Thinking, Fast and Slow

Table of Contents

• Two Systems
• Heuristics and Biases
• Overconfidence
• Choices
• Two Selves

Two Systems

Nobel Prize winner Daniel Kahneman introduces the central characters of the book: System 1 and System 2.

• System 1: Fast, automatic, frequent, emotional, stereotypic, and subconscious. It operates effortlessly. (e.g., detecting that one object is more distant than another, completing the phrase "bread and...", driving a car on an empty road).
• System 2: Slow, effortful, infrequent, logical, calculating, and conscious. It requires attention. (e.g., focusing on the voice of a particular person in a crowded room, parking in a narrow space, calculating 17 x 24).

The central thesis is that we identify with System 2 (the rational self), but System 1 actually runs the show most of the time. System 1 is prone to systematic errors called "biases." System 2 is lazy and often just endorses the impulsive suggestions of System 1.

Heuristics and Biases

When faced with a difficult question, System 1 often substitutes an easier question. This is called a "heuristic." While often helpful, heuristics lead to predictable biases.

The Anchoring Effect

When we estimate a value, we are heavily influenced by any number that is currently in our mind (the "anchor"), even if it's irrelevant. For example, if you are asked "Is the height of the tallest redwood more or less than 1,200 feet?" and then asked to estimate the height, your guess will be much higher than if the anchor was 180 feet.

The Availability Heuristic

We judge the frequency or probability of an event by how easily examples come to mind. Because plane crashes are highly publicized and dramatic, we think they are more common than they are. We overestimate the risk of terrorism and underestimate the risk of heart disease.

The Sunk Cost Fallacy

We continue a behavior or endeavor as a result of previously invested resources (time, money, or effort), even if the future costs outweigh the benefits. We finish a bad movie because we paid for the ticket. We stay in a bad job because we've spent years training for it.

Overconfidence

We have an "Illusion of Understanding." We construct coherent stories about the past that make us feel like the world is predictable, when in fact it is largely random. This is the "Narrative Fallacy."

Kahneman discusses the "Planning Fallacy": our tendency to underestimate the time, costs, and risks of future actions and at the same time overestimate the benefits. We are optimists. We assume the best-case scenario.

He also introduces the concept of "WYSIATI" (What You See Is All There Is). System 1 jumps to conclusions based on limited evidence and ignores the evidence that is missing. We form strong opinions based on very little information.

Choices

Kahneman challenges the economic theory that humans are "rational agents." He introduces Prospect Theory, which earned him the Nobel Prize.

The core finding is Loss Aversion: We feel the pain of a loss about twice as intensely as we feel the pleasure of a gain. Losing $100 hurts more than winning $100 feels good. This leads to risk-averse behavior when we are winning (to protect gains) and risk-seeking behavior when we are losing (to avoid realizing the loss).

He also discusses the Endowment Effect: We value things more simply because we own them. If you own a mug, you might sell it for $5. If you don't own it, you might only pay $2 for it.

Two Selves

Kahneman distinguishes between the Experiencing Self and the Remembering Self.

• Experiencing Self: Lives in the present. It answers the question, "How does it feel now?"
• Remembering Self: Keeps the score. It answers the question, "How was it?"

We make decisions based on the Remembering Self, not the Experiencing Self. And the Remembering Self is biased by the Peak-End Rule: We judge an experience largely based on how it felt at its peak (most intense point) and at its end. The duration of the experience matters very little (Duration Neglect).

For example, a colonoscopy that is painful for 10 minutes but ends with 2 minutes of mild pain is remembered as less painful than a colonoscopy that is painful for 10 minutes and stops abruptly. The Remembering Self prefers the longer procedure because the end was better.