I had first read this book 6 years back and a rereading was due for some time. For me, Thinking, Fast and Slow by Daniel Kahneman is probably the most important book of the 21st century. Kahneman is a Nobel Laureate in Economics who is also a psychologist by profession. In this book, he refines a lifetime of work on the human brain and thinking, highlighting our cognitive biases and emphasizing both the excellence and limitations of the human mind. This book covers so many topics that it’s almost like an encyclopaedia of our mind. A few of the topics it covers include psychology, cognition, perception, irrationality, intuition, statistics, uncertainty, decision making, errors of judgment, types of thinking, gambling, and behavioral economics.
Kahneman introduces two sides of the human mind:
• “System 1 operates automatically and quickly, with little or no effort and no sense of voluntary control.
• System 2 allocates attention to the effortful mental activities that demand it, including complex computations. The operations of System 2 are often associated with the subjective experience of agency, choice, and concentration.”
These two systems are only conceptual and they co-exist in the human brain and help us to navigate our lives.
There are so many things to learn from this book. Below I've listed the ones that stood out for me.
• People intuitively can't think in probabilities.
• Fast thinking (System 1) uses heuristics (mental short-cuts), intuition and perception/memory and the vast majority of our decisions are made using this systems.
• Slow thinking (System 2) is based on reason and deliberate thought.
• System 2, unless trained, will often let system 1 rule
• People avoid cognitive effort (slow thinking) and rely on their intuition too much.
• Pain and pleasure drives mostly everything for humans.
• Nothing in life is as important as you think it is when you are thinking about it.
• Intuition is nothing more than superior awareness
• It is easier to recognize the mistakes of others than our own.
• We know ourselves much less than we think we do as we don’t know the majority of our thoughts which are in the subconscious.
• Our mood affects our subconscious thinking.
• System 2 is in-charge of detecting lies and System 1 in believing them.
• Halo effect – a tendency to like everything about a person if you like one aspect of their personality.
• Availability bias – most obvious and recent example pops up first in the mind
• Statistical sampling can give strange results when using small numbers.
• Anchoring has a huge effect on our thinking and decisions and it can be found everywhere.
• Priming – our thoughts and behaviors are affected much more by our environment and small things we are exposed to than we care to admit or recognize. We can be primed just by being exposed to words.
• People are quite bad at dealing with small risks. Either they ignore them altogether or tend to overreact.
• People ignore base rates when come across any new information.
• We fool ourselves by constructing inaccurate accounts of the past.
• We do not recognize role of luck in our life.
• We should start judging decisions by how they were made and not only by their outcomes.
• Overconfidence in explaining the past makes us believe that we can predict the future as well.
• Surrounding yourself with like-minded people can be dangerous as it reinforces your beliefs and you ignore new facts which don't match your perceptions.
• Planning fallacy – projects almost always go over budget and take longer than expected.
• Loss aversion is the driving factor in most financial and other decisions.
• Endowment Effect – value of something goes up when you own it.
• Bad events weigh much more in our mind than good things.
• Prospect theory shows how human beings decide between alternatives that involve risk and uncertainty. It shows that people think in terms of expected utility relative to a reference point rather than absolute outcomes.
• Do not consider one risk or gamble in isolation, think of all of them spread over a long period of time and will see that this decision actually carries very little risk.
• People keep mental accounts for their expenses/losses or actions in order to keep score.
• In order to avoid hindsight bias, make decisions after very thorough thought or almost none.
• Framing of a question or a situation greatly affects our beliefs and preferences, and thus outcome.
We use sunk cost fallacy to avoid feeling bad about cutting our losses and being called a failure, we tend to throw good money after bad, stay too long in bad relationships and stay in miserable jobs.
The disposition effect refers to our tendency to prematurely sell assets/stocks that have made us gains, while holding on to assets that are losing money.
The optimism bias refers to our tendency to overestimate our chances of experiencing positive occurrences and underestimate our chances of falling to negative events.
We believe more in stories than in statistics.
The narrative fallacy leads us to see some events as stories, as logical chains of cause and effect.
When we are confronted with a perplexing problem, we tend to make life easier for ourselves by answering a substitute, simpler question.
Confirmation bias is the tendency to search for and find confirming evidence for what you believe to be true while ignoring any contradictory evidence.
Cognitive ease explains that the things that are easier to compute, more familiar, and easier to read seem truer than things that require deep thought, are new, or are hard to see.
To make sense of the world we tell ourselves stories about what’s going on and we make associations between events and circumstances. The more these events fit into our own stories the more normal they seem to us. These are the coherent stories that we use.
This is not a book which will sink in one reading. Understanding our biases is one thing and being able to avoid them is totally another. Even Daniel Kahneman has said he fails to avoid these errors most of the time. Being deliberate while making important decisions does not come naturally to us. We should start judging decisions by how they were made and not only how they turned out in the end.