Imagine you're one of the first human beings, and you're walking with your kid and you see
a lion. And you don't know what a lion is,
so you take your kid over to play with him and the lion eats your kid.
So you go home and you're sad, but it's okay, you get your wife pregnant,
and in five years, you're walking again with your new kid
and you see a lion far away. This time you hide with your kid,
and the lion eventually leaves and you both survive.
So you come out, you start walking with your kid again
and a bird flys over and all of a sudden your kid drops dead.
And you go home sad again, you get your wife pregnant again,
and you make a promise to yourself. You're going to make sure
that you hide your new kid from lions, and that you'll hide him if you see a bird
So there are two ways that we think. Both of the decisions that you made
are based on the fast, automatic thought process, which Kahneman calls System 1.
System 1 is where we find how irrational and illogical or just simply how stupid we
really are so it can lead us to not value System 1
or think that it's useless.
If you had used your slow, more rational and logical thinking,
you would have found that you were right about the lion,
but the bird had nothing to do with your kid's death.
But, we should value System 1, because it has huge benefits.
It's the reason why we've survived. Yes, maybe at the cost of some really ridiculous
assumptions, like your kid dying every time a bird flys
over, but if we had rationally thought about
what a loud noise might mean and analyze it carefully
instead of being scared and running away from it immediately,
we wouldn't be here.
So big idea 1 is: Understanding System 1 and System 2.
There are huge benefits to both systems, the problem however really arises when we
use System 1 instead of System 2, when System 2 would be the appropriate system
to use. And this leads us to all kinds of biases and
fallacies that are not optimal. It's not optimal to think that if a bird flys
over, your kid will drop dead.
So if I were to ask you these two questions, what would your answer be?
1. Is the height of the tallest redwood more or less than 1,200 feet?
2. What is your best guess about the height of the tallest redwood?
So one group was asked these questions, And another group was asked the exact same
questions except instead of 1,200 feet in the first
question, this time they were asked whether the height
of the tree was more or less than only 180 feet.
So what do you think the answers looked like? The first group's mean guess was 844 feet.
The second group's mean guess was only 282 feet.
That is a HUGE difference.
This is what is known as anchoring. So ask yourself and throughout this video,
how can knowing this be useful to you. Dan Ariely, one of my favorite economists,
talks about how we have no idea about most things
and what they should cost. If you're not an expert just like we aren't
in most things, you don't know how tall a redwood tree should
be, I don't know what a microwave should cost
when I go buy it... Should it be $99, $199?
I have no idea... So we use different ways to approximate what
it should be, and anchoring is one of them.
So again how is this useful to you personally? If you're the buyer do you want to look at
the MSRP, and be anchored to that?
If you're selling something, how do you want to set up your MSRP
to use anchoring to your advantage?
Big idea 2 is: Understanding anchoring.
So one of the things that I really enjoy about my life
is the peace of mind I have while doing things. When I visit somewhere I'm not worried about
a terrorist attack, and when I fly there I'm not worried about
the plane crashing. And that peace of mind largely comes from
the fact that I'm not really a big consumer of mainstream
But I meet people all the time who are really constantly worried.
"Have you seen how terrorism is taking over the world?
What are we headed towards? Have you seen how planes are just crashing
all the time now?" But in reality,
it's not like the chances of those two things have risen in some dramatic proportion.
They're highly unlikely, and I mean a probability very close to zero
that your plane will crash.
And this is what is known as the science of availability.
Even an event that has an almost non-existent probability of happening to you
can be assigned a reasonable or even a high probability by you
just because of what's available to you.
So again ask yourself, how can you use this concept to make your
life better? Is it better to enjoy your life
and realize that the world is actually not as bad as commonly portrayed,
or watch the news every day where you'll be shown
constant death and destruction because that's what sells?
Big idea 3 is: Understanding the Science of Availability
Now let's say I offer you to play a game with me.
We're going to flip a coin, and if you win, you win a $1000.
And if you lose, you lose a $1000. Do you want to play that game?
If you're like most people, that is a game that you do not want to play.
What if we change the rules a little bit. If you win, you win $1100.
And if you lose, you lose only a $1000. From an expected value point of view,
that is a good game to play. But if I asked you to play that game right
now, and you knew that there was a 50% chance of
losing your $1000, if you're like most people you still wouldn't
play even though there's also a 50% chance of winning
This is called Loss Aversion. Most people are very loss averse.
In fact, you have to offer somewhere about $2000
to get people to play.
Now this might be intersting, but again ask yourself,
how can you use understanding this in your life?
You know you're going to be more convincing explaining to someone what they are risking
losing, instead of what they could possibly gain.
So maybe you want to convince someone that being an alcoholic is bad...
How do you want to go about doing that? Do you want to talk about how they could possibly
gain a better job and make more money if they overcome this
problem, or do you want to tell them how they're going
to lose their loved ones like their spouse and children?
Big idea 4 is: understanding Loss Aversion.
Now imagine I'm your doctor and I have to do an operation on you
and I tell you, "There is a %10 chance that you're going to
die." I could also tell you,
"There is a 90% chance that you're going to live."
Now from a statistical point of view, there is absolutely no difference in those
two statements. BUT...
In the first case, you're going to feel much worse than in the
This is known as framing. How you frame the exact same situation
can have dramatically different consequences.
So big idea 5 is: Understanding framing. Again ask yourself, how can you use this?
How can you use framing to make good things more appealing and convincing
to your friends or your children or whoever else you want to influence?
And finally, big idea 6 is: Understanding the Sunk Cost Fallacy.
This is all about letting your past decisions influence your present decisions.
So think of John. He has no idea about poker,
but he thought he would go gamble and play. Fast forward into the night,
and John has now lost a $1000 and hasn't won anything.
Now if John looks at the odds of his winning from this moment on,
which would require the use of System 2, which he's probably not going to use,
he would find that the best thing to do is completely disregard the $1000 and get
up and leave. The $1000 already lost has nothing to do
with what his odds are starting from this moment.
But John is going to be heavily influenced by the $1000
and most likely keep playing and losing even more.
Let me give you another example... Jen bought 50 boxes of candy a few months
ago, so her house is full of candy.
But she now finds out about the importance of eating healthy,
and she realizes that the candy actually hurts her,
but she can't just get rid of it. She payed money for it at some point,
so it's really hard for her even though the candy is going to hurt her.
Now you might look at John and Jen and say, "Heh... What a bunch of idiots!"
But the reality is that you and I are no different... Look around your house right now.
How much stupid shit have you bought over the years
that's now just laying there taking up space, bothering you, you're never even going to
use it again, but you don't get rid of it?
There is no difference between Jen or John and you in this situation.
The chair that you bought gets in the way all the time,
there is no room for it in your little house, it's causing you pain,
but how can you get rid of it? You paid $59 for it at some point.
This is what is known as the sunk cost fallacy. Your past decisions shouldn't affect what
is good for you now. If you paid money for a bunch of candy at
some point, it doesn't mean that it's good for you to
keep eating it.