Episode 1
The Sneaky Science Behind Your Choices: Exploring Prospect Theory
This episode delves into the powerful influence of framing on our decision-making processes, highlighting how the presentation of information can significantly sway our choices. Tversky and Kahneman's groundbreaking research reveals that rather than being purely rational, our decisions are often guided by emotional responses, particularly when it comes to potential losses. The episode explores fascinating examples, such as the Asian disease problem, which illustrate how subtly changing the wording can lead to dramatically different choices. Listeners will gain insights into concepts like prospect theory, the certainty effect, and mental accounting, all of which explain why we often make seemingly irrational decisions. Ultimately, this discussion encourages awareness of these psychological biases, empowering us to make smarter choices in everyday life.
Paper Referenced:
Tversky, A., & Kahneman, D. (1981). The Framing of Decisions and the Psychology of Choice. Science, 211(4481), 453–458. http://www.jstor.org/stable/1685855
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Transcript
Hi all. Welcome to this audio project where we decode the science of human behavior with a twist.
I'm Parv, and this podcast brings to you AI generated conversations that simplify complex hidden patterns that shape our decisions, emotions, and actions. A while ago, I started using NotebookLM to help me translate academic research that talked about hidden internal patterns that make us us.
So let's dive in and uncover the unique algorithm that makes you. You.
Speaker B:Ever get that feeling like someone could convince you of anything? Depending on how they phrase it. Like salad or pizza. Easy choice, right? Until it's guilt free. Goodness versus ultimate indulgence.
Suddenly you're rethinking your whole order. That's the power of framing. And today's deep dive, we're going deep into its sneaky, brilliant depths.
Tversky and Kahneman, back in:Our listener is all about getting to the heart of things. They've been digging into this Tversky and Kahneman paper on framing. What's the quick pitch? Why is this research such a big deal?
Speaker C:Well, before this research, a lot of experts figured people were, well, basically like robots when making choices, you feed them the facts, they spit out the most logical decision. This paper blew that idea out of the water.
Speaker B:So, like that whole perfect information thing, everyone's got all the facts and they just, what, make the most sensible, calculated choice?
Speaker C:Exactly. But Tversky and Kahneman showed us it's just not how our brains work in the real world.
Our choices, they're swayed by all sorts of things, often stuff we're not even aware of. And one of the biggest culprits, framing how those choices are presented to us.
Speaker B:All right, hit me with an example. The listener sent one in from the paper. The Asian disease problem. It always gets me.
What is it and why is it so important in understanding this whole framing thing?
Speaker C:So picture this. There's this new disease, right? And it's expected to kill, say, 600 people.
You've got two programs to fight it, both with the same chances of working. But, but, and this is key, they're described differently.
Speaker B:Same problem, different wording. Uh huh. Okay, I'm following what changes just by tweaking how you talk about it.
Speaker C:In one version, you hear about how many lives each program could save. The other, it's all about how many lives could be lost.
Speaker B:I'm already hooked. Just changing, saved to lost. Changes how we think about it subtly.
Speaker C:But yeah. When it was about lives saved, people wanted to play it safe.
The option that guaranteed a certain number of lives saved, even if it meant potentially saving fewer overall. But frame it around losing lives, and suddenly people were more willing to gamble, even with the exact same odds.
Speaker B:Hold on. So even with something as serious as, like, a pandemic, how you present the problem totally changes our sense of risk.
Speaker C:Yeah.
Speaker B:This is why I love a good deep dive, man. Uncovering these hidden forces that shape our thinking.
Speaker C:Right, and that's what makes this research so powerful. It reveals how deeply these biases are woven into how we make decisions.
We like to think we're being all rational and logical, but Tversky and Kahneman, they showed us our emotions, especially when facing potential loss. They play a much bigger role than we realize.
Speaker B:So it's like our brains are wired to trip us up.
Speaker C:That's kind of freaky and fascinating, right? What's even more interesting is that these biases, as irrational as they seem, they're actually very predictable.
And that opens up a whole world of possibilities. It's like our brains have these patterns, these predictable ways of reacting, even when it comes to risk.
And figuring out those patterns, well, that's the key to making smarter choices.
Speaker B:Love it. So Tversky and Kahneman, they didn't just point out these quirks, right? They came up with a whole theory to explain it all. Prospect theory.
Catchy, right?
Speaker C:It's actually surprisingly intuitive once you get past the name. Basically, it says that our brains, they don't see gains and losses the same way at all.
Speaker B:So, like, if I lose 100 bucks, that feels way worse than the joy of finding a hundred bucks. Even though it's the same amount?
Speaker C:Exactly. That's the value function. One of the core ideas of prospect theory.
It explains why in that Asian disease problem, people got all risky when it was about lives lost. That potential loss, it looms larger in our minds than the potential for an equal gain.
Speaker B:We're hardwired to avoid those losses. Makes sense. But didn't they also find that we're kind of bad with probabilities, too?
Speaker C:Oh, absolutely. And this is where it gets really relatable.
I think we tend to overestimate the chances of something unlikely happening and underestimate the likelihood of the more common stuff.
Speaker B:So that's why people play the lottery, right? Overestimating those tiny odds of winning big.
Speaker C:Could be. But think about it. On an everyday level, how often do we stress about things that are statistically unlikely? Like your flight getting canceled.
It's Rare, but we still freak out.
Speaker B:Okay, yeah, guilty as charged. I'm a champion catastrophizer. So, this tendency to warp probabilities, they call it decision weights, right? Right.
How does that play into our choices beyond just buying lottery tickets?
Speaker C:It means we might make decisions based more on fear than logic. Even when the odds are in our favor. That tiny chance of something bad happening, it overshadows the more probable good outcome. Or the flip side.
We get overly optimistic about a long shot, pouring our energy into something that's probably not going to happen. It's like our brains are drawn to the drama, you know?
Speaker B:Yeah. It's like we're wired for a good story, even if we have to make it up ourselves.
Speaker C:Right.
Speaker B:So what else did Tversky and Kahneman find about our interesting decision making? The listener sent over a couple more of these little quirks.
Speaker C:Well, they found that we're kind of suckers for certainty. They called it the certainty effect. We just. We crave a sure thing.
Speaker B:Okay, I need an example. I'm not sure I'm getting it.
Speaker C:All right, so say you have two options. Win 30 bucks guaranteed, or you could have an 80% chance of winning $45. What feels better? Just instinctively.
Speaker B:That's tough. I mean, part of me wants to go for the bigger win, but knowing I could end up with nothing. Yeah, I think I'd take the guaranteed $30.
It just feels safer.
Speaker C:And most people would. We like that sure thing, even if it means possibly missing out. But. And here's where it gets really interesting.
If you frame that same choice in terms of reducing risk, suddenly people flip.
Speaker B:Wait, really? How do you reframe it to make people want the gamble?
Speaker C:Think of it like, say, insurance.
Would you rather have a plan that totally eliminates some risk, or one that, I don't know, just makes it less likely, even if that second option, statistically, is a better deal?
Speaker B:Okay, I see what you mean. It's like that peace of mind is worth something, even if it costs a bit more or means a smaller potential win.
Speaker C:Exactly. That feeling of certainty, it just. It carries so much weight in our minds, more than we realize. And this plays into all kinds of decisions.
We make money, health care, you name it.
Speaker B:We'll pay a premium for that sense of control, even when it's, let's face it, often an illusion. Speaking of illusions, what about mental accounting? That sounds like how I justify, like, all my impulse buys.
Speaker C:More common than you think. Mental accounting is this thing where we, like, divide our money into these mental categories, and then we play by different rules for each one.
Speaker B:Oh, totally. Like, money I got is a gift. That's fun money in my head, even though it's, you know, the same as any other dollar in my account.
Speaker C:Exactly. And you can guess how that leads to some, shall we say, interesting financial choices.
Tversky and Kahneman, they had this great illustration called the Lost Ticket Problem. Imagine you buy a $10 ticket to a play. You get there, you're about to go in, and, oh, no, you've lost the ticket. Would you buy another one?
Speaker B:That's the worst. It's only 10 bucks. But for some reason, buying a second ticket just feels wrong. I probably just cut my losses and go home, right?
Speaker C:A lot of people would. Okay, now, different scenario. You're about to buy that $10 ticket, and you realize, oh, no, you've lost a $10 bill. Do you still buy the ticket?
Speaker B:See, that feels different. I'd probably just buy the ticket, tell myself to be more careful with my cash. But wait, it's still 10 bucks either way.
Why does losing the ticket feel worse?
Speaker C:Mental accounting. You've already put that first $10 in the entertainment bucket. In your mind, losing the ticket makes it feel like the play costs $20.
But that lost $10 bill, that's coming from a different mental account. So it doesn't sting as much to spend another 10 on the ticket.
Speaker B:Our brains are too good at justifying things to ourselves. So, expert speaker. We've covered a lot. Framing, this prospect theory, all these ways we trip ourselves up.
How does our listener actually use this stuff? We're not dealing with pandemics every day, thankfully.
Speaker C:It's about awareness, right? Once you start to see how framing is at play, whether it's evaluating or even just like how you budget your money, it's everywhere.
It's about recognizing that we're not always as rational as we think.
Speaker B:My brain is already doing backflips, thinking of examples. If our listener wants to dive deeper into Tversky and Kahneman's work, where should they start?
Speaker C: ychology of Choice. It's from: Speaker B:Love it. And listener, as always, we like to leave you with something to ponder. We've seen how framing can be used to nudge people.
Sometimes not in a good way. But what if you could use this knowledge for good? Could you use it to help people see things differently?
To communicate better, to make choices that really line up with what they value. Until next time, keep those brains engaged and those perspectives shifting.
