This month’s book, Thinking Fast and Slow, is by Daniel Kahneman, winner of the Nobel Memorial Prize in Economics. Brilliant people are often brilliant in multiple subjects, and Kahneman certainly falls into that category. I thoroughly enjoy studying the brain’s function and how we process information. Kahneman’s insight into this topic are both complex and yet surprisingly understandable.
He begins with a division of mental processes into two systems, the first being the fast or automatic. This is the system that allows for quick, on the fly, knee-jerk, or reactive decisions based on limited or no information on the subject.
It is easy to say that this system is flawed and has no merit, but that is not necessarily the case. This system has allowed for man’s survival for millennia. We are walking in the forest and we hear a huge roar, from what animal or machine we have no clue, but we automatically run or, at the very least, change direction to avoid the sound. There may have been no danger present, however, we are willing to err on the side of caution and it has proven to be judicious over the years.
This fast system is also a tremendous time saver. It allows us to dramatically increase efficiency in our daily lives. Many decisions, like the shirt we choose to wear, what cereal we choose to eat, or the route to our job in the morning, do not require in-depth analysis. We make these decisions using the automatic system and, for the most part, they work out just fine.
The second system is the one where we pause in the process and carefully examine the options. We review the various predicted outcomes based on the data we gather and logically and rationally make the best decision. We often refer to these as “big” decisions as the outcomes have greater variation and often a greater effect on our existence.
The first important point in Kahneman’s theory is that both of these systems are important. The critical point is knowing when to use each system and why. Here are some ideas.
System one has no doubt attached. It happens too quickly and, as we shoot from the hip, we don’t consider the possible negative consequences. System two, on the other hand, can be riddled with doubt. This is especially common when there are two options that are summarily incompatible.
Kahneman goes on to explain the effect of anchors and biases in the two systems. Anchors are examples from memory that may or may not be accurate. If you recall that the last mattress you bought was $300, you are likely to assume that a mattress costing $1000 is absurd. If, on the other hand, you remember a radio commercial touting a mattress for $2000, one with a price of $1000 appears to be a bargain.
So many of our decisions are affected by our imperfect memory and the biases created by events as we remember them. Too often we remember only the peak emotional moment of an event and it colors our memory in such a way so as to make it inaccurate. We then rely on this memory in the decision process and it becomes a flaw in our reasoning.
”Our memory, a function of System 1, has evolved to represent the most intense moment of an episode of pain or pleasure (the peak) and the feelings when the episode was at its end. A memory that neglects duration will not serve our preference for long pleasure and short pains.”
Kahnemen gives an incredible description of the role risk avoidance plays in our decision making. He explains how risk is a human creation designed to assist in dealing with dangers, fears. and uncertainties. He submits that real risk or “objective risk” doesn’t actually exist. Think on that for a while.
”Many of the options we face in life are ‘mixed’: there is a risk of loss and an opportunity for gain, and we must decide whether to accept the gamble or reject it.”
There is so much more in sections on loss aversion, defeat, regret, and the emotional results of the process. I recommend this book to anyone willing to take a deeper dive into the decision-making process. The outcome could be substantially illuminating.
Check out all the titles in Dave Donald’s Business Book Club.