Another very interesting read that I warm-heartedly recommend is Nobel-prize winning Daniel Kahneman’s Thinking, Fast and Slow. The book's central thesis is a distinction between two modes of thought: "System 1" that is fast, instinctive and emotional and "System 2" that is slower, more meditative, and more logical. The book defines cognitive biases associated with each type of thinking, starting with Kahneman's own research on loss aversion. From framing choices to substitution, Kahneman highlights several decades of academic research to suggest that people place too much confidence in human judgment.
Kahneman writes of a "pervasive optimistic bias", which generates the illusion of control - that we have substantial control of our lives. This bias may be usefully adaptive. Optimists are more psychologically resilient and have stronger immune systems than more reality-based opposites. Also optimists are wrongly thought of having longer lives on average, a common belief which was disproved in the longevity project. Optimism protects from loss aversion: people's tendency to fear losses more than they value gains.
A natural experiment reveals the prevalence of one kind of unwarranted optimism. The planning fallacy is the tendency to overestimate benefits and underestimate costs, impelling people to take on risky projects, for example, investing money in non-profitable undertakings.
To explain overconfidence, Kahneman introduces the concept he labels What You See Is All There Is (WYSIATI). This theory states that when the mind makes decisions, it deals primarily with Known Knowns, phenomena it has already observed. It rarely considers Known Unknowns, phenomena that it knows to be relevant but about which it has no information. Finally it appears oblivious to the possibility of Unknown Unknowns, unknown phenomena of unknown relevance.
He explains that humans fail to take into account complexity and that their understanding of the world consists of a small and not necessarily representative set of observations. Furthermore, the mind generally does not account for the role of chance and therefore falsely assumes that a future event will mirror a past event.
Kahneman proposed an alternate measure that assessed pleasure or pain sampled from moment to moment, and then summed over time. Kahneman called this “experienced” well-being and attached it to a separate "self". He distinguished this from the “remembered” well-being that the polls had attempted to measure. He found that these two measures of happiness diverged. His major discovery was that the remembering self does not care about the duration of a pleasant or unpleasant experience. Rather, it retrospectively rates an experience by the peak (or valley) of the experience, and by the way it ends. Further, the remembering self dominated the patient's ultimate conclusion.
You can watch him talk live about the two selves, the experiencing and the remembering one at a TED conference. http://www.ted.com/talk/daniel_kahneman_the_riddle_of_experience_vs_memory?