Thinking Fast, Thinking Wrong: Intuitiveness Modulates LLM Counterfactual Reasoning in Policy Evaluation

• URL: http://arxiv.org/abs/2604.10511v1
• Date: Sun, 12 Apr 2026 08:00:38 GMT
• Title: Thinking Fast, Thinking Wrong: Intuitiveness Modulates LLM Counterfactual Reasoning in Policy Evaluation
• Abstract summary: Large language models (LLMs) are increasingly used for causal and counterfactual reasoning, yet their reliability in real-world policy evaluation remains underexplored.<n>We construct a benchmark of 40 empirical policy evaluation cases drawn from economics and social science.<n>We analyze the results using mixed-effects logistic regression.
• Score: 0.0
• License: http://arxiv.org/licenses/nonexclusive-distrib/1.0/
• Abstract: Large language models (LLMs) are increasingly used for causal and counterfactual reasoning, yet their reliability in real-world policy evaluation remains underexplored. We construct a benchmark of 40 empirical policy evaluation cases drawn from economics and social science, each grounded in peer-reviewed evidence and classified by intuitiveness -- whether the empirical finding aligns with (obvious), is unclear relative to (ambiguous), or contradicts (counter-intuitive) common prior expectations. We evaluate four frontier LLMs across five prompting strategies with 2,400 experimental trials and analyze the results using mixed-effects logistic regression. Our findings reveal three key results: (1) a chain-of-thought (CoT) paradox, where chain-of-thought prompting dramatically improves performance on obvious cases but this benefit is nearly eliminated on counter-intuitive ones (interaction OR = 0.053, $p < 0.001$); (2) intuitiveness as the dominant factor, explaining more variance than model choice or prompting strategy (ICC = 0.537); and (3) a knowledge-reasoning dissociation, where citation-based familiarity is unrelated to accuracy ($p = 0.53$), suggesting models possess relevant knowledge but fail to reason with it when findings contradict intuition. We frame these results through the lens of dual-process theory (System 1 vs. System 2) and argue that current LLMs' "slow thinking" may be little more than "slow talking" -- they produce the form of deliberative reasoning without the substance.

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