Daniel Kahneman’s Thinking,
Fast and Slow, reveals many of the fallacies in our thinking, whether we
are ordinary men and women or scientists, statisticians and policy makers. He
partitions the thinking self into two entities with the generic names System 1
and System 2. System 1 is the intuitive part of our thinking self: the part
that after training executes skills spontaneously; the part that generates
impressions, feelings, and inclinations, which when endorsed by System 2 become
beliefs, attitudes, and intentions. System 2 is the analytical part, which
checks System 2 through critical analysis but which is often too lazy to act.
Decision Tree
Whenever System 2 fails to check System 1, there is likely
to be errors in our judgment, decisions, and thinking. Kahneman, through his
research throughout the years with colleagues, discovered these thinking errors
including heuristic and biases such as putting too much emphases on low
probability events, being influenced by how a statement or question is framed,
giving more weights (in terms of probabilities) to incidences that we are
familiar with or that are dramatic, ignoring base rates and focusing only on
the representative features of event or person to decide probabilities. Other
fallacies are overconfidence through the illusion of understanding, where
through hindsight we create artificial items for success (successful companies,
CEOs, startups, etc); through the illusion of validity where the environment is
so “noisy” that practitioners have difficulty mastering the skill (stock
picking); through neglecting the outside view (the base rate) and only focusing
on what is in front of us. Also, we make bad decisions because we are not the
rational individuals that utility theory, decision theory, and other economic
theories presupposes (we don’t maximize expected utilities because emotions
such as fear from System 1 interferes).
Normal Distribution
In general, System 1 is useful in our day-to-day lives
since the shortcuts that we have developed over our lifetimes saves time and
mental energy. However, at key moments, we must recognize that these shortcuts
will harm rather than help us. By pointing out these fallacies, by turning
these “unknown unknowns” into “known unknowns” Kahneman has alerted us to the
tendencies for us to prejudge, to under-plan, to ignore the bird’s eye view, to
select the wrong path, etc. Now that we are aware of the danger, we must design
formal structures or informal alarms to guard against these fallacies. Since
they affect personal finance, individual happiness, as well as national
policies and international economics, we can’t afford to avoid them. Overcoming
these fallacies will improve our individual, national, and global
wellbeing.
