Thinking Fast and Slow

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.