[Book Summary] Thinking, Fast and Slow by Daniel Kahneman
Decades of research on behavioral psychology and economics, at your fingertips!
Title: Thinking, Fast and Slow
Author: Daniel Kahneman
Published on: 2011
A long - sometimes tedious -, yet incredible book that sparkles knowledge. In this occasion, Nobel Laureate Daniel Kahneman makes you feel like you have a diamond in your hands by explaining how two complex systems in our mind work.
This is one of those books in which it is kind of difficult to extract four or five ideas to get the general perspective, since it contains lots of condensed concepts and facts that could last a lifetime. It’s definitely a book worth reading step by step, without any kind of hurry.
MAIN LEARNINGS
SYSTEM 1 & SYSTEM 2
According to Dr. Kahneman, we have two thinking cognitive systems: System 1 and System 2.
System 1 is the one that happens fast, easy and almost automatically. It doesn’t require any effort, and it makes quick judgements based on well-known patterns. E.g. commuting and solving easy math additions are tasks of the System 1.
System 2, on the other hand, requires much more effort and concentration. We need to focus deeply on the task, think clearly on what we are doing. It works in a logical way. E.g. learning a new skill or solving a complex puzzle are tasks of the System 2.
These two systems are in constant flow, and interact between them constantly, even though they are not always aligned. The author attributes this to the fact that us, human beings, tend to minimize the effort (yes, we are lazy by nature!), meaning that our body will always try to take decisions based on System 1.
Two examples, covered in the book, to illustrate the rapidness of System 1 against the “laziness” of System 2 say as follows:
Example 1: System 1 vs System 2
“Both a baseball bat and a ball are worth $1.10. If you know that the bat costs $1 more than the ball, how much is the ball?“
In the previous statement, System 1 quickly kicks in and tell us that the answer is $1. But then, while we slowly process the information, System 2 realizes that, according to the problem statement, that solution might not be correct.
Example 2: biased cognitive systems
“Linda is 31 years old, single, outspoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations.”
Which is more probable?
Linda is a bank teller.
Linda is a bank teller and is active in the feminist movement.
This last example was presented to students at Stanford’s Graduate School of Business, and 85% went for the second option. The thing to bear in mind here is that in probability theory, the probability of two events happening at the same time is always less than or equal to the probability of either one occurring alone.
System 1:
loves to give the easy answer, meaning that if the solution to a problem looks apparently correct and quickly arises, we will tend to answer the question with this first-to-mind, intuitive answer even if posterior information shows that it is wrong.
prefers the world to be inter-linked, self-explained. That is why we tend to correlate facts when, a priori, there is not clear relation between them. Since System 1 looks for cause-effect explanations, when information is missing it auto-completes the rest, creating the Halo Effect.
System 2:
is slow and analytical, since it is the most effortful of both systems to reasoning about the everything that happens around us.
acts on top of the observations drawn by System 1 to later arrive at explicit conclusions and reasoned solutions.
Retrospective Assessment
We tend to judge an event (be it either pleasant or unpleasant) based on how it felt at its peak and at its end, rather than averaging the total sum of feelings during the event.
This brings us to the two different measures Dr. Kahneman observed: “remembered” against “experienced” feelings. For instance, what brings “experienced happinness” might differ tremendously from what brings “remembered happinness”, since the latter does not take into account the duration, only the peak-end moments.
How did Dr. Kahneman experiment with retrospective assessment? With colonoscopies! Two groups of people, split randomly, Group A and Group B:
Group A was having a regular colonoscopy; and Group B was undergoing an extra three minutes where the scope would remain unmoved, making it uncomfortable but not painful. As you might’ve expected, people on Group B rated the experience as less unpleasant than people on Group A! Actually, they even proved to be more likely to come back.
So conclusions drawn here are that human beings tend to prioritize the latest memories over the rest, always putting more emphasis on the ones that presented a stronger peak-end rule.
Prospect Theory
Kahneman’s Prospect Theory (PT), which is considered his most influential contribution, explains that, given a situation in which there might a potential loss and/or a potential gain and the probabilities of them happening being known, individuals will behave differently since the conception of both loss and gain might differ greatly between agents.
This a more psychologically accurate approach of Bernoulli’s Expected Utility Theory (EUT), which states that individuals will always choose the option with the greatest utility, and that they will not differentiate on options that give the same increase on utility.
This theory can be divided in four main assumptions:
Losses and gains are evaluated in relation to a reference point. In the book, and for the sake of simplicity, the author took the reference point to be the current wealth of the individual.
People are loss averse, and increasingly so as the bets get closer to the reference point. This reinforces the idea of the endowment effect, which states the idiosyncrasy that people tend to overvalue in price an object they own, but undervalue the same object when it is not owned.
People are risk averse on gains, and risk seeking on losses.
People tend to overweight low probability events and underweight high probability ones.
Example 3: Applied Prospect Theory
Given a situation where a person is told that will either:
Lose $1,000 with a 50% chance of not losing anything.
Lose $500 no matter what.
And given a situation where the case is either:
Win $1,000 with a 50% not winning anything.
Win $500 straight away.
The previous example oversimplifies the divergences between EUT and PT: according to EUT, the previous cases should be conceived as equal for the individuals since, theoretically, all yield the same gain or loss; in contrast, according to PT we would see how much more people would tend to choose option 1 on the first case, and option 2 on the second case.
CONCLUSION
Kahneman’s book covers quite well the great advances on behavioral psychology and economics of the past decades. It helps us understand, and even explain, most of the theoretically irrational behavior we observe on a day-to-day basis by using a very interesting science-based approach.
In the end, it feels like we are in a world driven by science and statistics, even though most of us lack the basic knowledge and experience to succeed. Could this bring us to a situation where a small but powerful minority would be able to manipulate the bigger but powerless minority?