Thinking, Fast and Slow by Daniel Kahneman

Thinking Fast and Slow

 

Summary
  1. Divides decision making into our intuitions (System 1) and our slower, more rational side (System 2). People often place too much faith in System 1 and this often leads to trouble. Offers tips and techniques into how to avoid certain psychological fallacies in order to make better decisions.
Key Takeaways
  1. People are intuitively poor statisticians
  2. Studied the role of intuition and how they affect our opinions and outlooks
  3. Availability heuristic – people biased because of heuristics. Most obvious and prevalent example pops up first (shark attacks although very rare)
  4. Resemblance and recall often used but don’t forget to also think about statistics. Farmer and librarian example where describe somebody shy and think librarian but in fact many more farmers than librarians in the world
  5. Goal is to provide a view of how the mind works. Drawing on recent cognitive and psychological findings focusing on biases
  6. Expert intuition strikes as magical when in a special skill but we all have some of it. Detecting anger in voices quickly, etc
  7. Intuition is nothing more than recognition. Sometimes superior recognition, but recognition nonetheless
  8. Affect heuristic – make decision based on gut with little use of reason or intellect.
    1. Fast thinking uses heuristics, intuition and perception/memory and the vast majority of our decisions are made using this systems (but maybe they shouldn’t be…)
    2. Slow thinking based on reason, deliberate thought
  9. Broad framing – do not consider one risk or gamble in isolation, think of all of them spread over your whole life and will see that this decision actually carries very little risk
  10. Setting for yourself certain risk policies will help alleviate some of the narrow framing issues and make decisions easier
  11. In order to avoid hindsight bias, make decisions after very thorough thought or almost none
  12. Pain and pleasure drives mostly everything. Understand that duration of plays a big role when deciding
  13. Time matters greatly and need to make decisions around this. Ultimate finite resource in this life
  14. Nothing in life is as important as you think it is when you are thinking about it
  15. 2 selves – experiencing self and remembering self (keeps score and makes decisions)
    1. Make sure to take duration of event into account when making decision
    2. Start judging decisions by how they were made and not only how they turned out
  16. Part 1 – fast v slow and how it affects our decisions
  17. Part 2- updates on judgment heuristics and why so difficult to think statistically
  18. Part 3- overconfidence due to thinking we know more than we do and not recognizing our supreme ignorance. Underestimate role of chance and our use of hindsight
  19. Part 4 – economic agents are rational? Examples of human decisions which aren’t. Prospect theory
  20. Part 5- distinction between experiencing self and remembering self. These two have differing Interests
What I got out of it
  1. We have two systems for basing decisions on – system 1 is the intuitive decision maker and system 2 is the thorough and analytical decision maker. We often rely too much on system 1 and need to be aware of that. Judge your decisions by how they were made as opposed to how they turned out. Somewhat repetitive book but great lessons

Buy Thinking, Fast and Slow

Part 1- The Two Systems

  • Fast thinking – You see and make decisions immediately. Reading people, judging distance, finishing sentences, hostility in voice, easy math, innate skills, can be widely shared or specialized for example
  • Slow thinking – deliberate and strained thinking. agency, choice, concentration and computations, focused attention almost always system 2. Often makes people blind to other inputs when using system 2. Blind to our own blindness
    • System 1 is the hero and we use this most of the time but both always work together with two taking over when making difficult decisions. System 1 cannot be turned off
    • System 2 is in charge of self control
  • Easier to recognize others mistakes than our own

2- Attention and Effort

  • System 2 takes effort and is inherently lazy. Used as little as possible
  • The harder you think the more your pupils dilate
  • Very sophisticated allocation of attention in brain
  • People’s thinking patterns will trend to what is easiest. People inherently lazy

3- The Lazy Controller

  • If system 2 needed most people cannot walk at same time
  • Flow stems from a balance of both systems
  • When system 2 is busy we are more likely to fall to our impulses in system 1 (cheat on diet)
  • System 2 controls thoughts and behaviors
  • Overuse leads to ego depletion and giving up earlier and glucose levels drop
  • People avoid cognitive effort and rely on their intuition too much
  • Cognitive control linked to intelligence (marshmallow study)
  • Rationality and intelligence should be separated

4- The Associative Machine

  • Cognition is embodied – think with body as well as brain
  • Know ourselves much less than we think we do as we don’t know the majority of our thoughts as they are subconscious
  • We can be primed just by being exposed to words (old people words made people walk slower)

5- Cognitive Ease

  • Certain questions (am I safe?) continually asked by system 1 to determine if extra cognitive effort from system 2 needed
  • Cognitively easy you are happy and casual
  • If have seen something before it will see and feel familiar making you recognize it and cognitively easier
  • Ideas described with more complex words seen as less intelligent. Use familiar words to describe you’re ideas (rhymes often work best for people to remember)
  • System 2, unless trained, will often inherently trust system 1
  • Mood affects system 1 – happier people react more accurately and quicker to intuition experiments
  • Exposure effect – familiarity breeds liking

6- Norms, Surprises or Causes

  • System 1’s goal is to update your view of the world around you
  • Surprises help form world around you and prime you for what to anticipate
  • Violations of normality are detected extremely quickly
  • We often assign causes to events even if no real cause
  • Can say that we “see” causality like we see color
  • People often use causal thinking when statistical thinking should be used

7- A Machine for Jumping to Conclusions

  • System 2 in charge if detecting lies and 1 in believing
  • People believe weak arguments more when tired
  • Halo effect– tendency to like everything about a person if you like one aspect
  • Often forget that there is more than what we see. “What we is is all there is” fallacy

8- How Judgments Happen

  • 70% of senators who were deemed to have a competent face after a quick glance won their Race. Strength and trustworthiness better predictors than likability

9- Answering an Easier Question

  • Intensity matching – match action with intensity of emotion
  • We often answer heuristics as opposed to the actual question posed

Part 2 – Heuristics and Biases

10- The Law Of Small Numbers

  • Statistical sampling can give strange results when using small numbers – small counties with high cancer incidents can be caused just by sampling effects
  • Be careful with assigning causality with truly random events
  • No such thing as a hot hand in basketball because it is truly random
  • Pay more attention to messages than the content of their reliability (sample size too small), jump to conclusions and some things have to cause – simply random

11- Anchors

  • Using a number as a base, or anchor, when asked to answer something else that may be completely unrelated
  • Anchoring has a huge effect on us and can be found everywhere. In order to get past it, find reasons as to why the anchor is wrong
  • Priming – our thoughts and behaviors are affected much more by our environment and other things we are exposed to than we care to admit

12- Science of Availability

  • Availability heuristic – the ease which examples come to mind
  • Ease with which instances come to mind is a system 1 heuristic

13- Availability, Emotion and Risk

  • More recent a disaster struck, more diligent people are but as memory fades people become less so
  • Media coverage warps our views of severe events
  • “Emotional tail wags the rational dog”
  • Importance of an idea depends on it’s fluency and the emotional charge it elicits
  • People very bad at dealing with small risks. Either ignore them altogether or overreact

14- Tom W’s Specialty

  • Base rate should be combined with individual circumstance. People tend to forget base case when hear individual situation or details

15- Less is More

  • Conjunction fallacy – When valuing objects in a group people tend to take the average so if a couple crappy baseball cards with great card it’ll lower the average people would pay for the group

16- Causes Trump Statistics

  • Teaching psychology mostly a waste if time as people ignore base rates when come across information that conflicts with their stereotypes
  • People very tough to change their minds about human nature and even more so about themselves in negative terms

17- Regression to the Mean

  • Reward works better than punishment
  • People’s great performance will likely be worse next time as they revert to the mean
  • Intuitive predictions are not regressive and therefore need to be corrected towards the mean
  • With small samples, regression to mean even more important

Part 3- Overconfidence

Chapter 19- the illusion of understanding

  • Humans fool ourselves by constructing flimsy account of past. Do not recognize role of luck in everything
  • Human mind does not deal well with non-events
  • People find it very tough to recall what they thought of something or an event before their mind changed
  • Tend to blame people too much when turn out bad and too little credit when good
  • World being orderly is an illusion and we can definitely not predict future from past
  • Leader’s effects very exaggerated. CEOs should not be praised as much as they are

20- Illusion of Validity

  • Often overconfident in our skills. Stock picking for example on average is very much based on luck as opposed to skill
  • Surrounding self with like minded people dangerous as it reinforces this overconfidence and way of thinking (financial community refuses to believe could do better than just throwing darts at random stocks)
  • Overconfidence in explaining past makes us believe we can predict future but are very poor at this in reality
  • Experts often fared worse than chance when asked to predict something in their given field

21- Intuitions vs Formulas

  • Experts over complicate decision making and this often hurts the accuracy of their predictions. Simple formulas often fare better than experts. Wine price example
  • Use formulas for decisions when possible
  • Intuition nothing more than great recognition
  • Emotional learning may be quick but becoming an expert a very slow process. Being an expert can be thought of as a summation of thousands of small skills
  • In order to gain a skill need a stable environment, practice and immediate feedback
  • Be cautious of trusting people’s judgment, even your own

23- The Outside View

  • Need to combine inside (case specific) with outside (general or average scenario) views
  • Planning fallacy – projects almost always go over budget and take longer than expected. Look at base case statistics and then alter to your specific project

24- Engine of Capitalism

  • Optimistic bias – people think goals more achievable than really are, better than they are and world more benign than really is
  • Optimistic people usually healthier and happier and often inherited from parents
  • Entrepreneurs more optimistic on average and drives growth although most fail
  • Outcome of small business depends on much on competitors ad market conditions than their own decisions
  • Do not fall into the “all you see is all there is” fallacy. Ask the right questions and be wary of what you do not know
  • Optimism might be necessary in order to get through small failures entrepreneurs and others will face on their career
  • Premortem is an exercise before doing project which helps lower overconfidence and spark creative thinking

Part 4- Choices

25- Bernoulli’s Errors

  • People are risk averse and people should decide between options by seeing the probability and outcome of the average of all the options in the group
  • Reference dependence vital for almost anything it seems like. Is this color dark? – compared to what?…
  • Bernoulli did not take reference dependence into account

26- Prospect Theory

  • Loss aversion drives most decisions but reference point also important
  • Staying at status quo a version of loss aversion
  • Tastes change and bad effects look larger in your mind that good effects

27- Endowment Effect

  • Endowment Effect – value of something goes up after you actually own it
  • Endowment effect not universal for everything you own. Depends on if own for use or exchange. Can be explained by loss aversion

28- Bad Events

  • Brain prioritizes things that are bad news – angry faces for example
  • Bad events weigh much more in out mind than good
  • Lottery ticket is ultimate example of possibility effect. Care less when payoff huge

30- Rare Events

  • Prospect theory – decision weight and probably not weighed the same
  • Utility theory decision weights and probability weighed the same
  • If don’t experience rare event don’t give it as much weight in your decisions

31- Risk Policies

  • Do not fall into trap of “all you see is all there is”
  • Broad framing – do not consider one risk or gamble in isolation, think of all of them spread over your whole life and will see that this decision actually carries very little risk
  • Setting for yourself certain risk policies will help alleviate some of the narrow framing issues and make decisions easier
  • People tend to be overly optimistic when planning something and then overly pessimistic to losses

32- Keeping Score

  • People keep mental accounts for their expenses or actions in order to keep score. One must be aware of these accounts and not weigh one much more heavily than others
  • Realize when something is a sunk cost and do not make poor decisions because have already paid for something
    • Keeps people at bad jobs and poor marriages
  • People have stronger regret to something that requires action. Even if same result but taken inaction instead you are less happy about it too
  • In order to avoid hindsight bias, make decisions after very thorough thought or almost none. Regret when think a little and then can look back and scold yourself

Chapter 33- Reversals

  • Preference reversals makes you focus on only one aspect of the task or question or decision at hand
  • Be aware of single evaluation (looking at a scenario and not considering anything else). Will lead to worse and less informed decisions otherwise. The broader scope will help you out things in perspective

34- Frames and Reality

  • Framing of a question or situation greatly affects our beliefs and preferences
  • Emotional area of brain active when decision matches frame, cognitive dissonance when choose something framed as lose (even if right decision), rational subjects combine the two and have little conflict
  • Aim to make decisions which are reality bound and not frame bound
  • Risk aversion or seeking also affected by frame and if a sure thing or a gamble

Part 5 – Two Selves

35- Two Selves

  • Pain and pleasure drives mostly everything. Understand that duration of plays a big role when deciding
  • Duration neglect – Be sure to weigh duration appropriately as pain instinctively gets more weight

36- Life as a Story

  • People will pay less for an experience if they cannot remember it (hypothetically) even if truly enjoyed it during
  • Can be said that our experiencing self is a stranger whereas we are our remembering self
    • People who can remember experiences in detail can relive the situation – even accompanying emotions
  • Get more happiness by switching from passive forms of leisure (TV) to active forms (socialize, exercise)
  • Aim to spend less time in uncomfortable state by putting more hours into things you enjoy doing

38- Thinking About Life

  • Time matters greatly and need to make decisions around this. Ultimate finite resource in this life
  • Nothing in life is as important as you think it is when you are thinking about it
  • Focus illusion – tend to buy material goods which are exciting when thinking about them but eventually lose their appeal

Conclusions

  • Brain has two characters – system 1 and 2
    • System 2 is deliberate decision maker, who we think we are but often it is influenced by system 1 more than we know
  • Two species – ecogs (completely rational but impossible for humans to be, and humans
  • Two selves – experiencing self and remembering self (keeps score and makes decisions)
    • Make sure to take duration of event into account when making decision
    • Start judging decisions by how they were made and not only how they turned out

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