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- Thinking, Fast and Slow; Summary (OA)

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> Two Systems
> Heuristics & Biases
> Overconfidence
> Choices
> Thinking about life
> Conclusion
Behavioural economics(OA)
Intuition; Decision-making(OA)
Utility Theory: Reasoning(OA)

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Two Systems

Kahneman's (2011) stated aim is to present a view of how the mind works with regard to intuitive judgements and choices. He proposes a two-system model of mind, one fast, one slow, and then proceeds to focus mainly on the imperfect role of the fast system in decision making. He claims that we now understand the marvels and the flaws of intuitive thought.

Kahneman adopts the terms originally proposed by Stanovich and West (2000); fast System 1 that functions unconsciously and automatically; and the slower System 2 that is conscious, operating in low-effort mode normally. These convenient metaphors describe processes, rather than brain structures. He believes it easier to explain something in terms of what it does, rather than what it is, as we naturally construct and interpret stories about people in terms of personalities, capabilities, and habits. Kahneman calls this the language of systems.

Kahneman encourages us to mistrust the impressions generated by System 1, and because it cannot be turned off, ideally we should increase the level of monitoring by System 2. However, acknowledging this is impractical all the time he proposes a compromise; learn to recognize situations in which mistakes are likely, and if the situation is critical, try to avoid mistakes.

[Thus far we could model the mind as suggested by Kahneman, see figure 1, with the "lazy" System 2 happy to let System 1 get on with the routine. The problem he highlights is that System 1 does not always get things right, it is prone to systematic errors and biases in making intuitive judgements and choices. But because it takes considerable effort for slow System 2 to keep a check on System 1 it tends to come into play only when events in the world clash with the model of the world we have built in our own minds.]

Unconscious control of
day-to-day activities
Automatic reaction
System 1
System 2
Conscious algorithmic mind
deals with slow
Deliberate self-control
Conscious "flow"
effortless concentration
No exertion of self-control
Reflective mind
strong on reasoning
checks intuitions
Fig. 1. Fast System 1 / Slow System 2

[Kahneman then proceeds to explain in more detail the defining features of System 1 and System 2, and the various systematic errors and biases to which we are prone. For instance, accepting an automatic judgement based upon an emotional response (System 1); rather than thinking about the situation in a methodical way, and then making an informed decision (System 2).]

System 1: Wonders and limitations

Kahneman describes one of the main functions of System 1, to maintain and update a model of your personal world, which represents what is normal in it. This model determines your interpretation of the present as well as your expectations of the future. A capacity for surprise is an essential aspect of our mental life, and surprise is the most sensitive indication of how we understand our world and what we expect from it.

Finding causal connections is part of understanding a story, an automatic operation of System 1. System 2, the conscious self, is offered the causal explanation and accepts it. Kahneman explains that we have limited information about what happened on a day, and System 1 is adept at finding a coherent causal story that links the fragments of knowledge at its disposal.

The normal state of mind is that of having intuitive feelings and opinions about almost everything that comes your way. Kahneman proposes a simple account of how we generate intuitive opinions on complex matters. He states that, "If a satisfactory answer to a hard question is not found quickly System 1 will find a related question that is easier and will answer it." He calls this substitution. [i.e., How do I feel about this.] This is the core of what became the heuristics and biases approach that he and Tversky proposed.
[heuristics: the principles used to make decisions when all possibilities cannot be explored, (Chambers, 2014)]

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Heuristics & Biases

Citing Slovic et al, they eventually developed the notion of an affect heuristic, in which people make judgements and decisions by consulting their emotions. People form opinions and make choices that directly express their feelings and their basic tendency to approach or avoid, often without knowing that they are doing so. The affect heuristic is an instance of substitution, in which the answer to an easy question (how do I feel about it?) serves as an answer to a much harder question (what do I think about it?).

Kahneman notes that life presents us with many occasions to forecast. Some predictive judgements, such as those made by engineers, rely largely on look-up tables, precise calculations, and explicit analyses of outcomes observed on similar occasions. Others involve intuition and System 1, in two main varieties. Some intuitions draw primarily on skill and expertise acquired by repeated experience. A solution to a current problem comes to mind quickly because familiar cues are recognized.


Kahneman explains that narrative fallacies arise inevitably from our continuous attempt to make sense of the world. Citing Taleb, we are said to constantly fool ourselves by constructing flimsy accounts of the past and believing them to be true.

The core of the illusion is that we believe we understand the past, which implies that the future also should be known, but in fact we understand the past less than we believe we do.

Kahneman explains that System 1 is designed to jump to conclusions from little evidence—and it is not designed to know the size of its jumps. Because of WYSIATI (what you see is all there is), only the evidence at hand counts. Because of confidence by coherence, the subjective confidence we have in our opinions reflects the coherence of the story that System 1 and System 2 have constructed. The amount of evidence and its quality do not count for much, because poor evidence can make a very good story. For some of our most important beliefs we have no evidence at all, except that people we love and trust hold those beliefs. Considering how little we know, the confidence we have in our beliefs is preposterous—and it is also essential.

Subjective confidence in a judgement is not reasoned evaluation of probability that this judgement is correct. Confidence is a feeling, which reflects the coherence of the information and the cognitive ease of processing it. It is wise to take admissions of uncertainty seriously, but declarations of high confidence mainly tell you that an individual has constructed a coherent story.

Kahneman asks, if subjective confidence is not to be trusted, how can we evaluate the probable validity of an intuitive judgement. The answer comes from two basic conditions for acquiring skill:
  • an environment that is sufficiently regular to be predictable
  • an opportunity to learn these regularities through prolonged practice.
He states that when these two conditions are satisfied, intuitions are likely to be skilled. Chess is a regular environment, athletes and firefighters also face complex but fundamentally ordered situations. The accurate intuitions are due to highly valid clues that the expert's System 1 has learned to use, even if System 2 has not learned to name them. But stock pickers and political scientists who make long-term forecasts operate in a zero-validity environment. Kahneman encourages us to remember this rule: intuition cannot be trusted in the absence of stable regularities in the environment.

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After five years he and Tversky published "Prospect theory: An Analysis of Decision under Risk." Their theory was closely modelled on utility theory but departed from it in fundamental ways. Most important, the model was purely prescriptive, and its goal was to document and explain systematic violations of the axioms (elementary rules) of rationality in choices between gambles.

People's choices are based not on dollar values but on the psychological values of outcomes, their utilities. The psychological value of a gamble is therefore not the weighted average of possible dollar outcomes; it is the average of the utilities of these outcomes, each weighted by its probability.

Kahneman believes that many of the options that we face in life are "mixed"; there is a risk of a loss and an opportunity for gain, and we must decide whether to accept the gamble or reject it. Investors who evaluate a start-up, lawyers who wonder whether to file a lawsuit, wartime generals who consider an offensive, and politicians who must decide whether to run for office, all face the possibilities of victory or defeat. The research findings reported led them to conclude that "losses loom larger than gains" and that people are loss averse.

[Here Kahneman is arguing that people are loss averse; so presumably in the examples above, investors, lawyers, generals and politicians will be more reluctant than willing to proceed. But he does acknowledge that these same groups may proceed against the odds due to over-optimism.]

The concept of loss aversion is certainly the most significant contribution of psychology to behavioural economics. Kahneman now embeds loss aversion in the context of a broader two-systems model of the mind, and specifically a biological and psychological view in which negativity and escape dominate positivity and approach.

The brains of humans and other animals contain a mechanism that is designed to give priority to bad news. By shaving a few hundreths of a second from the time needed to detect a predator, this circuit improves the animal's odds of living long enough to reproduce. The automatic operations of System 1 reflect this evolutionary history.

How do people make the judgments and how do they assign decision weights? Kahneman offers two oversimplified answers:
  • People overestimate the probabilities of unlikely events.
  • People overweight unlikely events in their decisions.

Keeping Score

We refuse to cut our losses when doing so would be to admit failure, we are biased against actions that could lead to regret, and we draw an illusory but sharp distinction between omission and commission, not doing and doing, because the sense of responsibility is greater for one than the other.

If you require some cash, you will sell a stock that makes a profit rather than one that will make a loss, if the alternatives are framed as a choice between giving yourself pleasure and causing yourself pain. Finance research has documented a massive preference for selling winners rather than losers—a bias that has been given an opaque label: the disposition effect, an instance of narrow framing." He explains that a rational agent would have a comprehensive view of a portfolio and sell the stock that is least likely to do well in the future, without considering whether it is a winner or a loser.

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Thinking about life

Kahneman now believes that the goals people set for themselves are so important to what they do and how they feel about it that an exclusive focus on experienced well-being is not tenable. He argues that we cannot hold a concept of well-being that ignores what people want. On the other hand, he also believes it true that a concept of well-being that ignores how people feel as they live, and focuses only on how they feel when they think about their life, is also untenable. We must accept the complexities of a hybrid view, in which the well-being of both selves is considered.

The mistake that people make in the focussing illusion involves attention to selected moments and neglect of what happens at other times. The mind is good with stories, but it does not appear to be well designed for the processing of time. Kahneman suggests we have learned that the word happiness does not have a simple meaning and should not be used as if it does.


Two selves
The possibility of conflicts between the remembering self and the interests of the experiencing self turned out to be a hard problem.

The remembering self is a construction of System 2. However, the distinctive features of the way it evaluates episodes and lives are characteristics of our memory. Duration neglect and the peak-end rule originate in System 1 and do not necessarily correspond to the values of System 2.

The remembering self's neglect of duration, its exaggerated emphasis on peaks and ends, and its susceptibility to hindsight, combine to yield distorted reflections of our actual experience.

Although Humans are not irrational, they often need help to make more accurate judgements and better decisions. An Econ [imaginary totally rational being] will read and understand the fine print of a contract before signing it, but [emotional] humans usually do not.

Two systems
The attentive System 2 is who we think we are. System 2 articulates judgments and makes choices, but it often endorses or rationalizes ideas and feelings that were generated by System 1 [supporting stories]. But System 2 is not merely an apologist for System 1; it also prevents many foolish thoughts and inappropriate impulses from overt expression. However, System 2 is not a paragon of rationality. Its abilities are limited and so is the knowledge to which it has access. We do not always think straight when we reason, and the errors are not always due to intrusive and incorrect intuitions. Often we make mistakes because we (System 2) do not know any better.

System 1 is indeed the origin of much of what we do wrong, but it is also the origin of most of what we do right—which is most of what we do. Our thoughts and actions are routinely guided by System 1 and generally on the mark. One of the marvels is the rich and detailed model of our world that is maintained in associative memory: it distinguishes surprising from normal events in a fraction of a second, immediately generates an idea of what was expected instead of a surprise, and automatically searches for some causal interpretation of surprises and of events as they take place.

Memory also holds the vast repertory of skills we have acquired in a lifetime of practice, which automatically produce adequate solutions to challenges as they arise. All this is the work of System 1, which means it occurs automatically and fast. A marker of skilled performance is the ability to deal with vast amounts of information swiftly and efficiently.

System 1 registers the cognitive ease with which it processes information, but it does not generate a warning signal when it becomes unreliable. Intuitive answers come to mind quickly and confidently, whether they originate from skills or heuristics. There is no simple way for System 2 to distinguish between a skilled and heuristic response. Its only recourse is to slow down and attempt to construct an answer on its own, which it is reluctant to do. Many suggestions of System 1 are casually endorsed with minimal checking. This is how System 1 acquires its bad reputation as the source of errors and biases.

Kahneman asks what can be done about biases? He stresses that little can be achieved without a considerable investment of effort.

The way to block errors that originate in System 1 is simple in principle: recognize the signs that you are in a cognitive minefield, slow down, and ask for reinforcement from System 2. Unfortunately this sensible procedure is least likely to be applied when it is needed most. More doubt is the last thing you want when you are in trouble. The upshot is that it is much easier to identify a minefield when you observe others wandering into it than when you are about to do so yourself. [pp408-417]

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