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The author argues that humans are not entirely rational beings when it comes to decision-making. They introduce the concept of Prospect Theory, developed by psychologists Daniel Kahneman and Amos Tversky, which challenges the classical models of rationality. Prospect Theory suggests that people make decisions based on an underlying structure that is influenced by emotion and cognitive difficulties. The theory uncovers behavior patterns that rational decision-making models fail to recognize. For example, people exhibit risk-aversion when it comes to gains but become risk-seekers when it comes to losses. They also tend to ignore the common components of a problem, focus on isolated parts, and pay excessive attention to low-probability events with high drama. Moreover, people’s preferences and choices are affected by how a problem is framed and presented to them. They are often unable to accurately assess the probabilities of certain events, leading to inconsistencies in decision-making. The authors also discuss the concepts of regression to the mean, loss aversion, mental accounting, and ambiguity aversion. The authors argue that despite the deviations from rationality, humans are still capable of making decisions in a predictable and systematic manner. They emphasize that rational behavior is not the only way to survive in a competitive environment and that quasi-rationality can be effective. The findings from psychological experiments conducted by Kahneman, Tversky, and others are consistent and provide insight into decision-making in various contexts, including financial investing. The author concludes by posing the question of why more smart people don’t get rich if people are prone to irrational decision-making.

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