The cornerstone of behavioral economics. I took an entire college course where each class was essentially a chapter out of Kahneman’s book. While many of the insights are knowledge your grandma could tell you, now confirmed by experiment, this long book is so well written that each new nugget of information feels like a revelation.
My Notes
To convey information better, Kahneman splits our brain into System 1 and System 2. System 1 operates automatically and quickly and can be understood as the unconscious part of our brain that takes care of activities like reacting with facial expressions, driving a car on an empty road, and filling in incomplete sentences while reading. System 1 updates our model of the world and thus what is normal in it. System 2 activities command attention and deliberate decision-making. Think of following a hidden ball in a cup game, doing your taxes, comparing two models of cars, and looking for a friend in a crowd.
These constructs of the mind are fictitious but are illustrative. They do not have clear boundaries in their scope or map to clear, specific parts of the brain. System 1 more readily understands stories with agents who have personalities, which makes the two actors of this story easier to grasp and remember.
When we think of ourselves, we identify with the System 2 part. This is intuitive, when we are conscious of who we are, we think of our actions, reasons, beliefs, and patterns of thought. This neglects the whole System 1 dimension of our brain which is essential to us putting most things in our lives on autopilot and informing many of the impressions System 2 works on.
Optical illusions work because System 1 creates impressions in automatic ways. Even when we know we are being deceived, we still see the illusion as System 1 wants to. Mistrusting your impression to form an accurate belief about what is in front of you is a System 2 function.
Continuous System 2 functioning is impractical. Questioning every impression System 1 generates would tax your brain heavily and slow your actions unnecessarily. Contemplating the decision to brush your teeth after waking up every day is not a desirable outcome. System 2 is lazy and will rely on heuristics whenever possible.
Humans follow the law of least effort. Our brains want to rely on System 1 as much as possible. We will avoid as much thinking as possible to do this.
Self-control and deliberate thought draw on the same limited effort budget. E.g. You can have a conversation with a friend while walking, but if you asked them to calculate 14X54, they would almost certainly stop in their tracks. Our mental work applies to self-control and cognitive effort: speeding up one often comes at the cost of another. This trade-off has been dubbed ego depletion.
Ego depletion can be offset by ingesting glucose.
Ego depletion has big implications: when we are fatigued and hungry, we rely more often on System 1. If you are a judge or admissions counselor, this could manifest as defaulting to denying parole or admission as your emotions and bodily state hinder System 2 thinking.
The state of effortlessly attending to our mental work creates a state of flow. I find this in rock climbing, running, skiing, working on process automation, reading, and working on comedy. I often optimize my life for the amount of time I can spend in flow states.
Using System 2 dilates your pupils, which supposedly makes you come off as more attractive. Thinking is good for your looks!
Intelligence is not only the ability to think logically, it is also the capacity to recall memory and dedicate attention.
Our brains can be primed by various stimuli. Nodding your head up and down while listening to an argument will make you more agreeable to it. Priming is at odds with our belief that System 2 is in charge and that we are conscious actors.
Thinking about money primes individualism. Thinking too much about the idea reduces our tendency to depend on and accept requests from others.
Familiarity is not easily distinguished from the truth. Seeing something our brains have already seen before results in cognitive ease, meaning that we will be more likely to trust our System 1 impression.
There are many sources of ease like nice font or well-structured prose that further grease the wheels of System 1. In a study using a cognitive test, students’ performance improved with barely legible font as it further engaged their System 2 thinking.
Under uncertainty, System 1 bets on conclusions, and those bets and informed by past experiences. We observe this as humans always seem to have a coherent causal story about most events.
Anchoring influences decisions. Starting a negotiation with a high number will lead to agreements closer to that number than not. Having a limit on toilet paper will cause consumers to buy more than they would normally toward the upper limit.
The availability heuristic substitutes a question that you face with one that you have an answer to. Instead of delivering an accurate answer, you respond with your impression shaped by available information to you. E.g. In a study on marriages, each partner was asked about their percentage contributions to common household tasks like taking out the trash or cleaning. When you added up the self-assessed contribution to tasks, the percentage was invariably over 100% as they remembered their efforts far better, leading to a difference in availability. Recognizing this fact defuses tension.
Availability can cause some contradictory outcomes. In a study when students had to list either 6 or 12 instances of them being assertive, people who listed more instances believed themselves less assertive. As they had to search harder in their memory for instances, reducing the ease of information, perceptions shifted. A similar study found students rated a class higher if forced to list more improvements on the end-of-semester review.
Risk evaluation depends on your selection of a measure, and that choice can be influenced by a preference for a certain outcome.
Humans often fail to consider regression to the mean as a satisfactory explanation of outcomes. Aiming for an intermediate between baseline and intuitive predictions can correct this oversight.
Stories about false institutions feel foreign. Only winners get press.
Business writing loves illusory uncertainty. Stories about the rise and fall or successes and failures of individual companies look for coherence rather than evidence. Naturally, management practices and leadership become exaggerated factors as our brains love to focus on agents.
The stock-picking industry is built on the illusion of skill. On each side of a transaction is someone who believes they are right. At least one of them will always be wrong, and no one cares to admit this reality.
Experts overweigh their judgment relative to algorithms, and simple models can often deliver comparable, occasionally better, performance than complex statistical ones.
Only trust experts who are aware of the limits of their knowledge and thus their intuitions. Subjective confidence is far too high for many “experts” who do not see the borders of their competence.
Intuitions work when:
- The environment is regular enough to be predictable
- Prolonged practice allows learning these regularities
Here, we can see that stock-pickers aren’t stupid, but simply that long-term forecasts in stock pricing operate in a zero-validity environment. Failure in realms like this reflects the basic unpredictability of the events.
The quality and immediacy of feedback in conjunction with sufficient opportunities to practice is what develops accurate intuitions.
Appreciation of uncertainty is a cornerstone of rationality, but we often fail to do it as expressing confidence intervals feels like an admission of ignorance. We feel as though we are paid to be knowledgeable, and so our tendency is to understate uncertainty.
The loss aversion ratio, i.e. how much more painful losses feel than gains of an equal amount, is observed to be somewhere between 1.5-2.5.
Owning something increases our value of it.
Humans hold two kinds of goods: those “for use” and those “for exchange.” We readily treat money as the latter, but consider concert tickets: we are unlikely to sell them even at a higher price than what we bought them at because have classified them as a “for use” good.
Successful relationships depend far more on avoiding negative experiences than seeking positive ones.
The economic theory does not acknowledge the emotions people attach to their mental accounts: namely, we try our best to avoid failures and in turn fail to utilize rational frameworks, such as sunk costs, to our decisions.
Retrospective ratings of events can be accurately predicted as the average between the best (or worst) part of the experience and the final moments of that experience.
The duration of an experience does not seem to have an impact on the total enjoyment or pain of that experience.
These two facts indicate what we can intuit: memory is representative, informed by peaks and powerful moments, and not an accurate account of the actual experience.
Our happiness is determined by what we pay attention to. This often falls into two buckets: the immediate situation or recurrent thoughts.