Thinking, Fast & Slow

4.5 out of 5 stars.

Daniel Kahneman
Penguin, UK, 2011, RRP: $22.95

I meant to review this book some time ago but there was so much in it I put it aside for a second read. The implications of Kahneman’s research can be quite confronting. The book is intellectually stimulating, but there’s a lot of it.

The author can draw on more than four decades of research. One of the papers that led to him winning the Nobel Prize for Economics was first published in 1974. He’s done plenty since then.

Kahneman’s core thesis is now pretty much a part of many mainstream ideas of how the brain works. He sees us as driven by two separate but occasionally engaged entities which he calls, unpretentiously, System One (S1) and, yes, System Two (S2).

System One is very quick. It’s intuitive. It decides most of our behavior automatically. Sometimes it’s our instinctive response, like flight, fight or freeze. Other times it’s responding to what we have come to expect, doing so without much thought.

System Two is regarded as more rational. It’s the thinking bit that get’s involved when things have to be thought through.

The problem is, says Kahneman, that both systems are affected by our experience, including our natural and learned biases. And both have their idiosyncrasies.

S1 is lazy. It takes short cuts and makes quick judgments, both good and bad. S2 tires easily. It doesn’t have the natural exuberance of S1 and usually defers to S1, whether it’s right or wrong.

We tend to see ourselves as the rational thinking S2, but our actual personality and behavior are more often aligned with S1.

From there, the book launches into a plethora of research findings and experiment descriptions, which, collectively, make for sobering reading.

Intuition is the first notion to be humbled. Early in the book, the reader is told quite plainly that there is no magic to intuition. When the expert chess player immediately spots the winning strategy, it is not some amazing insight. It is simply obvious from the thousands of hours he has spent playing the game.

He quotes fellow researcher, Herbert Simon, on how an intuitive decision is made. “The situation has provided a cue; this cue has given the expert access to information stored in memory, and the information provides the answer.”

Unfortunately, we are not experts at everything and often we make intuitive judgment calls in areas in which we have no expertise. Or worse still, all sorts of biases color the experience on which we draw.

Some are evolutionary. A great deal of research, not just Kahneman’s has shown that we are disproportionately upset by losses, compared to how we feel about gains.

This is partly survival. “Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce.”

An asymmetric result of that is our reluctance to make tough decisions; because our experience is that they hurt more.

Investors regularly fail to cut bad positions, preferring to take profits on their better performers. Yet investment performance usually suffers from holding poor performers too long.

Says Kahneman: “the threat of accepting the large loss is too painful, and the hope of complete relief is too enticing.”

It makes negotiation tougher when one side has to make a concession. It’s probably one reason why successful negotiators stress the need to have some “giveaways” in your bargaining position so that you can accommodate a demanding opponent by giving away some things that don’t hurt quite so much.

This loss aversion is partly behind issues of confidence. By and large, we tend to be over-confident. It shows up in business start-ups and strategic plans that regularly overstate benefits and underestimate costs.

Even mature businesses are swayed by this natural optimism – or reluctance to experience the pain – when they are losing ground to a new or superior technology and waste remaining assets in futile attempts to catch up.

It’s is what the book refers to as the “sunk-cost fallacy”. You are so far in; it’s hard to pull out. My father understood this, although his advice on the matter was earthier: “if the horse is dead, get off.”

This is a good book to use as a health check on your biases and decision-making, as long as your S1 allows you to be open to some of the conclusions.

You could also brighten up your outlook by taking some of the book’s advice. One experiment shows that people who jam a pencil sideways into their mouth and force a smile are more likely to find a cartoon funnier that someone who merely sucks their pencil.

I would have thought so.

But if you are finding yourself too absorbed in Kahneman’s finding, you might try frowning for a moment. Frowning, apparently, activates skepticism.