The Undoing Project: The Essence of Rational Choice within Decision Making Process and Its Relation to Behavior Economics

Before we proceed, first think of the following two questions.

Question one: Imagine you’ve been given $1,000, and you need to choose from two options. Option A is a 50% chance to win $1,000. Option B is a 100% chance to win $500. Which one would you pick?

Question two: You've been given $2,000, and you need to choose from another two options. Option A is a 50% chance to lose $1,000. Option B is a 100% chance to lose $500. Which one would you pick this time?

These were the two questions that the two psychologists asked their research participants. The result showed that for the first question, the majority picked the option with a 100% chance of winning $500. When answering the second question, however, most people chose the prospect with a 50% chance of losing $1,000.

However when you think carefully, you'll see that the two questions are virtually identical. If you are happy with $1,500, then you should pick both options offering the same resulting amount with a 100% chance. On the other hand, if you’d like to take the opportunity to win the $2,000, then you should choose both options giving you a 50% chance to achieve it. So, why would people make contrary choices, even if the gain remains the same and the only difference being the description?

We make all kinds of similar irrational choices in our daily lives. What lies behind such behavior and preferences? That is precisely one of the points that the book we're sharing with you today seeks to explore.

The above study was designed by two psychologists, Daniel Kahneman and Amos Tversky, who are the focus of The Undoing Project. In the 1970s, they began their research on the human thinking process. They initiated the scientific understanding of decision-making and judgment, which subverted the basic assumptions of the traditional economic theory, and later developed behavioral economics.