Summaries of Thinking fast and slow

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http://www.hyperink.com/Overall-Summary-For-Thinking-Fast-And-Slowb895a12 The book is divided into five parts, with a pair of appendixes the pioneering articles Kahneman authored alongside Amos Tversky providing additional context. Each part of the book is spilt into numerous sections, averaging around 10 pages each. The organization successfully makes an intellectually imposing book feel more accessible and navigable. Part 1 In Part 1, Kahneman explains how the brains thought process switches between System 1 and System 2. System 1 is the automatic response or kneejerk reaction. System 2, on the other hand, involves concentration and deliberation. Although System 2 believes itself to be where the action is, the automatic System 1 is the hero of the book, Kahneman writes. He argues that overreliance on System 2 can result essentially in tunnel vision, then provides exercises that the reader can easily follow to test themselves and see firsthand some of the tricks System 1 and System 2 can play on one another. Further sections drive into deeper detail about the manner in which we generate opinions and make judgment calls. Part 1 closes with a comprehensive list of characteristics assigned to System 1, including is biased to believe and confirm and neglects ambiguity and suppresses doubt. Part 2 Part 2, Heuristics and Biases, will be of particular interest to readers possessing a strong feeling about statistics, be it positive or negative. Kahneman repeatedly demonstrates how easily statistics can be misinterpreted always a timely reminder during any sort of election season. He also demonstrates the risk of using statistics as an attempt to assign greater meaning to something that occurred due to chance. Casual explanations of chance events are inevitably wrong, he summarizes. He goes on to demonstrate how educated guesses supported by statistics (or stereotypes) can sometimes backfire. In one example, the reader is asked to picture a passenger on the New York subway reading the Times, and to guess whether the person has a PhD or didnt go to college at all. The common gut reaction is to pick the PhD, even though there are far fewer PhDs on the subway at a given time than

passengers without college degrees. Not just taking a situation at its face value, even statistically speaking, runs counter to how System 1 is programmed to operate. Kahneman sprinkles some academic autobiography through the book as well. Part 2 includes a section on what he calls the best-known and most controversial of his experiments with Amos Tversky: a seemingly simple question about a young woman named Linda. Linda is introduced to the crowd as a young woman who majored in philosophy and kept active with various social causes. Kahnemans audience then had to choose the most likely outcome for Linda. Was she a bank teller or a bank teller who was active in the feminist movement? Although the former is the smarter choice, an overwhelming number of undergraduates chose the latter due to the associations they were making about Linda. Even renowned scientist Stephen Jay Gould fell into the trap. Part 3 This part of the book tackles overconfidence. Citing the work of statistician Nassim Taleb (The Black Swan), Kahneman puts the spotlight on our constant need to think in concrete terms about the world around us, and how frequently we dont quite see the full picture, no matter what we may think. He draws from further case studies to show that hindsight is 20/20 is more than just a cliche; in revisiting their past beliefs and opinions, people tend to paint a much more flattering picture of themselves. Kahneman extends his critique into Wall Street. A major industry appears to be built largely on an illusion of skill, he writes, going on to say that, statistically speaking, mutual fund managers perform more like dice rollers than poker players. In an effort to override faulty intuition, Kahneman even dishes out tips for any managers facing a hiring decision, with the goal of having you never again say Lets go with that person; I got a good vibe. Part 4 Choices, the fourth part, provides the reader with an opportunity to absorb some of the economics-centric work that led to Kahnemans Nobel Prize. He sheds some autobiographical light onto the story of how a pair of psychologists (he and Tversky) became interested in studying the rationality of economics. It wasnt an unprecedented leap between fields, but it was certainly atypical. The duo conducted intensive research in the areas of risk

aversion and prospect theory to learn more about the ways in which humans make decisions and weigh risk. Research suggested that the negative often trumped the positive; that is, if presented with data that was 50 percent positive and 50 percent negative, the general tendency is for our brains to come away with an impression of negative, even though the positive/negative factors are equally divided. Similarly, people tend to overestimate the probability of unlikely occurrences. In a business setting, that may mean failing to take a smart risk because of an unlikely hypothetical scenario. A gambler may refuse to cash out on a hot hand because he or she has a feeling that it will continue. A day trader may make a decision that is based on compensating for a past mistake rather than an objective assessment of future potential. The fear of regret is a factor in many of the decisions that people make, Kahneman writes. Part 5 While Part 4 stems from previous work, Part 5 focuses on current findings. The reader learns about the relationship between the experiencing self and the remembering self. Kahneman tells the story of a man who listened with great pleasure to a long symphony on a recorded disc, only to find that the disc was scratched near its end. The man said the experience had been ruined, when in actuality it was only his memory of the experience that suffered (the vast majority of his experience remained very pleasant, just buried beneath the negative association at the end). Tastes and decisions are shaped by memories, and the memories can be wrong, Kahneman points out. We sometimes feel our preferences and beliefs so strongly that they can seem to be somehow rooted in fact; this, however, is often not the case. This applies even to our choice of vacation. For many people, the value of a vacation is not the experience but the anticipation beforehand and the memory afterward. If mountain climbers didnt remember climbing the mountain, would they still feel the endeavor was worth experiencing? Similarly, many people will say that they would be willing to experience a tremendous amount of pain if they were only guaranteed a drug that would wipe any trace of the memory from their brains. Odd as it may seem, Kahneman sums up, I am my remembering self, and the experiencing self, who does my living, is like a stranger to me.

ny times

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Two Brains Running By JIM HOLT THINKING, FAST AND SLOW By Daniel Kahneman 499 pp. Farrar, Straus & Giroux. $30 In 2002, Daniel Kahneman won the Nobel in economic science. What made this unusual is that Kahneman is a psychologist. Specifically, he is one-half of a pair of psychologists who, beginning in the early 1970s, set out to dismantle an entity long dear to economic theorists: that arch-rational decision maker known as Homo economicus. The other half of the dismantling duo, Amos Tversky, died in 1996 at the age of 59. Had Tversky lived, he would certainly have shared the Nobel with Kahneman, his longtime collaborator and dear friend. Human irrationality is Kahnemans great theme. There are essentially three phases to his career. In the first, he and Tversky did a series of ingenious experiments that revealed twenty or so cognitive biases unconscious errors of reasoning that distort our judgment of the world. Typical of these is the anchoring effect: our tendency to be influenced by irrelevant numbers that we happen to be exposed to. (In one experiment, for instance, experienced German judges were inclined to give a shoplifter a longer sentence if they had just rolled a pair of dice loaded to give a high number.) In the second phase, Kahneman and Tversky showed that people making decisions under uncertain conditions do not behave in the way that economic models have traditionally assumed; they do not maximize utility. The two then developed an alternative account of decision making, one more faithful to human psychology, which they called prospect theory. (It was for this achievement that Kahneman was awarded the Nobel.) In the third phase of his career, mainly after the death of Tversky, Kahneman has delved into hedonic psychology: the science of happiness, its nature and its causes. His findings in this area have proved disquieting and not just because one of the key experiments involved a deliberately prolonged colonoscopy. Thinking, Fast and Slow spans all three of these phases. It is an astonishingly rich book: lucid, profound, full of intellectual surprises and selfhelp value. It is consistently entertaining and frequently touching, especially when Kahneman is recounting his collaboration with Tversky. (The pleasure we found in working together made us exceptionally patient; it is much

easier to strive for perfection when you are never bored.) So impressive is its vision of flawed human reason that the New York Times columnist David Brooks recently declared that Kahneman and Tverskys work will be remembered hundreds of years from now, and that it is a crucial pivot point in the way we see ourselves. They are, Brooks said, like the Lewis and Clark of the mind. Now, this worries me a bit. A leitmotif of this book is overconfidence. All of us, and especially experts, are prone to an exaggerated sense of how well we understand the world so Kahneman reminds us. Surely, he himself is alert to the perils of overconfidence. Despite all the cognitive biases, fallacies and illusions that he and Tversky (along with other researchers) purport to have discovered in the last few decades, he fights shy of the bold claim that humans are fundamentally irrational. Or does he? Most of us are healthy most of the time, and most of our judgments and actions are appropriate most of the time, Kahneman writes in his introduction. Yet, just a few pages later, he observes that the work he did with Tversky challenged the idea, orthodox among social scientists in the 1970s, that people are generally rational. The two psychologists discovered systematic errors in the thinking of normal people: errors arising not from the corrupting effects of emotion, but built into our evolved cognitive machinery. Although Kahneman draws only modest policy implications (e.g., contracts should be stated in clearer language), others perhaps overconfidently? go much further. Brooks, for example, has argued that Kahneman and Tverskys work illustrates the limits of social policy; in particular, the folly of government action to fight joblessness and turn the economy around. Such sweeping conclusions, even if they are not endorsed by the author, make me frown. And frowning as one learns on Page 152 of this book activates the skeptic within us: what Kahneman calls System 2. Just putting on a frown, experiments show, works to reduce overconfidence; it causes us to be more analytical, more vigilant in our thinking; to question stories that we would otherwise unreflectively accept as true because they are facile and coherent. And that is why I frowningly gave this extraordinarily interesting book the most skeptical reading I could. System 2, in Kahnemans scheme, is our slow, deliberate, analytical and consciously effortful mode of reasoning about the world. System 1, by

contrast, is our fast, automatic, intuitive and largely unconscious mode. It is System 1 that detects hostility in a voice and effortlessly completes the phrase bread and. . . . It is System 2 that swings into action when we have to fill out a tax form or park a car in a narrow space. (As Kahneman and others have found, there is an easy way to tell how engaged a persons System 2 is during a task: just look into his or her eyes and note how dilated the pupils are.) More generally, System 1 uses association and metaphor to produce a quick and dirty draft of reality, which System 2 draws on to arrive at explicit beliefs and reasoned choices. System 1 proposes, System 2 disposes. So System 2 would seem to be the boss, right? In principle, yes. But System 2, in addition to being more deliberate and rational, is also lazy. And it tires easily. (The vogue term for this is ego depletion.) Too often, instead of slowing things down and analyzing them, System 2 is content to accept the easy but unreliable story about the world that System 1 feeds to it. Although System 2 believes itself to be where the action is, Kahneman writes, the automatic System 1 is the hero of this book. System 2 is especially quiescent, it seems, when your mood is a happy one. At this point, the skeptical reader might wonder how seriously to take all this talk of System 1 and System 2. Are they actually a pair of little agents in our head, each with its distinctive personality? Not really, says Kahneman. Rather, they are useful fictions useful because they help explain the quirks of the human mind. To see how, consider what Kahneman calls the best-known and most controversial of the experiments he and Tversky did together: the Linda problem. Participants in the experiment were told about an imaginary young woman named Linda, who is single, outspoken and very bright, and who, as a student, was deeply concerned with issues of discrimination and social justice. The participants were then asked which was more probable: (1) Linda is a bank teller. Or (2) Linda is a bank teller and is active in the feminist movement. The overwhelming response was that (2) was more probable; in other words, that given the background information furnished, feminist bank teller was more likely than bank teller. This is, of course, a blatant violation of the laws of probability. (Every feminist bank teller is a bank teller; adding a detail can only lower the probability.) Yet even among students in Stanfords Graduate School of Business, who had extensive

training in probability, 85 percent flunked the Linda problem. One student, informed that she had committed an elementary logical blunder, responded, I thought you just asked for my opinion. What has gone wrong here? An easy question (how coherent is the narrative?) is substituted for a more difficult one (how probable is it?). And this, according to Kahneman, is the source of many of the biases that infect our thinking. System 1 jumps to an intuitive conclusion based on a heuristic an easy but imperfect way of answering hard questions and System 2 lazily endorses this heuristic answer without bothering to scrutinize whether it is logical. Kahneman describes dozens of such experimentally demonstrated breakdowns in rationality base-rate neglect, availability cascade, the illusion of validity and so on. The cumulative effect is to make the reader despair for human reason. Are we really so hopeless? Think again of the Linda problem. Even the great evolutionary biologist Stephen Jay Gould was troubled by it. As an expert in probability he knew the right answer, yet he wrote that a little homunculus in my head continues to jump up and down, shouting at me But she cant just be a bank teller; read the description. It was Goulds System 1, Kahneman assures us, that kept shouting the wrong answer at him. But perhaps something more subtle is going on. Our everyday conversation takes place against a rich background of unstated expectations what linguists call implicatures. Such implicatures can seep into psychological experiments. Given the expectations that facilitate our conversation, it may have been quite reasonable for the participants in the experiment to take Linda is a bank clerk to imply that she was not in addition a feminist. If so, their answers werent really fallacious. This might seem a minor point. But it applies to several of the biases that Kahneman and Tversky, along with other investigators, purport to have discovered in formal experiments. In more natural settings when we are detecting cheaters rather than solving logic puzzles; when we are reasoning about things rather than symbols; when we are assessing raw numbers rather than percentages people are far less likely to make the same errors. So, at least, much subsequent research suggests. Maybe we are not so irrational after all.

Some cognitive biases, of course, are flagrantly exhibited even in the most natural of settings. Take what Kahneman calls the planning fallacy: our tendency to overestimate benefits and underestimate costs, and hence foolishly to take on risky projects. In 2002, Americans remodeling their kitchens, for example, expected the job to cost $18,658 on average, but they ended up paying $38,769. The planning fallacy is only one of the manifestations of a pervasive optimistic bias, Kahneman writes, which may well be the most significant of the cognitive biases. Now, in one sense, a bias toward optimism is obviously bad, since it generates false beliefs like the belief that we are in control, and not the playthings of luck. But without this illusion of control, would we even be able to get out of bed in the morning? Optimists are more psychologically resilient, have stronger immune systems, and live longer on average than their more reality-based counterparts. Moreover, as Kahneman notes, exaggerated optimism serves to protect both individuals and organizations from the paralyzing effects of another bias, loss aversion: our tendency to fear losses more than we value gains. It was exaggerated optimism that John Maynard Keynes had in mind when he talked of the animal spirits that drive capitalism. Even if we could rid ourselves of the biases and illusions identified in this book and Kahneman, citing his own lack of progress in overcoming them, doubts that we can it is by no means clear that this would make our lives go better. And that raises a fundamental question: What is the point of rationality? We are, after all, Darwinian survivors. Our everyday reasoning abilities have evolved to cope efficiently with a complex and dynamic environment. They are thus likely to be adaptive in this environment, even if they can be tripped up in the psychologists somewhat artificial experiments. Where do the norms of rationality come from, if they are not an idealization of the way humans actually reason in their ordinary lives? As a species, we can no more be pervasively biased in our judgments than we can be pervasively ungrammatical in our use of language or so critics of research like Kahneman and Tverskys contend. Kahneman never grapples philosophically with the nature of rationality. He does, however, supply a fascinating account of what might be taken to be its goal: happiness. What does it mean to be happy? When Kahneman first took up this question, in the mid 1990s, most happiness research relied on asking

people how satisfied they were with their life on the whole. But such retrospective assessments depend on memory, which is notoriously unreliable. What if, instead, a persons actual experience of pleasure or pain could be sampled from moment to moment, and then summed up over time? Kahneman calls this experienced well-being, as opposed to the remembered well-being that researchers had relied upon. And he found that these two measures of happiness diverge in surprising ways. What makes the experiencing self happy is not the same as what makes the remembering self happy. In particular, the remembering self does not care about duration how long a pleasant or unpleasant experience lasts. Rather, it retrospectively rates an experience by the peak level of pain or pleasure in the course of the experience, and by the way the experience ends. These two quirks of remembered happiness duration neglect and the peak-end rule were strikingly illustrated in one of Kahnemans more harrowing experiments. Two groups of patients were to undergo painful colonoscopies. The patients in Group A got the normal procedure. So did the patients in Group B, except without their being told a few extra minutes of mild discomfort were added after the end of the examination. Which group suffered more? Well, Group B endured all the pain that Group A did, and then some. But since the prolonging of Group Bs colonoscopies meant that the procedure ended less painfully, the patients in this group retrospectively minded it less. (In an earlier research paper though not in this book, Kahneman suggested that the extra discomfort Group B was subjected to in the experiment might be ethically justified if it increased their willingness to come back for a follow-up!) As with colonoscopies, so too with life. It is the remembering self that calls the shots, not the experiencing self. Kahneman cites research showing, for example, that a college students decision whether or not to repeat a springbreak vacation is determined by the peak-end rule applied to the previous vacation, not by how fun (or miserable) it actually was moment by moment. The remembering self exercises a sort of tyranny over the voiceless experiencing self. Odd as it may seem, Kahneman writes, I am my remembering self, and the experiencing self, who does my living, is like a stranger to me.

Kahnemans conclusion, radical as it sounds, may not go far enough. There may be no experiencing self at all. Brain-scanning experiments by Rafael Malach and his colleagues at the Weizmann Institute in Israel, for instance, have shown that when subjects are absorbed in an experience, like watching the The Good, the Bad, and the Ugly, the parts of the brain associated with self-consciousness are not merely quiet, theyre actually shut down (inhibited) by the rest of the brain. The self seems simply to disappear. Then who exactly is enjoying the film? And why should such egoless pleasures enter into the decision calculus of the remembering self? Clearly, much remains to be done in hedonic psychology. But Kahnemans conceptual innovations have laid the foundation for many of the empirical findings he reports in this book: that while French mothers spend less time with their children than American mothers, they enjoy it more; that headaches are hedonically harder on the poor; that women who live alone seem to enjoy the same level of well-being as women who live with a mate; and that a household income of about $75,000 in high-cost areas of the country is sufficient to maximize happiness. Policy makers interested in lowering the misery index of society will find much to ponder here. By the time I got to the end of Thinking, Fast and Slow, my skeptical frown had long since given way to a grin of intellectual satisfaction. Appraising the book by the peak-end rule, I overconfidently urge everyone to buy and read it. But for those who are merely interested in Kahnemans takeaway on the Malcolm Gladwell question it is this: If youve had 10,000 hours of training in a predictable, rapid-feedback environment chess, firefighting, anesthesiology then blink. In all other cases, think.

3/31/2012 7:07:00 PM The title page idea is that humans use two systems to make decisions: one fast and generally correct, and one slow and rational, but lazy. Sometimes the slow system provides after-the-fact rationalization for the conclusions drawn by the fast system, but other times it provides correction, reining in erroneous conclusions. The concluding chapter includes a critique of libertarianism that is rather weak. By setting up the argument that libertarianism is built upon a foundation of assumed hyper-rationality, Kahneman proceeds to show this position untenable. Of course, the position is untenable if libertarians actually based their ideas on 100% rational human behavior. However, a brief acquaintance with Von Mises, Rothbard, Hayek, or many others of the Austrian school of economics would reveal that no such assumption is necessary to prove that the state always destroys, rather than creates, value. I have previously linked to PraxGirls YouTube channel, which has many educational videos relevant to the matter. A good place to start with the science of praxeology is with her video Study Praxeology. Key Concepts System 1 vs. System 2: System 1 is quick and instinctive. System 2 is slow, lazy, and rational. System 1 is right most of the time but suffers from bias and over-simplification. System 2 can correct System 1, but it has limited resources to work with. System 1 works day-in and day-out, but important decisions need System 2 involvement. The Econs vs. The Humans: Econs are the homo economicus or rational man used in modeling economics. [Austrian scholars are exempt from this generalization.] Humans are generally rational, but are subject to some eccentricities such as framing, biased decisions, and judgment anomalies. The Experiencing Self vs. The Remembering Self: The experiencing self does the living while the remembering self keeps score and makes choices. A selection of other ideas follows. Regression to the Mean Four Step Process for Un-Biasing Predictions Given limited information and asked to make a prediction, the usual, intuitive method is to think of a result that matches the remarkability of the

information given. However, the subject could have been (un)lucky, especially if the data is a mere snapshot. Begin with an estimate of average results. ["The average GPA is 3.0."] Determine your intuitive judgment or impression of what the result will be. ["Susie could read at age 4, which is pretty unusual. A similarly exceptional GPA for a college senior would be 3.8."] Estimate the correlation between your evidence and the result. ["But the correlation between early reading and college GPA is probably small. Let's call it 25%."] Move the prediction the same distance from the mean to the intuitive prediction. ["25% of the distance from 3.0 to 3.8 gives 3.2."] The Fourfold Pattern Page 317 contains a summary of the over-weighting of various outcomes that are subject to chance. When probabilities are very low, or very high, outcomes tend to be weighted in a manner not strictly in accord with statistical rationality. When there is a high (but not 100%) probability of gains, people become risk averse, generally accepting an unfavorable settlement for a sure thing. When there is a high (but not 100%) probability of losses, people become risk seeking, rejecting favorable settlements. When there is a very low (but not 0%) probability of gains, people again become risk-seeking. When there is a very low (but not 0%) probability of losses, people become risk averse. For example, if you were to encounter a situation wherein you had a 95% change of winning $1,000,000 (for example, in a lawsuit), you would be biased toward accepting a settlement of $900,000 and letting someone else take the risk of not winning anything, even though the value of a 95% probability of winning $1,000,000 is technically $950,000. http://www.albertsuckow.com/thinking-fast-slow-daniel-kahneman/

3/31/2012 7:07:00 PM This book reminds me very much of another very good book called "The Happiness Hypothesis". I enjoyed reading that one very much, got very absorbed and rushed to finish it. After having finished it, though, I realized that I could only vaguely recall what it was that I had found so inspiring at the time. Damn :) I am actually reading it now a second time, little by little. I do feel that, by getting carried away, I had somehow sacrificed the long term for the sake of a short term gain :D So I am trying not to make the same mistake with Daniel Kahneman's book, which seems to belong to the same category - very interesting, and lots of stuff that will just fly off unless I write them down. Looks like the author did put a lot of effort when writing this book, for what he sees as a worthy cause. He made it pretty clear that he was not exactly in a state of "flow" while doing it. I think the reader should do a bit of that too. I am making this summary as I am reading the book. This is mostly for my own use :) I suggest that the reader should get the book, rather than waste time with my notes. Looks like these will be very long notes. Chapter 1 Quick overview of the framework - we have system 1 and system 2 inside our heads, where system 1 is the auto pilot, who can handle routine operations by itself, and system 2 that is our conscious effort to solve problems, make decisions or control behavior. A bit like Jonathan Haidt's rider and elephant, but not quite. Or like Robert Kurzban's "modules". Looks like Kahneman can make a lot more sense with the two precisely defined systems, than Mr. Kurzban with his infinite set of vaguely defined modules. There seems to be strong evidence that self control, conscious attention focusing and deliberate thought draw on the same pool of energy resources. Exhausting the available resources on one of this kind of activities can be expected to lead to poor performance of the other - for example, intense effort to stay focused a longer period can lead to poor self control right after (being more likely to choose the "sinful chocolate cake" over the "virtuous fruit salad"). Also there seems to be some correlation between cognitive abilities and capacity for self control.

Doing something demanding that you don't enjoy depletes resources twice as fast - once, to do the task at hand, and twice, to keep yourself focused. There is a good word for when you are low on this energy - "ego depletion". This doesn't have to happen if you love what you are doing and achieve a state of flow (I am beginning to think all psychology books published recently mention Mr. Chiksent - this is the fifth time I run into him in a couple of months - this time with a different suggestion for the pronunciation of his name - used to be "cheeks sent me high", now is "six cent me high") There is strong evidence that pupil dilation is a good indicator of the rate at which mental energy is being used, much like the electricity meter we have at home. Pupil contraction is also a good indicator that a solution has been reached or the subject is just about to give up. Some mental tasks, like remembering long sequences, are difficult because the material stored in working memory decays very fast. One has to keep repeating what is where (similar to playing blind chess). When solving problems, System 1 (which can never be switched of) comes up with some quick suggestions, if he can find any, and System 2 reviews them. Our beliefs usually start up as "suggestions" from System 1, which System 2 will later adopt. System 2 is lazy by design, and sometimes the review it performs is quite superficial, with differences from person to person. "Engaged" is a good word for people with a a more active System 2. This is not so much a function of education, as shown by a neat example "a bat and a ball cost $1.10 The bat costs $1 more than the ball. How much does the ball cost". Apparently more than 50% of Harvard and MIT students get it wrong. And even more at regular universities. System 1 comes quickly with a very appealing suggestion, and System 2 is easily persuaded to approve it. I can recall some instances of this from my own experience with financial derivatives, but will mention them in another post.

Ideas are, at an unconscious level, strongly associated with other ideas. Words evoke memories, those memories evoke emotions, and emotions will change our facial expressions etc all very quickly, as some kind of ripple effect inside our brains. Scientists think of ideas as nodes in a network called "associative memory". Which introduces the next topic - priming - being exposed to certain information, messages, images etc. will influence your subsequent behavior without you being aware of it. This has strong cultural implications. The concept of money has been shown to prime individualism. Reminding people of their morality seems to increase the appeal of authoritarian ideas. There is a state we can call "cognitive ease"- when System 1 is running in a "business as usual" mode, like when doing things we are very familiar with that require little conscious attention focus. Its opposite is "cognitive strain", and that's when System 1 encounters something unexpected, and calls in System 2 for help. As strain increases, you get less superficial, more suspicious, but also less intuitive and less creative. This seems to happen regardless of the cause of the cognitive strain. At an unconscious level, "cognitive ease" comes from positive feelings associated with the object of our attention. Cognitive ease is also associated with the idea of validity. We sometimes think of statements as true because we perceive them as natural and familiar. System 1 does not alert System 2 that anything unusual has happened, and System 2 will endorse the view. Prolonged exposure to anything leads to familiarity. There is something called "mere exposure effect", common to most animals. Organisms react with caution to new stimuli, but exposure to them and nothing bad happening afterwards gradually lead from cognitive strain to familiarity and cognitive ease. That stimulus becomes a safety signal, after a while. It can turn into liking. In the case of humans, it applies to ideas, images, words, people etc. Hearing the same thing many times around us makes System 1 perceive its familiarity, and System 2 tends to rely on that familiarity for a true/false judgement. "Familiarity isn't easily distinguished from truth." Changing conditions from cognitive ease to cognitive strain (strain can be

induced in many ways) will lead to predictable changes in assessment. The reverse is also true - "anything that makes it easier for the associative machine to run smoothly will also bias beliefs." 'You can enlist cognitive ease to work in your favor" using lots of tricks. Mood affects System 1. It seems good mood, creativity, gullibility, increased reliance on System 1 belong together. Sadness, vigilance, suspicion, analytic approach, increased effort also go together. Now more details about System 1 maintains and updates all the time a model of your personal world the model is our benchmark for "normality". can sense items / words / actions that are out of context/norm if they are close enough to the model norm, they go unnoticed - see Moses illusion (and then replace with George W :D) good word for normality here is "associative coherence" violations of normality are detected with astonishing speed our models of our personal worlds share a lot of items/ categories, and we can communicate easily by referring to them system 1 automatically looks for causal connections. big events are destined to be the explanation of subsequent events (see market commentary) we have a need for coherence system 1 also perceives intention and emotion can also understand language system 1 perceives the world of objects as distinct from the world of minds > Paul Bloom speculates this could be the reason of the near universality of religion system 1 needs little repetition for an experience to feel normal (maybe related to law of small numbers) its only measure of success is the coherence of the narrative it manages to generate. it assumes the information available is complete. WYSIATI what you see is all there is (have been looking for this one) ambiguous or missing information is automatically adjusted by something similar to "interpolation" without us ever being aware of the existence of ambiguity System 1 is unable of conscious doubt

small amount of information is always easier to fit in a coherent pattern Understanding a statement starts with an unconscious attempt to believe it, which is equivalent to constructing the best possible interpretation of the situation. System 2 later unbelieves it, if anything looks suspicious. Keeping system 2 busy with other tasks will impair its ability to perform this function. System 1 is gullible, System 2 is sometimes busy and always lazy. Halo effect is filling in missing information as seen consistent with initial impression. Our assessments of anything are "path dependent" - order matters. We try to create consistency with our first impressions and avoid the disturbing feeling of inconsistency = "supress ambiguity". High confidence with a decision can be a sign of bad decisions, based on a spurious impression of coherence. For example listening to only one side in a trial will lead to high confidence with a biased decision. It is better to do things in a way that decorrelates errors. Opinions spoken early and assertively influence others. Related biases : overconfidence, base rate neglect, framing effects System 1 instantly evaluates the faces of strangers on two scales: 1) dominance and 2) trustworthiness. They managed to predict outcomes of elections by showing pictures of candidates to test subject who didn't know them. The feature most correlated with the choice for candidate was "competence" - approximated by combination of dominance and trustworthiness. Uninformed voters that watch a lot of TV were more likely to make up their mind this way. When dealing with categories, System 1 is very good with averages and very poor with sums. It can pick the "representative" items very quickly. Test subjects were asked how much they would donate to save birds after Exxon Valdez incident. Some were told that there were 2,000 birds' lives to be saved, others 200,000 birds. The average contribution does not change in these cases. Participants responded to the intensity emotional impact of the idea of one bird dying and neglected their number. Intensity of feelings can

be converted to many other scales, including money. In everyday life, instances when no answer comes to mind are very rare. The normal state is that we have intuitive feelings about anything and everything. To achieve that when faced with complex issues or questions, we unconsciously substitute the actual questions with related easier ones. The author calls this "substitution". Example of substitution: Actual question - called target question - how happy are you with your life these days? Simplified question - what is my mood right now? Another example - target - how should the financial advisers that prey on the elderly be punished. Heuristic - how much anger do I feel when I think of financial predators? Answers to the heuristic question need to be fitted to the original question. This is done by "intensity matching". Feelings and dollars are both on intensity scales. Our emotional attitude to a lot of stuff (nuclear power, motorcycles, bankers :D) drive our beliefs about the benefits and risks. Then System 2 becomes an apologist for System 1. It looks for information that is consistent with existing beliefs, and doesn't have the intention to examine them. Chapter 2 Heuristics and biases Goes through a lot of known biases one at a time. Roughly the same stuff covered "Fooled by randomness". One is the law of small numbers, seen as part of a larger story - we are prone to exaggerate the consistency and coherence of what we see. It is a lot harder to sustain doubt. System 1 is quick to produce a rich representation of reality from scraps of evidence, and that reality will make too much sense. The idea of pure randomness is very difficult to accept - people saw a pattern in the areas of London bombed in WWII, and

suspected spies to be living in the areas that had not been damaged. We pay more attention to the content of the message than to the information about its realiability (I guess we are quick to check that if we don't like the content). Anchoring effect - both System 1 and System 2 are involved. Random reference is perceived to be wrong, the direction of a necessary adjustment is guessed right, but the adjustment process ends prematurely (System 2). Adjustment stops at the near edge of the uncertain region. If you start from a much lower reference, you will hit the other edge of the uncertain region. System 1 also involved - compatible memories are activated automatically priming. Both experts and common people are subject to it. The only difference is that experts don't admit it. Anchorage effect can be plotted on a graph (provided you have enough experiments). You will have the estimate as some kind of function f of a value x as anchor. Impact of anchoring in our daily lives - caps and floors act as anchors. Availability heuristic = judging frequency by the ease with which things come to mind. How many instances do we need to retrieve from memory to get a feel for how easy it is? None. The sense of ease comes immediately, somehow. Asking people to list examples can influence their assessment. They can be surprised by the difficulty with which more than a few instances come to mind and reverse their initial guess. The initially perceived "availability" now becomes "unexplained unavailability". If you start by offering subjects plausible ways to explain unavailability, you will make it less surprising, so the effect is reversed again. System 2 resets expectations of System 1 on the fly. People are less confident with their choices when they are asked to produce more arguments to support it.

In everyday life - media coverage, availability cascades. Ease with which ideas of risk come to mind is strongly associated with the intensity of emotional reactions to those risks. Affect heuristic - people make decisions by consulting their emotions. It is an instance of substitution - an easier question (how do I feel about it) is substituted for a more difficult one (what do I think about it). There is a strong negative correlation between our perceived benefits of something, and our perceived risks of that same something. You would expect higher risks to go with higher returns, like in finance. We actually start with one emotional attitude towards that thing and transpose it on two other scales - expected benefits and expected risks. We need to keep "consistent affect" in our "associative coherence". The emotional tail wags the rational dog (Jonathan Haidt). Our inner world is much tidier than reality. Importance of ideas is judged by fluency and emotional charge with which it comes to mind. Availability + affect can cause availability cascades. We have a basic limitation to handle small risks. We either ignore them completely or blow them out of proportion. Representativeness heuristic - we judge probability and frequency by how much the item in question resembles our stereotype image of it. A nerdy looking guy is more likely to be considered an IT student even in a university where only 5% study IT (I made this up based on other examples in the book). The "base rate" of 5% is usually completely ignored, and the judgement is based only on the description of the guy. Again substitution representativeness instead of frequency and probability. Probability is a difficult concept. Although only vaguely defined in everyday speech, people don't notice the ambiguity around it. Need to come back to

this. Another example - Linda - probability of a subcategory is judged as greater than the whole category it belongs to - because the subcategory is seen as closer to the stereotype. There are ways to reduce the bias. We are sensitive to the way in which question are worded, although the algebraic meaning is the same. For example "how many of the 100 people" comes across different from "what percentage (of a general population)". Also, data can be presented in a way that already offers some causal interpretation (or begs for one). Or can be shown as pure statistical data with no apparent meaning. We will be more sensitive the causal - System 1. Results that come against our intuition are quickly "explained away". Students "quietly exempt themselves" from the conclusions of experiments that surprise them. (some experiment where few people offered to help, knowing that many others are around the person asking for help). "Subjects unwillingness to deduce the particular from the general was matched only by their willingness to infer the general from the particular". Regression to the mean - I find the part from here to the end of the chapter is a bit occurred, and will have to place the ideas under "quarantine" for now. The idea that luck plays a bigger role in our lives than we want to think is taken further, reaching some unusual conclusions. Those conclusions are argued with the help of inadequate statistical language - something like "statistics 101 for people who hated math all their lives and can't add". He refers to what could be accurately be described by terms like bivariate distributions, stochastic processes, correlations, confidence intervals, first and second moment etc., but avoids these concepts, and this makes the whole argument quite ambiguous. We make biased guesses, and the author suggests a rational way to make them less biased - 1. get the base rate estimate 2. adjust for your intuition

while accounting for "correlation" !?... Isn't there a beta supposed to be there somewhere, r squared and all? I have my suspicion about other stuff. Thinking fast and slow, Daniel Kahneman. Summary 2 Chapter 3 - Overconfidence Again the "fooled by randomness" stuff, explained in a bit more detail. Hindsight bias - "The core of the illusion is that we believe that we understand the past, which implies that the future should also be knowable, but we understand the past less than we believe we do". Recent events alter not only our view of the future, but also our view of the past. If two teams with comparable track record play against each other, and one is the clear winner, in our "revised model of the world", the losing team's track record to that point will be a lot less impressive than it was before the match. "A general limitation of the human mind is its imperfect ability to reconstruct past states of knowledge, or beliefs that have changed". "Once you adopt one view of the world (or any part of it), you immediately lose much of your ability to recall what you used to believe before your mind changed. Asked to reconstruct their former beliefs, people retrieve their current ones instead - an instance of substitution - and many cannot believe that they ever felt differently". We can call it the "I knew it all along" effect. If the effect occurs, people exaggerate the probability that they had assigned to it earlier. This impacts the way people make decisions. Somebody who expects to have his decisions scrutinized later will favor those that are the most defensible, to protect themselves against the subsequent hindsight bias of reviewers, in case something bad happens. The author lists physicians as an example, but it is true for bankers too. "Subjective confidence in a judgement is not a reasoned evaluation of the 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 in his mind, not necessarily that the story is true" Now he goes on to talk about the world of finance. Again "fooled by randomness", "black swan" stuff. While I agree to the general idea, I think it has been taken too far. Professional investors and advisers do no better than dart throwing chimps, and careful scrutiny of financial statements and other information is useless. I wonder whether the author considered what the world would look like if everybody completely ignored financial information and switched to dart throwing chimps for stock picking. I don't think the world would look the same, and would definitely not be better. It is easy to take the "efficient market hypothesis" for granted, as if some law of nature, like gravity, automatically makes markets efficient. I think there is no such law. If markets are close to being efficient, they are so precisely because of people who think markets are not efficient, and actively look for inefficiencies and trade accordingly. Those who believe that markets are already efficient have a negative contribution to that efficiency. Stock picking skill is super-over-rated in the culture of financial industry, and it's extremely difficult to tell skill from luck, no matter which method you use. But the "randomness" idea is also oversold, in some circles. In its extreme form, it says that there is no such thing as stock picking skill. In replaces one certainty with another - or one coherent narrative with another coherent narrative :) Luckily, the author explains the biases that he himself falls prey to elsewhere in the book :D Hedgehogs and foxes - interesting way to look at experts. I have seen before, but it is presented differently here, as far as I can remember. The hedgehog is in love with one theory that explains everything and completely defensive about anything else. Foxes have more theories and are less confident about each. Hedgehogs are by far more fun to see on TV. The author moves on to compare experts against simple statistics. He crosses the line between "expert predictions are no better than simple algorithms" to "expert predictions are clearly worse than simple algorithms".

Lists the example of his economist friend and wine lover, who found a clever formula to predict the price of fine wines: "His formula provides accurate price forecasts years and even decades into the future. Indeed, his formula forecasts future prices much more accurately than the current prices of young wines do". This guy's formula "is extremely accurate - the correlation between his predictions and actual prices is above 0.9"... 90% correlation... decades into the future... Daniel, for God's sake, read your own god-damn book man :( Particularly this current chapter 3, called... "overconfidence". You are implying that your friend is a genius and everybody else that takes an interest in the market for fine wines is a complete retard. And, with 90% accuracy, he must also be the richest most successful wine trader in history. The rest of the chapter goes on about the contest between experts and algorithms. Human experts can have valid skills, depending on the general predictability of the domain in question (with chess masters and fire-gighters at one end of the scale, in "high validity environments", and stick pickers and political analysts at the other, in "low validity environments"). If there is enough feedback, and if it comes soon enough, a lot can we learned from experience - works well for drivers, not so well for psychotherapists. It seems experts don't compare options - they go straight for the first guess, and only if that one doesn't feel right, they look for another. It's pattern recognition after hours of training. System 1 can recognize the cues, but System 2 can't put it into words. This is just "the norm of mental life" for everybody, not just experts. But the boundaries of expert sills are not obvious, and certainly not obvious to the experts themselves. The author prefers simple formulas to expert advice, because the formula always gives the same result for the same inputs (unlike humans), doesn't leave out evidence etc. It just leaves one small question - which simple formula? Not sure why such basic point needed to be made at all. It's pretty obvious to every grown up that in most fileds some checklist or procedure is preferable to having the expert making predictions based on nothing but his gut feel.

The author introduces the "inside view" and "outside view". A team or company tend to predict the outcome of whatever it is they are engaged in by giving weight only to information to do with their activities, skills, resources etc. E.g. Hollywood studios try to predict box office success by how good the film and the promotion campaign are. How good are other films released the same weekend is also very important. People often ignore the statistics for the class they belong to - this is the "outside view". For example most entrepreneurs think their start-up will succeed, ignoring the odds of doing so as implied from the experiences of others. Very interesting one is the following - when people are asked to rate themselves with regard to a specific task, they will actually rate the task itself :) For example "are you better than average at starting conversations with strangers". If the task is perceived as difficult => poor rating, and reverse also true. I remember this from my school days - people were happy when the exam questions were easy, even though we knew everybody had the exact same questions and only the top x candidates got accepted. Being overconfident is a social necessity, particularly for people in management positions. In scientific research, optimism is essential. "I have yet to meet a successful scientist who lacks the ability to exaggerate the importance of what he or she is doing". The last question - can optimism be overcome by training? The author goes on to say he is skeptical. I am wondering whether we should wish for that to happen in the first place. If there was a way to do that, Columbus would have had to postpone his trip for a couple of hundred years. Perhaps before that, we never would have made it out of Africa. It all depends on what we consider to be the overall cost of failure, and overall reward for success, for mankind taken as a whole. Optimism of "unreasonable men" seem to have helped us out quite a bit. Chapter 4 - Decisions This is mainly a presentation of prospect theory. Classic economic theory assumes all players to be rational. The author considers rational players to

be a different species, which he calls "Econs". This is different from us, humans - we have a System 1, they don't. The chapter presents the conclusions a large number of experiments in which participants are asked for their choices on lots of hypothetical gambles. These hypothetical gambles are "to the students of decision making what the fruit flies are to geneticists". The difference between utility perceived by Econs and Humans is that Econs care only about aggregate wealth. Humans care about changes in wealth with regard to some unspoken reference point. This reference point depends on context, framing of the consequences of choice to be made etc. To use financial option language, the utility function seems to be "path dependent". The same thing can be perceived as a gain or as a loss, depending on each individual's reference point - the psychological equivalent of the experiment in which one hand feels same temperature water as warm and another hand as cold. It is the emotional response to the perceived changes relative to reference points that influence the decision. Reference points can be moved around by the way the question is worded etc. The reference point is sometimes referred as the "adaptation level", or "default case". Loss aversion has evolutionary roots - organisms that treat threats more urgent than opportunities do better. A loss aversion ratio can be calculated seems to be in the range of 1.5 to 2.5 - on average we are willing to take a 50/50 bet if outcomes are +200/-100, not worse. Preferences are not constant, they depend on variable reference points. For example the minimum price for which we are willing to sell something we own is much higher than the price we are willing to pay for getting the same thing when we don't already own it. This is called "endowment effect". Suggested explanation - in one case we have the pain of giving up something we own. In the other case, the pleasure of getting something new. They are not symmetrical ultimately due to risk aversion. This also shows that emotional attachment to many things we own is a lot higher than to the money we have. Money is perceived as a means for exchange (quite rightly, I would say). Endowment effect doesn't apply to professional traders

for the same reason as the money example - emotional attachment doesn't exist. It's the difference between "items held for use' and "items held for exchange" (I bought of pair of Levi's jeans two weeks ago - and traded in my old jeans for 50 dollars - I kind of regretted the decision, although it was a good deal). There are "frames" in which people can be persuaded to be less influenced by the endowment effect. For a Econ, the buying price should be irrelevant with regard to the subsequent decision to sell. Not the case for Humans (applies to stocks, houses, anything). "Being poor, in prospect theory, is living below one's reference point". Neurologists proved that the brain reacts to a perceived threat way before we become conscious of it - via some super fast neural channel. There is a mechanism designed to give priority to bad news. There is no equivalent system for processing good news. Loss aversion is part of a bigger negativity bias. Bad impressions are quicker to form and more resistant to disconfirmation than good ones. Success in a marital relation seems to depend much more on avoiding the negative than on seeking the positive. Some expert even worked out a ratio of good to bad experiences 5:1. (John Gottman). Pleasure has the biological role of indicating the direction of a significant improvement of circumstances. Risk aversion and conservatism are the gravitational force that holds our lives together near the reference point. Moral judgements are also reference-dependent. And we are not designed to reward generosity as reliably as we punish meanness (asymmetry again). Example given by author : "This reform will not pass. Those who stand to lose will fight harder than those who gain" - nearly identical to a quote from "The Prince".

Possibility effect - the perceived change of likelihood from 0% to 5% is much larger than 5% to 10%. We overweight small probabilities. Makes both gambles and insurance policies more attractive than they are - price for peace of mind, or price for the hope and dreams of winning big - in both cases the reward is immediate. Decision weights are not identical to probabilities. I don't particularly like this probability talk - I find the idea of known probabilities of outcomes as some artificial construction of the modern world. You can only find them in casinos and lotteries, not in real life. Value is derived from perceived gains and losses, not from states of wealth. Planning fallacy - people come up with "best case scenarios" when asked for fair estimates. It is easy to overweight the plan itself than the reasons unknown reasons for failure. "Measurable reactions like hart rate show that the fear of an impending electric shock was essentially uncorrelated with the probability of receiving the shock". "Affect laden imagery" overwhelmed the response to probability and can be shown to disrupt calculation. Representation of outcome is more important than probability. "denominator neglect fallacy" - 0.1% is smaller than 1 in ten, which is smaller than 10 in 100. This is present when each case is taken individually. When compared, the effect disappears. Without comparison, it takes an exceptionally active System 2. Choices from experience are very different from choices from description. Broad framing usually leads to sounder decisions than narrow framing. We are by nature narrow framers. "We have neither the inclination nor the mental resources to enforce consistency of our preferences". The "outside view" is a broad frame. "Money is a proxy for points on a scale of self-regard and achievement".

We keep separate "mental accounts" for each decision we make - these are a form of narrow framing. (Sometimes I find myself wanting my last trade to work well, even when it is only a partial reduction of existing position meaning I would lose money if the last trade made money - not particularly consistent). Massive preference for selling winners has been documented - if you NEED to sell something, that is. "Regret is one of the counterfactual emotions that are triggered by the availability of alternatives to reality". Acting and failing to act are perceived very differently. Emotional reaction to results of action are stronger than to inaction. Black Jack example asymmetry of regret for bad outcomes in "hit" or "stand". It is departure from default that produces regret. (my boss was once upset with me for having hedged a position which we hadn't intended on keeping, that would have made money if left open - his default was the open position). Efficient risk management is sometimes at odds with intense loss averse moral judgements. Spending too much money on insurance for some risks leaves fewer resources available to cover other risks which are not so present in people's minds. System 1 risk management actually minimize the expectation of regret. And people seem to anticipate more regret than they will actually face - they underestimate the power of the "psychological immune system" (Daniel Gilbert). Change of framing can reverse judgement on choices that have identical outcomes - this is the clearest proof of irrationality to me. For example high probability small loss vs low probability big gain is declined, but buying a lottery ticket with identical details is taken on - the difference between mental representations of "loss" vs "cost". Evaluability hypothesis (Hsee) - info without a term of comparison is underweighted. "Italy won" and "Frnace lost" have identiacl meanings to Econs, but not to

Humans. They trigger different mental representations. They are not emotionally equivalent. "The credit card lobby pushed for making differential pricing illegal, but it had a fallback position: the difference, if allowed, would be labelled a cash discount, not a credit surcharge." It's easier to forgo a discount than to pay a surcharge. The same can be shown for some moral judgements. Some people are more rational than others, and there is evidence of this in brain scans. Less rational choices seem to be associated with the amygdala, suspected to be involved heavily in System 1 stuff. Important stuff about framing - it is not that framing distorts our true preferences, as much as our preferences themselves are about frames. Loss of cash is charged to a different mental account than loss of objects that can be bought with the same amount of cash. Opting in and opting our have huge impact on organ donations. The term "utility" has two different meanings. One corresponds to Bentham's definition - the amount of pleasure or pain experienced. Another one, used by economic theory, is some kind of "wantability". These two correspond to what the author calls "experienced utility"and "remembered utility". Experienced utility is some kind of integral of pain and pleasure dt (so to speak), whereas remembered utility is not proportional to the integral. The distinction is thus made between the experiencing self and remembering self. One derives pleasure from the experience, the other from the memory of the experience. One answers the question "does it hurt now?", the other "how was it on the whole?". Inconsistency between actual experience and remembered experience can be demonstrated. Experiments show that sometimes people choose the worse experience, based on the fact that they retain a better memory of that experience compared to a less painful one. Duration of the pain is not so important in the memory of it - we retain only several slices of time. It's

associated more to the peak to end part of the experience. Sudden end leaves a worse experience than a gradual decrease in pain over a longer period. People confuse the experience itself with the memory of it, which seems to be a strong cognitive bias - it's substitution again. Experiencing self doesn't have a voice. We identify ourselves with the remembering self, and the experiencing self is some kind of stranger (I agree...). The remembering self works by composing stories and keeping them for future reference. "Caring for people often takes the form of caring for the quality of their stories, not for their feelings". "Tourism is about helping people to construct stories and collect memories". "Ed Diener and his team provided evidence that it is the remembering self that chooses vacations" - I would guess the remembering self chooses a lot, not just that. Something called the U-index (experienced unhappiness) can and has been surveyed for large samples. Normally we draw pleasure and pain from what is happening that moment, but there are exceptions - somebody who is in love can be happily stuck in traffic. Similar surveys can be done for the remembering self at the same time. Looks like some aspects of life influence the overall evaluation of the quality of life than experienced utility. Educational attainment for instance, is associated with higher evaluation of one's life, but not with greater experienced well being. Ill health has a much stronger adverse effect on experienced well-being than on life evaluation. Religion doesn't seem to provide a reduction of feelings of depression or worry, based on these studies. Money beyond a certain point does not increase experienced well being, despite the fact that money permits the purchase of many pleasures. Higher income does seem to bring higher life satisfaction. The importance that people attach to money at age 18 is a good predictor of the satisfaction with their income as adults. The decision to marry reflects for many people a massive error of "affective forecasting". Experienced well being is on average unaffected by marriage some things change for the better, some for the worse.

Life satisfaction is influenced to some degree by recent events. In general it is influenced by a small sample of highly available ideas. Both experienced happiness and life satisfaction seem to be heavily influenced by the genes (shown by experiments with twins separated at birth). People who appear equally fortunate vary greatly in how happy they are. Exclusive focus on happiness as experienced well being is wrong, in the author's view. I would agree - people spend a lot of time with their memories as well. I guess that the same experiencing self can focus on memories or outside events. "Any aspect of life to which attention is directed will loom large in a global evaluation". This is the "focusing illusion". "Nothing in live is as important as you think it is when you are thinking about it" :) When you are asked to rate how much you enjoy your car, you answer a simpler question - "how much pleasure do you get from your car when you are thinking about it". Most of the time, even when driving, you think about something else though. Any aspect of life is likely to be more salient if a contrasting alternative is highly available. There is no adaptation to chronic pain, constant exposure to loud noises and severe depression. They constantly attract attention. Adaptation works by gradually switching focus on something else. We can adapt to most of the long term circumstances of life though. For paraplegics, life satisfaction is much more affected then experienced well being. "Miswanting" is a term for the bad choices that arise from errors of "affective forecasting" (I think I have a long list of those). The focusing illusion is a rich source of miswanting. Difference in the impact on happiness of buying a new car vs joining a club. Social interaction will always attract your attention. The car won't.

Author's Conclusions The author doesn't claim that people are "irrational" - a term that conjures "impulsivity, emotionality and a stubborn resistance to reasonable argument". Just that the rational agent model is not a good description. This has some implications way beyond psychology, into public policy. Extreme libertarian views (Chicago school of economics) claims that people are rational, thus it is "unnecessary and even immoral to protect people against their choices". Interesting example of excessive rational interpretation of human behavior. Obesity epidemic could be explained by people's belief that a cure for it will be soon available :) The same thing happens sometimes in financial markets - people enforce some weird implied rational view on behaviors that contradict each other - like bonds going up at the same time as gold - the "printing money" and "inflation fears" story can't explain both. "For behavioral economists freedom has a cost, borne by individuals who made bad choices, and by a society that feels obligated to help them". For the Chicago guys, freedom is free of charge. The author is in favor of some libertarian paternalism - Thanler and Sustein, a book called Nudge - in which, without restricting the freedom, available choices can be framed in such a way that favor the better choice. For example, opting out of health insurance, not opting in. Or making regulations that prevent companies from exploiting the psychological weaknesses of Humans by pretending they are Econs (like hiding important information in small print). I actually agree with this, and have had arguments with extreme libertarians, which I consider a crazy bunch :D It's hard to keep ourselves from falling prey to all these cognitive biases, but we can spot others when they do :) and that can improve decision making in an organization (which is a factory for making decisons). We can also learn to recognize "cognitive mine fields" and call in reinforcements from System 2.

3/31/2012 7:07:00 PM http://cataligninnovation.blogspot.in/2012/02/thinking-fast-slow-landmarkbook-in.html Thinking, fast & slow: A landmark book in intuitive thinking & decision making

"What is E=mc2 of this century?", our son Kabir asked me a few days after we watched the NOVA film "Einstein's big idea" together sometime last year. I thought about it for a few moments and said, "Psychology is the physics of 21st century, Kahneman is the Einstein and his work on happiness is like E=mc2". My answer and speed with which it came surprised me more than it surprised Kabir. I was clearly under the spell of Kahneman. Who is this Kahneman? And what is his work about? If you want to know, your best bet is to read Nobel Laureate Daniel Kahneman's bestselling book "Thinking, fast and slow". It has come out a couple of months back in India. It is a landmark among the psychology literature intended for layman, more specifically about intuitive thinking and decision making under uncertainty. It covers a vast spectrum. Let me articulate a few nuggets of wisdom from it. Answering an easier question: When I look back at my answer to Kabir's question, it is clear that the answer was given off-the-cuff. In fact, I was in no position to answer the original question because I am clueless about most of the recent breakthrough developments in various sciences including those in psychology. Then what happened here? Kahneman explains it in chapter 9 titled "Answering an easier question". Whenever we are asked a question whose answer we don't know, the fast thinking mode answers an easier

question. And unless the slow thinking mode checks & rejects the answer, it is given out like it happened with me. In my case the easier question that got answered was, "Among the scientific results I know, which one appeals to me the most?" Kahneman calls such shortcuts "heuristics" and we use them all the time. They work mostly and trick us real bad occasionally. When we are asked, "How happy are you with life these days?" we tend to answer the easier question, "What is my mood right now?" Expert intuition: when can we trust it? I wrote an article last month about mathematician Srinivas Ramanujan and the marvels of his expert intuition. The article also highlighted how the intuition tricked Ramanujan occasionally creating incorrect results. In chapter 22 which is titled "Expert intuition: when can we trust it?" Kahneman presents the exact criteria under which experts develop real expertise. You acquire skill when (a) you have an environment that is sufficiently regular to be predictable and (b) you have an opportunity to learn these regularities through prolonged practice. In some cases like that of stock analysts, the environment isn't sufficiently regular. On the other hand, chess players and basketball players do develop real skills. Illusion of understanding: Kodak filed for bankruptcy protection last month. All the related stories published in Economist, Wall Street Journal, Wharton School of Business, an HBR blog had one thing in common. None of them contained the phrase "bad luck". Most of them sited some story or the other related to poor management decision making, the most common being the Kodak's invention of digital camera and how Kodak didn't pursue it's development etc. Implicit in these articles was an assumption that bad management decisions cause bad outcomes like bankruptcy and randomness or bad luck plays insignificant role. Kahneman calls these generalizations where randomness is substituted by causation "illusions of understanding" (chapter 19). It stems from 3 things: (1) We believe that we understand the past. However, in reality, we know a story of the past constructed from very limited information easibly accessible to us. (2) We can't reconstruct the uncertainty associated with the past events. It leads to things like the HBR blog suggesting Kodak should have created a photo sharing social network. (3) We have a strong tendency to see causation where there is none. Many times a single story such as Kodak's digital camera story is good enough for us to label Kodak management as the root

cause of its debacle. I don't know how much of strategy literature suffers from "illusion of understanding". Kahneman's law of happiness: Ask yourself "How special is your car to you?" and then ask yourself "How much do you enjoy the commute?" Psychologists have found a decent correlation (0.35) between the first question and the blue book value of the car. And, they have found zero correlation between the second question and the blue book value of the car. Such observations have led Kahneman to formulate the following law Nothing in life is is as important as you think it is when you are thinking about it. Your car's importance to you is exaggerated only when you think about it. Unfortunately, you spend significantly more time driving it than thinking about it.

3/31/2012 7:07:00 PM http://richarddeaves.com/behavioralfinanceresearch/?p=144 Dual process theory and behavioral bias By admin Thursday, March 29, 2012 From time to time I will be posting book reviews. Here is the first. It is forthcoming in the Journal of Economic Psychology. Thinking, Fast and Slow, Daniel Kahneman, Farrar, Straus and Giroux, New York (2011). 499 pp., $30.00, ISBN: 978-0-374-27563-1. In 2002 Daniel Kahneman was awarded the Nobel Prize in Economic Sciences for his research in decision-making under uncertainty, where he has demonstrated how human decisions may systematically depart from those predicted by standard economic theory[and for documenting that] human judgment may take heuristic shortcuts that systematically depart from basic principles of probability (Royal Swedish Academy of Sciences 2002). Much of this research of course was undertaken in collaboration with the late Amos Tversky. In his memoir-like Thinking, Fast and Slow Kahneman reviews much of this seminal research. What makes this book far more than just a retrospective though is Kahnemans choice to begin with a lengthy description of dual process theory and then to move forward with a reinterpretation through this lens of the main body of his research. Dual process theory is based on the view that the mind operates using two parallel systems. These have been termed the Unconscious and the Conscious (e.g., Wilson 2002), Intuition and Reasoning (e.g., Kahneman 2003), or (after Stanovich and West 2000) System 1 and System 2. Kahneman adopts the latter usage and appealing to a broad readership the book is a bestseller likens them to characters in a movie: In the unlikely event of this book being made into a film, System 2 would be a supporting character who believes herself to be the hero (p. 31). System 1 operates continuously and automatically, without reflection and any sense of voluntary control, while System 2 is powered by effortful mental activity and is associated with agency, choice and concentration. While we like to think that System 2 (our reasoning) makes all but a few trivial decisions for us, proponents of dual process theory argue that this is an illusion. In Strangers to Ourselves, Timothy Wilson writes that a better working definition of the

unconscious [i.e., System 1] is mental processes that are inaccessible to consciousness but that influence judgments, feelings and behavior (p. 23). So clearly dual process theory should be of potential concern to students of judgment and decision making. Kahneman devotes the first quarter of the book (chapters 1-9) to dual process theory. After introducing the characters, he goes on to describe their roles using a series of entertaining examples based on research. System 2 is inherently lazy and is often content to accept answers provided by System 1. This is evidenced by priming research. For example, there is evidence that money-primed people are more independent, persevere longer and show a preference for being alone (chapter 4). System 2, being in charge of self-control and susceptible to fatigue, is particularly prone to making poor choices when it is ego-depleted. For example, Israeli judges are less likely to grant parole when they are tired and hungry (p. 43). Kahneman argues that System 1 holds in memory a kind of inner model of our normal world. When something untoward occurs, triggering surprise, System 2 is likely to become engaged. On the other hand, when in a state of cognitive ease, which is characterized by related experience and good mood, one is more likely to be gullible and to believe that the familiar is good (Zajonc (1968)). System 1 is a machine for jumping to conclusions (chapter 7). It digests the data on hand and quickly comes up with a good story. Kahneman calls this WYSIATI: what you see is all there is. Unlike the scientific method which searches for disconfirming evidence, in looking for coherence System 1 is subject to confirmation bias. Halo effects can result: one observes a positive attribute and then (sometimes inappropriately) connects the dots. Basic assessments are constantly being generated by System 1. When a difficult question requiring the resources of System 2 is asked, answers to questions arising from these basic assessments may be substituted for hard questions. When one is asked Are you happy? the answer given may really be to the question Are you currently in a good mood? People allow likes and dislikes to determine beliefs: for example, your political preferences can determine which arguments you find compelling (chapter 9). Next in Part 2 (chapters 10-18) Kahneman turns to his work on heuristics and biases. This research agenda, to be sure, has attracted its share of critics (e.g., Hertwig and Ortmann 2005) and some of their points are well-

taken. For example, overconfidence (in the sense of miscalibration) is often inflated because researchers (whether unconsciously or otherwise) choose questions most likely to take in System 1s tendency to jump to wrong conclusions (Gigerenzer 1991). Still this review is not the place to fan these flames. Consider some examples of heuristics and biases and how dual process theory can potentially elucidate their origins. The tendency to anchor to available cues, even if they are patently meaningless, famously documented in Kahneman and Tverskys famous spinning wheel and African nations in the U.N. experiment, is argued to have both a System 1 and System 2 basis (chapter 11). System 2 being grounded in rationality knows that it must move away from the cue in (what is likely to be) the direction of the correct answer. But being lazy it does not go far enough, allowing the anchor to influence the answer. In line with the notion that those in a state of cognitive ease tend to be less cognitively vigilant, those nodding/shaking their heads stay closer to/depart further from the anchor (Epley and Gilovich 2001). As for System 1, research indicates that its gullibility and tendency to look for confirming evidence induces it to search memory for related answers. Next consider availability: when people are to assess frequency they search memory for known instances of an event. If retrieval is easy it will be guessed the frequency is large. Of course retrieval may be easy because the frequency is truly large. On the other hand, it may be the case that recent, salient occurrences foster easy retrieval. The substitution of an easy question (how easy is it to think of occurrences?) for a hard question (how large is the category?), done by System 1 and endorsed by a lazy System 2, is argued to be at the root of this bias. Finally, consider the tendency to be surprised by regression to the mean. The tendency of System 1 to look for a coherent story leads to an exaggeration of predictability. Indeed, decomposing randomness from systematic (i.e., story-based) factors is complex and it is not surprising that those untrained in statistics have difficulty with the task. And so System 2 defers to intuitions supplied by System 1. The proclivity to overconfidently believe that the world is more predictable than it really is the major theme of Part 3 (chapters 19-24) of the book. The illusion of understanding, reflecting our tendency to constantly fool ourselves by constructing flimsy accounts of the past and believing they are true (p. 199) leads us to erroneously believe that the future is much more

predictable than it really is. Like Nicholas Taleb in The Black Swan (2007), Kahneman rails against false prophets who are at the most convincing when they believe their own patter. The fact is that many domains are close to unpredictable: while it is true that the weather has a significant predictable component, financial, economic and political systems are much less predictable. Indeed in unpredictable environments there is evidence that one does better utilizing simple algorithmic decision rules while eschewing the forecasts of the experts and simple is usually better than complex because of the overfitting problem (chapter 21). Experts fall short because they try to be clever, think outside the box, and consider complex combinations of features (p. 224). This will not be surprising to those who have investigated the performance of professional forecasters and found it wanting relative to nave benchmarks (e.g., Deaves 1994). One of the delights of Kahnemans book is that he peppers it with personal anecdote, sometimes at his own expense. For example, he tells the story of a curriculum project to teach judgment and decision making in Israeli high schools that he headed (chapter 23). Early on he asked committee members to opine on how long they thought it would take to complete the project, with forecasts ranging between one and half and two and half years. One committee member with experience in such initiatives was next asked what was typical, replying that of those groups that successfully completed their tasks (40% didnt), the completion range was 7-10 years yet this same individual when taking the inside view was as subject to planning fallacy as the rest of the team. Clearly it is advisable to take the outside view and be appropriately influenced by the base rate. Kahneman confesses that years later he concluded that he too was at fault (he calls himself chief dunce and inept leader ,p. 253). Despite the fact that the project was eventually finished (eight years later, after Kahneman had left the team), if he had not been subject to the sunk cost fallacy he would have terminated the initiative once historical data were made available to him. In Part 4 (chapters 25-34) Kahneman turns to his famous work on choices made under uncertainty. He begins with another anecdote: Amos handed me a mimeographed essay by a Swiss economist which said: the agent in economic theory is rational, selfish, and his tastes do not change[but] to a psychologist it is self-evident that people are neither fully rational nor completely selfish, and that their tastes are anything but stableSoon

afterAmos suggested that we make the study of decision making our next project (p. 269). So began Kahneman and Tverskys research which led to prospect theory and related issues such as the endowment effect and framing. The emotional side of System 1 plays a larger role in this discussion. Indeed, there is a growing view and Kahneman shares it (p. 12) that emotion plays a significant role in decision making. While decision making has been traditionally viewed as a purely cognitive activity with at most anticipated emotions (such as regret) being considered, in the risk-as-feelings view of Loewenstein, Weber, Hsee and Welch (2001), immediatevisceral reactions concurrent with the decision itself may occur and potentially influence the cognitive process. Importantly, Kahneman does not equate System 1 with affective assessment. For one thing there is no one part of the brain that either of the systems would call home (p. 29) not that we really know with certainty where emotions or any particular brain function truly reside despite the sometimes inflated claims of neuroeconomics (e.g., Harrison (2008)). Loss aversion is at the heart of prospect theory. Positive-expected-value mixed prospects are routinely rejected by most people because while the rejections of such gambles are System 2 decisions the critical inputs are emotional responses that are generated by System 1 (p. 284). Such behavior is likely adaptive since the view that threats are urgent (or losses exceedingly painful) likely increased the probability of survival. The endowment effect which some view as the non-random counterpart to loss aversion is also argued to have an emotional basis (chapter 27). Thinking like a trader can induce people to avoid both loss aversion and endowment effects. Probability weighting is another key component of prospect theory. While typical probability weighting suggests that very lowprobability events are overweighted, Kahneman discusses evidence that this is especially so when such events are emotionally vivid, such as in the work of Rottenstreich and Hsee (2001) on kissing movie stars. Finally, in Part 5 (chapters 35-38), more recent research undertaken by Kahneman in the area of happiness is reviewed. This work will be least known to many. One of the major insights coming from this research is that in the realm of well-being there can be a divergence between its experience and its memory, and it is not necessarily clear which trumps (or should trump) the other.

Naturally reviewers are expected to quibble. The one that comes to mind is that sometimes references are wanting. While the decision to do away with standard footnotes was perhaps imposed likely publishers have decided lay readers will not pick up a book with full-blown footnotes at times references are missing in the pseudo-footnotes at the end of the book. To take one example, in his discussion of vivid outcomes and how they might impact probability weighting (p. 326), Kahneman spends some time talking about research done by a Princeton team without identifying either the paper or the authors. This is naturally frustrating for researchers like myself who wish to do some follow-up reading. Thinking, Fast and Slow is a well-written, truly enjoyable book. While accessible to the lay reader, even researchers well acquainted with much of Kahnemans work will be engaged by its sense of (academic) history, its variegated anecdotes and its refreshing dual process theory-based perspective (though such a perspective will perhaps not be to everyones taste). Likely this is a book that will be read sooner or later by all readers of the Journal of Economic Psychology. This reviewer recommends sooner. REFERENCES Deaves, R., 1994, How good are Canadian macroeconomic forecasters?Canadian Business Economics 2 (No. 3): 60-66. Epley, N., and T. Gilovich, 2001, Putting the adjustment back in the anchoring and adjustment heuristic: Differential processing of self-generated and experimenter-provided anchors, Psychological Science 12, 391-96. Harrison, G. W., 2008, Neuroeconomics: A critical reconsideration. Economics and Philosophy 24, 303-44. Hertwig, R., and A. Ortmann, 2005, The cognitive illusion controversy: A methodological debate in disguise that matters to economists, in Zwick, R., and A. Rapaport (eds.), Experimental Business Research 3, 113-30 Kahneman, D., 2003, A perspective on judgment and choice, American Psychologist 58, 697-720. Loewenstein, G., E. U. Weber, C. K. Hsee and N. Welch, 2001, Risk as feelings, Psychological Bulletin 127, 267-286. Rottenstreich, Y., and C. K. Hsee, 2001, Money, kisses and electric shocks: On the affective psychology of risk, Psychological Science 12, 185-90. Royal Swedish Academy of Sciences, 2002, Press release announcing the Nobel Prize in Economic

Sciences,http://www.nobelprize.org/nobel_prizes/economics/laureates/2002 /press.html. Stanovich, K. E., and R. F. West, 2000, Individual differences in reasoning: Implications for the rationality debate, Behavioral and Brain Sciences 23, 645-65. Taleb, N. N., The Black Swan: The Impact of the Highly Probable, Random House, New York. Wilson, T. D., 2002, Strangers to Ourselves: Discovering the Adaptive Subconscious, Harvard University Press, Cambridge, Massachusetts. Zajonc, R. B., Attitudinal effects of mere exposure, Journal of Personality and Social Psychology 9, 1-27.

3/31/2012 7:07:00 PM http://www.guardian.co.uk/books/2011/dec/13/thinking-fast-slow-danielkahneman These days, the bulk of the explanation is done by something else: the "dual-process" model of the brain. We now know that we apprehend the world in two radically opposed ways, employing two fundamentally different modes of thought: "System 1" and "System 2". System 1 is fast; it's intuitive, associative, metaphorical, automatic, impressionistic, and it can't be switched off. Its operations involve no sense of intentional control, but it's the "secret author of many of the choices and judgments you make" and it's the hero of Daniel Kahneman's alarming, intellectually aerobic book Thinking, Fast and Slow. System 2 is slow, deliberate, effortful. Its operations require attention. (To set it going now, ask yourself the question "What is 13 x 27?" And to see how it hogs attention, go to theinvisiblegorilla.com/videos.html and follow the instructions faithfully.) System 2 takes over, rather unwillingly, when things get difficult. It's "the conscious being you call 'I'", and one of Kahneman's main points is that this is a mistake. You're wrong to identify with System 2, for you are also and equally and profoundly System 1. Kahneman compares System 2 to a supporting character who believes herself to be the lead actor and often has little idea of what's going on. System 2 is slothful, and tires easily (a process called "ego depletion") so it usually accepts what System 1 tells it. It's often right to do so, because System 1 is for the most part pretty good at what it does; it's highly sensitive to subtle environmental cues, signs of danger, and so on. It kept our remote ancestors alive. Systme 1 a ses raisons que Systme 2 ne connat point, as Pascal might have said. It does, however, pay a high price for speed. It loves to simplify, to assume WYSIATI ("what you see is all there is"), even as it gossips and embroiders and confabulates. It's hopelessly bad at the kind of statistical thinking often required for good decisions, it jumps wildly to conclusions and it's subject to a fantastic suite of irrational biases and interference effects (the halo effect, the "Florida effect", framing effects, anchoring effects, the confirmation bias, outcome bias, hindsight bias, availability bias, the focusing illusion, and so on).

The general point about the size of our self-ignorance extends beyond the details of Systems 1 and 2. We're astonishingly susceptible to being influenced puppeted by features of our surroundings in ways we don't suspect. One famous (pre-mobile phone) experiment centred on a New York City phone booth. Each time a person came out of the booth after having made a call, an accident was staged someone dropped all her papers on the pavement. Sometimes a dime had been placed in the phone booth, sometimes not (a dime was then enough to make a call). If there was no dime in the phone booth, only 4% of the exiting callers helped to pick up the papers. If there was a dime, no fewer than 88% helped. Since then, thousands of other experiments have been conducted, right across the broad board of human life, all to the same general effect. We don't know who we are or what we're like, we don't know what we're really doing and we don't know why we're doing it. That's a System-1 exaggeration, for sure, but there's more truth in it than you can easily imagine. Judges think they make considered decisions about parole based strictly on the facts of the case. It turns out (to simplify only slightly) that it is their blood-sugar levels really sitting in judgment. If you hold a pencil between your teeth, forcing your mouth into the shape of a smile, you'll find a cartoon funnier than if you hold the pencil pointing forward, by pursing your lips round it in a frown-inducing way. And so it goes. One of the best books on this subject, a 2002 effort by the psychologist Timothy D Wilson, is appropriately called Strangers to Ourselves. We also hugely underestimate the role of chance in life (this is System 1's work). Analysis of the performance of fund managers over the longer term proves conclusively that you'd do just as well if you entrusted your financial decisions to a monkey throwing darts at a board. There is a tremendously powerful illusion that sustains managers in their belief their results, when good, are the result of skill; Kahneman explains how the illusion works. The fact remains that "performance bonuses" are awarded for luck, not skill. They might as well be handed out on the roll of a die: they're completely unjustified. This may be why some banks now speak of "retention bonuses" rather than performance bonuses, but the idea that retention bonuses are needed depends on the shared myth of skill, and since the myth is known to be a myth, the system is profoundly dishonest unless the dart-throwing monkeys are going to be cut in.

In an experiment designed to test the "anchoring effect", highly experienced judges were given a description of a shoplifting offence. They were then "anchored" to different numbers by being asked to roll a pair of dice that had been secretly loaded to produce only two totals three or nine. Finally, they were asked whether the prison sentence for the shoplifting offence should be greater or fewer, in months, than the total showing on the dice. Normally the judges would have made extremely similar judgments, but those who had just rolled nine proposed an average of eight months while those who had rolled three proposed an average of only five months. All were unaware of the anchoring effect. The same goes for all of us, almost all the time. We think we're smart; we're confident we won't be unconsciously swayed by the high list price of a house. We're wrong. (Kahneman admits his own inability to counter some of these effects.) We're also hopelessly subject to the "focusing illusion", which can be conveyed in one sentence: "Nothing in life is as important as you think it is when you're thinking about it." Whatever we focus on, it bulges in the heat of our attention until we assume its role in our life as a whole is greater than it is. Another systematic error involves "duration neglect" and the "peak-end rule". Looking back on our experience of pain, we prefer a larger, longer amount to a shorter, smaller amount, just so long as the closing stages of the greater pain were easier to bear than the closing stages of the lesser one. Daniel Kahneman won a Nobel prize for economics in 2002 and he is, with Amos Tversky, one of a famous pair. For many in the humanities, their names are fused together, like Laurel and Hardy or Crick and Watson. Thinking, Fast and Slow has its roots in their joint work, and is dedicated to Tversky, who died in 1996. It is an outstanding book, distinguished by beauty and clarity of detail, precision of presentation and gentleness of manner. Its truths are open to all those whose System 2 is not completely defunct; I have hardly touched on its richness. Some chapters are more taxing than others, but all are gratefully short, and none requires any special learning.

3/31/2012 7:07:00 PM http://www.dayonbay.ca/index.php/book-reviews/thinking-fast-andslow.html One brain two systems Thinking Fast and Slow by Daniel Kahneman presents an up-to-date survey of decision making theory in order to help individuals identify errors of judgment and choice in others and hopefully, but more difficultly, themselves. The book explores how ones brain uses two distinct systems (aptly characterized by Kahneman as System 1 and System 2) to make decisions, and how the operation of these systems can lead to suboptimal results. Thinking Fast and Slow fits into the ever-expanding genre of popular psychology books and assumes little prior knowledge of the subject. It is accessible to the average reader, and gives them an overview of Kahnemans current understanding of judgment and decision making (pg 4). Kahnemans understanding is worth taking note of as he is an authoritative figure in the world of psychology. Kahneman was a winner of the Nobel Prize in Economics in 2002 for his work about decision making, and currently serves as a professor at Professor at Princeton in both the Psychology and Public & International Affairs departments. System 1 and System 2 2+2=? 17 x 24 = ? The above equations can help one understand the two thinking systems Kahneman discusses. System 1 (i.e. 2+2) represents quick, effortless, automatic thought processes which one does not have a sense of control over. However, this system is ridden with biases, is blind to logic and statistics, and has a tendency to turn difficult questions into easier ones which it then proceeds to answer. System 2 is the antithesis of System 1. System 2 is deliberative, and requires mental effort; this system generally takes its cues from System 1 but has a tendency to take over when the going gets tough. The author accepts that because System 2 requires so much mental effort it would be impractical to rely on it for every decision one makes in the course of a day given humans only have a limited supply of mental effort. However, the author suggests that by learning about decision making individuals can

learn to recognize situations (i.e. use System 1) where judgmental mistakes are likely. In doing so we are better able to know when we must expend our mental effort (i.e. System 2) to avoid making significant mistakes. Key Points Thinking Fast and Slow covers a wide range of topics, many of which can be found in an introduction to psychology textbook. Reading this book through a lens of how it applies to finance/trading there were a few points which stood out: Mental Effort Intense focus can make people blind to things which should obviously catch their attention (pg 23). An example is an experiment where participants had to watch a video and count the number of times people threw balls back and forth. In the middle of the video a man in a gorilla suit appeared on screen; shockingly half of participants failed to notice anything unusual as they were engrossed counting the throws. Switching from one task to another requires great mental effort when time pressure is involved (pg 37). Restoring the available sugar in the brain (e.g. from drinking a sugary drink) prevents the deterioration of mental performance (pg 43). When people are instructed to frown while doing a task, they actually try harder and experience greater cognitive strain (pg 132). The Illusion of Confidence Confidence depends on the quality of the story seen, as demonstrated by participants in a study who were more confident of their judgments than those who saw both sides (pg 87). Intuitive predictions from System 1 are generally overconfident and overly extreme. Unbiased predictions permit the prediction of rare or extreme events only when the information is very good . . . if your predictions are unbiased, you will never have the satisfying experience of correctly calling an extreme case (pg 192). Confidence is a function of how coherent information is and how easily this information is processed cognitively. Notice that confidence is not contingent upon how correct someone is (pg 212). Ethics One of the most interesting tidbits from the book can directly be applied to acting ethically in the sense that a single slip-up can doom an individuals

reputation. The psychologist Paul Rozin, an expert on disgust, observed that a single cockroach will completely wreck the appeal of a bowl of cherries, but a cherry will do nothing at all for a bowl of cockroaches (pg 302).