Thinking Fast and Slow by Daniel Kahneman
What it is about
A real classic in its field aimed at introducing a groundbreaking research on human behaviour, cognitive biases and decision making conducted by Daniel Kahneman and Amos Tversky to a layperson audience. Kahneman introduces the notion of System 1 and System 2 thinking, both of which are vital in real life and explores their benefits and pitfalls. The book also summarises several cognitive biases (e.g. Availability & Recency, Linda effect, Regression to the mean, Anchoring etc.) and on real-world examples and experiments illustrates the impact such biases have on decision making and behaviour. In the book, the author also outlines the Prospect theory which serves as a basis for behavioural economics for which he ultimately received a Nobel Prize in 2002.
Categories
management | psychology | behaviour | biases
Related titles
Noise: A Flaw in Human Judgment by Daniel Kahneman, Olivier Sibony, Cass R. Sunstein
Key ideas & Notes
System 1
Fast and Automatic
Generates intuitions
Suppresses doubt
Neglects ambiguity
Does not require cognitive effort
WYSIATI — What You See Is All There Is
System 2
Slower & Deeper
Uses data retrieved by System 1
Reasoning
Neocortex
Analysis
Hedgehogs
Have an overall theory about a world
Reluctant to accept they are wrong
Try to match reality to their beliefs
Failed prediction is a question of timing not an invalid theory
Foxes
Complex thinkers
Recognise a role of luck and unpredictable events
Don't believe in one grand theory
Biases & Heuristics
Availability & Recency —Substitutes one question for another based on what comes easiest to mind from recent memory. Overreaction to risk events (e.g. terrorism) due to media coverage
Linda effect (conjunction fallacy) — Assumption that specific conditions (combination) are more probable than a single general one
Law of small numbers — Small samples are more likely to include extreme results
Regression to the mean — if a variable is extreme on its first measurement, it will tend to be closer to the average on its second measurement—and if it is extreme on its second measurement, it will tend to have been closer to the average on its first.
Anchoring
Underestimating role of luck — We look for causality where it isn't. We construct stories
Outcome bias — Decision makers are blamed for good decisions that turned out badly and given much less credit for all the good decisions that turned out well.
Hindsight bias — After an event, people overestimate the probability of they assigned to the outcome previously
Affect Heuristic — Positive and negative feelings associated with the decision influence the risks that people perceive
Prospect Theory
People value gains and losses differently, placing more weight on perceived gains versus perceived losses.
Humans do not behave rationally purely based on utility - e.g. Loss Aversion
The Endowment Effect — people ascribe more value to things merely because they own them
Summary
A genuinely eye opening book with a range of valuable and useful insights. Kahneman shines a light at human imperfections, errors in reasoning and decision-making and helps us understand why we behave and act the way we do. Does reading Thinking, Fast and Slow make you immune to biases and turn you to a perfectly rational individual? Of course not. But it does open a whole new set of perspectives on human behaviour and enables one to be more aware of one’s own biases, be more careful when applying System 1 thinking and be more effective in predicting and responding to other people’s behaviour, reasoning and actions. The realisation that humans are far from perfectly rational also enabled a departure from the traditional conception of economics where people are rational actors (e.g. utility maximisation akin to Homo Economicus) towards behavioural economics that takes into account how real people actually think.
