Daniel Kahneman is a psychologist who in 2002 won Nobel Prize in Economic Sciences. His book published in 2011 describes two different ways our brains form thoughts: system 1 – fast, intuitive, and emotional, versus system 2 – slow, logical, and thoughtful. He explains the rules that people use to form judgments and decisions (heuristics). He examines decisions and judgments that are typical mainly for system 1 and the resulting biases and errors of fast and automatic thinking.
Below are a few examples of biases and errors:
- The law of small numbers explains why small samples of data often provide extreme results and therefore are not reliable.
- Anchoring effect often happens when we have to estimate an unknown value but are influenced by an irrelevant know value.
- Availability heuristic explains how people estimate a size of a given category. For example if we are able to recall many examples that fall into a category than we think of it as large or important and vice versa. We follow stereotypes rather than statistics.
- Substitution effect happens when we substitute a difficult question with an easy one, and answer or make a decision based on the easier one.
- Outcome bias occurs when people judge quality of decisions by their final outcome and not by evaluating decision process and available information during the process.
- Hindsight bias can be observed when we are unable or not willing to accurately recall our past beliefs. This makes us think that past events were easier to predict that they were in fact, for example economic crisis of 2008.
- Illusion of validity is our belief that if information is consistent and easy to process it is true.
- Planning fallacy is an error that is often made in planning when considering only the most optimistic scenario.
- Sunk-cost fallacy occurs when people resist to accept failure and endure in efforts that lead to further failures.
Part of the book is devoted to study of how people make choices. Daniel Kahneman explains the Prospect Theory which is an analysis of decisions under risk. According to this theory peoples’ decisions are not optimal. It’s because we make decisions based on the potential value of losses and gains rather than the final outcome. For example when we consider the two following scenarios. One: you have a 50% chance to gain $1000 or $500 gain for sure. Two: you are given $1000 and then you have 50% chance to lose $1000 or lose $500 for sure. Even though the outcomes are the same people tend to vary on risk taking in those two cases.
The book also describes a concept of “Two Selves“. Daniel Kahneman reveals how our “experiencing selves” and our “remembering selves” perceive our happiness differently. It turns out that the remembering self does not care about the duration of a pleasant or unpleasant experience. Instead, it evaluates an experience by significant points of the experience, and by the way it ends. The remembering self dominates our conclusions about past experiences and is mainly responsible for making our future choices.
The research presented in the book proves that very often people think in a way described by system 1 and rarely by system 2 because the latter one requires much more effort. The book gives a lot of real-life examples and anecdotes that are very interesting and anyone can relate to them. This makes it very interesting to read and helpful in realizing how our minds work, in what situations we might be biased, how to avoid making errors, and make better decisions in our lives. Highly recommended reading for anyone who is interested in understanding the way our minds operate.