Thinking, Fast and Slow

Thinking, Fast and Slow by Daniel Kahneman explores the differences between people’s System 1 & 2, Econs & Humans, and the experiencing & remembering self. It exposes logical hypocrisies of thought and the significance behind them. This book has a lot of overlap with Nudge and references it a few times as well as the authors Richard Thaler and Cass Sunstein. Their book referenced this one which is how I found out about it.

People have two systems for decision making: the automatic System 1 and the effortful System 2. Like the name suggests, System 1 is constantly running. It uses either expert/good intuition or intuitive heuristics. The former is when a person has been trained in an environment that can be predictable, and the latter is when an easier question substitutes the original. System 2 is called in when there is a disturbance that requires more mental effort. System 2 is lazy and would rather heuristics be used than be called upon. It is also subject to ego depletion, meaning that it gets worn out after time. It can still be called and used when tired, but it needs more significant motivation. Studies showed that glucose was able to recharge system two.

Heuristics/Biases covered include priming, confirmation bias, the halo effect, framing, anchoring, and hindsight. The ones that I have seen covered the least outside of this text are hindsight, confirmation bias, and the halo effect. The halo effect is the way that people’s attitudes toward people/objects/concepts are disproportionately influenced by an initial feeling. A good first impression may overpower subsequent bad encounters. Confirmation bias is a person’s instinct to believe the information they are presented. This feeds back into the laziness of System 2, which is only activated when System 1 is disrupted i.e. notices something is incorrect. Hindsight makes it hard for decisions to be evaluated correctly because evaluation is only made after knowing the outcomes and people will likely skew estimates to what happened.

The ideas introduced interact with each other so it’s hard to summarize the book into distinct sections when everything is very interwoven. One of the biggest biases mentioned that was significant in all three is What You See Is All There IS (WYSIATI). People have difficulty considering things that aren’t salient. In a lot of studies mentioned, opinions would conflict with each other based on if they were looking at information pieces at a time or all at once. Values assigned to a situation can be manipulated by how much information is presented.

One of the most interesting concepts introduced was the regression to the mean. When evaluating performance over extended periods, there tends to be a lack of correlation between people and results in some fields. Kahneman attributes this to luck where dips and bumps in performance are a result of bad or good luck. If a student aces an exam, it does not necessarily mean they are experts in the material. They might have just guessed better on some questions than other students. Consistent results are needed.

Econs and Humans, which I first heard about while reading Nudge, are brought up when identifying how people make decisions, especially when it comes to finances. Ideas introduced here are the inside vs outside view, planning fallacy, and irrational perseverance. The last ties into the sunk cost fallacy. People are loss adverse and would rather have a sure gain than a potential gain. However, if they are going to have a sure loss they might rather gamble for a smaller loss even if the odds are unfavorable. The endowment effect is the overvaluation of an item if it is already owned and can be enjoyed. Framing was also expanded on with a study that showed people overestimate risk when hearing statistics that use number of outcomes over percentages. Saying 1 out of 1000 makes the one person affected more vivid and salient than .1%. This is called denominator neglect. Most of these misconceptions are the result of focalizing on specific decisions instead of using a long-term broad view, again WYSIATI.

Perhaps the largest frameworks introduced were Utility Theory and Prospect Theory and I know that I don’t completely understand them. These are two areas I should review more but I probably won’t spend a ton of time on because I don’t think they have a huge potential impact on my life right now. Utility Theory, coined by Daniel Bernoulli from Spider-Man 2, reasons that the value/utility of money gained depends on the current amount of wealth someone has. $10 given to someone with $100 has the same utility as $20 given to someone with $200. People use their utility rationally. Prospect theory takes into account that people evaluate their wealth based on previous reference points of wealth and takes into account loss aversion more significantly. The graph below shows this.

The final big idea was the contrast between the remembering and experiencing self. The remembering self is biased to how things ended and peaks of an experience. There is duration neglect. This bias leads to focalism on factors that are not relevant to the experiencing self and distorts values to create miswanting.

Two other interesting tidbits were how people often reject algorithms for coming up with diagnosis in some fields like school counseling and favor expert intellect even when it has been shown to be less accurate. The Gary Klein premortem exercise of imagining that something went wrong and asking oneself, “How did it go wrong?” seemed very useful. This was a long read but a useful one. I’m not sure if reading this before or after Nudge would have been better.