How We Think About Risk

A bat and a ball cost $1.10 in total. The bat costs $1 more than the ball. How much does the ball cost? Almost everyone feels the temptation to answer "10 cents" because the sum $1.10 so neatly separates into $1 and 10 cents, and 10 cents seems the right price for a ball relative to a bat. In fact, more than half of a group of students at Princeton and at the University of Michigan gave precisely that answer -- that wrong answer. The right answer is: The ball costs a nickel. "People are not accustomed to thinking hard and are often content to trust a plausible judgment that comes quickly to mind," observes Nobel Laureate Daniel Kahneman. In this fascinating article Kahneman parses the roles of emotion, cognition, and perception in the understanding of business risk. (PDF, ~100kb)

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