A Modern Guide to Thinking, Fast and Slow
Part IV - Choices
- Bernoulli's Errors
- Prospect Theory
- The Endowment Effect
- Bad Events
- The Fourfold Pattern
- Rare Events
- Risk Policies
- Keeping Score
- Reversals
- Frames and Reality
Chapter 25: Bernoulli's Errors
Overview
Bernoulli explained risk aversion with diminishing marginal utility. His error was assuming people care only about final wealth, not changes from a reference point.
In reality, we judge outcomes as gains or losses relative to where we are (with losses weighing more), which produces risk aversion in gains risk seeking in losses.
Prospect theory corrects for these omissions by incorporating reference dependence and loss aversion.
Replications & Reliability
- Prospect theory: Kahneman & Tversky’s 1979 Econometrica paper is foundational and remains highly cited. The main update is cumulative prospect theory (Tversky & Kahneman, 1992), now the standard formulation in economics and finance. Core components are broadly supported; see Gisbert-Pérez et al., 2022 for a bibliometric and systematic review of the literature.
- Framing effects: The Science article on risky-choice framing (Tversky & Kahneman, 1981) has held up well. A meta-analysis finds a reliable framing effect overall (Kühberger, 1998), and a re-appraisal of it using p-curve methods concludes the effect is real with no evidence of heavy p-hacking (Steiger & Kühberger, 2018).
Recommendations
This chapter is replication-crisis safe and highly valuable. Prospect theory and risky-choice framing are well supported across replications and meta-analyses, and the move from final-wealth utility to reference-dependent evaluation is now standard in economics.
Chapter 26: Prospect Theory
Coming soon
Chapter 27: The Endowment Effect
Coming soon
Chapter 28: Bad Events
Coming soon
Chapter 29: The Fourfold Pattern
Coming soon
Chapter 30: Rare Events
Coming soon
Chapter 31: Risk Policies
Coming soon
Chapter 32: Keeping Score
Coming soon
Chapter 33: Reversals
Coming soon
Chapter 34: Frames and Reality
Coming soon
Courses
Fallacy Detectors
Develop the skills to tackle logical fallacies through a series of 10 science-fiction videos with activities. Recommended for ages 8 and up.
Social Media Simulator
Teach your kids to spot misinformation and manipulation in a safe and controlled environment before they face the real thing. Recommended for ages 9 and up.
A Statistical Odyssey
Learn about common mistakes in data analysis with an interactive space adventure. Recommended for ages 12 and up.
Logic for Teens
Learn how to make sense of complicated arguments with 14 video lessons and activities. Recommended for ages 13 and up.
Emotional Intelligence
Learn to recognize, understand, and manage your emotions. Designed by child psychologist Ronald Crouch, Ph.D. Recommended for ages 5 to 8.
Worksheets
Logical Fallacies Worksheets and Lesson Plans
Teach your grades 3-7 students about ten common logical fallacies with these engaging and easy-to-use lesson plans and worksheets.
Symbolic Logic Worksheets
Worksheets covering the basics of symbolic logic for children ages 13 and up.
Elementary School Worksheets and Lesson Plans
These lesson plans and worksheets teach students in grades 2-5 about superstitions, different perspectives, facts and opinions, the false dilemma fallacy, and probability.
Middle School Worksheets and Lesson Plans
These lesson plans and worksheets teach students in grades 5-8 about false memories, confirmation bias, Occam’s razor, the strawman fallacy, and pareidolia.
High School Worksheets and Lesson Plans
These lesson plans and worksheets teach students in grades 8-12 about critical thinking, the appeal to nature fallacy, correlation versus causation, the placebo effect, and weasel words.
Statistical Shenanigans Worksheets and Lesson Plans
These lesson plans and worksheets teach students in grades 9 and up the statistical principles they need to analyze data rationally.
Printable Logical Fallacy Handbook
A printable PDF explaining 20 common logical fallacies with real-world examples. Recommended for teens and adults.