5MR#28: Thinking Fast and Slow

Physicians have a large set of labels to diagnose and treat diseases (e.g. identify symptoms, possible causes, interventions and cures). Likewise, to understand how we make judgements and choices, we need a richer vocabulary to describe how our mind works.

Thinking Fast and Slow: The 2 Systems

Kahneman explains how our brain work by simplifying it into 2 systems: (fast and slow):

System 1 is fast: It operates automatically and involuntarily; it is unconscious, can’t be stopped, and runs continuously. We apply it effortlessly and intuitively to everyday decisions, e.g. when we drive, recall our age, or interpret someone’s facial expression.

System 2 is slow: It’s only called upon when necessary to reason, compute, analyze and solve problems. It confirms or corrects System 1 judgement, is more reliable, but takes time, effort and concentration.

It takes energy to think and exercise self-control. Our mental capacity gets depleted with use, and we’re programmed to take the path of least resistance. In the book, Kahneman elaborates on the “Law of Least Effort”, and how System 1 and System 2 work together to affect our perceptions and decisions.

Heuristics Cause Biases & Errors

Small Sample Sizes

Most of us know that small sample sizes are not as representative as large samples. Yet, System 1 intuitively believes small sample outcomes without validation. We make decisions based on insufficient or unrepresentative data. Moreover, System 1 suppresses doubt by constructing coherent stories and attributing causality. Once a wrong conclusion is accepted as “true”, it triggers our associative mechanism, spreading related ideas through our belief systems.

Causes Over Statistics

Statistical data are facts about a case, e.g. “50% of cabs are blue”. Causal data are facts that change our view of a case, e.g. “blue cabs are involved in 80% of road accidents” – we may infer from the latter that blue cab drivers are more reckless. In the overview of key heuristics, we learn how System 1 thinks fast using categories and stereotypes, and likes causal explanations. When we’re given statistical data and causal data, we tend to focus on the causal data and neglect or even ignore the statistical data. In short, we favor stories with explanatory power, over mere data.

1.?????Heuristics Cause Overconfidence

We feel confident when our stories seem coherent and we are at cognitive ease. Unfortunately, confidence does not mean accuracy.?Kahneman explains 3 main reasons why we tend to be overconfident in our own assessments. Specifically, we’re overconfident in several areas:

2.?????Overconfidence in perspectives

We think we understand the world and what’s going on, because of our Narrative Fallacy (how we create flawed stories to explain the past, which in turn shape our views of the world and our expectations of the future), and Hindsight Illusion (the tendency to forget what we used to believe, once major events or circumstances change our perspectives).

3.?????Overconfidence in expertise

We’re also overconfident the validity of our skills, formulas and intuitions, which are unfortunately not valid in many circumstances. In the book, Kahneman explains when we can trust “expert intuition”, and when not to.

4.?????Over-Optimism

Finally, we tend to be overly optimistic, taking excessive risks. Kahneman explains the planning fallacy syndrome and how we should balance it using a more objective “outside view”.

Heuristics Affect Choices

Obviously, how we perceive and think about inputs affect our choices. Using exercises and examples, the book helps us to see our own decision-making processes at work, to understand why our heuristics can result in flawed, and less-than-optimal decisions.

The Prospect Theory

In particular, the Prospect Theory (which won Kahneman the Nobel Prize in Economics) is built on 3 key ideas:

1. The absolute value of money is less vital than the subjective experience that comes with changes to your level of wealth. For example, having $5,000 today is “bad” for Person A if he owned $10,000 yesterday, but it’s “good” for Person B if he only owned $1,000. The same $5,000 is valued differently because people don’t just attach value to wealth – they attach values to gains and losses.

2. We experience reduced sensitivity to changes in wealth, e.g. losing $100 hurts more if you start with $200 than if you start with $1000.

3. Loss aversion. We basically hate to lose money, and we weigh losses more than gains. To illustrate, look at these 2 options:

50% chance to win $1,000 OR get $500 for sure

=> Most people will choose the latter

50% chance to lose $1,000 OR lose $500 for sure

=>Most people will choose the former

Generally, our brain processes threats and bad news faster, people work harder to avoid losses than to attain gains, and they work harder to avoid pain than to achieve pleasure.

Our Two Selves

In a nutshell, our heuristics influence our choices, which can be irrational, counter-intuitive and sub-optimal. It’s impossible to totally avoid biases and errors from System 1, but we can make a deliberate effort to slow down and utilize System 2 more effectively, especially when stakes are high.

In his research on happiness, Kahneman also found that we each have an “experiencing self” and a “remembering self” – our memories override our actual experiences, and we make decisions with the aim of creating better memories (not better experiences).

Conclusion:?The book is filled with pages of research, examples, and exercises to help us experience our System 1 biases and errors at work. At the end of each chapter, Kahneman also shares examples of how you can use the new vocab in your daily conversations to identify and describe the workings of your mind and the fallacies around you. Definitely worth a read to get detail different perspective altogether of our thought process and decision making.

Thanks for your time and make it a great day , stay safe !?