Thinking Fast and Slow: Decision making and Uncertainty

Humans are hard-wired to be overconfident in their decision-making abilities, an evolutionary feature that allows us to instantaneously and comfortably make decisions and avoid the paralysis that would result from constant self-doubt. People therefore have a hard time internalizing the idea that their preferences can be anything but coherent and consistent.

This book by Daniel Kahneman, recipient of the Nobel Prize in Economic Sciences, is a wonderful tour of our own mind. It makes you understand why you decide what we decide. It shatters myth of rational decision-making abilities by numerous examples and takes you through situations which has wide impact on many fields – including business, investment decisions, medicine, public policies and politics.

In?Thinking, Fast and Slow (TSH),?Daniel Kahneman?shatters its validity and warns against the societal implications that this understanding of human decision-making has. He explains in provocative detail all the biases and heuristics that we are prone to; all the quirks and complexities that make the human species far different from textbooks.

Are smart people immune from bias? Are these biases really mistakes? Does experience eliminate biases?

Answering these and many other questions about psychological mechanisms underlying behavioral decision research is at the core of?TFS.

It shows you where you can and can’t trust your gut feeling and how to act more mindfully and make better decisions.

Rather, Danny provides a history of the “demonstration approach” that he and Amos Tversky developed and perfected, starting in 1969 in Israel. He provides vivid details of how he and Amos would set about looking for biases in their own judgments, then he describes how they sought to develop demonstration projects to show that the effects were robust. Example of recruitment for army is really an eye opener.

Few lessons to remember:

Lesson 1:?Understanding 2 systems of your brain and how we decide

?System 1 is automatic and impulsive.

It’s the system you use when for many instinctive /quick / spontaneous decisions…They could relate to our reactions to sudden unexpected events where you sense danger, they could be where you make choice to eat to liking of your taste buds or approaching a stranger based on your judgement of his/her appearance or voice etc.

System 1 is a remnant from our past, and it’s crucial to our survival. It need not even be from your present life experiences but a part of evolutionary process.

It does not ask for data or analysis while making decisions but is very intuitive and quick to arrive at conclusions.

In the process it has obvious advantage of speed but could be biased too…Better understanding of these biases and its causes can lead to improve judgements and decisions in situations of uncertainty.

?System 2 is very conscious, aware and considerate.

It helps you exert self-control and deliberately focus your attention. This system is at work when you’re solving a maths problem or planning for a move in chess or simply trying to spot a friend in a crowd of people, as it helps you absorb the data , filter and analyse before reaching conclusion.

It is a ‘recent’ addition to our brain and only a few thousand years old. It’s what helps us succeed in today’s world, where our priorities have shifted from getting food and shelter to earning money, supporting a family and making many complex decisions.

However, these 2 systems don’t just perfectly alternate or work together. They often fight over who’s in charge and this conflict determines how you act and behave.

TFS?also provides a comprehensive and integrated treatment of the role that two different cognitive systems play in explaining our judgments and decisions. Danny explains?that?System 1 thinking, or the intuitive reactions and quick judgments that we rely on for most decisions, is also the process that leads to far greater biases in judgment. He also explains how System 2, our more deliberative thought processes, can be used to dampen the negative effects of our intuitive judgments.

In doing so, he clarifies a structure for understanding the processes and mechanisms that can explain when biases are most likely to appear and when we need to apply our System 2 processes to the problem at hand.

Lesson 2:?When you’re making decisions about money, leave your emotions at home.

We’re a lot more risk averse when it comes to losing what we have though we are keen on getting more. And in many situations, we may choose lower benefits if they are guaranteed rather than taking risks for higher returns. On the other hand, when comes to a situation where there is likely loss we opt for higher risk solutions where there are some chances of reducing the loss

We also perceive value based on?reference points.?Gain or loss will be perceived differently based on this reference point. For Ex., value we attach to gain or loss of $ 1000 will be very different if we have $ 1000 or $ 10000 with you right now.

Lastly, we get less sensitive about money (called?diminishing sensitivity principle), the more we have. So, we may take risks more easily for amounts which represent small fraction of what we have.

Don’t let emotions get in the way where they have no business. Try to consider statistics, probability and when the odds are in your favour, act accordingly.

Lesson 3: Understanding remembering and experiencing self

Remembering self is a creation of System 2

The concept of utility and value are commonly used in 2 different senses. One is about experience value and second is about decision value (representing overall attractiveness of the outcome)…

The last section of the book explores the contrasting ‘selves’ embodied in every individual: the remembering self and the experiencing self. The remembering self refers to the aspect in our nature that evaluates episodes by the lasting memory they leave; the one that keeps track of goals and keeps mental accounts; that answers the question: how satisfied are you with your life? The experiencing self is the aspect that feels every moment; that evaluates pleasure and pain on the go. Interestingly, these two selves are in conflict. The remembering self overweighs the end of an episode and is indifferent to duration; it often promotes actions based on the memory that will result. Paradoxically, people may prefer an experience that is more painful in aggregate sum than another simply as a result of it ending on a less painful note.

Lesson 4: relevance of psychology in making public policy

In this work, the author also seeks to stress the relevance of psychology in informing improved public policy.

To use an example from the book, take the explosion of?fear with regards to the chemical Alar, sprayed on apples to regulate their growth. The media sensationalized the story, leading to an exaggeration of the actual risk posed, and further fueling stories in the media. The public understandably applied pressure on politicians to address the risk, and they in turn obliged with an exaggerated response, banning the use of the chemical and costing farmers a fortune. In the end a small risk was blown totally out of proportion and “the net effect of the incident on public health was probably detrimental because fewer good apples were consumed”.

Overflowing with insights and endlessly fascinating, this book covers a wide range of topics and spans decades of pioneering work in the field of psychology.

This book succeeds in instilling an awareness of the many biases and heuristics that lead to errors of judgments and poor decision-making.

TFS?is a much more complex book and this short summary is far too brief to capture the complexity of?TFS, and there are many insights to note when we read the book.

?As always, all comments and sharing of thoughts welcome.