Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 8

So you think you think rationally. Think again

Nobel Prize winner Daniel Kahneman published Thinking, Fast and Slow in 2011, and it shot to the top of bestseller lists. The reviewers often sounded as if Kahneman were reporting on new research or putting out a fresh idea, like a Michael Lewis or Malcolm Gladwell insight. But this did an injustice to Kahneman. His book was nothing less than a summary of a lifetime’s work. His Nobel Prize was awarded in 2002, and he traces his work back to 1969 at the Hebrew University of Jerusalem, when he met Amos Tversky. Together, they would bring behavioural finance out of the margin and into the mainstream, such that over 40 years later, it is an accepted part of understanding how investors and markets behave.

But this article is not another review of his book. Rather, Kahneman reports on dozens of studies he and his colleagues have done on how we make decisions, and explains our irrational behaviour. The reader is drawn in to take the tests and judge their own weaknesses in logic, which is why this book can be so humbling to read.

Kahneman divides our thought processes into System 1, which is automatic, effortless and unconscious, but answers questions quickly and gullibly based on intuition. And System 2, which is controlled, deliberate and requiring effort, but often only engages when circumstances require it.

Try these quick questions

So here we go. I’ve taken 10 examples from Kahneman’s book, and I will give the questions first, followed by the answers and a brief explanation. Try not to peep.

  1. A bat and a ball cost $1.10. The bat costs one dollar more than the ball. How much does the ball cost?
  2. If it takes 5 machines 5 minutes to make 5 widgets, how long would it take 100 machines to make 100 widgets? Here’s a clue: is the answer 100 minutes or 5 minutes?
  3. How many animals of each kind did Moses take into the ark?
  4. A man has been described by a neighbour as follows: “Steve is very shy and withdrawn, invariably helpful but with very little interest in people or in the world of reality. A meek and tidy soul, he has a need for order and structure, and a passion for detail.” Is Steve more likely to be a librarian or a farmer?
  5. Consider three possible sequences of boys and girls born in a hospital: BBBGGG, GGGGGG, BGBBGB. Which of these sequences is least likely?
  6. Is the height of the tallest redwood in the United State more or less than 1,200 feet? What’s your best guess about the height of the tallest redwood?
  7. It’s a fact that people with a PhD are more likely to subscribe to The New York Timesthan people who did not go to college. You see a lady reading The New York Times on a New York subway. Which of the following is more likely? a) She has a PhD  or  b) She does not have a college degree.
  8. The most famous and controversial experiment involves a lady called Linda. “Linda is 31 years old, single, outspoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in antinuclear demonstrations.”The question is, which alternative is more probable? a) Linda is a bank teller b) Linda is a bank teller and is active in the feminist movement.
  9. What if you were given a choice between the following:a) A gamble with 80% chance to win $100 and 20% chance to win $10, or b) A sure payment of $80. Which would you choose based on your personal preferences? Which would you choose based on the expected value of the outcomes?
  10. Consider these two problems:

Problem 1. Which do you choose? Get $900 for sure or 90% chance to get $1,000.

Problem 2. Which do you choose? Lose $900 for sure or 90% chance to lose $1,000.


What are the logical or rational answers and what is happening in your decision-making?

  1. It’s difficult to stop the answer 10 cents jumping into your mind. More than 80% of university students give this first intuitive answer. But it’s wrong, and Kahneman highlights our failure to check the answer as we simply follow the law of least effort. The correct answer is 5 cents.
  2. Again, there is an intuitive response, but the correct response is 5 minutes. Kahneman also reports that students are far more inclined to make a mistake if given the puzzle in normal font, but do better in a small, washed-out font. The cognitive effort of reading the question produces a better result.
  3. Very few people detect what is wrong with this question. Look again. Holy Moses! Oh Noah!
  4. Most people reply that Steve is more likely to be a librarian than a farmer. But there are at least five times more farmers than librarians in the United States, and the majority of the librarians are women. So it is far less likely that Steve is a librarian.
  5. Intuitively, we don’t expect a sequence of six girls, but since each event is independent of the one before it, they are all equally likely.
  6. When the question is asked like this, the mean estimate given by respondents was 844 feet. But when it is asked like this: “Is the height of the tallest redwood more or less than 180 feet? What’s your best guess about the height of the tallest redwood?” … the mean answer is 282 feet. This ‘anchoring’ effect has many examples in investing.
  7. It’s more likely to be the second because far more non graduates ride the subway than PhDs.
  8. People think Linda is a very good fit for an active feminist. But the set of feminist bank tellers must be wholly included in the set of bank tellers. Therefore, the probability that Linda is a feminist bank teller must be lower than the probability she is a bank teller. When a possible event is specified in increasingly greater detail, you only lower its probability. People are confusing intuition with the logic of probability. In tests of undergraduates at top universities, 85% to 90% chose the second, incorrect option.
  9. Most people dislike risk and almost everyone prefers the sure thing. The expected value of the gamble is $82 (0.8 X 100 + 0.2 X 10), which is more than the sure thing. But few people evaluate risks in this way. Most people would choose the sure thing even if it were only $50.
  10. You were probably risk-averse in problem 1, as for the great majority of people, a $900 gain is much better than a gamble. But then in problem 2, you probably chose the gamble. The thought of losing $900 encourages you to take the bet. People become risk-seeking when all their options are bad, and you probably dislike losing more than you like winning.

Kahneman hopes his examples improve our ability to identify and understand errors of judgement. If we make mistakes in these simple questions where the logic is obvious, we are likely to be missing critical information or focussing on the wrong issues in many of our investment decisions. Each day, we respond to problems quickly and automatically, giving undue attention to details that stand out easily. Critical information is often ignored. The best investors are those who can hear  through the noise.



Most viewed in recent weeks

How to enjoy your retirement

Amid thousands of comments, tips include developing interests to keep occupied, planning in advance to have enough money, staying connected with friends and communities ... should you defer retirement or just do it?

Results from our retirement experiences survey

Retirement is a good experience if you plan for it and manage your time, but freedom from money worries is key. Many retirees enjoy managing their money but SMSFs are not for everyone. Each retirement is different.

A tonic for turbulent times: my nine tips for investing

Investing is often portrayed as unapproachably complex. Can it be distilled into nine tips? An economist with 35 years of experience through numerous market cycles and events has given it a shot.

Rival standard for savings and incomes in retirement

A new standard argues the majority of Australians will never achieve the ASFA 'comfortable' level of retirement savings and it amounts to 'fearmongering' by vested interests. If comfortable is aspirational, so be it.

Dalio v Marks is common sense v uncommon sense

Billionaire fund manager standoff: Ray Dalio thinks investing is common sense and markets are simple, while Howard Marks says complex and convoluted 'second-level' thinking is needed for superior returns.

Fear is good if you are not part of the herd

If you feel fear when the market loses its head, you become part of the herd. Develop habits to embrace the fear. Identify the cause, decide if you need to take action and own the result without looking back. 

Latest Updates


The paradox of investment cycles

Now we're captivated by inflation and higher rates but only a year ago, investors were certain of the supremacy of US companies, the benign nature of inflation and the remoteness of tighter monetary policy.


Reporting Season will show cost control and pricing power

Companies have been slow to update guidance and we have yet to see the impact of inflation expectations in earnings and outlooks. Companies need to insulate costs from inflation while enjoying an uptick in revenue.


The early signals for August company earnings

Weaker share prices may have already discounted some bad news, but cost inflation is creating wide divergences inside and across sectors. Early results show some companies are strong enough to resist sector falls.


The compelling 20-year flight of SYD into private hands

In 2002, the share price of the company that became Sydney Airport (SYD) hit 80 cents from the $2 IPO price. After 20 years of astute investment driving revenue increases, it sold to private hands for $8.75 in 2022.

Investment strategies

Ethical investing responding to some short-term challenges

There are significant differences in the sector weightings of an ethical fund versus an index, and while this has caused some short-term headwinds recently, the tailwinds are expected to blow over the long term.

Investment strategies

If you are new to investing, avoid these 10 common mistakes

Many new investors make common mistakes while learning about markets. Losses are inevitable. Newbies should read more and develop a long-term focus while avoiding big mistakes and not aiming to be brilliant.

Investment strategies

RMBS today: rising rate-linked income with capital preservation

Lenders use Residential Mortgage-Backed Securities to finance mortgages and RMBS are available to retail investors through fund structures. They come with many layers of protection beyond movements in house prices. 



© 2022 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.