Summary of Thinking, fast, and slow by Daniel Kahneman
George Mason University
Summary of Thinking, fast, and slow by Daniel Kahneman
Introduction The author, Daniel Kahneman, hopes that the readers would benefit from the reading of his book, which is about biases of intuition. According to the author, it can be a tough choice between what we believe and what we want. Friends and colleagues help us in making and evaluating choices. The thinking process is one conscious thought leading to another. The mental work creates impressions and intuitions silently in our minds. We allow our beliefs, feelings and preferences to feel confident about our decision, even if we are wrong. The book presents the author’s understanding of judgment and decision-making and how working together makes one more patient. Kahneman’s aim is to present how mind works. The book is based on recent developments in cognitive and social psychology.
There are five sanctions of the book, the first part discusses the systems approach to judgment and choice, the second part shows how associative memory creates a coherent interpretation. The third part describes the limitation of mind and the excessive confidence in beliefs. The focus of the fourth is on the nature of decision making while the fifth part describes recent research done on the feeling self and the remembering self and introduces the distinction between two selves. The last chapter explores the discrepancies drawn in the book, the remembering and the experiencing selves, the commencement of agents in behavioral economics and classical economic.
When one looks at the black and white picture of the woman’s face, one immediately distinguishes that she is angry and shouting harsh words. The mind automatically and effortlessly undergoes a premonition of what she was going to do next. If one looks at a multiplication problem, they can immediately tell that it is a problem that can be solved with some effort. The mental process here is deliberate and orderly, which is the prototype of slow thinking.
Psychologists have been interested intensely for several decades in the kind of thinking evoked by the picture of the angry woman and the multiplication problem. They point to two systems is in the mind, System 1 and System 2. System 1 functions fast, automatically and with little or no effort, while System 2 assigns effort to the mental activities that require complex computations plus concentration. Both systems are active whenever we are wide-awake. System 1 runs mechanically and continuously offers suggestions for System 2. System 2 operates in a relaxed low-effort mode, and if it endorses System 1 with little or no modification, those impressions and intuitions are changed into beliefs. In the case of a difficulty, System 1 asks for support from System 2 that is for specific processing to solve the problem. System 2 gets the credit for monitoring of the behavior. Thus, there is a highly efficient division of cooperation between the two systems. In the case of a conflict between them, which is common in our lives, one of the tasks of System 2 is to overpower the impulses of System 1. The purpose is to dissolve the conflict between an intention and an automatic reaction.
Illusions are a good example, which shows that one cannot prevent System 1 from doing its process. One should keep in mind that not all illusions are visual, and they can relate to thought. The issue here is how to overcome cognitive illusions. The two systems, “automatic system” and “effortful system”, can be thought of having their own personalities, limitations and abilities. As automatic system takes more time, it also takes more of your working memory.
System 2 has a limited capacity but protects the most important activity that requires attention. System 1 takes over in emergencies and as one becomes skilled in a task, the demand for energy repaired for it lowers. Highly intelligent individuals take less time to solve the same problem. The cognitive operations are more demanding than others are. System 2 carries a natural speed, and one can conduct routine exchanges with little effort. Most of us require self-control to maintain a coherent train of thought. It is a well-established proposition that both cognitive effort and self-control are a kind of mental work. Ego depletion occurs when one is forced to something that requires their self-control and will. Researchers have tried to examine the link between thinking and self-control. Psychologists look upon ideas as nodes in a huge network known as associative memory.
Illusions of remembering are illusions to mind and memory. The predictable illusions occur inevitably, and if an idea is repeated, it appears true. In the discussion of associative coherence, the dominant theme was the symmetry of associative connections. The link between cognitive ease and positive emotion in System 1 has a long evolutionary history. The associative machine sends a very faint signal during a sense of cognitive ease. These findings suggest that good mood, creativity, and intuition increase reliance on System 1.The primary role of System 1 is to maintain a model of the personal world and the normalcy in it.
The importance of causal intuitions is a regular theme, as people are prone to apply causal thinking unsuitable to situations that need statistical reasoning. You may not know but a definite choice is made, and one is never aware of the ambiguity. This is because System 1 does not keep track of the alternatives it rejects. System 1 understands language and its understanding relies on the basic assessments made of computations of similarity and representativeness and estimates of the availability of associations. It can carry out several computations at one time.
The anchoring effect is an important phenomenon in the everyday world and takes place when people consider a specific value for an anonymous quantity. The judgments of people are influenced by uninformative number. There are two different mechanisms that create the anchoring effects both System 1 and 2. During the operation of System 2, a kind of anchoring happens in a careful process of adjustment and in automatic manifestation of System 1. It occurs by a priming effect. Anchoring as adjustment strategy takes place for uncertain quantities, assessing if it is too high or too low. Anchoring as priming effect is a deliberate and conscious effort.
System 1 attempt to create a world where the anchor is the true number. There are few psychological phenomena that can actually be measured but the effect of anchors is an exception as it can be measured. The anchoring effects can be used and abused because of insufficient adjustment and priming. The relationship between System 1 and System 2 can be explained by the effects of random anchors. System 2 makes use of data retrieved from memory during an automatic operation of System 1.
Availability, emotion, and risk are found to be related to each other in the study of risk and insurance. The media coverage shapes the thinking of the public and it is unusual that attract disproportionate attention. When assessing the differences between experts and the public, they can be partly explained because of the biases in judgments. Experts measure risks by the number of lives lost while the public draws finer distinctions between the good and the bad deaths. The source of erratic priorities in public policy are the biased reactions to risks. The availability and affect heuristics guide citizens’ beliefs that are inevitably biased.
When considering Causes Trump Statistics, there is a standard problem of Bayesian inference where there is a reliable testimony of a witness, which is imperfect. People often ignore the base rate, and those who give considerable weight to the base rate are not too far from the Bayesian solution. Statistical base rates thus are often neglected altogether and underweighted generally. Stereotyping is bad for any culture, and hostile stereotyping can lead to dreadful consequences.
This base rate is a statistical fact that can be neglected. It is tough to change one’s mind about human nature, and the test of learning psychology is whether one has learned a new fact. Causal interpretation based on statistical results can have a stronger effect on one’s thinking. At the same time, individual cases leave a stronger impact on psychology. Thus, mere statistics cannot be relied on for learning.
Regression to the Mean relates to fluctuations in the quality of performance and success is based on the combination of talent plus luck. The idea that luck has a role to play in the success carries surprising consequences. The phenomenon of regression was discovered during nineteenth-century, and it took best minds to make sense of it. Wrong and causal interpretations of regression are not restricted to the standard mines but eminent researchers who have confused mere correlation with causation. The regression effects are seen as a source of trouble in research
Many predictions are made in professional and personal lives. Some intuitions are drawn based on skill and expertise. Intuitive judgments are made even in the absence pf substantial evidence. When taming intuitive predictions, a causal link is made between the evidence and the target of the prediction sought. The evidence is evaluated according to the relation to a relevant norm, and the next step involves substitution and intensity matching. Intuitive predictions need to be corrected as they are not regressive and thus are biased. A significant effort is required to locate the baseline prediction and assess the quality of the evidence. The principle of moderating intuitive predictions should be taken seriously, as the lack of bias is not what matters most. Unbiased predictions can be justified when all errors of prediction are treated alike. Unbiased and moderate predictions should not present a problem for a rational person. Extreme predictions based on weak evidence often face regression as a problem. Statistics teachers dread the classes on Regression as the students often carry a vague understanding of the concept.
It is not easy to follow the illusion of understanding. The human mind is not able to deal well with non-events and most important events often do not involve choices. Luck has a role to play as it can disrupt even the most successful steps taken. The powerful WY SIATI rule states that one can make sense based on a secure foundation of our limitless ability to ignore our ignorance. The focus of the illusion is that we tend to believe that as we have understood the past, we can understand the future. The mind is a sense-making organ, and one of its limitation lies in its imperfect ability to rebuild past states of knowledge or beliefs that have changed. The experimenter studies what happens when people change their minds and measures people’s attitudes carefully on a topic that is debatable.
System 1 machinery for sense making makes one see the world as simple, coherent and predictable. Those comforting illusions help lower the anxiety and allow one to acknowledge the qualms of existence fully. The book” The Halo Effect” shows how the demand for illusory certainty is met with the histories of the rise and fall of particular individuals. As luck has a large role, one cannot assess the leadership and management practices simply from the observations of success.
Considering how little we know, it seems absurd to show immense confidence in our beliefs. The Illusion of Validity can be referred to as cognitive illusion. If one cannot predict, it has little effect on their confidence in individual cases. Subjective confidence is not a reasoned evaluation of the probability that it is right. If one looks at what works behind the illusions of skill and validity, it is observed that Cognitive illusions are more stubborn than visual illusions. The illusions of validity and ability are based on an influential and professional culture. Still, people whose business is prediction exploit that fact that the illusion of valid prediction remains intact.
When comparing Intuitions and Formulas, it is evident that comparisons of clinical and statistical predictions have increased manifold. About 60% of the studies show higher accuracy for the algorithms. One reason as to why experts are inferior to algorithms is they try to be clever while making their predictions thinking outside the box. Complexity may work sometimes, but it does not lower validity. Another reason for the inferiority of those expert judgments is that humans remain inconsistent when making summary judgments of complex information. The widespread extent of the inconsistency is the real issue here, and it is due to the extreme context dependence of System 1. Inconsistency is unhelpful of any predictive validity when predictability is poor. There has always been a moral dimension about clinical, and statistical predictions as experienced clinicians consider statistical methods to be mechanical, additive and artificial. This is a common attitude when a human competes with a machine and the prejudice against algorithms is exaggerated when the decisions are consequential. One can hope to combat the halo effect when the first impressions are likely to influence later judgments.
Professional controversies are not good news for the in academics. One of the distinctive features of intuition lies in the mystery of knowing without knowing. Emotional learning is faster than the acquisition of expertise in complex tasks. A sufficiently regular environment and opportunity to learn through prolonged practice are the core conditions for acquiring a skill. Intuitions are likely to be skilled when both these conditions are met with. One should not be blamed for forecasting inaccurately as we live in an unpredictable world. However, the professionals can be blamed for believing that they can do in an impossible task.
The outside view is worrisome, as one never considers the possibility that one might fail. There is no connection between mind, the knowledge of the history and the forecast of future. The inside view is adopted by all of us to assess the future of our project. The forecast of an outcome is slightly worse than the baseline prediction, and it is already grim. The accuracy of the outside-view forecast should not be seen as evidence for its validity. Overly optimistic forecasts are present everywhere, and there are endless stories of planned fallacy. There is a technical name given to the treatment for the planning fallacy and people take risks when the odds are favorable, and they get overly optimistic about them. We take a step as we ignore the risks and do not want to admit failure and this is an example of the sunk-cost fallacy.
Most of us view the world to be harmless and tend to exaggerate our ability to forecast the future. An optimistic bias can be both a risk and a blessing. However, some fortunate people are more optimistic than others are and therefore popular as they are resilient to failures. Optimistic individuals are not average people as they love to take risks but without losing track of reality. Their confidence and positive mood works in their favor. The idea of adopting an outside view does not occur to them when assessed for the odds of their own venture. Psychologists confirm that most people are superior to others and this may lead them to be more confident and optimistic. The encouraging risk taking behavior contributes to the economic dynamism of a capitalistic society and drives the engine of capitalism. The emotional, cognitive, and social factors come together to build an exaggerated optimism that can leads people to take risks, that they would avoid if they knew the odds. It is not easy to overcome overconfident optimism but one can tame optimism and individuals.
Every decision one makes in life comes with some uncertainty. The expected utility theory is the most relevant theory and is the foundation of the rational-agent model in the social sciences. Bernoulli proposed a radically new approach when evaluating gambles that were earlier assessed by their expected value and given a weight based on the average of the possible outcomes. He observed most people disliked taking risks, and a risk-averse step makes them decide on the choices to make. Their choices are the psychological values of outcomes of their utilities and not the dollar values. However, there are flaws in Bernoulli’s theory that assumes that it is the utility of the wealth that makes people more or less happy. His model lacks the reference point and cannot explain the risk-seeking preference in gambling. It is remarkable that his conception of the utility of outcomes has survived for so long. Perhaps he was a victim of theory-induced blindness that often weakens of the scholarly mind.
The experimenters used by distinguished scholars to measure the utility of wealth raised questions. Recent developments question the subjective value of wealth and not the changes in wealth. It has been noticed that people become risk seeking when their options are bad, but a theory-induced blindness prevails. The utility theorists do not know about ones’ attitudes to risk, gains, and losses. Bernoulli’s model is too simple, as one only needs to know the state of wealth to determine its utility. However, the Prospect Theory is more complex than the utility that must be justified by sufficiently interesting predictions of facts. Three cognitive features make the core of prospect theory and play an essential role when assessing financial outcomes. The first is that evaluation is about a neutral reference point, which is the status quo, and the next principle is of diminishing sensitivity that applies to sensory dimensions and the assessment of changes in wealth. The third principle is loss aversion and how positive and negative expectations carry an evolutionary history. To decide between the risk of loss and for gain, one must balance the psychological benefits. Speaking of Prospect Theory, it is accepted by many scholars not because it is true but because it adds to the utility theory, reference point, and loss aversion.
Bernoulli’s representation of outcomes and conventional indifference maps as states of wealth share a wrong supposition that the utility relies only on the state of affairs and is not influenced by the past and history. The origin of behavioral economics cannot be specified precisely. The Endowment Effect is particularly striking and not universal. The basic mechanisms of supply and demand work when the economic theory correctly predicts the final prices of the market. However, the magic of the market did not work for goods that the owners expected to use. The fundamental prospect theory states that reference points exist, and the losses are larger than the corresponding gains in real markets conditions. No endowment effect is seen when owners consider their goods as carriers of value for future exchanges. The poor reason like traders and carry different dynamics but are not indifferent to the differences between giving up and getting profits. All their decisions focus more between losses.
The concept of aversion to losses is one of the most significant contribution of psychology to behavioral economics. Bad events made of bad feedback and bad emotions carry a more impact than good ones. However, the boundary between good and bad will rely on the immediate circumstances. One is driven to avoid losses than to achieve and the abhorrence to the failure of not realizing the goal is much higher than the desire to exceed it. Loss Aversion is the gravitational power that holds one near the reference point. The distinction in the law between compensating for inevitable gains and restoring losses may be defensible by their asymmetrical effects on individual well-being.
Bernoulli expectation principle retained this method for assigning weights to the outcomes. The possibility effect causes improbable outcomes when weighted disproportionately. The decision maker should be rational must conform to the expectation principle. Probabilities that are very low or high are a particular case. The fourfold pattern of preferences is one of the essential achievements of prospect theory. A systematic deviation creates expensive expected value in the long run.
People overweight dubious events in their decisions and overestimate the probabilities of unlikely events. Thus, the probability of a rare event is likely to be overestimated. The ease of imagining and the fluency of an idea contribute to decision weights gains. There has been an increasing interest in studies of choice from experience that are analyzed in prospect theory. The conditions, where rare events are ignored or overweight are understood better under the prospect theory.
The ideal of logical consistency is not attainable by our limited mind, and our preferences are set to be coherent. For example, the grouping of loss aversion and narrow framing is an expensive curse. Decision makers prone to narrow framing face a risky choice and will do better by applying a routine risk policy with a broad frame. There are two different biases that oppose each other; one is the confidence of the planning fallacy, and the other is the overstated caution persuaded by loss aversion. There is no guarantee that those biases cancel out in every situation.
For the very poor, the income coincides with survival and moneymaking is not necessarily economic. The finance research documents a huge penchant for propagating winners rather than the losers and the bias gets a tag, the disposition effect which is an example of slim framing. The sunk-cost fallacy preserves one in unhappy situations for a longer time. Regret is triggered by the availability of alternatives to reality. Decision makers are aware that they are prone to regret, and intuitions about regret are uniform and compelling in a remarkable way.
If one is asked to select between a safe bet for a modest amount and a riskier one with a small chance to win a substantially, safety prevails with them. Neuroscientists have carries thousands of such experiments on what person’s brain does when taking a decision and have shown how particular regions of the brain are activated because of an increased flow of oxygen. It suggests a higher neural activity. Amygdala is associated with emotional arousal; anterior cingulate relates to conflict and self-control while the frontal area of the brain takes cares of rational choices. The moral feelings and intuitions are descriptions, not about substance. An important choice is controlled by the consequences.
Part V. Two Selves
The term utility carries two distinct meanings in its long history, the experienced utility, and decision utility. The experienced utility varies based on the measures of the retrospective assessment and the hedonimeter total. Decisions that do not lead to the best possible experience and mistaken forecasts of future feelings are not good news for believers in rational choice. The pattern of judgments seems absurd when making an intuitive evaluation of entire lives. One gives the good and the bad experience an equal weight, although the good part may be significantly longer as compared to the bad.
What is the valid measure of well-being? Several different experiences are made of both mental and physical pleasures. There are many alternatives of positive feelings and negative emotions, and both emotions exist at the same time. The mood of an individual at any moment depends on his overall happiness and temperament, but his emotional well-being fluctuates considerably. The two aspects of well-being include the experience of the well-being by people as they live their lives and how they evaluate their life. When people evaluate their life, they do not engage in a careful examination. It is logical to describe the life as the sum of a series of experiences. The hedonometer total can be the value of an episode of life that may be represented by few critical moments.
Conclusions
The book introduces two fictitious characters, the intuitive System 1 and effortful System 2. Econs are fictitious species who live in the land of theory, while the Humans live in the real world. The living and the remembering are the two selves that create conflicts. Humans cannot consistently avoid reversals and rationality impossibly restrictive. Reasonable people cannot be rational and although Humans are not irrational, they often need assistance to make better decisions. However, life is more complex for behavioral economists for whom freedom has a cost. Humans need protection from the quirks of System 1 and the laziness of System and need help to make good decisions, unlike Econs. System 2 articulates judgments but endorses feelings generated by System 1. However, the abilities of System 2 are limited, as humans do not think straight reasoning and errors are made due to incorrect intuitions. System 1 guides our thoughts and actions and generally, the acquisition of skills is made in a regular environment and proper feedback. System 1 registers the cognitive ease but cannot generate a warning signal. Intuitive answers may originate from skills or from heuristics and come to mind quickly and confidently. Organizations perform better than individuals do when it comes to evading errors, as they think more slowly naturally and carry the power to impose orderly procedures.
REFERENCES
Kahneman, Daniel. "Thinking Fast and Slow." Penguin. 20.1 (2015): 1- 512.
