Thinking, Fast and Slow

Two systems

In the book's first section, Kahneman describes two different ways the brain forms thoughts:

• System 1: Fast, automatic, frequent, emotional, stereotypic, unconscious. Examples (in order of complexity) of things system 1 can do:
  • see that an object is at a greater distance than another
  • localize the source of a specific sound
  • complete the phrase "war and ..."
  • display disgust when seeing a gruesome image
  • solve 2+2=?
  • read a text on a billboard
  • drive a car on an empty road
  • come up with a good chess move (if you're a chess master)
  • understand simple sentences
  • connect the description 'quiet and structured person with an eye for details' to a specific job
• System 2: Slow, effortful, infrequent, logical, calculating, conscious. Examples of things system 2 can do:
  • brace yourself before the start of a sprint
  • point your attention towards the clowns at the circus
  • point your attention towards someone at a loud party
  • look out for the woman with the grey hair
  • dig into your memory to recognize a sound
  • sustain a higher than normal walking rate
  • determine the appropriateness of a behavior in a social setting
  • count the number of A's in a certain text
  • give someone your phone number
  • park into a tight parking space
  • determine the price/quality ratio of two washing machines
  • determine the validity of a complex logical reasoning
  • solve 17*24

Kahneman covers a number of experiments which purport to highlight the differences between these two thought systems and how they arrive at different results even given the same inputs. Terms and concepts include coherence, attention, laziness, association, jumping to conclusions, WYSIATI (What you see is all there is), and how one forms judgments. The System 1 vs. System 2 debate dives into the reasoning or lack thereof for human decision making, with big implications for many areas including law and market research.^[5]

Heuristics and biases

The second section offers explanations for why humans struggle to think statistically. It begins by documenting a variety of situations in which we either arrive at binary decisions or fail to precisely associate reasonable probabilities with outcomes. Kahneman explains this phenomenon using the theory of heuristics. Kahneman and Tversky originally covered this topic in their landmark 1974 article titled Judgment under Uncertainty: Heuristics and Biases.^[6]

Kahneman uses heuristics to assert that System 1 thinking involves associating new information with existing patterns, or thoughts, rather than creating new patterns for each new experience. For example, a child who has only seen shapes with straight edges would experience an octagon rather than a triangle when first viewing a circle. In a legal metaphor, a judge limited to heuristic thinking would only be able to think of similar historical cases when presented with a new dispute, rather than seeing the unique aspects of that case. In addition to offering an explanation for the statistical problem, the theory also offers an explanation for human biases.

• Anchoring

The "anchoring effect" names our tendency to be influenced by irrelevant numbers. Shown higher/lower numbers, experimental subjects gave higher/lower responses.^[3]

This is an important concept to have in mind when navigating a negotiation or considering a price. As an example, most people, when asked whether Gandhi was more than 114 years old when he died, will provide a much larger estimate of his age at death than others who were asked whether Gandhi was more or less than 35 years old. Experiments show that our behavior is influenced, much more than we know or want, by the environment of the moment.

• Availability

The availability heuristic is a mental shortcut that occurs when people make judgments about the probability of events on the basis of how easy it is to think of examples. The availability heuristic operates on the notion that, "if you can think of it, it must be important." The availability of consequences associated with an action is positively related to perceptions of the magnitude of the consequences of that action. In other words, the easier it is to recall the consequences of something, the greater we perceive these consequences to be. Sometimes, this heuristic is beneficial, but the frequencies at which events come to mind are usually not accurate reflections of the probabilities of such events in real life.^[7][8]

• Substitution

System 1 is prone to substituting a difficult question with a simpler one. In what Kahneman calls their "best-known and most controversial" experiment, "the Linda problem," subjects were told about an imaginary Linda, young, single, outspoken, and very bright, who, as a student, was deeply concerned with discrimination and social justice. They asked whether it was more probable that Linda is a bank teller or that she is a bank teller and an active feminist. The overwhelming response was that "feminist bank teller" was more likely than "bank teller," violating the laws of probability. (Every feminist bank teller is a bank teller.) In this case System 1 substituted the easier question, "Is Linda a feminist?", dropping the occupation qualifier. An alternative view is that the subjects added an unstated cultural implicature to the effect that the other answer implied an exclusive or (xor), that Linda was not a feminist.^[3]

• Optimism and loss aversion

Kahneman writes of a "pervasive optimistic bias", which "may well be the most significant of the cognitive biases." This bias generates the illusion of control, that we have substantial control of our lives.

A natural experiment reveals the prevalence of one kind of unwarranted optimism. The planning fallacy is the tendency to overestimate benefits and underestimate costs, impelling people to take on risky projects. In 2002, American kitchen remodeling was expected on average to cost $18,658, but actually cost $38,769.^[3]

To explain overconfidence, Kahneman introduces the concept he labels What You See Is All There Is (WYSIATI). This theory states that when the mind makes decisions, it deals primarily with Known Knowns, phenomena it has already observed. It rarely considers Known Unknowns, phenomena that it knows to be relevant but about which it has no information. Finally it appears oblivious to the possibility of Unknown Unknowns, unknown phenomena of unknown relevance.

He explains that humans fail to take into account complexity and that their understanding of the world consists of a small and necessarily un-representative set of observations. Furthermore, the mind generally does not account for the role of chance and therefore falsely assumes that a future event will mirror a past event.

• Framing

Framing is the context in which choices are presented. Experiment: subjects were asked whether they would opt for surgery if the "survival" rate is 90 percent, while others were told that the mortality rate is 10 percent. The first framing increased acceptance, even though the situation was no different.^[9]

• Sunk-cost

Rather than consider the odds that an incremental investment would produce a positive return, people tend to "throw good money after bad" and continue investing in projects with poor prospects that have already consumed significant resources. In part this is to avoid feelings of regret.^[9]

Overconfidence

This section of the book is dedicated to the undue confidence in what the mind believes it knows. It suggests that people often overestimate how much they understand about the world and underestimate the role of chance in particular. This is related to the excessive certainty of hindsight, when an event appears to be understood after it has occurred or developed. Kahneman's views on overconfidence are influenced by Nassim Nicholas Taleb.^[10]

Choices

In this section Kahneman returns to economics and expands his seminal work on Prospect Theory. He discusses the tendency for problems to be addressed in isolation and how, when other reference points are considered, the choice of that reference point (called a frame) has a disproportionate impact on the outcome. This section also offers advice on how some of the shortcomings of System 1 thinking can be avoided.

• Prospect Theory

Kahneman developed prospect theory, the basis for his Nobel prize, to account for experimental errors he noticed in Daniel Bernoulli's traditional utility theory.^[11] According to Kahneman, Utility Theory makes logical assumptions of economic rationality that do not reflect people's actual choices, and does not take into account cognitive biases.

One example is that people are loss-averse: they are more likely to act to avert a loss than to achieve a gain. Another example is that the value people place on a change in probability (e.g., of winning something) depends on the reference point: people appear to place greater value on a change from 0% to 10% (going from impossibility to possibility) than from, say, 45% to 55%, and they place the greatest value of all on a change from 90% to 100% (going from possibility to certainty). This occurs despite the fact that under traditional utility theory all three changes give the same increase in utility. Consistent with loss-aversion, the order of the first and third of those is reversed when the event is presented as losing rather than winning something: there, the greatest value is placed on eliminating the probability of a loss to 0.

After the book's publication, the Journal of Economic Literature published a thorough discussion of its take on prospect theory,^[12] as well as an analysis of the four fundamental factors that it rests on.^[13]

Two Selves

The fifth part of the book describes recent evidence which introduces a distinction between two selves, the 'experiencing self' and 'remembering self'.

• Two Selves

Kahneman proposed an alternative measure that assessed pleasure or pain sampled from moment to moment, and then summed over time. Kahneman called this "experienced" well-being and attached it to a separate "self." He distinguished this from the "remembered" well-being that the polls had attempted to measure. He found that these two measures of happiness diverged.

• Life as a Story

The author's significant discovery was that the remembering self does not care about the duration of a pleasant or unpleasant experience. Instead, it retrospectively rates an experience by the peak (or valley) of the experience, and by the way it ends. The remembering self dominated the patient's ultimate conclusion.

"Odd as it may seem," Kahneman writes, "I am my remembering self, and the experiencing self, who does my living, is like a stranger to me."^[4]

• Experienced Well-Being

Kahneman first took up the study of well-being in the 1990s. At the time most happiness research relied on polls about life satisfaction. Having arrived at the subject from previously studying unreliable memories, the author was doubtful of the question of life satisfaction as a good indicator of happiness. He designed a question that focused instead on the well-being on the experiencing self. The author proposed that "Helen was happy in the month of March" if she spent most of her time engaged in activities that she would rather continue than stop, little time in situations that she wished to escape, and not too much time in a neutral state that wouldn't prefer continuing or stopping the activity either way.

• Thinking About Life

Kahneman suggests that focusing on a life event such as a marriage or a new car can provide a distorted illusion of its true value. This "focusing illusion" revisits earlier ideas of substituting difficult questions and WYSIATI.