liking or disliking) is theheuristic attribute for numerous target at-tributes including the evaluation of the costsand bene ts of various technologies the safeconcentration of chemicals and even the pre-dicted economic performance of various indus-tries In an article aptly titled ldquoRisk asFeelingsrdquo Loewenstein et al (2001) docu-mented the related proposition that beliefs aboutrisk are often expressions of emotion

If different target attributes are strongly in- uenced by the same affective reaction thedimensionality of decisions and judgmentsabout valued objects may be expected to beunreasonably low Indeed Melissa L Finucaneet al (2000) found that peoplersquos judgments ofthe costs and bene ts of various technologiesare negatively correlated especially when thejudgments are made under time pressure Atechnology that is liked is judged to have lowcosts and large bene ts These judgments aresurely biased because the correlation betweencosts and bene ts is generally positive in theworld of real choices In the same vein Kahne-man et al (1997) presented evidence that dif-ferent responses to public goods (egwillingness to pay ratings of moral satisfactionfor contributing) yielded essentially inter-changeable rankings of a set of policy issuesHere again a basic affective response appearedto be the common factor

Kahneman et al (1997) suggested that peo-

plersquos decisions often express affective evalua-tions (attitudes) which do not conform to thelogic of economic preferences To understandpreferences then we may need to understandthe psychology of emotions And we cannottake it for granted that preferences that are con-trolled by the emotion of the moment will beinternally coherent or even reasonable by thecooler criteria of re ective reasoning In otherwords the preferences of System 1 are notnecessarily consistent with the preferences ofSystem 2 The next section will show that somechoices are not appropriately sensitive to vari-ations of quantity and costmdashand are better de-scribed as expressions of an affective responsethan as economic preferences

VI Prototype Heuristics

The results summarized in Figure 8 showedthat the judgments that subjects made about theTom W and Linda problems substituted themore accessible attribute of similarity (repre-sentativeness) for the required target attribute ofprobability The goal of the present section is toembed the representativeness heuristic in abroader class of prototype heuristics whichshare a common psychological mechanismmdashthe representation of categories by their proto-typesmdashand a remarkably consistent pattern ofbiases

In the display of lines in Figure 3 the average(typical) length of the lines was highly accessi-ble but the sum of their lengths was not Bothobservations are quite general Classic psycho-logical experiments have established the fol-lowing proposition whenever we look at orthink about a set (ensemble category) which issuf ciently homogeneous to have a prototypeinformation about the prototype is automati-cally accessible (Michael I Posner and StephenW Keele 1968 Eleanor Rosch and Carolyn BMervis 1975) The prototype of a set is char-acterized by the average values of the salientproperties of its members The high accessibil-ity of prototype information serves an importantadaptive function It allows new stimuli to becategorized ef ciently by comparing their fea-tures to those of category prototypes3 For

3 Stored information about individual exemplars alsocontributes to categorization


example the stored prototype of a set of linesallows a quick decision about a new linemdashdoesit belong with the set There is no equallyobvious function for the automatic computationof sums

The low accessibility of sums and the highaccessibility of prototypes have signi cant con-sequences in tasks that involve judgments ofsets as in the following examples

(i) category prediction (eg the probabilitythat the category of bank tellers containsLinda as a member)

(ii) pricing a quantity of public or privategoods (eg the personal dollar value ofsaving a certain number of migratory birdsfrom drowning in oil ponds)

(iii) global evaluation of a past experience thatextended over time (eg the overall aver-siveness of a painful medical procedure)

(iv) assessment of the support that a sample ofobservations provides for a hypothesis(eg the probability that a sample of col-ored balls has been drawn from one spec-i ed urn rather than another)

The objects of judgment in these tasks aresets or categories and the target attributes havea common logical structure Extensional at-tributes are governed by a general principle ofconditional adding which dictates that each el-ement within the set adds to the overall value anamount that depends on the elements alreadyincluded In simple cases the value is additivethe total length of the set of lines in Figure 3 isjust the sum of their separate lengths In othercases each positive element of the set increasesthe aggregate value but the combination rule isnonadditive (typically subadditive)4 The at-tributes of the category prototype are not exten-sionalmdashthey are averages whereas extensionalattributes are akin to sums

The preceding argument leads to the hypoth-esis that tasks that require the assessment of

extensional variables will be relatively dif cultand that intuitive responses may be generatedby substituting an attribute of the prototype forthe extensional target attribute Prototype heu-ristics involve a target attribute that is exten-sional and a heuristic attribute which is acharacteristic of the category prototype Proto-type heuristics are associated with two majorbiases which generalize the biases of represen-tativeness that were introduced in the precedingsection

(i) Violations of monotonicity Adding ele-ments to a set may lower the average andcause the judgment of the target variable todecrease contrary to the logic of exten-sional variables The prevalent judgmentthat Linda is less likely to be a bank tellerthan to be a feminist bank teller illustratesthis bias

(ii) Extension neglect Other things equal anincrease in the extension of a category willincrease the value of its extensional at-tributes but leave unchanged the values ofits prototype attributes The apparent ne-glect of the base rates of areas of special-ization in judgments about Tom W is anexample

Studies that have examined the two biases indifferent contexts are described next

A Pricing Goods

The price of a set of goods is an extensionalvariable If price is evaluated by the attractive-ness of a prototypical element of the set viola-tions of monotonicity and extension neglect arepredicted

Scope NeglectmdashComplete or almost com-plete neglect of extension has often been ob-served in studies of the willingness to pay forpublic goods where the effect is called ldquoneglectof scoperdquo The best known example is a studyby William H Desvousges et al (1993) inwhich respondents indicated their willingness tocontribute money to prevent the drowning ofmigratory birds The number of birds that wouldbe saved was varied for different subsamplesThe estimated amounts that households werewilling to pay were $80 $78 and $88 to save2000 20000 or 200000 birds respectively

4 If the judgment is monotonically related to an additivescale (such as the underlying count of the number of birds)the formal structure is known in the measurement literatureas an ldquoextensive structurerdquo (R Duncan Luce et al 1990Ch 3) There also may be attributes that lack an underlyingadditive scale in which case the structure is known in theliterature as a ldquopositive concatenation structurerdquo (Luce etal 1990 Ch 19 volume 3 p 38)


The target attribute in this case is willingness topay (WTP) and the heuristic attribute appearsto be the emotion associated with the image ofa bird drowning in oil or perhaps with theimage of a bird being saved from drowning(Kahneman et al 1999)

Frederick and Baruch Fischhoff (1998) re-viewed numerous demonstrations of such scopeneglect in studies of willingness to pay for pub-lic goods For example Kahneman and Knetschfound that survey respondents in Toronto werewilling to pay almost as much to clean up thelakes in a small region of Ontario or to clean upall the lakes in that province (reported by Kah-neman 1986) The issue of scope neglect iscentral to the application of the contingent val-uation method (CVM) in the assessment of theeconomic value of public goods and it has beenhotly debated (see eg Richard T Carson1997) The proponents of CVM have reportedexperiments in which there was some sensitiv-ity to scope but even these effects are minutefar too small to satisfy the economic logic ofpricing (Diamond 1996 Kahneman et al1999)

Violations of MonotonicitymdashList (2002) re-ported an experiment that con rmed in a realmarket setting violations of dominance thatHsee (1998) had previously reported in a hypo-thetical pricing task In Listrsquos experiment trad-ers of sportscards assigned signi cantly highervalue to a set of ten sportscards labeled ldquoMintnear mint conditionrdquo than to a set that includedthe same ten cards and three additional cardsdescribed as ldquopoor conditionrdquo In a series offollow-up experiments Jonathan E Alevy et al(2003) also con rmed an important difference(originally suggested by Hsee) between theprices that people will pay when they see onlyone of the goods (separate evaluation) or whenthey price both goods at the same time (jointevaluation) The goods were similar to thoseused in Listrsquos experiment The predicted viola-tion of dominance was observed in separateevaluation especially for relatively inexperi-enced market participants These individualsbid an average of $405 for the small set ofcards and only $182 for the larger set Theviolations of dominance were completelyeliminated in the joint evaluation conditionwhere the bids for the small and large setsaveraged $289 and $332 respectively

Alevy et al (2003) noted that System 1 ap-pears to dominate responses in separate eval-uation whereas System 2 conforms to thedominance rule when given a chance to do soThere was a de nite effect of market experi-ence both in this study and in List (2002) thebids of highly experienced traders alsoshowed violations of monotonicity in separateevaluation but the effect was much smaller

B Evaluations of Extended Episodes

The global utility of an experience that ex-tends over time is an extensional attribute (Kah-neman 1994 2000a b Kahneman et al 1997)and the duration of the experience is a measureof its extension The corresponding prototypeattribute is the experienced utility associatedwith a representative moment of the episode Aspredicted by attribute substitution global eval-uations of the episode exhibit both durationneglect and violations of monotonicity

Duration NeglectmdashIn a study described byRedelmeier and Kahneman (1996) patients un-dergoing colonoscopy reported the intensity ofpain every 60 seconds during the procedure (seeFigure 9) and subsequently provided a globalevaluation of the pain they had suffered Thecorrelation of global evaluations with the dura-tion of the procedure (which ranged from 4 to66 minutes in that study) was 003 On the otherhand global evaluations were correlated (r 5067) with an average of the pain reported attwo points of time when pain was at its peakand just before the procedure ended For exam-ple patient A in Figure 9 reported a more neg-ative evaluation of the procedure than patient BThe same pattern of duration neglect and PeakEnd evaluations has been observed in otherstudies (Barbara L Fredrickson and Kahneman1993 see Kahneman 2000a for a discussion)These results are consistent with the hypothesisthat the extended episode (which can be consid-ered an ordered set of moments) is representedin memory by a typical moment of theexperience

Violations of DominancemdashA randomizedclinical experiment was conducted followingthe colonoscopy study described above For halfthe patients the instrument was not immedi-ately removed when the clinical examination


ended Instead the physician waited for about aminute leaving the instrument stationary Theexperience during the extra period was uncom-fortable but the procedure guaranteed that thecolonoscopy never ended in severe pain Pa-tients reported signi cantly more favorableglobal evaluations in this experimental condi-tion than in the control condition (Redelmeier etal 2003)

Violations of dominance have also beencon rmed in choices Kahneman et al (1993)exposed participants to two cold-pressor ex-periences one with each hand a ldquoshortrdquo ep-isode (immersion of one hand in 14degC waterfor 60 seconds) and a ldquolongrdquo episode (theshort episode plus an additional 30 secondsduring which the water was gradually warmedto 15degC) When they were later asked whichof the two experiences they preferred to re-peat a substantial majority chose the longtrial This pattern of choices is predicted fromthe PeakEnd rule of evaluation that was de-scribed earlier Similar violations of domi-nance were observed with unpleasant soundsof variable loudness and duration (Charles ASchreiber and Kahneman 2000) These vio-lations of dominance suggest that choices be-tween familiar experiences are made in anintuitive process of ldquochoosing by likingrdquo Ex-tended episodes are represented in memory bya typical momentmdashand the desirability oraversiveness of the episode is dominated bythe remembered utility of that moment (Kah-

neman 1994) When a choice is to be madethe option that is associated with the higherremembered utility (more liked) is chosenThis mode of choice is likely to yield choicesthat do not maximize the utility that willactually be experienced (Kahneman et al1997)

C Other Prototype Heuristics

The pattern of results observed in diversestudies of prototype heuristics suggests the needfor a uni ed interpretation and raises a signif-icant challenge to treatments that deal only withone domain A number of authors have offeredcompeting interpretations of base-rate neglect(Leda Cosmides and John Tooby 1996Jonathan Jay Koehler 1996) insensitivity toscope in WTP (Raymond Kopp 1992) andduration neglect (Ariely and Loewenstein2000) In general however these interpretationsare speci c to a particular task and would notcarry over to demonstrations of extension ne-glect in the other tasks that have been dis-cussed In contrast the account offered here(and developed in greater detail by Kahnemanand Frederick 2002) is equally applicable todiverse tasks that require an assessment of anextensional target attribute

The cases that have been discussed are onlyillustrations not a comprehensive list of proto-type heuristics For example the same form ofnonextensional thinking explains why the me-

FIGURE 9 PAIN INTENSITY REPORTED BY TWO COLONOSCOPY PATIENTS


dian estimate of the annual number of murdersin Detroit is twice as high as the estimate of thenumber of murders in Michigan (Kahnemanand Frederick 2002) It also explains whyprofessional forecasters assigned a higherprobability to ldquoan earthquake in Californiacausing a ood in which more than 1000people will drownrdquo than to ldquoa ood some-where in the United States in which more than1000 people will drownrdquo (Tversky and Kah-neman 1983)

As these examples illustrate there is no guar-anteed defense against violations of monotonic-ity How could a forecaster who assigns aprobability to a lethal ood ensure (in nitetime) that there is no subset of that event whichwould have appeared even more probableMore generally the results reviewed in thissection suggest a profound incompatibility be-tween the capabilities and operational rules ofintuitive judgment and choice and the norma-tive standards for beliefs and preferences Thelogic of belief and choice requires accurateevaluation of extensional variables In contrastintuitive thinking operates with exemplars orprototypes that have the dimensionality of indi-vidual instances and lack the dimension ofextension

VII The Boundaries of Intuitive Thinking

The judgments that people express the ac-tions they take and the mistakes they commitdepend on the monitoring and corrective func-tions of System 2 as well as on the impressionsand tendencies generated by System 1 Thissection reviews a selection of ndings and ideasabout the functioning of System 2 A moredetailed treatment is given in Kahneman andFrederick (2002) and Kahneman (2003b)

Judgments and choices are normally intui-tive skilled unproblematic and reasonablysuccessful (Klein 1998) The prevalence offraming effects and other indications of super- cial processing such as the bat-and-ball prob-lem suggest that people mostly do not thinkvery hard and that System 2 monitors judg-ments quite lightly On some occasions how-ever the monitoring of System 2 will detect apotential error and an effort will be made tocorrect it The question for this section can beformulated in terms of accessibility when dodoubts about onersquos intuitive judgments come to

mind The answer as usual in psychology is alist of relevant factors

Research has established that the ability toavoid errors of intuitive judgment is impairedby time pressure (Finucane et al 2000) byconcurrent involvement in a different cognitivetask (Gilbert 1989 1991 2002) by performingthe task in the evening for ldquomorning peoplerdquoand in the morning for ldquoevening peoplerdquo (GalenV Bodenhausen 1990) and surprisingly bybeing in a good mood (Alice M Isen et al1988 Herbert Bless et al 1996) Converselythe facility of System 2 is positively correlatedwith intelligence (Stanovich and West 2002)with the trait that psychologists have labeledldquoneed for cognitionrdquo (which is roughly whetherpeople nd thinking fun) (Eldar Sha r andRobyn A LeBoeuf 2002) and with exposure tostatistical thinking (Richard E Nisbett et al1983 Franca Agnoli and David H Krantz1989 Agnoli 1991)

The question of the precise conditions underwhich errors of intuition are most likely to beprevented is of methodological interest to psy-chologists because some controversies in theliterature on cognitive illusions are resolvedwhen this factor is considered (see Kahnemanand Frederick 2002 Kahneman 2003b) Oneof these methodological issues is also of con-siderable substantive interest this is the distinc-tion between separate evaluation and jointevaluation (Hsee 1996)

In the separate evaluation condition of Listrsquosstudy of dominance violations for exampledifferent groups of traders bid on two sets ofbaseball cards in joint evaluation each traderevaluated both sets at the same time The resultswere drastically different Violations of mono-tonicity which were very pronounced in thebetween-groups comparison were eliminated inthe joint evaluation condition The participantsin the latter condition evidently realized that oneof the sets of goods included the other and wastherefore worth more Once they had detectedthe dominance relation the participants con-strained their bids to follow the rule Thesedecisions are mediated by System 2 Thus thereappear to be two distinct modes of choiceldquochoosing by likingrdquo selects the most attractiveoption ldquochoosing by rulerdquo conforms to an ex-plicit constraint

Prospect theory introduced the same distinc-tion between modes of choice (Kahneman and


Tversky 1979) The normal process corre-sponds to choice by liking the decision makerevaluates each gamble in the choice set thenselects the gamble of highest value In prospecttheory this mode of choice can lead to theselection of a dominated option5 However thetheory also introduced the possibility of choiceby rule if one option transparently dominatesthe other the decision maker will select thedominant option without further evaluation Totest this model Tversky and Kahneman (1986)constructed a pair of gambles that satis ed threecriteria (i) gamble A dominated gamble B (ii)the prospect-theory value of B was higher thanthe value of A (iii) the gambles were complexand the dominance relation only became appar-ent after grouping outcomes As expected fromother framing results most participants in theexperiment evaluated the gambles as originallyformulated failed to detect the relation betweenthem chose the option they liked most andexhibited the predicted violation of dominance

The cold-pressor experiment that was de-scribed earlier (Kahneman et al 1993) isclosely analogous to the study of nontransparentdominance that Tversky and Kahneman (1986)reported A substantial majority of participantsviolated dominance in a direct and seeminglytransparent choice between cold-pressor experi-ences However postexperimental debrie ngsindicated that the dominance was not in facttransparent The participants in the experimentdid not realize that the long episode included theshort one although they did notice that theepisodes differed in duration Because theyfailed to detect that one option dominated theother the majority of participants chose as peo-ple commonly do when they select an experi-ence to be repeated they ldquochose by likingrdquoselected the option that had the higher remem-bered utility and thereby agreed to exposethemselves to a period of unnecessary pain(Kahneman 1994 Kahneman et al 1997)

The complex pattern of results in the studiesof dominance in the joint-evaluation designsuggests three general conclusions (i) choicesthat are governed by rational rules do exist but(ii) these choices are restricted to unusual cir-cumstances and (iii) the activation of the rules

depends on the factors of attention and accessi-bility The fact that System 2 ldquoknowsrdquo the dom-inance rule and ldquowantsrdquo to obey it onlyguarantees that the rule will be followed if apotential violation is explicitly detected

System 2 has the capability of correctingother errors besides violations of dominance Inparticular the substitution of one attribute foranother in judgment inevitably leads to errorsin the weights assigned to different sourcesof information and these couldmdashat least inprinciplemdash be detected and corrected For ex-ample a participant in the Tom W study (seeFigure 8a) could have reasoned as followsldquoTom W looks very much like a library sciencestudent but there are very few of those I shouldtherefore adjust my impression of probabilitydownwardrdquo Although this level of reasoningshould not have been beyond the reach of thegraduate students who answered the Tom Wquestion the evidence shown in Figure 8 showsthat few if any of these respondents had theidea of adjusting their predictions to allow forthe different base rates of the alternative out-comes The explanation of this result in terms ofaccessibility is straightforward the experimentprovided no explicit cues to the relevance ofbase rates

Base-rate information was not completely ig-nored in experiments that provided strongercues though the effects of this variable wereconsistently too small relative to the effect ofthe case-speci c information (Jonathan St B TEvans et al 2002) The evidence of numerousstudies supports the following conclusions (i)the likelihood that the subject will detect a mis-weighting of some aspect of the informationdepends on the salience of cues to the relevanceof that factor (ii) if the misweighting is de-tected there will be an effort to correct it (iii)the correction is likely to be insuf cient and the nal judgments are therefore likely to remainanchored on the initial intuitive impression(Gretchen B Chapman and Johnson 2002)

Economists may be struck by the emphasison salient cues and by the absence of nancialincentives from the list of major factors thatin uence the quality of decisions and judg-ments However the claim that high stakeseliminate departures from rationality is not sup-ported by a careful review of the experimentalevidence (Camerer and Robin M Hogarth1999) A growing literature of eld research and

5 Cumulative prospect theory (Tversky and Kahneman1992) does not have this feature


eld experiments documents large and system-atic mistakes in some of the most consequential nancial decisions that people make includingchoices of investments (Brad M Barber andTerrance Odean 2000 Benartzi and Thaler2001) and actions in the real estate market(David Genesove and Christopher J Mayer2001) The daily paper provides further evi-dence of poor decisions with large outcomes

The present analysis helps explain why theeffects of incentives are neither large nor robustHigh stakes surely increase the amount of at-tention and effort that people invest in theirdecisions But attention and effort by them-selves do not purchase rationality or guaranteegood decisions In particular cognitive effortexpended in bolstering a decision already madewill not improve its quality and the evidencesuggests that the share of time and effort de-voted to such bolstering may increase when thestakes are high (Jennifer S Lerner and Philip ETetlock 1999) Effort and concentration arelikely to bring to mind a more complete set ofconsiderations but the expansion may yield aninferior decision unless the weighting of thesecondary considerations is appropriately lowIn some instancesmdashincluding tasks that requirepredictions of onersquos future tastesmdashtoo muchcognitive effort actually lowers the quality ofperformance (Wilson and Jonathan WSchooler 1991) Klein (2003 Ch 4) has arguedthat there are other situations in which skilleddecision makers do better when they trust theirintuitions than when they engage in detailedanalysis

VIII Concluding Remarks

The rational agent of economic theory wouldbe described in the language of the presenttreatment as endowed with a single cognitivesystem that has the logical ability of a awlessSystem 2 and the low computing costs of Sys-tem 1 Theories in behavioral economics havegenerally retained the basic architecture of therational model adding assumptions about cog-nitive limitations designed to account for spe-ci c anomalies For example the agent may berational except for discounting hyperbolicallyevaluating outcomes as changes or a tendencyto jump to conclusions

The model of the agent that has been pre-sented here has a different architecture which

may be more dif cult to translate into the the-oretical language of economics The core ideasof the present treatment are the two-systemstructure the large role of System 1 and theextreme context-dependence that is implied bythe concept of accessibility The central charac-teristic of agents is not that they reason poorlybut that they often act intuitively And the be-havior of these agents is not guided by whatthey are able to compute but by what theyhappen to see at a given moment

These propositions suggest heuristic ques-tions that may guide attempts to predict or ex-plain behavior in a given setting ldquoWhat wouldan impulsive agent be tempted to dordquo ldquoWhatcourse of action seems most natural in thissituationrdquo The answers to these questions willoften identify the judgment or course of actionto which most people will be attracted Forexample it is more natural to join a group ofstrangers running in a particular direction thanto adopt a contrarian destination However thetwo-system view also suggests that other ques-tions should be raised ldquoIs the intuitively attrac-tive judgment or course of action in con ictwith a rule that the agent would endorserdquo If theanswer to that question is positive then ldquoHowlikely is it in the situation at hand that therelevant rule will come to mind in time to over-ride intuitionrdquo Of course this mode of analysisalso allows for differences between individualsand between groups What is natural and intui-tive in a given situation is not the same foreveryone different cultural experiences favordifferent intuitions about the meaning of situa-tions and new behaviors become intuitive asskills are acquired Even when these complex-ities are taken into account the approach to theunderstanding and prediction of behavior thathas been sketched here is simple and easy toapply and likely to yield hypotheses that aregenerally plausible and often surprising Theorigins of this approach are in an importantintellectual tradition in psychology which hasemphasized ldquothe power of the situationrdquo (LeeRoss and Nisbett 1991)

The present treatment has developed severalthemes that intuition and reasoning are alterna-tive ways to solve problems that intuition re-sembles perception that people sometimesanswer a dif cult question by answering aneasier one instead that the processing of infor-mation is often super cial that categories are


represented by prototypes All these features ofthe cognitive system were in our minds in someform when Amos Tversky and I began our jointwork in 1969 and most of them were in HerbertSimonrsquos mind much earlier However the roleof emotion in judgment and decision makingreceived less attention in that work than it hadreceived before the beginning of the cognitiverevolution in psychology in the 1950rsquos Morerecent developments have restored a central roleto emotion which is incorporated in the view ofintuition that was presented here Findingsabout the role of optimism in risk taking theeffects of emotion on decision weights the roleof fear in predictions of harm and the role ofliking and disliking in factual predictionsmdashallindicate that the traditional separation betweenbelief and preference in analyses of decisionmaking is psychologically unrealistic

Incorporating a common sense psychology ofthe intuitive agent into economic models willpresent dif cult challenges especially for for-mal theorists It is encouraging to note how-ever that the challenge of incorporating the rstwave of psychological ndings into economicsappeared even more daunting 20 years ago andthat challenge has been met with considerablesuccess

REFERENCES

Agnoli Franca ldquoDevelopment of JudgmentalHeuristics and Logical Reasoning TrainingCounteracts the Representativeness Heuris-ticrdquo Cognitive Development AprilndashJune1991 6(2) pp 195ndash217

Agnoli Franca and Krantz David H ldquoSuppress-ing Natural Heuristics by Formal InstructionThe Case of the Conjunction Fallacyrdquo Cog-nitive Psychology October 1989 21(4) pp515ndash50

Alevy Jonathan E List John A and Adamo-wicz Wiktor ldquoMore is Less Preference Re-versals and Non-Market Valuationsrdquo Work-ing paper University of Maryland 2003

Ariely Dan ldquoSeeing Sets Representation byStatistical Propertiesrdquo Psychological Sci-ence March 2001 12(2) pp 157ndash62

Ariely Dan and Loewenstein George ldquoWhenDoes Duration Matter in Judgment and De-cision Makingrdquo Journal of ExperimentalPsychology General December 2000129(4) pp 508ndash23

Arrow Kenneth J ldquoRisk Perception in Psychol-ogy and Economicsrdquo Economic Inquiry Jan-uary 1982 20(1) pp 1ndash9

Barber Brad M and Odean Terrance ldquoTradingis Hazardous to Your Wealth The CommonStock Investment Performance of IndividualInvestorsrdquo Journal of Finance April 200055(2) pp 773ndash806

Barberis Nicholas Huang Ming and ThalerRichard H ldquoIndividual Preferences Mone-tary Gambles and the Equity Premiumrdquo Na-tional Bureau of Economic Research(Cambridge MA) Working Paper NoW9997 May 2003

Bargh John A ldquoThe Automaticity of EverydayLiferdquo in Robert S Wyer Jr ed The auto-maticity of everyday life Advances in socialcognition Vol 10 Mahwah NJ Erlbaum1997 pp 1ndash61

Benartzi Shlomo and Thaler Richard H ldquoMyo-pic Loss Aversion and the Equity PremiumPuzzlerdquo Quarterly Journal of EconomicsFebruary 1995 110(1) pp 73ndash92

ldquoRisk Aversion or Myopia Choices inRepeated Gambles and Retirement Invest-mentsrdquo Management Science March 199947(3) pp 364ndash81

ldquoNaDaggerve Diversi cation Strategies inDe ned Contribution Saving Plansrdquo Ameri-can Economic Review March 2001 91(1)pp 79ndash98

Bernoulli Daniel ldquoExposition of a New Theoryon the Measurement of Riskrdquo EconometricaJanuary 1954 22(1) pp 23ndash36 (Originalwork published 1738)

Bless Herbert Clore Gerald L Schwarz Nor-bert Golisano Verana Rabe Christian andWolk Marcus ldquoMood and the Use of ScriptsDoes a Happy Mood Really Lead to Mind-lessnessrdquo Journal of Personality and SocialPsychology October 1996 71(4) pp 665ndash79

Bodenhausen Galen V ldquoStereotypes as Judg-mental Heuristics Evidence of CircadianVariations in Discriminationrdquo PsychologicalScience September 1990 1(5) pp 319ndash22

Bruner Jerome S and Minturn A Leigh ldquoPer-ceptual Identi cation and Perceptual Organi-zationrdquo Journal of General Psychology July1955 53 pp 21ndash28

Camerer Colin F and Hogarth Robin M ldquoTheEffect of Financial Incentivesrdquo Journal ofRisk and Uncertainty December 1999 19(1ndash3) pp 7ndash42


Camerer Colin F Loewenstein George andRabin Matthew eds Advances in behavioraleconomics Princeton NJ Princeton Univer-sity Press (forthcoming)

Carson Richard T ldquoContingent Valuation Sur-veys and Tests of Insensitivity to Scoperdquo inR J Kopp W W Pommerhene and NSchwartz eds Determining the value of non-marketed goods Economic psychologicaland policy relevant aspects of contingent val-uation methods Boston MA Kluwer 1997pp 127ndash63

Chaiken Shelly and Trope Yaacov eds Dual-process theories in social psychology NewYork Guilford Press 1999

Chapman Gretchen B and Johnson Eric J ldquoIn-corporating the Irrelevant Anchors in Judg-ments of Belief and Valuerdquo in ThomasGilovich Dale Grif n and Daniel Kahne-man eds Heuristics and biases The psy-chology of intuitive thought New YorkCambridge University Press 2002 pp 120ndash38

Choi James J Laibson David Madrian Brigitteand Metrick Andrew ldquoDe ned ContributionPensions Plan Rules Participant Decisionsand the Path of Least Resistancerdquo in JamesM Poterba ed Tax policy and the economyVol 16 Cambridge MA MIT Press 2002pp 67ndash113

Chong Sang-Chul and Treisman Anne ldquoRepre-sentation of Statistical Propertiesrdquo Vision Re-search February 2003 43(4) pp 393ndash404

Cohen David and Knetsch Jack L ldquoJudicialChoice and Disparities Between Measures ofEconomic Valuerdquo Osgoode Hall Law Re-view 1992 30(3) pp 737ndash70

Cosmides Leda and Tooby John ldquoAre HumansGood Intuitive Statisticians After All Re-thinking Some Conclusions From the Litera-ture on Judgment and UncertaintyrdquoCognition January 1996 58(1) pp 1ndash73

De Bondt Werner F M and Thaler Richard HldquoDoes the Stock Market Overreactrdquo Journalof Finance July 1985 40(3) pp 793ndash808

Desvousges William H Johnson F Reed Dun-ford Richard W Hudson Sara P Wilson KNichole and Boyle Kevin J ldquoMeasuring Nat-ural Resource Damages with Contingent Val-uation Tests of Validity and Reliabilityrdquo inJerry A Hausman ed Contingent valuationA critical assessment Amsterdam North-Holland 1993 pp 91ndash164

Diamond Peter A ldquoA Framework for SocialSecurity Analysisrdquo Journal of Public Eco-nomics December 1977 8(3) pp 275ndash98

ldquoTesting the Internal Consistency ofContingent Valuation Surveysrdquo Journal ofEnvironmental Economics and ManagementMay 1996 30(3) pp 155ndash73

Elster Jon ldquoEmotions and Economic TheoryrdquoJournal of Economic Literature March 199826(1) pp 47ndash74

Epstein Seymour ldquoCognitive-Experiential Self-Theory of Personalityrdquo in Theodore Millonand Melvin J Lerner eds Comprehensivehandbook of psychology volume 5 Person-ality and social psychology Hoboken NJWiley amp Sons 2003 pp 159ndash84

Evans Jonathan St B T Handley Simon JOver David E and Perham Nicholas ldquoBack-ground Beliefs in Bayesian Inferencerdquo Mem-ory and Cognition March 2002 30(2) pp179ndash90

Finucane Melissa L Alhakami Ali Slovic Pauland Johnson Stephen M ldquoThe Affect Heuris-tic in Judgments of Risks and Bene tsrdquoJournal of Behavioral Decision Making Jan-uaryMarch 2000 13(1) pp 1ndash17

Fiske Susan T ldquoStereotyping Prejudice andDiscriminationrdquo in Daniel T Gilbert SusanT Fiske and Gardner Lindzey eds Thehandbook of social psychology 4th Ed Vol1 New York McGraw-Hill 1998 pp 357ndash411

Frederick Shane W and Fischhoff BaruchldquoScope (In)sensitivity in Elicited Valua-tionsrdquo Risk Decision and Policy August1998 3(2) pp 109ndash23

Fredrickson Barbara L and Kahneman DanielldquoDuration Neglect in Retrospective Evalua-tions of Affective Episodesrdquo Journal of Per-sonality and Social Psychology July 199365(1) pp 45ndash55

Gawande Atul Complications A surgeonrsquosnotes on an imperfect science New YorkMetropolitan Books 2002

Genesove David and Mayer Christopher JldquoLoss Aversion and Seller Behavior Evi-dence from the Housing Marketrdquo QuarterlyJournal of Economics November 2001116(4) pp 1233ndash60

Gigerenzer Gerd Swijtink Zeno Porter Theo-dore Daston Lorraine Beatty John andKruger Lorenz The empire of chance Howprobability changed science and everyday


life Cambridge Cambridge University Press1989

Gilbert Daniel T ldquoThinking Lightly About Oth-ers Automatic Components of the Social In-ference Processrdquo in James S Uleman andJohn A Bargh eds Unintended thoughtEnglewood Cliffs NJ Prentice-Hall 1989pp 189ndash211

ldquoHow Mental Systems BelieverdquoAmerican Psychologist February 199146(2) pp 107ndash19

ldquoInferential Correctionrdquo in ThomasGilovich Dale Grif n and Daniel Kahne-man eds Heuristics and biases The psy-chology of intuitive thought New YorkCambridge University Press 2002 pp 167ndash84

Grether David M ldquoRecent Psychological Stud-ies of Behavior Under Uncertaintyrdquo Ameri-can Economic Review May 1978 (Papersand Proceedings) 68(2) pp 70ndash74

Higgins E Tory ldquoKnowledge Activation Ac-cessibility Applicability and Saliencerdquo in ETory Higgins and Arie W Kruglanski edsSocial psychology Handbook of basic prin-ciples New York Guilford Press 1996 pp133ndash68

Hsee Christopher K ldquoThe Evaluability Hypoth-esis An Explanation of Preference ReversalsBetween Joint and Separate Evaluations ofAlternativesrdquo Organizational Behavior andHuman Decision Processes September 199667(3) pp 247ndash57

ldquoLess is Better When Low-Value Op-tions are Valued More Highly Than High-Value Optionsrdquo Journal of BehavioralDecision Making June 1998 11(2) pp 107ndash21

Isen Alice M Nygren Thomas E and Ashby FGregory ldquoIn uence of Positive Affect on theSubjective Utility of Gains and Losses It isJust Not Worth the Riskrdquo Journal of Person-ality and Social Psychology November1988 55(5) pp 710ndash17

Johnson Eric J and Goldstein Daniel G ldquoDoDefaults Save Livesrdquo Working paper Cen-ter for Decision Sciences Columbia Univer-sity 2003

Johnson Eric J Hershey John Meszaros Jac-queline and Kunreuther Howard ldquoFramingProbability Distortions and Insurance Deci-sionsrdquo Journal of Risk and Uncertainty Au-gust 1993 7(1) pp 35ndash51

Kahneman Daniel ldquoCommentrdquo in Ronald GCummings David S Brookshire and Wil-liam D Schultze eds Valuing environmen-tal goods Totowa NJ Rowman andAllenheld 1986 pp 185ndash93

ldquoNew Challenges to the RationalityAssumptionrdquo Journal of Institutional andTheoretical Economics March 1994 150(1)pp 18ndash36

ldquoEvaluation by Moments Past and Fu-turerdquo in Daniel Kahneman and Amos Tver-sky eds Choices values and frames NewYork Cambridge University Press 2000app 693ndash708

ldquoExperiencedUtility and Objective Hap-piness A Moment-Based Approachrdquo in DanielKahneman and Amos Tversky eds Choicesvalues and frames New York CambridgeUniversity Press 2000b pp 673ndash92

ldquoA Psychological Perspective on Eco-nomicsrdquo American Economic Review May2003a (Papers and Proceedings) 93(2) pp162ndash68

ldquoA Perspective on Judgment andChoice Mapping Bounded RationalityrdquoAmerican Psychologist September 2003b56(9) pp 697ndash720

Kahneman Daniel and Frederick Shane ldquoRep-resentativeness Revisited Attribute Substitu-tion in Intuitive Judgmentrdquo in ThomasGilovich Dale Grif n and Daniel Kahne-man eds Heuristics and biases The psy-chology of intuitive thought New YorkCambridge University Press 2002 pp 49ndash81

Kahneman Daniel Fredrickson Barbara LSchreiber Charles A and Redelmeier DonaldA ldquoWhen More Pain is Preferred to LessAdding a Better Endrdquo Psychological Sci-ence November 1993 4(6) pp 401ndash05

Kahneman Daniel Knetsch Jack and ThalerRichard ldquoFairness as a Constraint on Pro t-seeking Entitlements in the Marketrdquo Amer-ican Economic Review September 198676(4) pp 728ndash41

ldquoExperimental Tests of the Endow-ment Effect and the Coase Theoremrdquo Jour-nal of Political Economy December 199098(6) pp 1325ndash48

ldquoThe Endowment Effect Loss Aver-sion and Status Quo Bias Anomaliesrdquo Jour-nal of Economic Perspectives Winter 19915(1) pp 193ndash206


Kahneman Daniel and Lovallo Daniel ldquoTimidChoices and Bold Forecasts A CognitivePerspective on Risk Takingrdquo ManagementScience January 1993 39(1) pp 17ndash31

Kahneman Daniel Ritov Ilana and SchkadeDavid ldquoEconomic Preferences or AttitudeExpressions An Analysis of Dollar Re-sponses to Public Issuesrdquo Journal of Riskand Uncertainty December 1999 19(1ndash3)pp 203ndash35

Kahneman Daniel Slovic Paul and TverskyAmos eds Judgment under uncertaintyHeu-ristics and biases New York CambridgeUniversity Press 1982

Kahneman Daniel and Tversky Amos ldquoOn thePsychology of Predictionrdquo PsychologicalReview July 1973 80(4) pp 237ndash51

ldquoProspect Theory An Analysis of De-cisions Under Riskrdquo Econometrica March1979 47(2) pp 263ndash91

eds Choices values and frames NewYork Cambridge University Press 2000

Kahneman Daniel Wakker Peter P and SarinRakesh ldquoBack to Bentham Explorations ofExperienced Utilityrdquo Quarterly Journal ofEconomics May 1997 112(2) pp 375ndash405

Keren Gideon and Wagenaar Willem A ldquoVio-lations of Utility Theory in Unique and Re-peated Gamblesrdquo Journal of ExperimentalPsychology Learning Memory and Cogni-tion July 1987 13(3) pp 387ndash91

Klein Gary Sources of power How peoplemake decisions Cambridge MA MIT Press1998

Intuition at work Why developingyour gut instincts will make you better atwhat you do New York Doubleday 2003

Koehler Jonathan Jay ldquoThe Base-Rate FallacyReconsidered Descriptive Normative andMethodological Challengesrdquo Behavioral andBrain Sciences March 1996 19 pp 1ndash53

Kopp Raymond ldquoWhy Existence Value Shouldbe Used in Cost-Bene t Analysisrdquo Journalof Policy Analysis and Management Winter1992 11(1) pp 123ndash30

Kunreuther Howard ldquoThe Changing SocietalConsequences of Risks From Natural Haz-ardsrdquo Annals of the American Academy ofPolitical and Social Science May 1979443(443) pp 104ndash16

Langer Ellen J Blank Arthur and ChanowitzBenzion ldquoThe Mindlessness of OstensiblyThoughtful Action The Role of lsquoPlacebicrsquo

Information in Interpersonal InteractionrdquoJournal of Personality and Social Psychol-ogy June 1978 36(6) pp 635ndash42

LeDoux Joseph E ldquoEmotion Circuits in theBrainrdquo Annual Review of NeuroscienceMarch 2000 23 pp 155ndash84

Lerner Jennifer S and Tetlock Philip E ldquoAc-counting for the Effects of AccountabilityrdquoPsychological Bulletin March 1999 125(2)pp 255ndash75

List John A ldquoPreference Reversals of a Differ-ent Kind The lsquoMore Is Lessrsquo PhenomenonrdquoAmerican Economic Review December2002 92(5) pp 1636ndash43

ldquoDoes Market Experience EliminateMarket Anomaliesrdquo Quarterly Journal ofEconomics February 2003a 118(1) pp 47ndash71

ldquoNeoclassical Theory Versus ProspectTheory Evidence From the MarketplacerdquoNational Bureau of Economic Research(Cambridge MA) Working Paper NoW9736 2003b Econometrica 2004 (forth-coming)

Loewenstein George ldquoOut of Control VisceralIn uences on Behaviorrdquo Organizational Be-havior and Human Decision ProcessesMarch 1996 65(3) pp 272ndash92

ldquoEmotions in Economic Theory andEconomic Behaviorrdquo American EconomicReview May 2000 (Papers and Proceed-ings) 90(2) pp 426ndash32

Loewenstein George Weber Elke U HseeChristopher K and Welch N ldquoRisk as Feel-ingsrdquo Psychological Bulletin March 2001127(2) pp 267ndash86

Luce R Duncan Krantz David H SuppesPatrick and Tversky Amos Foundations ofmeasurement volume 3 Representation axi-omatization and invariance San Diego CAAcademic Press 1990

Madrian Brigitte and Shea Dennis ldquoThe Powerof Suggestion Inertia in 401(k) Participationand Savings Behaviorrdquo Quarterly Journal ofEconomics November 2001 116(4) pp1149ndash87

Mellers Barbara ldquoChoice and the RelativePleasure of Consequencesrdquo PsychologicalBulletin November 2000 126(6) pp 910ndash24

Nisbett Richard E Krantz David H JepsonChristopher and Kunda Ziva ldquoThe Use ofStatistical Heuristics in Everyday Inductive


Reasoningrdquo Psychological Review October1983 90(4) pp 339ndash63

Pashler Harold E The psychology of attentionCambridge MA MIT Press 1998

Posner Michael I and Keele Stephen W ldquoOn theGenesis of Abstract Ideasrdquo Journal of Exper-imental Psychology Pt 1 1968 77(3) pp353ndash63

Rabin Matthew ldquoInference by Believers in theLaw of Small Numbersrdquo Quarterly Journalof Economics August 2002 17(3) pp 775ndash816

Read Daniel Loewenstein George and RabinMatthew ldquoChoice Bracketingrdquo Journal ofRisk and Uncertainty December 1999 19(1ndash3) pp 171ndash97

Redelmeier Donald A and Kahneman DanielldquoPatientsrsquo Memories of Painful MedicalTreatments Real-time and RetrospectiveEvaluations of Two Minimally Invasive Pro-ceduresrdquo Pain July 1996 66(1) pp 3ndash8

Redelmeier Donald A Katz Joel and Kahne-man Daniel ldquoMemories of Colonoscopy ARandomized Trialrdquo Pain July 2003 104(1ndash2) pp 187ndash94

Rosch Eleanor and Mervis Carolyn B ldquoFamilyResemblances Studies in the Internal Struc-ture of Categoriesrdquo Cognitive PsychologyOctober 1975 7(4) pp 573ndash605

Ross Lee and Nisbett Richard E The person andthe situation New York McGraw-Hill1991

Rottenstreich Yuval and Hsee Christopher KldquoMoney Kisses and Electric Shocks On theAffective Psychology of Riskrdquo Psychologi-cal Science May 2001 12(3) pp 185ndash90

Rozin Paul and Nemeroff Carol ldquoSympatheticMagical Thinking The Contagion and Simi-larity Heuristicsrdquo in Thomas Gilovich DaleGrif n and Daniel Kahneman eds Heuris-tics and biases The psychology of intuitivethought New York Cambridge UniversityPress 2002 pp 201ndash16

Samuelson William and Zeckhauser RichardldquoStatus Quo Bias in Decision Makingrdquo Jour-nal of Risk and Uncertainty March 19881(1) pp 7ndash59

Schelling Thomas C Choice and conse-quence Perspectives of an errant econo-mist Cambridge MA Harvard UniversityPress 1984

Schreiber Charles A and Kahneman DanielldquoDeterminants of the Remembered Utility of

Aversive Soundsrdquo Journal of ExperimentalPsychology General March 2000 129(1)pp 27ndash42

Sha r Eldar and LeBoeuf Robyn A ldquoRational-ityrdquo Annual Review of Psychology February2002 53(1) pp 419ndash517

Shiller Robert J Irrational exuberance Prince-ton NJ Princeton University Press 2000

Shleifer Andrei Inef cient markets An intro-duction to behavioral nance New YorkOxford University Press 2000

Simon Herbert A ldquoA Behavioral Model of Ra-tional Choicerdquo Quarterly Journal of Eco-nomics February 1955 69(1) pp 99ndash118

ldquoInformation Processing Models ofCognitionrdquo Annual Review of PsychologyFebruary 1979 30 pp 363ndash96

Simon Herbert A and Chase William G ldquoSkillin Chessrdquo American Scientist July 197361(4) pp 394ndash403

Sloman Steven A ldquoTwo Systems of Reasoningrdquoin Thomas Gilovich Dale Grif n and DanielKahneman eds Heuristics and biases Thepsychology of intuitive thought New YorkCambridge University Press 2002 pp 379ndash96

Slovic Paul Finucane Melissa Peters Ellen andMacGregor Donald G ldquoThe Affect Heuris-ticrdquo in Thomas Gilovich Dale Grif n andDaniel Kahneman eds Heuristics and bi-ases The psychology of intuitive thoughtNew York Cambridge University Press2002 pp 397ndash420

Stanovich Keith E and West Richard F ldquoIndi-vidual Differences in Reasoning Implica-tions for the Rationality Debaterdquo Behavioraland Brain Sciences October 2000 23(5) pp645ndash65

ldquoIndividual Differences in ReasoningImplications for the Rationality Debaterdquo inThomas Gilovich Dale Grif n and DanielKahneman eds Heuristics and biases Thepsychology of intuitive thought New YorkCambridge University Press 2002 pp 421ndash40

Strack Fritz Martin Leonard and SchwarzNorbert ldquoPriming and Communication So-cial Determinants of Information Use inJudgments of Life Satisfactionrdquo EuropeanJournal of Social Psychology OctoberndashNovember 1988 18(5) pp 429ndash42

Thaler Richard H ldquoToward a Positive Theoryof Consumer Choicerdquo Journal of Economic


Behavior and Organization March 19801(1) pp 36ndash90

ldquoMental Accounting and ConsumerChoicerdquo Marketing Science Summer 19854(3) pp 199ndash214

Quasi rational economics New YorkRussell Sage Foundation 1991

The winnerrsquos curse Paradoxes andanomalies of economic life New York FreePress 1992

ldquoMental Accounting Mattersrdquo Journalof Behavioral Decision Making July 199912(3) pp 183ndash206

ldquoToward a Positive Theory of Con-sumer Choicerdquo in Daniel Kahneman andAmos Tversky eds Choices values andframes New York Cambridge UniversityPress 2000 pp 268ndash87

Tversky Amos and Kahneman Daniel ldquoJudg-ment under Uncertainty Heuristics andBiasesrdquo Science September 1974185(4157) pp 1124ndash31

ldquoThe Framing of Decisions and thePsychology of Choicerdquo Science January1981 211(4481) pp 453ndash58

ldquoExtensional Versus Intuitive Reason-ing The Conjunction Fallacy in ProbabilityJudgmentrdquo Psychological Review October1983 90(4) pp 293ndash315

ldquoRational Choice and the Framing ofDecisionsrdquo Journal of Business October1986 59(4) pp S251ndash78

ldquoLoss Aversion in Riskless Choice AReference-Dependent Modelrdquo QuarterlyJournal of Economics November 1991106(4) pp 1039ndash61

ldquoAdvances in Prospect Theory Cumu-lative Representation of Uncertaintyrdquo Jour-nal of Risk and Uncertainty October 19925(4) pp 297ndash323

Tversky Amos and Redelmeier Donald A ldquoOnthe Framing of Multiple Prospectsrdquo Psycho-logical Science May 1992 3(3) pp 191ndash93

Wilson Timothy D Strangers to ourselvesDiscovering the adaptive unconsciousCambridge MA Harvard University Press2002

Wilson Timothy D and Schooler Jonathan WldquoThinking Too Much Introspection Can Re-duce the Quality of Preferences and Deci-sionsrdquo Journal of Personality and SocialPsychology February 1991 60(2) pp 181ndash92

Zajonc Robert B ldquoEmotionsrdquo in Daniel T Gil-bert Susan T Fiske and Gardner Lindzeyeds Handbook of social psychology 4th EdVol 1 New York Oxford University Press1998 pp 591ndash632


Copyright notice for Mapspdf

Kahneman (2003) - Maps of bounded rationality - Psychology for behavioral economics

Maps of Bounded Rationality

Psychology for Behavioral Economicsdagger

By DANIEL KAHNEMAN

The work cited by the Nobel committee wasdone jointly with Amos Tversky (1937ndash1996)during a long and unusually close collaborationTogether we explored the psychology of intu-itive beliefs and choices and examined theirbounded rationality Herbert A Simon (19551979) had proposed much earlier that decisionmakers should be viewed as boundedly rationaland had offered a model in which utility maxi-mization was replaced by satis cing Our re-search attempted to obtain a map of boundedrationality by exploring the systematic biasesthat separate the beliefs that people have and thechoices they make from the optimal beliefs andchoices assumed in rational-agent models Therational-agent model was our starting point andthe main source of our null hypotheses butTversky and I viewed our research primarily asa contribution to psychology with a possiblecontribution to economics as a secondary ben-e t We were drawn into the interdisciplinaryconversation by economists who hoped thatpsychology could be a useful source of assump-tions for economic theorizing and indirectly asource of hypotheses for economic research(Richard H Thaler 1980 1991 1992) These

hopes have been realized to some extent givingrise to an active program of research by behav-ioral economists (Thaler 2000 Colin Camereret al forthcoming for other examples seeKahneman and Tversky 2000)

My work with Tversky comprised three sep-arate programs of research some aspects ofwhich were carried out with other collaboratorsThe rst explored the heuristics that people useand the biases to which they are prone in vari-ous tasks of judgment under uncertainty includ-ing predictions and evaluations of evidence(Kahneman and Tversky 1973 Tversky andKahneman 1974 Kahneman et al 1982) Thesecond was concerned with prospect theory amodel of choice under risk (Kahneman andTversky 1979 Tversky and Kahneman 1992)and with loss aversion in riskless choice (Kah-neman et al 1990 1991 Tversky and Kahne-man 1991) The third line of research dealt withframing effects and with their implications forrational-agent models (Tversky and Kahneman1981 1986) The present essay revisits thesethree lines of research in light of recent ad-vances in the psychology of intuitive judgmentand choice Many of the ideas presented herewere anticipated informally decades ago butthe attempt to integrate them into a coherentapproach to judgment and choice is recent

Economists often criticize psychological re-search for its propensity to generate lists oferrors and biases and for its failure to offer acoherent alternative to the rational-agent modelThis complaint is only partly justi ed psycho-logical theories of intuitive thinking cannotmatch the elegance and precision of formal nor-mative models of belief and choice but this isjust another way of saying that rational modelsare psychologically unrealistic Furthermorethe alternative to simple and precise models isnot chaos Psychology offers integrative con-cepts and mid-level generalizations which gaincredibility from their ability to explain ostensi-bly different phenomena in diverse domains Inthis spirit the present essay offers a uni ed

dagger This article is a revised version of the lecture DanielKahneman delivered in Stockholm Sweden on December8 2002 when he received the Bank of Sweden Prize inEconomic Sciences in Memory of Alfred Nobel The articleis copyright copy The Nobel Foundation 2002 and is publishedhere with the permission of the Nobel Foundation

Woodrow Wilson School Princeton UniversityPrinceton NJ 08544 (e-mail Kahnemanprincetonedu)This essay revisits problems that Amos Tversky and Istudied together many years ago and continued to discuss ina conversation that spanned several decades It builds on ananalysis of judgment heuristics that was developed in col-laboration with Shane Frederick (Kahneman and Frederick2002) A different version was published in American Psy-chologist in September 2003 For detailed comments on thisversion I am grateful to Angus Deaton David LaibsonMichael Rothschild and Richard Thaler The usual caveatsapply Geoffrey Goodwin Amir Goren and Kurt Schoppeprovided helpful research assistance

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