What I learnt from Thinking, Fast and Slow — Book Review

Thinking Fast and Slow, a book on behavioral psychology and decision-making by Daniel Kahneman. This book demonstrates theories on how people make decisions. It will help you understand why humans sometimes make errors in judgement, and how to look for signs that you yourself may be about to make a System 1 error. Here are some of the most important take-aways from the book.

Two systems

System one and system two. System one is the default system that forms “first impressions” and often is the reason why we jump to conclusions. System two does the deep thinking — reflection, problem-solving, and analysis, but are often lazy.

People are poor at logic and statistical thinking, because system one prefer plausible stories to explain what is happening by relying on associations and memories, pattern-matching, and assumptions. We crave for cause and effect explanations but many facts of the world are due to chance, including accidents of sampling. Causal explanations of chance events are inevitably wrong. It’s just a statistical result and we need to accept that except of finding explanations. This also explains why people tend to look at the results of a small sample and conclude that it’s representative of the population and jump to conclusions with just a few data points or limited evidence.

“The measure of success for System 1 is the coherence of the story it manages to create. The amount and quality of the data on which the story is based are largely irrelevant. When information is scarce, which is a common occurrence, System 1 operates as a machine for jumping to conclusions.”

The Two Selfs

The experience self vs memory self. The memory self is often in dominance so we neglect the duration of experience. We don’t sum up the continuous experience, rather we remembers the start and end and take average. The option that ends better will gives us better memory so we would prefer that choice. If two options causing the same amount of pain but one ended with less pain, people will likely to choose that option. We need to develop medicine and policy plans according to this.

Making Decisions

Halo effect. We tend to think more good looking people will also be kind and smart. This is due to the halo effect. If people we dislike do something, we are more likely to think it’s wrong.

Anchoring effect. When presented with a an initial piece of information, we are tend to relies too heavily and make decisions based on it. It is better to use formulas to do rational choice like hiring candidates. The only criteria of rational choice is to be consistence.

Focusing effect. When making predictions about happiness or convenience, people focus on notable differences and tend to exclude those that are less conspicuous. For example, when people were asked how much happier they believe Californians are compared to Midwesterners, people said Californians must be considerably happier, when, in fact, there was no difference between the actual happiness rating of Californians and Midwesterners. The bias lies in that most people focused on and overweighed the sunny weather and ostensibly easy-going lifestyle of California and devalued and underrated other aspects of life and determinants of happiness. A rise in income has only a small and transient effect on happiness and well-being, but people consistently overestimate this effect. This is a result of a focusing illusion, with people focusing on conventional measures of achievement rather than on everyday routine. The former one is fictional — a promotion cannot suffer, while the later is more real to us.

Prospect Theory

We are risk adverse for losing and risk seeking for winning. In choices between two potential losses, we would rather attempt the chance of maintaining our current wealth, even though it means they might eventually lose more money. But for winning, people would rather have a guarantee of improving their wealth than the potential of not gaining any money at all. We tend to sell the winner stocks so we could feel that we’ve closed a win, and hold on to losing ones waiting for them to come back up which normally deteriorate. The ability to view lost objectively and take necessary risks is beneficial in the long-term and will give you bigger returns on average. Don’t weight lost too much because situation fluctuates. People often overestimate the probabilities of unlikely events; this causes us to overweight them in our decisions.

Utility Theory

Most people dislike risk and want to avoid the worst outcome. Thus, people’s choices are not based on dollar value, but on the psychological values of outcomes. The risk taking for people is not the same. Their recent change in wealth is more important to their experience than their state of wealth. That explains why poor people buy insurance and why rich people sell it: the loss of 1 million ducats represents a greater decrease in utility for a poorer person than a richer one, and so poor people are willing to pay a premium in order to transfer the risk to the richer person.

Mental Accounts

We make more rational choices when we don’t separate the account for overall deposable money VS the money to purchase a single experience. Consider the case: when lost a $80 ticket to the concert at the gate of the concert, do you buy another one with another $80? The rational way to make decision here is to think if you would buy the second ticket if you lost $80, not seeing the $80 as a sink cost. Companies usually put more resources into a project that already got invested a lot instead of to new, more promising projects because thinking of sink cost.

Well Beings

We evaluate our well beings based on where our attention is focused on. When buying a new luxury product won’t last your happiness for long because it depreciates as your attention moves away from it. You only evaluate how much pleasure a luxury car brings you when you thought of it. But spend money and quality time weekly doing things you like (the optimal experience, high skills and high challenge, sense of time changes) with people will last longer with constant new stimulations. Marriage will boost well beings in the short term but decays fast due to high expectation. People with hight expectation are less happy in life. Another example, the nice weather in California doesn’t make people there more happy because they are used to it. It takes a contrast of winter time to appreciate the nice, warm weather. Women with or without a relationship reports similar well beings. Those married spend less time with friends and more doing chores with averages out the benefits from a relationship.

Originally published at http://pretteyandnerdy.wordpress.com on April 8, 2019.