Thinking, Fast And Slow
reviewed by Ray Silverstein
Daniel Kahneman won the 2002 Nobel Prize in Economic Sciences for his pioneering work on how human judgment sometimes defies logic or probability—and how even supposedly scientific decisions are influenced by human bias and irrational assumptions. This was alarming news to economists.
Kahneman spend decades of research digging deeply into the human brain and the often-flowed way in which we make decisions and arrive at conclusions supported not by objective fact but by subjective assumption.
The brain thought process switches between automatic response or kneejerk reaction, System 1, and System 2, which involves concentration and deliberation. Although System 2 believes itself to be where the action is, the automatic System 1 is the hero of the book, according to Kahneman.
He argues that overreliance on System 2 can result essentially in tunnel vision. System 1, however has a bias to believe and confirm and neglects ambiguity and suppresses doubt.
He also shows that “hindsight is 20/20” is more than just a cliché’ in revisiting past beliefs and opinions. People tend to paint a much more flattering picture of themselves
Research in the areas of risk aversion and prospect theory to learn more about the ways in which humans make decisions and weight risk. Research suggested that the negative often trumped the positive; that is, if presented with data that a 50 percent positive and 50 percent negative, the general tendency is for out brains to come away with an impression of “negative.” Even though the positive/negative factors are equally divided.
Similarly, people tend to overestimate the probability of unlikely occurrences. In a business setting, that may mean failing to take a smart risk because of an unlikely hypothetical scenario. A gambler may refuse to cash out on a hot hand because he or she has a “feeling” that it will continue. The fear of regret is a factor in many of the decisions that people make.
There is also the relationship between the “experiencing self” and the “remembering self.” Taste and decisions are shaped by memories and memories can be wrong. We sometimes feel our preferences and beliefs so strongly that they can seem to be somehow rooted in fact; this however, is often not the case. This applies even to our choice of vacation. For many people, the value of a vacation is not the experience but the anticipation beforehand and the memory afterwards. Kahneman sums up, “I am my remembering self, and the experience self, who does my living, is like a stranger to me.”
Key terms and concepts:
Anchors: are related to how people try to estimate an unknown quantity. An example, the amount of money you will offer to pay for a house is in large part influenced—or anchored—by the asking price.
The Certainty effect: describes a process where your chance for success escalates from very high to certain. An example, if you are bidding on eBay and knew you had a 90%^ chance to win an auction with a $20 bid, would you still be tempted to use the “Buy It Now” option for $25, thus paying five dollars more to offset the 10% of chance of losing your bid?
In his study of decision making related to gambling Kahneman found that people tended to overvalue small risk, again showing that people make calculations and conclusions that are not aligned with probability.
The Halo effect: can be seen whenever a person makes assumptions based on a factor. An example, a beautiful stranger at a dinner party may be automatically assumed to be successful and confident. The Halo effect impacts not just social situations, but economic decisions as well.
Loss aversion: is a term that reccurs repeatedly throughout the book. Case studies show how people tend to be more driven by fear of failure than by the promise of success. This is loss aversion.
Optimistic bias: explains the decisions that we make or the beliefs that we should in the face of ample evidence to the contrary.
The major theme of Thinking, Fast and Slow is that our brains are divided into System 1 and System 2. System 1 houses our emotion and intuition, and it processes information making decisions automatically. System 2 describes the part of the brain that gets wrapped up in rationalization and concentration and value based judgments. While System 2 saves us from many of the unchecked kneejerk idiocies of System1, its decision-making capacity is more limited than we often think.
WYSIATI—“what you see is all there is.” WYSIATI basically describes our minds jumping to conclusions, drawing simply on what is in front of us without looking for missing evidence or data.
Interesting observation: studies on the impact of money on happiness, Kahneman found that there was a predictable dramatic difference between people living in poverty and people making 69K a year. Beyond that, though, the studies offered some surprise: Millionaires didn’t show any greater emotional happiness than people around the 50K zone.
The general conclusion is “We have a very narrow view of what is going on. We don’t see very far in the future, we are very focused on one idea at a time, one problem at a time, and all these are incompatible with rationality as economic theory assumes it.”
Wall Street Journal: “One major effect of the work of Messrs, Kahneman and Tversky has been to overturn the assumption that human beings are rational decision-makers who weigh all the relevant factors logically before making choices.”….”What Messrs. Kahneman and Tversky argued that, even when we have all the information that we need to arrive at a correct decision, and even when the logic is simple, we often get it drastically wrong.