Already a Bloomberg.com user?
Sign in with the same account.
Ford Motor Co
A Nobel laureate’s new book cautions us not to trust our gut
Thinking, Fast and Slow
By Daniel Kahneman
Farrar, Straus and Giroux; 499 pp; $30
For the last decade or so a band of scholars has been trying to cast off the long-accepted “rational agent” theory of economic behavior—the one that says that people, in their economic lives, behave like calculating robots, making rational decisions when they buy a stock, take out a mortgage, or go to the track. These scholars have offered a trove of evidence that people, far from being the rational agents of textbook lore, are often inconsistent, emotional, and biased. Perhaps tellingly, the pioneers of this field were not economists. Daniel Kahneman and Amos Tversky were Israeli psychologists who noticed that real people often do not make decisions as economists say they do. Tversky died in 1996; six years later, Kahneman won the Nobel Prize for economics.
Thinking, Fast and Slow, Kahneman’s new and most accessible book, contains much that is familiar to those who have followed this debate within the world of economics, but it also has a lot to say about how we think, react, and reach—rather, jump to—conclusions in all spheres. What most interests Kahneman are the predictable ways that errors of judgment occur.
Synthesizing decades of his research, as well as that of colleagues, Kahneman lays out an architecture of human decision-making—a map of the mind that resembles a finely tuned machine with, alas, some notable trapdoors and faulty wiring.
Behavioralists, Kahneman included, have been cataloging people’s systematic mistakes and nonlogical patterns for years. A few of the examples he cites: 1. Framing. Test subjects are more likely to opt for surgery if told that the “survival” rate is 90 percent, rather than that the mortality rate is 10 percent. 2. The sunk-cost fallacy. People seek to avoid feelings of regret; thus, they invest more money and time in a project with dubious results rather than give it up and admit they were wrong. 3. Loss aversion. In experiments, most subjects would prefer to receive a sure $46 than have a 50 percent chance of making $100. A rational agent would take the bet. Remarkably, and for similar reasons, golfers putt better when missing would leave them a stroke behind.
As compelling as these examples are—repeatedly, we recognize our own biases—Kahneman’s greater achievement is to build a framework for how, or why, the mind reasons as it does. You may feel a spasm of doubt, as I did, when first introduced to his central contrivance—using two fictional “characters,” which he refers to as System 1 and System 2. Suspend your doubts for just a moment.
System 2 is your conscious, thinking mind. We conceive of this active consciousness as the principal actor, the “decider” in our lives. System 2 thinks slowly; it considers, evaluates, reasons. Its work requires mental effort—multiplying 24 by 17 or turning left at a busy intersection. We attribute most of our opinions and decisions to this thinking, reasonable fellow.
For Kahneman, however, the main protagonist is System 1. This is the agent of our automatic and effortless mental responses. System 1 can add single-digit numbers and fill in the phrase “bread and —.” It is equipped with a nuanced picture of the world, the product of retained memory and learned patterns of association (“Florida/old people”) that enable it to spew out a stream of reactions, judgments, opinions. System 1 can detect a note of anger in a voice on the telephone; it forms snap judgments about those we meet, Presidential candidates, investments that we might be considering.
The flaw in this remarkable machine is that System 1 works with as little or as much information as it has. If it can’t answer the question, “Is Ford (F) stock a good investment?” it supplies an answer based on related but not really relevant data, such as whether you like Ford’s cars.
System 1 simplifies, confirms—it looks for, and believes it sees, narrative coherence in an often random world. It does not perform complicated feats of logic or statistical evaluations. You hear about a terrorist incident and want to avoid all buses and trains; only if you slow down, employ the tools of System 2, do you realize that the risks of terrorism affecting you are very slight.
Willpower requires effort; it is a feature of System 2. In an experiment, 4-year-olds who were able to delay eating an Oreo scored higher, a decade later, on IQ tests. Kahneman suggests that the ability to switch to System 2 is a sign of an “active mind” and a predictor of success.
Contrivance though it is, this framework is remarkably effective in describing how we think; we believe we are creatures of our thinking selves, but many of our opinions merely ratify our automatic responses. In contrast to Malcolm Gladwell, Kahneman is telling us not to blink.
Kahneman is perhaps least persuasive in his treatment of the business world. Noting that even top performers in business—also sports—tend eventually to revert to the mean, he attributes success largely to luck. This confuses events that may not be predictable with those that are determined by chance. A high-achieving retail store, to cite one of his examples, is not lucky—it is well-situated. And if its sales later decline, that is not necessarily a sign that its prior success was random. Business has a self-correcting cycle that fosters mean reversion. Success attracts competitors.
Some readers will object that Kahneman’s is an overly Cartesian world, barren of human intuition. He recommends using formulae even for predicting the future value of wines. Thinking, Fast and Slow is nonetheless rife with lessons on how to overcome bias in daily life. Kahneman advises that you “recognize the signs that you are in a cognitive minefield, slow down, and ask for reinforcement from System 2.” The next time a relative pops off about the stock market or President Obama, I will wonder: Does he or she know? Or is this just their reflexive self? I will never think about thinking quite the same. It’s a monumental achievement.