Daniel Kahneman’s Thinking, Fast and Slow (2011) places much emphasis on how human thoughts are processed and how these processes influence our decision-making in everyday life. His book categorizes our thought processes into two groups, which he refers to as Systems. System One refers to our irrational, immediate, and emotional decisions, whereas System Two, refers to more carefully processed thoughts. This summary will give you a deeper insight in the thought processing of humans.

Human decision-making is influenced by three considerable factors, namely, personal experiences, emotions, and risks. Recent personal experiences or events are considered to be more important than older ones. Risk is entirely subjective. It’s different for everyone. Risks should be thoroughly calculated, but instead, it’s deemed to be more emotional than mathematical. Emotions play a role in human decision-making, as it influences human choices.

Kahneman further uses human thought processing of System One and System Two to contrast rational and irrational human nature. He further stresses that human decision-making is deemed discernable even though they may be irrational at times, considering that human decision-making is made on emotions and risks.

Daniel Kahneman was born in Palestine in 1934. He was a psychology student at the Hebrew University, where he graduated with a BA degree. Later he moved to America and pursued his MA and Ph.D. at the University of California. Kahneman was popular for his works in behavioral economics as he’s interests were in the thought processing of humans. In 2002, Kahneman was awarded a Nobel Prize in Economic Science.

What you’ll learn in the summary

The summary breaks the book down into 5 sections.

  1. Section one will discuss System One and System Two.
  2. Section two will discuss Kahneman’s psychological theories in partnership with Amos Tversky.
  3. Section three will discuss causality, human judgment, and biases in thought processing.
  4. Section four will discuss the prospect theory.
  5. In section five regret, lived experiences and memories will be discussed.

Section One: System One and System Two

According to Kahneman, human decision-making can be analyzed using two Systems, namely, System One and System Two. System One is considered to be more irrational, immediate, and emotional, whereas System Two is rational and carefully thought out. As human beings, we possess both systems of decision-making.

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System One

System One is automatic, active, and unconscious. This system deals with complex data and fast processing that’s important for functioning in everyday life. The brain creates shortcuts to process quick decision-making. Human decision-making is more likely to contain mistakes as a result of System One decision-making.

System Two

In contrast, System Two is methodical, latent, and requires more time and effort. This system takes longer to process complex data and requires effort to perform complex analysis. The likelihood of mistakes during this system of decision-making is slim in comparison to System One. It requires a conscious effort for complex decision engagement and has an open-ended approach towards decision-making.

System One and System Two Acting as One System

In conclusion, human decision-making relies mostly on System One. However, System Two should be considered in certain situations. In context, a medical diagnosis is successful if both systems are thoroughly applied and can produce the best health decisions for patients. Medical doctors performing a medical analysis on patients would first lean-to System One, as doctors rely on their clinical experience to make a quick decision on diagnosis. However, if doctors should be faced with a life-and-death situation, then System Two will allow them to do a thorough analysis, which can be beneficial for patients. For example, for 75 out of 100 cases, doctors use their intuition and clinical experience to make a medical diagnosis; however, a faulty diagnosis is possible and can negatively implicate patients’ health. The use of System Two will ensure a thorough analysis of the medical diagnosis and will allow doctors to make a proper analysis of symptoms of patients, preparing them for unexpected information from medical diagnosis, that will influence the health of patients.

Section Two: Daniel Kahneman’s Influential Psychological Theories in Partnership with Amos Tversky

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Daniel Kahneman has worked with many researchers throughout his career. However, his most influential psychological theories were developed with Amos Tversky in the 1970s.

Both Kahneman and Tversky came from strong Jewish backgrounds that shaped their identities and worldviews. Kahneman stood from a general psychological point, whereas Tversky stood from a mathematical psychology point. The association between these two theorists started at the Hebrew University, where they were both professors. Kahneman hosted many seminars at the University, and Tversky spoke in one of them. This was the fuel to their relationship that later sparked and had many influences on psychological theories. This was the start of their relationship. After that, they were inseparable. Their work was centered around behavioral economics. Their work mirrored each other, which made the distinction between concepts hard.

The relationship between Kahneman and Tversky was phenomenal as they were considered inseparable. The Undoing Project: A Friendship that Changed Our Minds (2016), by Michael Lewis, witnessed their relationships and considered it to be an important factor in psychology and other relevant disciplines.

Further, in 1983, Miles Shore, a professor of psychiatry at Harvard Medical School, was conducting research for his study on “fertile pairs”. This study focused on professional work relationships between two people for five and more years. He, later on, conducted an interview with Kahneman and Tversky. Upon his findings, Kahneman and Tversky shared a relationship that he considered to be all-consuming. This had a negative impact on their personal relationships with others.

Kahneman and Tversky’s relationship took a bad turn in 1984. They worked together less frequently due to where they were located. Some jealousy also arose during their separation. Tversky was climbing in his professional career, receiving awards for his work. This infuriated Kahneman. Kahneman worked independently on his notions of happiness. He later worked alongside other scholars. Unfortunately for Tversky, he died in 1996, but his work remained relevant in the field.

Section Three: Causality, Human Judgment and Biases

Causality

As human beings, we tend to impose our logic onto the world where it’s not needed. Kahneman and Tversky based their theories on the fact that people naturally oppose uncertainty and lean towards reasons that make sense to them. They argue that it’s human nature to understand the world through cause and effect narratives, disregarding the relation between cause and effect.

Their theory focuses on the ability that humans have to draw their conclusions from their own experiences, known as the availability heuristic. This is the mental shortcut where we retrieve immediate information and examples when doing an analysis or evaluation of a decision.

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David Hume, a Scottish Philosopher, has based his metaphysical theories around cause and effect. His theories correlate with Kahneman’s theory of human nature, which he developed years after Hume. When comparing the two theories from Hume and Kahneman, there are noticeable similarities. Hume’s Treatise of Human Nature (1738) opposed the assumptions made by Cartesian philosophers, whose worldview was based on causality. Hume’s theory argues that human beings base their worldview upon causality as a result of personal experiences. In fact, he argues that causality cannot be applied everywhere.

Kahneman’s “What You See Is All There Is” aligns with Hume’s notions of human understanding. Kahneman believed that human understanding and logic are greatly influenced by emotion, meaning, and logic.

Hume’s distinction between impressions and ideas was similar to Kahneman’s analysis of decision-making using System One and System Two. Hume argues that impressions are sensory-based and consist of emotions, whereas ideas are a distant reflection of those impressions. Impressions are like System One, it’s fast-moving reactions, and ideas are like System Two, slow-moving thoughts.

Many years later, Kahneman and Tversky developed theories that were inspired by Hume’s psychological analysis of human nature.

Human Judgment

As humans, we tend to lean on our own understanding which can often lead to incorrect judgment.

Statistical analysis is known for its accuracy in predicting the future better than human judgment can, and is 10% more likely to be accurate than human-related data. People tend to regard this as untrue. The evidence of statistical data is more evident than human-judgment. However, people tend to disregard this, even though evidence shows the intellectual intelligence of statistical data.

In the year 2015, Kahneman did an observation that he named “algorithm aversion” meaning that people don’t believe or rely on statistical data for their judgment. A simple example of Kahneman’s phenomenon is a driver using his own judgment in traffic and relying on a GPS for traffic judgment. When the driver decides to take a shortcut to avoid traffic that he’s in, he might find himself in more traffic. The driver considers his judgment to be a one-time occurrence. However, if the driver depends on the GPS data for the shortcut, he or she might conclude that the GPS technology is faulty, which means that the driver will depend on human-judgment in the future.

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Kahneman’s study has examined people’s preferences for judgment-based predictions over evidence-based predictions in a broad range of situations. Upon his findings, people preferred judgment-based predictions over evidence-based predictions even though judgment-based predictions were less accurate than evidence-based predictions.

Kahneman further elaborated on his findings in discussion with other researchers. Researchers have found that due to the rise in Big Data, large amounts of personal data held by consumers have an impact on their preference.

Furthermore, Philip Tetlock, a professor in psychology, has drawn analysis from his Superforecasters (2015). His work highlights the scarcity of good algorithms; however, he states that algorithm skills can be taught to better the scarcity of algorithms. He further argues that the only way in cultivating objectivity is to become emotionally detached from decision-making, disregard cause-and-effect where there is none, to shift our doubts into positive thoughts, and to avoid being overconfident. All of these points Tetlock highlights are important to consider when making decisions. Our decision-making is easily influenced by our personal judgments based on previous experiences and emotions.

Biases

Are we rational thinkers by nature? I think not. Our thinking is often aligned with our biases we developed through our environments, cultures, social settings, and much more. As human beings, our decision-making is often misguided due to biases and emotions.

Kahneman and Tversky argue that human decision-making doesn’t rely on the knowledge, causing errors in System One decision-making. The list of errors is as follows:

  • A common type of System One error in decision-making is availability heuristic: this refers to decisions being made by pre-developed biases, illusions, and mistaken beliefs.
  • Another common error is confirmation bias: meaning that as humans, we tend to seek information that is familiar to us that confirms existing information or views. An example of confirmation bias can be seen on network television news like MSNBC and Fox News. MSNBC target audiences that are politically liberal, whereas Fox News target audiences that are more conservative. These news channels each have their own target audiences. What they display on their channels either informs or confirms any information or views their viewers might have.
  • Common bias, also known as status quo bias: refers to the resistance people have towards change. For example, some people have a hard time getting rid of old clothes, even though they haven’t been worn in years.
  • Hindsight bias refers to people making history predictable. For example, the winner of a political election in a tight race seems more predictable.
  • Oversimplification: this is rooted in people’s need for coherence.
  • Halo effect: this is the general positive impression that overrules negative characteristics. For example, parents tend to overlook a child’s troubling behavior.
  • Overconfidence: this takes place when people seek to minimize discomfort caused by doubts.

Emotions play an important role in decision-making and predispose individuals to make decisions resulting in a specific outcome. For example, children know exactly when the best time is to ask their parents for a treat. Asking their parents when they’re in a good mood leads to a more positive reaction than when their parents are in a bad mood, leading to them standing a better chance of getting a treat. On the other hand, a person who losses a bet might react negatively to the situation. Based on emotions and the desire for reward over risk, the person challenges their opponent to a higher bet, regardless of the opponent having a good reputation for working carefully with their money.

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These outcomes are pre-determined by mood and emotions, and therefore, influences the decision-making process.

Section Four: Prospect Theory

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The prospect theory belonged to Kahneman and Tversky. This theory argues that people weigh their losses and gains differently. One person’s loss is another person’s gain. Losses and gains are reliant on emotions, and somehow, losses weigh more than gains. For example, losing a $100 note is a heavy loss; however, gaining a $100 note is more pleasant. This concept is known as “loss aversion”. This is when people experience major losses that make them less averse to loss and minimizing their willingness. The prospect theory argues that people can only absorb a certain amount of loss before they become desensitized to it. This results in an increase in their risk-taking behavior.

Alex Imas, a Psychology professor at the Carnegie Mellon University, refers to this concept as “chasing a loss”. This concept refers to the compensation of losses by gains with high risk-taking behaviors. For example, a trader who losses money from stocks that perform poorly might make uninformed and unwise decisions in aid to compensate for these losses. However, chasing a loss can be averted by transferring all bad stocks to another trader who is emotionally detached from the outcome.

Imas conducted his research around this notion and discovered opposing findings to the prospect theory. He differentiated between a “realized” loss and a “paper” loss. The “realized” loss offers closure and has valid reasoning, for example, selling devalued stocks. These losses minimize risk-taking behavior and maximize resolving discrepancies. “Paper” losses, on the other hand, remain open-ended with minimal reasoning, for example, holding onto devalued stocks. This leads to an increase in risk-taking behavior.

Section Five: Regret, Lived Experiences and Memories of Lived Experiences

Regret

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As human beings, it’s hard to deal with unexpected events. It leads to regret and further wanting to undo the past. Kahneman’s notion of “undoing” stemmed from personal real-life experience.

In the early 1980s, his dear nephew was killed in a plane crash. His nephew was a navigator in the Israeli Military. His nephew’s death was sudden, leading to many what-ifs. His nephew served in the Yom Kippur War, where he almost died. His death took place a week before his release from the Military. Kahneman observed the behavior of his family. He noticed their urge for wanting to undo the past by imagining possible what-ifs. These what-ifs consisted of alternatives possibilities for him being alive. What if another pilot flew the plane on that day? What if he was released from the Military a week earlier? All these what-ifs are results of coping with their loss and also dealing with regret. These what-ifs made minor adjustments to their reality. Their imagined scenarios seemed to require some degree of probability. This type of curiosity influenced Kahneman’s research regarding the parameters of counterfactual fantasies.

Later on, Kahneman’s formal research proved his curiosity. People are most successful in mentally wanting to undo the past of unusual events, making an alternative reality easily imaginable.

Lived Experiences

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Kahneman explains that two selves exist. The self that experiences events as they happen, and the self that remembers the experiences.

People often remember the past incorrectly, based on the experience’s end, causing them to forget the full experience. Memories seldom align with the experience as it happens. An example of this is the Warren family of four, including dad, mom, little Mikey, and Marcus. They decided to go on a one-week vacation camping trip. Their lived experiences and memories of their experiences were all going to be different.

Memories of Lived Experiences

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On the one hand, they could have had an amazing experience, and on the other hand, their memories of their experience can be the complete opposite. For the first six days of their camping trip, everything was amazing. The weather was beautiful, they enjoyed good food, and had lots of family fun. However, on the last day, things took a turn for the worse. Mikey’s cookies were stolen by raccoons, Marcus got an unexpected rash after walking too deep into the woods, and their tent leaked water due to the heavy rainfall. On the last day, the husband told his wife that he’ll never do this type of vacation again. Due to the last day, the entire six days of fun were immediately distant memories. Their camping experience will be remembered by the last day. However, the last day could have turned out different, making the memory more relevant.

Another scenario of this is that their first six days of their vacation was a nightmare. Their sleeping patterns were disturbed due to unexpected heavy rainfall that caused leakages inside the tent, raccoons stole all Mikey’s cookies, which really upset him and Marcus got a rash after walking too deep into the woods. On the last day when it was time to pack up, Marcus found a $100 note on his walk in the woods, Mikey befriended the raccoons, and they roasted marshmallows to the sunset. In this instance, their vacation will be remembered as a happy memory.

CONCLUSION

1. System One is automatic, whereas System Two requires carefully thought out

2. Our thought processes are dependant on System One and Two

3. Decision-making is influenced by emotions and personal experiences

4. Choices and emotions influence the outcome of our decision-making

5. Human judgment is preferred over statistical evidence

6. Our predisposed biases play a huge role in our decision-making

7. Change is easier for some than it is for others

8. People handle regret differently

9. Winning and losing affects people differently

10. Losses are weighed heavier than gains, resulting in risk-taking behavior

11. Fantasizing about a counterfactual reality is easier than accepting a factual reality

12. Lived experiences and memories about an experience are measured by recent events of an experience