Behavioral economics

It is human nature to overestimate how rational we are, both in general and even when we are trying to be. Such irrationality is not random, and the search for and explanation of patterns of fuzzy thinking is the basis for a new academic discipline known as behavioral economics. Examples are given of some of the best understood of our foibles, including prospect theory, framing, anchoring, salience, confirmation bias, superstition, and ownership. Humans have two cognitive systems: one conscious, deliberate, slow, and rational; the other fast, pattern-based, emotionally tinged, and intuitive. Each is subject to its own kind of error. In the case of rational thought, we tend to exaggerate our capacity; for intuition, we fail to train it or recognize contexts where it is inappropriate. Humans are especially poor at estimating probabilities, or even understanding what they are. It is a common human failing to reason backwards from random outcomes that are favorable to beliefs about our power to predict the future. Five suggestions are offered for thinking within our means.