The central thesis of the book "Thinking, Fast and Slow"

Thinking, Fast and Slow is a 2011 book by Nobel Memorial Prize winner in Economics Daniel Kahneman which summarizes research that he conducted over decades, often in collaboration with Amos Tversky.[1][2] It covers all three phases of his career: his early days working on cognitive bias, his work on prospect theory, and his later work on happiness.

The book's central thesis is a dichotomy between two modes of thought : System 1 is fast, instinctive and emotional; System 2 is slower, more deliberative, and more logical. The book delineates cognitive biases associated with each type of thinking, starting with Kahneman's own research on loss aversion. From framing choices to substitution, the book highlights several decades of academic research to suggest that people place too much confidence in human judgment.

Prospect theory[edit source | editbeta]

The basis for his Nobel prize, Kahneman developed prospect theory to account for experimental errors he noticed in Daniel Bernoulli's traditional utility theory. This theory makes logical assumptions that do not reflect people’s actual choices because it doesn’t take into account behavioral biases.

For example, one might reasonably assume that an individual would place twice as much value on a 20% chance of winning a prize as opposed to a 10% chance, but experiments show otherwise. Humans are more likely to act to avoid loss than to achieve a gain. For example, people generally ascribe a different absolute change in value to a 10% chance of a loss as opposed to a 10% chance of a gain. They also consider the reference point in deciding how much to value either one. Thus, a 10% change in probability has a greater value to most people if it changes the probability from 0% to 10% than if it changes the probability from 90% to 100%.[dubious – discuss] (The reference point has more value at either extreme: in case 1 because it creates a possibility from an impossibility and case 2 because it creates a certainty instead of a high probability.)

Two systems[edit source | editbeta]

In the book's first section, Kahneman describes the two different ways the brain forms thoughts:

System 1: Fast, automatic, frequent, emotional, stereotypic, subconscious

System 2: Slow, effortful, infrequent, logical, calculating, conscious

Kahneman covers a number of experiments which purport to highlight the differences between these two thought processes, and how they arrive at different results even given the same inputs. Terms and concepts include coherence, attention, laziness, association, jumping to conclusions and how one forms judgements.

Heuristics and biases[edit source | editbeta]

The second section offers explanations for why humans struggle to think statistically. It begins by documenting a variety of situations in which we either arrive at binary decisions or fail to precisely associate reasonable probabilities to outcomes. Kahneman explains this phenomenon using the theory of heuristics.

Kahneman uses heuristics to assert that System 1 thinking involves associating new information with existing patterns, or thoughts, rather than creating new patterns for each new experience. For example, a child who has only seen shapes with straight edges would experience an octagon rather than a triangle when first viewing a circle. In a legal metaphor, a judge limited to heuristic thinking would only be able to think of similar historical cases when presented with a new dispute, rather than seeing the unique aspects of that case. In addition to offering an explanation for the statistical problem, the theory also offers an explanation for human biases.

Anchoring[edit source | editbeta]

The “anchoring effect” names our tendency to be influenced by irrelevant numbers. Shown higher/lower numbers, experimental subjects gave higher/lower responses. Experiment: experienced German judges proposed longer sentences if they had just rolled a pair of dice loaded to give a high number.[1]

Availability[edit source | editbeta]

The availability heuristic is a mental shortcut that occurs when people make judgments about the probability of events by how easy it is to think of examples. The availability heuristic operates on the notion that, "if you can think of it, it must be important." The availability of consequences associated with an action is positively related to perceptions of the magnitude of the consequences of that action. In other words, the easier it is to recall the consequences of something, the greater we perceive these consequences to be. Sometimes, this heuristic is beneficial, but the frequencies that events come to mind are usually not accurate reflections of their actual probability in real life.

Substitution[edit source | editbeta]

System 1 is prone to substituting a simple question for a more difficult one. In what Kahneman calls their “best-known and most controversial” experiment, “the Linda problem.” Subjects were told about an imaginary Linda, young, single, outspoken and very bright, who, as a student, was deeply concerned with discrimination and social justice. They asked whether it was more probable that Linda is a bank teller or that she is a bank teller and an active feminist. The overwhelming response was that “feminist bank teller” was more likely than “bank teller,” violating the laws of probability. (Every feminist bank teller is a bank teller.) In this case System 1 substituted the easier question, "Is Linda a feminist?" dropping the occupation qualifier. An alternative view is that the subjects added an unstated implicature to the effect that the other answer implied that Linda was not a feminist.[1]

Optimism and loss aversion[edit source | editbeta]

Kahneman writes of a "pervasive optimistic bias",

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