Thinking, Fast and Slow

"Kahneman's exploration of cognitive biases and decision-making aligns with Ray Dalio's focus on systematic thinking and understanding human behavior in markets, as detailed in his own work on principles."

"Do you want to understand how humans think? Read this book."

"Much of the discussion in this book is about biases of intuition. However, the focus on error does not denigrate human intelligence, any more than the attention to diseases in medical texts denies good health… [My aim is to] improve the ability to identify and understand errors of judgment and choice, in others and eventually in ourselves, by providing a richer and more precise language to discuss them.”"

"This is an international bestseller by the Nobel Prize-winning behavioural economist—although he’s principally a psychologist—Daniel Kahneman. He developed research with Amos Tversky, who unfortunately died young. I think it would have been a co-written book otherwise. It’s a brilliant book that summarizes their psychological research on cognitive biases (or its patterns of thinking) which all of us are prone to, which aren’t reliable. There is a huge amount of detail in the book. It summarizes a lifetime of research—two lifetimes, really. But Kahneman is very clear about the way he describes patterns of thought: as using either ‘System One’ or ‘System Two.’ System One is the fast, intuitive, emotional response to situations where we jump to a conclusion very quickly. You know: 2 + 2 is 4. You don’t think about it. System Two is more analytical, conscious, slower, methodical, deliberative. A more logical process, which is much more energy consuming. We stop and think. How would you answer 27 × 17? You’d have to think really hard, and do a calculation using the System Two kind of thinking. The problem is that we rely on this System One—this almost instinctive response to situations—and often come out with bad answers as a result. That’s a framework within which a lot of his analysis is set. I chose this book because it’s a good read, and it’s a book you can keep coming back to—but also because it’s written by a very important researcher in the area. So it’s got the authority of the person who did the actual psychological research. But it’s got some great descriptions of the phenomena he researches, I think. Anchoring, for instance. Do you know about anchoring? That’s more or less it. If you present somebody with an arbitrary number, psychologically, most people seem prone to move in the direction of that number when you ask them a question. For instance, there’s an experiment with judges. They were being asked off the cuff: What would be a good sentence for a particular crime, say shoplifting? Maybe they’d say it would be a six-month sentence for a persistent shoplifter. But if you prime a judge by giving an anchoring number—if you ask, ‘Should the sentence for shoplifting be more than nine months?’ They’re more like to say on average that the sentence should be eight months than they would have been otherwise. And if you say, ‘Should it be punished by a sentence of longer than three months?’ they’re more likely to come down in the area of five , than they would otherwise. So the way you phrase a question, by introducing these numbers, you give an anchoring effect. It sways people’s thinking towards that number. If you ask people if Gandhi was older than 114 years old when he died, people give a higher answer than if you just asked them: ‘How old was Gandhi when he died?’ People use this anchoring technique often with selling wine on a list too. If there’s a higher-priced wine for £75, then somehow people are more drawn to one that costs £40 than they would otherwise have been. If that was the most expensive one on the menu, they wouldn’t have been drawn to the £40 bottle, but just having seen the higher price, they seem to be drawn to a higher number. This phenomenon occurs in many areas. And there are so many things that Kahneman covers. There’s the sunk cost fallacy, this tendency that we have when we give our energy, or money, or time to a project—we’re very reluctant to stop, even when it’s irrational to carry on. You see this a lot in descriptions of withdrawal from war situations. We say: ‘We’ve given all those people’s lives, all that money, surely we’re not going to stop this campaign now.’ But it might be the rational thing to do. All that money being thrown there, doesn’t mean that throwing more in that direction will get a good result. It seems that we have a fear of future regret that outweighs everything else. This dominates our thinking. Support Five Books Five Books interviews are expensive to produce. If you're enjoying this interview, please support us by donating a small amount . What Kahneman emphasizes is that System One thinking produces overconfidence based on what’s often an erroneous assessment of a situation. All of us are subject to these cognitive biases, and that they’re extremely difficult to remove. Kahneman’s a deeply pessimistic thinker in some respects; he recognizes that even after years of studying these phenomena he can’t eliminate them from his own thinking. I interviewed him for a podcast once , and said to him: ‘Surely, if you teach people critical thinking, they can get better at eliminating some of these biases.’ He was not optimistic about that. I’m much more optimistic than him. I don’t know whether he had empirical evidence to back that up, about whether studying critical thinking can increase your thinking abilities. But I was surprised how pessimistic he was. Unlike some of the other authors that we’re going to discuss . . . There has been a significant tendency in economics to talk about an ideal subject, making rational decisions for him or herself, and that didn’t take into account the kinds of cognitive biases that we’ve been discussing. The discipline of behavioural economics , which is very firmly established now, is kind of the antidote to that. You factor in these patterns of behaviour actual people have, rather than these idealized individuals making rational assessments about how they satisfy their desires. That’s probably a caricature of economics, but that’s the gist of it."

"This book reflects back on the work that Kahneman did with Amos Tversky, which won him the Nobel Prize for economics in 2004. (Truth in advertising: Tversky was another of my dissertation advisors). Their work revolutionized the economic understanding of decision-making—the idea that people were rational actors who weighed costs and benefits and made decision for themselves that maximized utility. It turns out that’s not true in most cases. They overturned the foundation of the psychological understanding about how people make decisions. Kahneman talks about two modes: fast—almost effortless, decision-making, largely based on intuition and emotions—and slow ways of thinking, which are laborious and deliberative. The latter type of decision-making is rarer. “Political psychology can also be used to understand anomalous actors, such as the current president of the United States.” Both fast and slow thinking are susceptible to systematic biases. They document these biases. For example, that conclusions can be made based on analogies between past events and current events. Biases themselves are predictable, they lead people to make decisions differently than classical economic analysis predicts. So this book helps people to understand the flaws of their own decision-making, which lead them into situations that they regret. You can see that same sort of decision-making all the time in politics and relations between states. Get the weekly Five Books newsletter Understanding systematic biases, particularly the way historical analogies get used and abused, but also how diplomats are susceptible to these biases, may reduce the negative consequences from them. That’s what I teach. Political psychology can be put to all sorts of use, not just to understand bargaining and negotiation, cooperation and conflict on the international stage. Political psychology can also be used to understand anomalous actors, such as the current president of the United States."

"From Daniel Kahneman's "Thinking, Fast and Slow," I learned not to overvalue endings and to counter the human tendency to fear loss more than valuing gain."