Thinking Fast and Slow

Recently I read the book "Thinking, Fast and Slow" by Daniel Kahneman who received the 2002 Nobel Prize in Economics. It is a fascinating book. In this post, I will try to summarize my understanding of key concepts from the book.

Kahneman starts by introducing two systems, named rather inaptly, System 1 and System 2, that drive the way we think. System 1 is fast, intuitive and emotional which can be somewhat manipulated. System 2 is slower, deliberate and logical but also somewhat lazy. We would like to believe that we are deliberate, rational and logical and hence System 2 is at works but most of the time, System 1 is in charge and funny thing is, we can not do much about it.

A lot of things we do, like answer to 2+2=?, or drive a car on an empty road, detect hostility in a voice, orient to the source of a sudden sound, all happen without much effort or attention from our side. We do these and similar things, involuntarily and can not prevent ourselves from doing even if we want to. This is all System 1 at work.

Operations of System 2, however, require attention and are disrupted when attention is drawn away. Few examples would be to search memory to identify a surprising sound, count the occurrence of letter "a" in a page of text, compare two washing machines for overall value, fill out a tax form.

According to the author, System 1 and System 2 are both active whenever we are awake. System 1 runs automatically and System 2 is normally in a comfortable low-effort mode. System 1 continuously generates suggestions for System 2. When all goes smoothly, which is most of the time, System 2 adopts the suggestions from System 1 with little or no modification. We generally believe our impressions and act on our desires, and that is fine - usually.

When System 1 runs into difficulty, it calls on System 2 for support. For example, when we are surprised, or someone asks a questions for which we do not have a ready made answer, like 17X24=?, System 2 is activated.

The division of labor between System 1 and System 2 is highly efficient. Arrangement works well most of the time because System 1 is generally good at what it does. System 1 has biases, however, systematic errors that it is prone to make in specified circumstances. It sometimes answers easier questions than the one it was asked, and it has little understanding of logic and statistics. Here is a good example.

Let us take a simple puzzle. Do not try to solve it but listen to your intuition.

A bat and ball cost $1.10.
The bat costs one dollar more than the ball.
How much does the ball cost?

What number came to your mind? If you are like most people, your intuitive answer is 10 cents. Now actually do the math. Correct answer is 5 cents. It is safe to assume that intuitive answer also came to the mind of those who ended with the correct answer - they somehow managed to engage their System 2 and resist the suggestion of System 1.

Author also introduces the concept of WYSIATI (What You See Is All There Is). System 1 is radically insensitive to both the quality and quantity of the information that gives rise to impressions and intuitions. It leads us to jumping to conclusions on the basis of limited evidence.

There are other important concepts in the book, all of which can not be described here. Kahneman uses these concepts to conclude that humans need help to make more accurate and better decisions and in some cases policies and institutions can provide that help. Libertarian approach assumes that humans are perfectly rational (System 2 is at works all the time) and they will make the right decision every time so we should not interfere with the individual's right to choose, unless the choice harms others. Kahneman makes a case for "Nudge", based on the book of the same name, written by Richard Thaler and Cass Sunstein. They advocate a position of libertarian paternalism, in which state and other institutions are allowed to "nudge" people to make decisions that serve their own long-term interest. A good example of Nudge would be the designation of joining a pension plan as the default option. It is difficult to argue that anyone's freedom is diminished by being automatically enrolled in the plan, when they merely have to check a box to opt out. Humans need help to make good decisions and there are informed and unintrusive ways to provide that help.