The Undoing Project: A Friendship that Changed the World(79)

It wasn’t hard to imagine why this might be—a heightened sensitivity to pain was helpful to survival. “Happy species endowed with infinite appreciation of pleasures and low sensitivity to pain would probably not survive the evolutionary battle,” they wrote.

As they sorted through the implications of their new discovery, one thing was instantly clear: Regret had to go, at least as a theory. It might explain why people made seemingly irrational decisions to accept a sure thing over a gamble with a far greater expected value. It could not explain why people facing losses became risk seeking. Anyone who wanted to argue that regret explains why people prefer a certain $500 to an equal chance to get $0 and $1,000 would never be able to explain why, if you simply subtracted $1,000 from all the numbers and turned the sure thing into a $500 loss, people would prefer the gamble. Amazingly, Danny and Amos did not so much as pause to mourn the loss of a theory they’d spent more than a year working on. The speed with which they simply walked away from their ideas about regret—many of them obviously true and valuable—was incredible. One day they are creating the rules of regret as if those rules might explain much of how people made risky decisions; the next, they have moved on to explore a more promising theory, and don’t give regret a second thought.

Instead they set out to determine precisely where and how people responded to the odds of various bets involving both losses and gains. Amos liked to call good ideas “raisins.” There were three raisins in the new theory. The first was the realization that people responded to changes rather than absolute levels. The second was the discovery that people approached risk very differently when it involved losses than when it involved gains. Exploring people’s responses to specific gambles, they found a third raisin: People did not respond to probability in a straightforward manner. Amos and Danny already knew, from their thinking about regret, that in gambles that offered a certain outcome, people would pay dearly for that certainty. Now they saw that people reacted differently to different degrees of uncertainty. When you gave them one bet with a 90 percent chance of working out and another with a 10 percent chance of working out, they did not behave as if the first was nine times as likely to work out as the second. They made some internal adjustment, and acted as if a 90 percent chance was actually slightly less than a 90 percent chance, and a 10 percent chance was slightly more than a 10 percent chance. They responded to probabilities not just with reason but with emotion.

Whatever that emotion was, it became stronger as the odds became more remote. If you told them that there was a one-in-a-billion chance that they’d win or lose a bunch of money, they behaved as if the odds were not one in a billion but one in ten thousand. They feared a one-in-a-billion chance of loss more than they should and attached more hope to a one-in-a-billion chance of gain than they should. People’s emotional response to extremely long odds led them to reverse their usual taste for risk, and to become risk seeking when pursuing a long-shot gain and risk avoiding when faced with the extremely remote possibility of loss. (Which is why they bought both lottery tickets and insurance.) “If you think about the possibilities at all, you think of them too much,” said Danny. “When your daughter is late and you worry, it fills your mind even when you know there is very little to fear.” You’d pay more than you should to rid yourself of that worry.

People treated all remote probabilities as if they were possibilities. To create a theory that would predict what people actually did when faced with uncertainty, you had to “weight” the probabilities, in the way that people did, with emotion. Once you did that, you could explain not only why people bought insurance and lottery tickets. You could even explain the Allais paradox.*

At some point, Danny and Amos became aware that they had a problem on their hands. Their theory explained all sorts of things that expected utility failed to explain. But it implied, as utility theory never had, that it was as easy to get people to take risks as it was to get them to avoid them. All you had to do was present them with a choice that involved a loss. In the more than two hundred years since Bernoulli started the discussion, intellectuals had regarded risk-seeking behavior as a curiosity. If risk seeking was woven into human nature, as Danny and Amos’s theory implied that it was, why hadn’t people noticed it before?

The answer, Amos and Danny now thought, was that intellectuals who studied human decision making had been looking in the wrong places. Mostly they had been economists, who directed their attention to the way people made decisions about money. “It is an ecological fact,” wrote Amos and Danny in a draft, “that most decisions in that context (except insurance) involve mainly favorable prospects.” The gambles that economists studied were, like most savings and investment decisions, choices between gains. In the domain of gains, people were indeed risk averse. They took the sure thing over the gamble. Danny and Amos thought that if the theorists had spent less time with money and more time with politics and war, or even marriage, they might have come to different conclusions about human nature. In politics and war, as in fraught human relationships, the choice faced by the decision maker was often between two unpleasant options. “A very different view of man as a decision maker might well have emerged if the outcomes of decisions in the private-personal, political or strategic domains had been as easily measurable as monetary gains and losses,” they wrote.



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