Thinking Fast and Slow by Daniel Kahneman
15 December, 2021 - 14 min read
I. Brief Summary
Daniel Kahneman is one of the greatest thinkers of our time. He has done an excellent job in documenting complex topics about our brain in this text. Let there be a reminder—writing anything complex in intuitive form is pretty difficult, but thankfully Kahneman is also a great writer. He deciphered several topics related to our brain in digestible form. I started reading this book earlier this year and finally finished it. To pay respect for his work and spend time understanding the concepts at its core, I had to slow down. Read this book if you want to understand why humans behave the way they behave. I am well aware of biases and the role that System 1 & System 2 plays in thinking. This book is definitely going in my re-read section.
II. Big Ideas
The book is divided into five parts:
- Part 1 presents the basic elements of a two-systems approach to judgment and choice. It elaborates the distinction between the automatic operations of System 1 and the controlled operations of System 2, and shows how associative memory, the core of System 1, continually constructs a coherent interpretation of what is going on in our world at any instant.
- Part 2 updates the study of judgment heuristics and explores a major puzzle: why is it so difficult for us to think statistically? We easily think associatively, we think metaphorically, we think causally, but statistics requires thinking about many things at once, which is something that System 1 is not designed to do.
- Part 3 studies the difficulties of statistical thinking which describes a puzzling limitation of our mind: our excessive confidence in what we believe we know, and our apparent inability to acknowledge the full extent of our ignorance and the uncertainty of the world we live in. We are prone to overestimate how much we understand about the world and to underestimate the role of chance in events. Overconfidence is fed by the illusory certainty of hindsight.
- Part 4 focuses on a conversation with the discipline of economics on the nature of decision making and on the assumption that economic agents are rational. This section of the book provides a current view, informed by the two-system model, of the key concepts of prospect theory, the model of choice that Amos and Kahneman published in 1979. It also address several ways human choices deviate from the rules of rationality.
- Part 5 describes recent research that has introduced a distinction between two selves, the experiencing self and the remembering self, which do not have the same interests. For example, we can expose people to two painful experiences. One of these experiences is strictly worse than the other, because it is longer. But the automatic formation of memories—a feature of System 1—has its rules, which we can exploit so that the worse episode leaves a better memory. When people later choose which episode to repeat, they are, naturally, guided by their remembering self and expose themselves (their experiencing self) to unnecessary pain. The distinction between two selves is applied to the measurement of well-being, where we find again that what makes the experiencing self happy is not quite the same as what satisfies the remembering self. How two selves within a single body can pursue happiness raises some difficult questions, both for individuals and for societies that view the well-being of the population as a policy objective.
- are fictional characters to illustrate the point of fast & slow thinking.
- System 1 (the automatic) operates automatically and quickly, with little or no effort and no sense of voluntary control. System 1 does the fast thinking.
- System 2 (the effortful) allocates attention to the effortful mental activities that demand it, including complex computations. The operations of System 2 are often associated with the subjective experience of agency, choice, and concentration. System 2 does the slow thinking.
Econs vs Humans
- The fictitious Econs live in the land of theory.
- The Humans act in the real world.
- The two selves are the experiencing self, which does the living, and the remembering self, which keeps score and makes the choices.
On Duration Neglect & the Peak-End Rule
- Duration neglect and the peak-end rule originate in System 1 and do not necessarily correspond to the values of System 2. We believe that duration is important, but our memory tells us it is not. The rules that govern the evaluation of the past are poor guides for decision making, because time does matter. The central fact of our existence is that time is the ultimate finite resource, but the remembering self ignores that reality. The neglect of duration combined with the peak-end rule causes a bias that favors a short period of intense joy over a long period of moderate happiness. The mirror image of the same bias makes us fear a short period of intense but tolerable suffering more than we fear a much longer period of moderate pain.
- Duration neglect also makes us prone to accept a long period of mild unpleasantness because the end will be better, and it favors giving up an opportunity for a long happy period if it is likely to have a poor ending.
- It is a good bet that many of the things we say we will always remember will be long forgotten ten years later.
- The remembering self and the experiencing self must both be considered, because their interests do not always coincide. Philosophers could struggle with these questions for a long time. The issue of which of the two selves matters more is not a question only for philosophers; it has implications for policies in several domains, notably medicine and welfare.
- The word rational conveys an image of greater deliberation, more calculation, and less warmth, but in common language a rational person is certainly reasonable. For economists and decision theorists, the adjective has an altogether different meaning. The only test of rationality is not whether a person’s beliefs and preferences are reasonable, but whether they are internally consistent. A rational person can believe in ghosts so long as all her other beliefs are consistent with the existence of ghosts.
- Although Humans are not irrational, they often need help to make more accurate judgments and better decisions, and in some cases policies and institutions can provide that help.
- The assumption that agents are rational provides the intellectual foundation for the libertarian approach to public policy: do not interfere with the individual’s right to choose, unless the choices harm others. Libertarian policies are further bolstered by admiration for the efficiency of markets in allocating goods to the people who are willing to pay the most for them.
- In a nation of Econs, government should keep out of the way, allowing the Econs to act as they choose, so long as they do not harm others. If a motorcycle rider chooses to ride without a helmet, a libertarian will support his right to do so. Citizens know what they are doing, even when they choose not to save for their old age, or when they expose themselves to addictive substances.
- Much is therefore at stake in the debate between the Chicago school and the behavioral economists, who reject the extreme form of the rational-agent model. Freedom is not a contested value; all the participants in the debate are in favor of it. But life is more complex for behavioral economists than for true believers in human rationality. No behavioral economist favors a state that will force its citizens to eat a balanced diet and to watch only television programs that are good for the soul. For behavioral economists, however, freedom has a cost, which is borne by individuals who make bad choices, and by a society that feels obligated to help them. The decision of whether or not to protect individuals against their mistakes therefore presents a dilemma for behavioral economists. economists. The economists of the Chicago school do not face that problem, because rational agents do not make mistakes. For adherents of this school, freedom is free of charge.
- The attentive System 2 is who we think we are. System 2 articulates judgments and makes choices, but it often endorses or rationalizes ideas and feelings that were generated by System 1. System 2 is not merely an apologist for System 1; it also prevents many foolish thoughts and inappropriate impulses from overt expression. However, System 2 is not a paragon of rationality. Its abilities are limited and so is the knowledge to which it has access. We do not always think straight when we reason, and the errors are not always due to intrusive and incorrect intuitions. Often we make mistakes because we (our System 2) do not know any better.
- System 1 is indeed the origin of much that we do wrong, but it is also the origin of most of what we do right—which is most of what we do. Our thoughts and actions are routinely guided by System 1 and generally are on the mark. One of the marvels is the rich and detailed model of our world that is maintained in associative memory: it distinguishes surprising from normal events in a fraction of a second, immediately generates an idea of what was expected instead of a surprise, and automatically searches for some causal interpretation of surprises and of events as they take place.
- Memory also holds the vast repertory of skills we have acquired in a lifetime of practice.
- customer. The acquisition of skills requires a regular environment, an adequate opportunity to practice, and rapid and unequivocal feedback about the correctness of thoughts and actions. When these conditions are fulfilled, skill eventually develops, and the intuitive judgments and choices that quickly come to mind will mostly be accurate. All this is the work of System 1, which means it occurs automatically and fast. A marker of skilled performance is the ability to deal with vast amounts of information swiftly and efficiently.
- In the conception of heuristics, the heuristic answer is not necessarily simpler or more frugal than the original question—it is only more accessible, computed more quickly and easily. The heuristic answers are not random, and they are often approximately correct. And sometimes they are quite wrong.
- System 1 registers the cognitive ease with which it processes information, but it does not generate a warning signal when it becomes unreliable. Intuitive answers come to mind quickly and confidently, whether they originate from skills or from heuristics.
- There is no simple way for System 2 to distinguish between a skilled and a heuristic response. Its only recourse is to slow down and attempt to construct an answer on its own, which it is reluctant to do because it is indolent.
- What can be done about biases? How can we improve judgments and decisions, both our own and those of the institutions that we serve and that serve us? The short answer is that little can be achieved without a considerable investment of effort. The way to block errors that originate in System 1 is simple in principle: recognize the signs that you are in a cognitive minefield, slow down, and ask for reinforcement from System 2.
- Organizations are better than individuals when it comes to avoiding errors, because they naturally think more slowly and have the power to impose orderly procedures. Organizations can institute and enforce the application of useful checklists, as well as more elaborate exercises, such as reference-class forecasting and the premortem.
- Stock pickers and political scientists who make long-term forecasts operate in a zero-validity environment. Their failures reflect the basic unpredictability of the events that they try to forecast.
- Statistical algorithms greatly outdo humans in noisy environments for two reasons: they are more likely than human judges to detect weakly valid cues and much more likely to maintain a modest level of accuracy by using such cues consistently.
- The greatest responsibility for avoiding the planning fallacy lies with the decision makers who approve the plan. If they do not recognize the need for an outside view, they commit a planning fallacy.
One of the reasons that it is harder to get an organization or team to change if they are currently successful is reflected in Prospect Theory. One of the main tenets of Kahneman’s theory is that people decide between uncertain alternatives by evaluating potential gains and losses differently using other baselines than expected utility, such as current wealth and the emotional impact of change in the evaluation. There are three cognitive features at the heart of Prospect Theory:
- Evaluating a decision or gamble is relative to a neutral reference point such as current net worth.
- The principle of diminishing sensitivity applies. Small changes in net worth have more of an impact on the decisions made by people that begin with low net worth.
- Losses loom larger than gains. Kahneman points out that organisms treat threats as more urgent than opportunities.
- Systematic errors are known as biases, and they recur predictably in particular circumstances.
- Even statisticians were not good intuitive statisticians.
- Scholars in other disciplines found it useful, and the ideas of heuristics and biases have been used productively in many fields, including medical diagnosis, legal judgment, intelligence analysis, philosophy, finance, statistics, and military strategy.
- Our goal was to develop a psychological theory of how people make decisions about simple gambles.
- Our collaboration on judgment and decision making was the reason for the Nobel Prize that I received in 2002, which Amos would have shared had he not died, aged fifty-nine, in 1996.
- My main aim here is to present a view of how the mind works that draws on recent developments in cognitive and social psychology.
- We focused on biases, both because we found them interesting in their own right and because they provided evidence for the heuristics of judgment.
- The situation has provided a cue; this cue has given the expert access to information stored in memory, and the information provides the answer. Intuition is nothing more and nothing less than recognition. — Herbert Simon
- We would all like to have a warning bell that rings loudly whenever we are about to make a serious error, but no such bell is available, and cognitive illusions are generally more difficult to recognize than perceptual illusions.
- Questioning your intuitions is unpleasant when you face the stress of a big decision. More doubt is the last thing you want when you are in trouble.
- Expertise is not a single skill; it is a collection of skills, and the same professional may be highly expert in some of the tasks in her domain while remaining a novice in others.
- When forecasting the outcomes of risky projects, executives too easily fall victim to the planning fallacy. In its grip, they make decisions based on delusional optimism rather than on a rational weighting of gains, losses, and probabilities. They overestimate benefits and underestimate costs. They spin scenarios of success while overlooking the potential for mistakes and miscalculations.
- The planning fallacy is only one of the manifestations of a pervasive optimistic bias.
- The evidence suggests that an optimistic bias plays a role—sometimes the dominant role—whenever individuals or institutions voluntarily take on significant risks.
- One of the benefits of an optimistic temperament is that it encourages persistence in the face of obstacles. But persistence can be costly.