The Science of Deciding

The Concept

Anchoring is the tendency to rely too heavily on the first piece of information offered (the 'anchor') when making decisions, even when that anchor is irrelevant.

Landmark Study

Tversky & Kahneman (1974) spun a wheel of fortune, then asked participants to estimate the percentage of African nations in the UN. A higher wheel number produced higher estimates — pure anchoring.

Why It Matters

Retail pricing leans on anchors: a '$200, now $89' tag makes $89 feel cheap. Salary negotiations are won by whoever names a number first.

The Concept

The framing effect describes how the same information, presented as a gain vs a loss, leads to systematically different choices.

Landmark Study

Tversky & Kahneman's 'Asian Disease Problem' (1981): framing an identical outcome as lives saved vs lives lost flipped the majority preference.

Why It Matters

'95% fat free' outsells 'contains 5% fat'. Surgeons quoting a '90% survival rate' get more consent than those quoting a '10% mortality rate'.

The Concept

Loss aversion: losses loom roughly twice as large as equivalent gains, so we reject fair or even favorable bets that risk a loss.

Landmark Study

Kahneman & Tversky's Prospect Theory (1979) estimated a loss-aversion coefficient around 2:1, reshaping economics.

Why It Matters

Investors hold losing stocks too long to avoid 'realizing' a loss, and sell winners too early. Free-trial cancellations spike because losing the service feels worse than its price.

The Concept

The sunk cost fallacy is continuing an endeavor because of previously invested resources (time, money, effort) that cannot be recovered.

Landmark Study

Nicknamed the 'Concorde fallacy' after Britain and France kept funding the supersonic jet despite knowing it would never be profitable.

Why It Matters

Finishing a bad movie 'because you paid for it', or governments funding failing megaprojects to honor prior spending.

The Concept

Confirmation bias is the tendency to search for, interpret, and recall information that confirms existing beliefs while ignoring disconfirming evidence.

Landmark Study

Wason's 2-4-6 task (1960) showed people propose only confirming sequences, rarely testing rules that could prove them wrong.

Why It Matters

News and social feeds become echo chambers; product teams cherry-pick metrics that validate decisions already made.

The Concept

The availability heuristic judges probability by how easily examples come to mind, not by actual frequency.

Landmark Study

Lichtenstein et al. (1978) found people overestimate dramatic causes of death (tornadoes) and underestimate quiet ones (asthma).

Why It Matters

People fear plane crashes more than car crashes despite cars being vastly deadlier, because crashes are vivid and heavily reported.

The Concept

Risk tolerance is the variance in outcomes you'll accept for higher expected return. There is no single 'right' answer — only consistency with your goals.

Landmark Study

Markowitz's Modern Portfolio Theory (1952) formalized the risk–return frontier and won the Nobel Prize.

Why It Matters

Portfolio construction balances expected return against volatility. Younger investors typically tolerate more variance.

The Concept

Entrepreneurial decisions weigh a high-variance payoff against a safe alternative. Expected value and personal risk capacity both matter.

Landmark Study

Studies of founders show systematic overconfidence: most expect to beat the ~10% startup survival base rate.

Why It Matters

Choosing a stable salary vs equity in an early startup is one of the highest-variance financial decisions people face.

The Concept

Conformity is adjusting your judgment to match a group, even when the group is clearly wrong.

Landmark Study

Asch's line experiments (1951): ~75% of participants conformed to an obviously wrong majority at least once.

Why It Matters

Teams approve flawed plans when no one wants to be the lone dissenter; markets form bubbles on herd behavior.

The Concept

Authority bias is the tendency to comply with or over-trust figures of authority, sometimes against our own judgment.

Landmark Study

Milgram's obedience studies (1961) and the 'captainitis' found in aviation crash investigations.

Why It Matters

Junior staff defer to senior decisions they privately doubt; patients rarely question doctors even when something feels wrong.

The Concept

The Ultimatum Game pits rational self-interest against an innate sense of fairness.

Landmark Study

Güth et al. (1982) found responders routinely reject unfair offers, sacrificing money to punish unfairness.

Why It Matters

Salary negotiations, profit splits, and tipping all hinge on perceived fairness over pure payoff.

The Concept

The Keynesian Beauty Contest measures how many levels of 'I think that you think...' you reason through.

Landmark Study

Keynes (1936) likened markets to a contest of guessing what others will guess; average winning guesses cluster around 20-25.

Why It Matters

Pricing, bidding, and market timing all reward anticipating others' anticipations.

The Concept

The Cognitive Reflection Test pits a fast intuitive answer against a slower correct one. Time pressure amplifies the intuitive trap.

Landmark Study

Frederick's CRT (2005): most people blurt '10 cents' to the bat-and-ball problem; the answer is 5 cents.

Why It Matters

Emergency decisions, trading floors, and exams all force accuracy under time constraints.