Thinking Fast and Slow by Daniel Kahneman is a pioneer psychology book detailing the main cognitive biases of our mind.
- We are less rational than we think
- Intuitive heuristics are simpler rules we use when faced with a complex reality
- Only when intuitive heuristics are not enough we engage our slower, rational brain
Daniel Kahneman says economics was blind for many years to the fact that humans are far from rational. Today though the idea that our mind is susceptible to systematic bias mistakes is generally accepted.
Part I: Two Systems
Kahneman describes two different mode of thinking we deploy, which he calls System 1 and System 2.
System 1 is our default system. System 2 is only called upon when system 1 doesn’t have a ready and quick answer and an “escalation” is needed.
System 2 also monitors system 1 to control that any suggestions and default decisions are correct and it suppresses the one that aren’t. But more likely than not, system 2 will go along with what system 1 dictates. Kahneman says “laziness is built deep into our system”.
Also self control shrinks when our brain is fatigued.
System 1: Fast
System one is fast and automated, it needs no voluntary control. It operates on simple heuristics kicks in automatically for the simplest actions and behavior. System one takes care of things like:
- Understand an angry face
- Drive (after you’ve been driving for a long time)
Some complex or more difficult tasks, such as the example of driving, can be “burned” into system one after adequate and long enough training and repetition.
The eye-opening part of the book is that system one, the non rational part of our brain, is much more influential than most of us would want to believe.
System 2: Slow
System two is the slower, rational part of our brain, the one that uses focus and concentration, that looks at different variables and that makes pondered decisions.
We use system to when, for example:
- Fill out a complex form
- Decide between two job offers
- Walk faster than we are used to
Some Heuristics Daniel Kahneman introduces are:
Priming: Conscious or subconscious exposure to a certain topic primes to think in the direction of that topic. Studies proved that people reading about older people walked slower and people who were asked to move more slowly more quickly recognized words related to old age. And it’s true that our body and movement influence our mood (emotion is created by motion says Tony Robbins).
Cognitive Ease: Things which are easier or more familiar seem more true. Similarly if a statement is linked to other beliefs or preferences you hold, it will also seem truer. Repeating something over and over then does work in making it sound truer (check Trump using during his first and second debate).
Coherent Stories: We always try to make the world and the events fit into stories that make sense to us.
Confirmation Bias: We look for evidence of what we believe is true and discard evidences proving the contrary (this is why for long time scientists refused to believe the brain is malleable).
Halo Effect: When we like someone we tend to fill in the dots of traits we haven’t even seen yet with positive characteristics. And the inverse is true. That’s why first impressions are very important.
Substitution: When faced with complex questions we often substitute it with an easier one instead and answer that one.
Part II: Heuristics and Biases
System 1 doesn’t like doubt. As we’ve seen for the confirmation bias, it’s System 1 that especially takes care of fitting exceptions and ambiguity in a way that fit our stories.
System 2 is our inner skeptic. It can handle doubt and can maintain opposing thoughts at the same time. But doubt is more taxing for the brain and sometimes System 2 just doesn’t intervene at all.
Law of Small Number: We often lend high credibility to the result of small samples. It’s a mistake because small samples are likely to lead to imprecise outcomes and are not statistically relevant.
Confidence Over Doubt: We tend to make connections and attribute causality when there are actually no connections. Sometimes it’s pure chance or luck and there’s no law or design behind the events.
Anchoring: The tendency to change our own beliefs and guesses based on the number we’ve previously heard. This is also sometimes used in negotiation as explained by Cialdini.
Availability Heuristic: We tend to overestimate the odds of something happening when it’s easier for us to retrieve that information. So being exposed to news about terror attacks, we tend to overestimate the likelihood of them happening.
Rare Events Overestimation: We overestimate the chances of rare events happening and we assign them too big a weight in our decision making.
Representativeness: We judge something we don’t know based on how familiar it is to something else we know. For example baseball scouts used to recruit new talents based on how closely they resembled previous successful player and the league improved when statistics instead started becoming common use.
Conjunction Fallacy: We are more likely to believe a person has more than one characteristic based on plausability than having a single characteristic, which is obviously statistically more likely. For example students rated as more likely that Linda is a feminist teller than her just being a teller. It’s because system 1 overlooks logic in favor of plausibility and system 2 just doesn’t always intervene.
Underestimating Statistics: When we only have statistics we usually make accurate prediction, but if we have statistic and plausible stories, we favor stories over data. So we tend to generalize from single stories and events rather than going from the general to the specific.
Overlooking Luck and Chance: We assign stories and explanations to events that are just random. If we scream at a bad performance we think it’s our screaming that “set them straight”, but it’s just the natural regression to the mean. But screaming is not the best way to teach. It was bad luck the student had a poor performance and it was simply likely he would do better the next time out.
Intuitive Prediction: Sometimes we just “feel right” and trust our intuition. That’s usually overconfidence bred from System 1, which has a tendency to predict events and extreme occurrences from flimsy evidence.
Part III: Overconfidence
Narrative Fallacy: We look at the past and create false narrative stories that make sense to us but that do not necessarily -and often do not- adhere to reality. And we tend to underestimate chance and luck.
Hindsight Illusion: Our intuitions feel much more true after the even has actually happened. So we get the famous “I knew it” or the worst “I told you so”, when nobody actually told us anything. We are prone to give too little credit to good decisions as in hindsight they seemed obvious and to overestimate bad decisions as they also seem like obvious blunders in hindsight. And that’s why Ray Dalio suggests to judge the swing more than the shot.
Illusion of Validity: Sometimes we feel confident about our judgement because we base our judgement on the coherence of the we have and the cognitive ease we experience in processing it. Of course we often discard to check other data and neglect to consider data running against our belief.
Intuition exists, but it’s more an immediate pattern recognition based on high experience or highly emotional events.
The Planning Fallacy: We have a strong tendency to plan with the best case scenario in mind and we often fail to take into account worst case scenarios and likely issues we’ll face.
Optimistic Bias: We tend to overestimate our capabilities and believe the final result lies fully in our hands. We discount the element of luck and the uncertainty of our environment. This is accentuated by human nature: confident leaders make us feel more certain and we turn to them.
Part IV: Choices
Daniel Kahneman introduces in this part Prospect Theory, the theory that granted him a Nobel prize. I invite you to read the book for more because it’s very interesting. But basically the theory debunked the aspects that viewed humans as being rational and mathematical when approaching money and risk (Expected Utility Theory).
For a quick summary:
- The value of money is subjective to how much one already has
- Changes in wealth are subjective to how much it previously changed
- Losses command a much bigger real estate in our brain
Loss Aversion: We dislike losing more than we like winning
Theory Blindness: Once you accept a theory you tend to use as a filter to see the reality. But you only see evidence supporting the theory and tend to exclude and omit anything else running against that theory.
Endowment Effect: We overestimate the value of an object we like and use. We invest it with emotional attachment and we hate to lose it.
Possibility Effect: We tend to overestimate the possibility of highly unlikely positive outcomes. Think of lottery tickets.
Certainty Effect: We underestimate the likelihood of highly likely scenarios.
Expectation Principle: The Possibility and Certainty Effect together explains how people don’t make decisions based on the weighed value of the outcomes but more to the psychological feeling that winning and losing give us. This means:
- We are scared large likely gain might not happen and will accept much smaller but sure gains
- We overestimate very small chances of winning huge. And we buy lottery tickets.
- We buy insurance -and often overpay for it- because it buys us peace of mind
- Faced with high chances of making things worse but a small chance of improving we’ll take the gamble because it gives us hope.
Disposition Effect: We prefer selling stocks we are making money with than the ones we are losing with. Selling losers is an admission of failure and selling winners make us feel smart.
Sunk Cost Fallacy: To avoid the bad feeling of cutting losses and admitting failure we stay too long in negative scenario, be it losing trades or abusive relationships.
Framing: How we verbalize the same scenario will lead to different choices. Doctors are more likely to operate with a 90% survival rate than with a 10% mortality rate.
Part V: Two Selves
Daniel Kahneman says we have two selves: one who experience and the other who remembers. Once the event is over, the one who remembers is the one in control.
And if we had an amazing holiday but on the last day had a negative experience, we are likely to remember the holiday as not really positive.
Also interestingly, Kahneman notices that people are really bad at assessing their global well being -they answer how happy they are right now- and what will make them happy in the future.
Ending Fallacy: how an experience ends takes a disproportionately bigger role in how you remember that experience.
Duration Neglect: how long we experienced the positive or negative experience matters little for our memory. The peak of the experience and the ending are the most important
Focusing Illusion: The most important thing in our life… Is what we are focusing on at that exact moment. And when we are asked to rate how happy something or someone makes us we are likely to focus mostly on one aspect. And we tend to focus on positive traits disregarding how often we actually experience those traits.
Thinking Fast and Slow Audio Summary
Here is a summary I liked on YouTube:
Real Life Applications
Trust Yourself.. A Bit Less
All the heuristic in Thinking Fast and Slow have a common thread: we are not rational decision makers. And often our decision do not serve our best interests or the interests of the people around us.
This allows us to make huge improvement in our life if we only learn where we fall short. As an example applied to human interactions, check 7 dating mistakes women do.
We Prefer Stories
When given the choice between listening to data or stories… We choose plausible stories. So choose plausible stories when you need to influence people.
Lack of Common Thread
Well, the thread of Thinking Fast and Slow seems to be that of “we are less rational than we think we are”, but it seems at times a collection of heuristic rather than a book build around a precise point.
It’s not necessarily a con though.
Daniel Kahneman is one of the guys that gave impetus to behavior economics -on which I based my master thesis– and “dethroned” the idea of humans as rational decision makers.
And for that, it got a spot in the best psychology books of all times.
Thinking Fast and Slow deals mostly with economics and choices in the face of uncertainty, but they are also relevant to our day to day interactions.