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  • Writer's pictureAnderson Petergeorge

Thinking Fast and Slow – Daniel Kahneman


Book Description: Thinking, fast and slow shows you how two systems in your brain are constantly fighting over control of your behavior and actions, and teaches you the many ways in which this leads to errors in memory, judgment and decisions, and what you can do about it

Following summary is organized by concept with some general takeaways to potentially apply to your daily life at the end (jump to the bottom if you want to skip all the theory).

Overarching Theme - Our mind is comprised of two systems

  • Kahneman explains that there are two systems when it comes to considering judgement and choice. The first system is fast and automatic in comparison to the second system which is slower and more deliberate

  • The general point about the size of our self-ignorance extends beyond the details of Systems 1 and 2. We're astonishingly susceptible to being influenced – puppeteer – by features of our surroundings in ways we don't suspect.

Experimental Evidence:

  • One famous experiment centered on a New York City phone booth. Each time a person came out of the booth after having made a call, an accident was staged – someone dropped all her papers on the pavement. Sometimes a quarter had been placed in the phone booth, sometimes not. If there was no quarter in the phone booth, only 4% of the exiting callers helped to pick up the papers. If there was a quarter, 88% of people helped - people were more likely to help if they felt "lucky/fortunate".

  • Judges think they make considered decisions about parole based strictly on the facts of the case. It was proven through an experiment that it is their blood-sugar levels that ultimately impacts their judgment. Judges were less lenient on sentences (higher sentencing - less risk tolerant) before lunch (low blood-sugar levels) as opposed to after lunch (blood-sugar levels restored) where they were proven to be more lenient (lower sentencing - willing to take more risk)

  • Scientifically proven if you hold a pencil between your teeth, forcing your mouth into the shape of a smile, you'll find a cartoon funnier than if you hold the pencil pointing forward, by pursing your lips round it in a frown-inducing way

  • Another highly publicized study in the book looked at the results of 10,000 investor brokerage accounts to see how trading activity impacted investment performance. The researchers looked at 163,000 trades over a 7 year period. They found that, on average, the stocks that investors sold did better than the ones they bought by 3.2% per year.

    • They also found that, on average, the most active traders had the poorest results, while the investors who traded least earned the highest returns. Men acted on their ideas more often and therefore women had much better results (many studies over the years have shown that women have a better temperament for investing than men).

Anchoring Effect - is a cognitive bias where an individual depends too heavily on an initial piece of information offered (considered to be the "anchor") when making decisions

Experimental Evidence:

  • In an experiment designed to test the "anchoring effect", highly experienced judges were given a description of a shoplifting offence. They were then "anchored" to different numbers by being asked to roll a pair of dice that had been secretly loaded to produce only two totals – three or nine. Finally, they were asked whether the prison sentence for the shoplifting offence should be greater or fewer, in months, than the total showing on the dice. Normally the judges would have made extremely similar judgments, but those who had just rolled nine proposed an average of eight months while those who had rolled three proposed an average of only five months. All were unaware of the anchoring effect.

  • An experiment around marketing proved that setting limits on sales anchored customers to purchase higher quantities that they typically would. Researchers observed the amount of sales that were made on soda bottles when they set a limit of 12, which resulted in an average of 7 bottles sold per customers. However when they put no limit on the exact same sale there was only an average of 3 bottles sold per customer. Customers were anchored to a higher number when given a limit of 12

Hindsight Bias - refers to the common tendency for people to perceive events that have already occurred as having been more predictable than they actually were before the events took place

  • Hindsight bias has pernicious effects on the evaluations of decision makers. It leads observers to assess the quality of a decision not by whether the process was sound but by whether its outcome was good or bad

Memories

  • Even short-term memory is limited, a memory from only 15 minutes ago can be remembered differently, and this has an impact on your decision making

    • Kahneman use an example of a failed marriage to explain the memory issue. When looking back at a failed marriage, people are likely to have only negative thoughts, considering the painful divorce process and the last few months which were potentially tense and miserable. What you fail to remember is the years and years of happiness and love that you enjoyed. Just because it ended on a bad note doesn’t mean that the whole experience was terrible. But unfortunately, we are predisposed to remember the bad parts, and that is then taken forward to help make future decisions.

  • Language is so important as it shapes our reality so it is essential that we use the right languages when thinking about the past to not alter our memories

  • As obvious as facts and statistics are to hear or read, we as humans are better to remember and learn something through an experience or individual case

  • Kahneman cites research showing, for example, that a college student’s decision whether or not to repeat a spring-break vacation is determined by the peak-end rule (by the peak of the trip and how it ended) applied to the previous vacation, not by how fun (or miserable) it actually was moment by moment.

  • Quote: ”Narrative fallacies arise inevitably from our continuous attempt to make sense of the world. We, humans, are constantly fooling ourselves by constructing flimsy accounts of the past and believing they are true.”

Optimistic Personalities

  • Optimists are more psychologically resilient, have stronger immune systems, and live longer on average than their more reality-based counterparts.

  • Setting a realistic budget is more likely to not over spend vs under budgeting and constantly changing it as you go over budget - planning fallacy

  • Quote: ”Optimistic individuals play a disproportionate role in shaping our lives. Their decisions make a difference; they are the inventors, the entrepreneurs, the political and military leaders—not average people. They got to where they are by seeking challenges and taking risks.”

Loss Aversion - people's tendency to prefer avoiding losses to acquiring equivalent gains

  • The majority of people don’t enjoy risk and avoid it whenever possible. In most cases, when offered two options, one being a gamble with a value much higher than expected, and one being a sure thing of expected value, most people will pick the sure thing. This is because we crave the security of knowing the outcome and avoiding the risk. In some cases if a sure thing is offered with less than expected value, some decision-makers will take this as the option, determined to avoid any potential risk.

  • Kahneman describes loss aversion as the motive to avoid losses as stronger than the motive to achieve gain. To use money as an example, we are likely to be motivated more to not lose money than we would be to make money. Kahneman explains that this is why many people don’t set high-achieving goals. By setting a goal you never reach, you are making a loss. By exceeding the goal, you are achieving a gain. He explains that in many cases, people will reduce their efforts once they have reached a specific goal because they see no point going above and beyond, it’s not about the gains, it’s about avoiding the loss.

  • Regret is not only an emotion but also a punishment. We often prescribe ourselves with regret when something goes wrong. And for this reason, a fear of regret is a motivation behind many decisions that we make. We avoid making decisions that may lead to regret and often miss out on opportunities because of this. Again, decision makers are the most affected by regret. They know that regret is more likely in their lives and they often live in anticipation of it. This gives the emotion of regret power, and it has a significant role in all decisions that are made.

  • Unfortunately, hope is not an investment strategy. Our tendency to have an aversion to loss is a good reason to pay less attention to the market on a daily basis. This is because the pain of seeing frequent small losses exceeds the pleasure from equally frequently small gains.

    • Kahneman suggests only checking your investment balances on a quarterly basis to avoid making System 1 decisions based on daily changes in the markets

  • When you want to get your point across, emphasize what people have to lose vs telling them what they have to gain to have the point more impactful and relatable

  • You will do yourself a large financial favor if you are able to see each gamble as part of a bundle of small gambles and rehearse the mantra that will get you significantly closer to economic rationality: you win a few, you lose a few. The main purpose of that mantra is to control your emotional response when you do lose and think as if the decision is just one of many

Mindset: Assess as if you have the option to make this decision 100 times. Would you be more likely to do it vs just one time. People feel loss aversion on decision because it only happens once but statistically it is still attractive. Therefore picturing being able to do it 100 times helps you assess statistically if you should do it.

  • People are more likely to take risks if they are about to lose something as opposed to taking a risk to win something

  • People are willing to overpay more than expected value for certainty. When tested people are willing to overpay for increase the statistical chance of something from 95% to 100% as opposed to 5%-10%. People are also willing to overpay for hope 0-5%, this is why people overpay to play the lottery

  • This is why framing things as not as a loss is important for marketing purposes

  • Credit card companies lobbied hard to avoid stores from charging a "surcharge" for customers to use credit cards as customers would then stop using credit cards to avoid the feeling of loss. This is why stores provide a "cash discount" for customers who pay with cash, this way it feels as though it is a gain to be paying in cash to the customer and paying with a credit card is the status quo

Experimental Evidence:

  • In an experiment individuals were given two scenarios: i) first scenario: a 50% change of losing $500 or nothing; ii) second scenario: 50% change of wining $500 or nothing. In the second scenario individuals were willing to take $250 up front to guarantee a return rather than risking 50% to win $500. However in the first scenario people declined to take a loss of $250 upfront and opted to risk losing $500 for the 50% chance to lose nothing

  • People love the idea of winning something to reiterate the point that they didn’t lose anything regardless of what the quantum is. In an experiment individuals that were given $1000 to start that won an additional $500 to total $1500 were measured to be much happier than individuals who were given $2000 and lost $500, even though both groups came out ahead by $1500.

    • Remember to understate and overperform, this allows those to see your work as a gain as opposed to overpromising and underperforming which would be seen as a loss to the recipient despite it potentially being the same quantum of work

  • Quote: ”People who face very bad options take desperate gambles, accepting a high probability of making things worse in exchange for a small hope of avoiding a large loss. Risk-taking of this kind often turns manageable failures into disasters.”

Framing

  • Logically different statements can evoke different reactions depending on how they are framed.

  • Framing something as “are dogs unfriendly?” makes people think about the negatives aspects about dogs first, which may influence their response to be more negative but if you went “are dogs friendly” people would then try and think of all the friendly aspect which may alter their response to be more friendly

  • Quote: "Reality can be framed in several different ways, affecting how your System 1 reacts to them. For instance, consider there are 600 people you could potentially save. If you choose option A, you are guaranteed to save 200 people. Let’s try wording that slightly differently. If you choose option A, 400 people are guaranteed to die. Your System 1 was probably much more enthusiastic about option A until you read the last sentence. Option A has not changed, just the way it is present and as a result, how you reacted to it."

  • How you frame things is how people will immediately see it

    • Example: 90% success rate makes people feel positive but 10% mortality rate makes you think negatively

    • Example: Saying France lost in a football game causes someone who is a France supporter to feel a negative emotion but saying that Spain won helps avoids those immediate emotions

Halo Effect - the tendency for an impression created in one area to influence opinion in another area

  • If you like the president’s politics, you probably like his voice and his appearance as well. The tendency to like (or dislike) everything about a person—including things you have not observed—is known as the halo effect.

Confirmation Bias -the tendency to interpret new evidence as confirmation of one's existing beliefs or theories

  • Kahneman presents a very simple argument that the human brain is much more adept at understanding narratives than mathematical formulas, and this is why we create stories when we’re faced with issues. Knowing this weakness is the first step to accepting the fact that the tales we tell ourselves about future success are often nothing more than idealized realities. Success requires a deep analysis of the data (System 2). If X product feature is going to fix the company, show the data to back it up. Show the market research that clearly demonstrates a trend.

  • Human beings are gullible by nature. If something is repeated to us enough times, we tend to believe it. This is because our minds are not able to distinguish between familiarity and the truth. This is a fact that has been exploited by marketers and institutions that are authoritative. It gets even more dynamic, because of the principle of familiarity, If a statement is repeated to you several times, you are likely to believe it as well as anything that is said after the statement. As long as some of the statement is familiar, the rest feels the same and becomes true to you. Try and use your system 2 to actively and logically guard against what you absorb repetitively.

Focusing Illusion - is a cognitive bias that occurs when people place too much importance on one aspect of an event, causing an error in accurately predicting the utility of a future outcome


Experimental Evidence:

  • In a famous experiment, a group of viewers were told to watch a basketball game and perform a calculation. One team in the team wore white uniforms while the other wore black uniforms. They were told to calculate the number of passes made by the team in the white uniforms. After that, the game started and they got to playing

  • During the game, a lady in a gorilla suit got into the court, performed some antics and left. After the game was over, the group counting the passes claimed not to have seen anything unusual. When they were told that there was a gorilla in the game, they all refused, and It was only after watching the game without performing any calculations that they discovered there actually was a gorilla in the court. In this way, it proved that is possible to be blinded by focusing too much on one detail in a situation. Moreover, it is possible to be blind to our own blindness. To counter this phenomenon, Daniel Kahneman encourages us to observe every situation from a broad point of view so as to analyse it properly

  • Quote: "Nothing in life is as important as you think it is when you're thinking about it." Whatever we focus on, it bulges in the heat of our attention until we assume its role in our life as a whole is greater than it is

Availability Bias - the human tendency to think that examples of things that come readily to mind are more representative than is actually the case

  • Use statistics to make decisions as opposed to intuition as it is scientifically proven you will have a 60% better chance to make the right decision

  • We have a tendency to plan projects based on best-case scenarios and without taking into account the base case and average completion time/failure rate, try and be conservative

  • Quote: "When we believe something to be true, we are also likely to believe arguments that appear to support them. An example being a phenomenon known as the “backfire affect.” People who are told facts to help update their incorrect views, hold even tighter to the incorrect information or beliefs they had prior to receiving corrective information. This doesn’t intuitively make sense, but after studying this phenomenon social scientists have concluded that when we accumulate information to form our views (to make sense of the world), they become so embedded into our identity that when those views are ‘threatened’ with new information, our response to ‘protect’ our identities and the stories we tell ourselves is to hold on to information that line up with our worldview even if they are wrong. System 2’s “search for information and arguments is mostly constrained to information that is consistent with existing beliefs, not with an intention to examine them.”

Experimental Evidence: Ignoring the base rate (average probability/scenario)

  • Guess someone’s job based on some info: "Steve is very shy and withdrawn…he has a need for order, structure and has a passion for detail.” Is Steve more likely to be librarian or a farmer?

    • If you’re like most people, you will have intuited that he is a librarian, because of the description; while ignoring the reality of base rates. That is, there are far more farmers than librarians in the world. Based on the short description given, it “feels right” that Steve is a librarian, yet it is statistically likely that he is a farmer.

  • You see a person reading The New York Times on the New York subway. Which of the following is a better bet about the reading stranger? i)She has a PhD ii) She does not have a college degree.

    • Representativeness would tell you to bet on the PhD, but this is not necessarily wise. You should seriously consider the second alternative, because many more nongraduates than PhDs ride in New York subways. The base rate of her not having a college degree is much higher than her having a PhD

Cognitive Ease - gives a false sense of security because it makes us think we understand far more than we actually do

  • Cognitive ease is a major reason why brand advertising exists. It’s why companies spend so much money on celebrity endorsements, ad campaigns and jingles.

    • This is why User Experience Designers are so important in this day and age. They are able to inducing cognitive ease, and are better able to lead users down a designed path

  • A reliable way to make people believe in falsehoods is frequent repetition, because familiarity is not easily distinguished from truth. Authoritarian institutions and marketers have always known this fact. But it was psychologists who discovered that you do not have to repeat the entire statement of a fact or idea to make it appear true. People who were repeatedly exposed to the phrase "the body temperature of a chicken" were more likely to accept as true the statement that "the body temperature of a chicken is 144 °" (or any other arbitrary number). The familiarity of one phrase in the statement sufficed to make the whole statement feel familiar, and therefore true. If you cannot remember the source of a statement, and have no way to relate it to other things you know, you have no option but to go with the sense of cognitive ease

  • If you want to make recipients believe something, general principle is to ease cognitive strain: make font legible, use high-quality paper to maximize contrasts, print in bright colours, use simple language, put things in verse (make them memorable), and if you quote, make sure it’s an easy name to pronounce.

Experimental Evidence

  • Stocks with pronounceable tickers were seen by investors to preform better than stocks that were harder to pronounce (Ex. REM vs RXM)

  • People found phrases that’s rhymed were more believable

  • Blue and red font was tested to be more believable than other colours

  • Adding more details to a story to allow people to visualize it provides cognitive ease and allows individuals to believe things easier

    • Example: "I received an envelope" vs "I received a blue envelope last night around 8pm"

Happiness/Satisfaction

  • The people who wanted money and got it were significantly more satisfied than average; those who wanted money and didn’t get it were significantly more dissatisfied. The same principle applies to other goals—one recipe for a dissatisfied adulthood is setting goals that are especially difficult to attain.

  • High income creates a higher need for satisfaction. It was tested that "rich" individuals enjoyed a simple chocolate bar less than someone with less wealth. Try and not to get caught up with your wealth and use base rates to realize how much more one has than the average to align your happiness and satisfaction

Priming

  • Just smiling naturally will make you feel positive, frowning will immediately put yourself in a bad mood. Your brain has been primed for this.

    • Feeling strained causes you to be less creative therefore when you frown while thinking you are thinking less creatively

Experimental Evidence

  • People who found a coin on the printing machine before doing the experimented were reminded they were lucky and ranked their happiness higher in the happiness survey they took

    • When taking tests and exams priming yourself to be happy has statistically been proven to have individuals test better on tests

Other

  • People often overestimate the probabilities of unlikely events; this causes us to overweight them in our decisions

  • You have a better chance to learn something by seeing the individual impact and experience it as opposed to bearing statistical facts about something. The surprise factor of discovering it yourself allows you to learn it better

  • Endowment Effect- we naturally assign more value to things just because we own them.

  • Sampling a small population will show trends that are not accurate and should not be extrapolated

Daily Life Takeaways

  • When you are cognitively working on tough tasks you are more likely to make poor health decisions

    • Example: Choosing what to eat for dinner while working late. To prevent this try and make health decisions like what to eat or when to work out while you are not in a strained mindset

  • When your blood sugars are low its hard to make tough decisions. Try and schedule when you need to complete tougher tasks for after lunch or dinner.

  • Initially, it’ll seem impossible to slow down System 1, but the best advice given would be to start by finding a simple activity you can do each day. An activity that forces you to focus on only your thoughts and breathing. An activity that will strip away all distractions. Meditation, yoga, and stretching are all great option.

  • People's memories are short therefore try and end interactions positively as that’s how most people will remember the whole of the interaction

  • When you want to get across your point, try and emphasize what the individual or party has to lose vs gain triggering loss aversion bias

  • Remember to understate and overperform, this allows those to see your work as a gain as opposed to overpromising and underperforming which would be seen as a loss to the recipient despite it potentially being the same quantum of work

Summary takeaway: Success relies upon slow thinking and fast movement.

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