This extraordinary book by Daniel Kahneman is a must read for everyone capable of a rational thought. The author is a renowned psychologist who has won a Nobel prize in economics. There is perhaps no other example of a non-economist winning a Nobel in economics. The book is an exposition of human behaviour and its impact on individuals, organizations, and public policies.
He divides the mind into two fictitious but easily understood systems- System 1 and System 2. These systems do not have any specific neural correlates; at least, he does not mention them. Neuroscience is involved in some deep research and it may just find the correlating counterparts of the two systems in the brain. System 1 is the fast, intuitive aspect of the brain which makes instantaneous decisions; and System 2 is the slow deliberate part making careful, balanced decisions. System 2 is lazy and comes into play only by effort when the intuitions of System 1 need checking. System 1 is responsible for most of the decisions we make in the waking world. It is unfortunately responsible for most of the wrong decisions we make too. Hence, it is a miracle and a flaw as per the author. The pre-frontal cortex of the brain which has evolved very late in evolution and characterizes humans is perhaps responsible for System 2.
A bat and a ball costs 1.10 dollar. The bat is worth one dollar more than the ball. What is the cost of the ball? If you have answered 10 cents, you have joined 50% of students at Harvard and Princeton, and 80% of students at other universities. The answer emanates from the intuitive System 1 and is wrong. The correct answer is 5 cents or 0.05 dollars-try the math. This answer comes from System 2 by slow analysis and deliberation. This example in the initial part sets the tone for the rest of the book. And it is an incredible journey into the deepest psychology of the mind.
He talks about intuition and gut feelings in some detail. Repetitive acts in a closed environment familiar to the individual makes a person very good at intuition. The intuitive skills of chess players or cricketers while facing a superfast delivery are prime examples. The instant diagnosis made by a skilled physician of long experience is another example of honed intuitive skills. The author cautions that intuition works in these kinds of situations only. During unconventional and new circumstances, intuition is likely to go wrong and it is certainly an effort to get into work System 2. The error of continuing with a losing gamble because of some ‘intuitive feel of winning’ is where things can go terribly wrong. System 2 should stop the gamble and check further losing. However, it is not that System 2 is a paragon of virtue and correctness. It has its share of errors.
Accuracy in skill and intuitive judgement hence comes from regular practice in a comfortable environment with rapid feedback of the correctness of thoughts and actions. Memory plays an important role in cementing the workings of System 1. David Eagleman calls this as ‘burning of actions’ in the neural circuitry. This burning allows a person to make instantaneous decisions, most of which would be right. Think again of a chess player or a tennis player or a physician meeting his patient. For doctors, most diagnosis is within the first minute of the consultation.
Intuitions and gut feelings never work in stock trading. In some elegant experiments, the author proves that most fund management is no better than luck. In a rapidly changing environment, the prediction of future, instincts, ‘good feels’ are mostly wrong. The fund managers will have an eerie ability to analyse things of the past-good or bad, but their prediction of the future is no better than a card picking parrot. This message comes clear in a very unsettling manner. Not surprisingly, most highly paid executives choose to ignore these findings when told about it.
System 1 looks only at ‘cognitive ease’ in making its decisions. Cognitive ease engages in a good number of mechanisms which the author speaks of in certain detail. Heuristics is an important one-a simple substitution answer for a complex question. Heuristics involve answering a related question and is more accessible with easier computation. The answer might be plain wrong; but System 1 has no way of knowing whether the answer to a question originated by skill or heuristics. It becomes the responsibility of System 2 to give correct checking to the answer generated by System 1. What-You-See-Is-All-That-Is or WYSIATI as the author calls it is the major operative feature of System 1. It is prone to all biases and prejudices arising from framing of the question, anchoring a thought by some unrelated suggestion or object, priming the brain by a suggestion, etc. to give a desired answer. Overconfidence in System 1 makes way for all errors possible. System 2 must be brought into work and this requires effort; the author makes his point repeatedly.
He talks in detail about his Prospect theory of economics which describes risk taking in decisions of individuals and organizations. This behavioural economics theory states that people make decisions based on the potential value of losses and gains rather than the outcome, and that people evaluate these losses and gains using certain heuristics. Heuristics as noted is a simplified, practical method of solving a problem which may not be perfect. By using substitutions, heuristics get hold over the immediate aspect of the problem and makes way for finding the correct solution. The mental shortcuts of heuristics ease the effort of the brain in planning. The discussion of prospect theory forms the core of the book. Very briefly, risk aversion becomes very prominent when a person is winning; however, risk seeking comes very strongly in the domain of losses. A losing proposition entails a person to be more prone to take risks and gambles. This behavioural peculiarity has several implications for individuals and companies.
The author says that organizations do better than individuals in minimizing errors because they will think more slowly and impose orderly procedures. Checklists, algorithms, framing of problems, collection of adequate data, reflections, and reviews are more likely undertaken by organizations rather than individuals. Constant quality control should be the aim of individuals and organizations. Taking an outsider view also helps in minimizing biases and errors. The author backs his claims with a lifetime of results achieved through meticulous experimentation. He gleefully introduces hundreds of new words and terms to create a vocabulary in understanding the two systems. He calls these words important to diagnose our errors in judgement just as in medicine, terms diagnose an ailment for possible cure. The author takes his time in explaining each of these terms and it would do well if the reader savours them like good wine. It would be rather foolish to hurry through the book, just as foolish to gulp down a priceless wine in a second.
He then talks about the two selves present in all of us from the point of view of a psychologist. There is an ‘experiencing’ self and there is a ‘remembering’ self. These two aspects have an important role in deciding the experience of happiness, well-being, pain, and pleasure. There is ignoring of the duration of a pleasant or unpleasant experience in favour of the peak experience and the ending time experience. He terms this as ‘duration neglect’ and ‘peak-end’ rule.
There is a conflict of interest between the remembering self and experiencing self. It does not make sense that a person is likely to judge a life by its last moments and the peaks, rather than how long it has lived. Same is true for an opera. A long play can have good feelings if the peaks were good and the end time performance was good. Duration neglect and peak-end rule originate in System 1 and do not correspond to the values of System 2. Hence, though we believe that duration is important, memory tells that it is not. The author says that the rules that govern the evaluation of the past are poor guides for decision making, because time does not matter.
The author is surprised by the findings that the ultimate reality of our life is the finite resource called time, and the remembering self simply ignores that reality. There is a bias that favours a short period of intense joy over a long period of moderate happiness. Quality of life takes precedence over the quantity of life. We perhaps know it intuitively, but the author fixes these concepts by careful experimentation and scientific proofs. We are prone to accept a long period of mild unpleasantness if it is likely to have a good ending and equally prone to reject a long period of happiness if likely to end on a bad note. These are the consequences of duration neglect and peak-end rule.
However, a word of caution, the perspective of the remembering self is not always correct. The author says, ‘The neglect of duration, its exaggerated emphasis on peaks and ends, and its susceptibility to hindsight combine to give a distorted reflection of our actual experience.’ The duration-weighted idea of well-being gives importance to all moments of life and gives each experience a weight. There will be some moments or experiences which may have a lasting impact on subsequent experiences. A few hours of learning music can enhance the enjoyment of music many years later. Similarly, a brief stressful event can have a long impact on the quality of life later. In the duration-weighted perspective, a moment is memorable or meaningful in retrospective evaluation. Hence, there is an essential clash between the experiencing self and the remembering self in deciding the well-being of the individual. The whole picture is perhaps a combination of two, but in what proportions, we do not yet know. The concepts of the two selves and their balance in achieving well-being has important implications in health and welfare as the author elegantly shows by various examples.
In what I considered the most philosophical part of the book, the author discusses rationality of behaviour, especially in economics. Rational beings are capable of deliberation, calculation, and reasonable behaviour. Other people can reason with them and their beliefs which have an internal consistency. Rationality is logical coherence-reasonable or not, as the author says. There are two kinds of people as the author says-Humans and Econs. The sad part is Humans are not rational; they can never be. However, they are not irrational! Only economists or Econs as he calls can be completely rational, free from the biases of priming, framing of problems in an appropriate language, insider views and so on. Hence, there is a clash between the Econs and the Humans regarding rationality.
Although Humans are not irrational, they need help in making their decisions. In the words of the author, ‘Some schools believe that faith in human rationality attaches itself to an ideology in which it is unnecessary and immoral to protect people against their choices.’ Rational people should be free to choose. Hence, there is a libertarian approach to public policy which states that the individual is free to choose so long as the choices are not harming others. A logical person who is internally coherent by this definition can choose to sit in front of the TV and consume tons of junk food. Choosing to get obese is not harming others perhaps, hence public policy should not interfere.
In a world of completely rational Econs, the state should have no problem if a person chooses to ride without a helmet or a seat belt. Unfortunately, life is far more complex to have such black and white approaches, says the author. Rational beings might take a bad decision and hurt themselves; and a dilemma indeed arises as to how much a society or public policy can interfere to do something about it. Robert Thaler has written a classic book called ‘Nudge‘ which the author says is the bible of behavioural economics. The concept of Thaler called ‘libertarian paternalism’ allows the state and the society to nudge people in making decisions to serve their long-term interests. The example he gives is of certain European countries where organ donation choice is a default yes and one needs to opt out by checking a box. These countries have the highest organ donors in the world!
A ‘choice architecture’ is a psychological device where the default choice is the normal choice. Deviation from the normal becomes an act of commission and hence may provoke greater regret if things go wrong later. Similarly, a default option would be taking an insurance or a pension scheme by employees. Nudge also suggests that companies design contracts which are simple to read and not obfuscate the Human customers with too much small print-which companies are often guilty of. Some companies have opposed this policy, but the implementation of this practice has good implications for the world order. Across all parties and countries, ‘libertarian paternalism’ has found a favourable echo. The automatic enrollment in health insurance as a default, the new version of dietary guidelines with an image of a food plate loaded with balanced diet, inclusion of messages like ‘10% fat’ along with ‘90% fat-free’ on food labels are some examples where countries have helped its Humans to make decisions in an unintrusive manner.
In the fewest of words, this book is a masterpiece of great rarity. The fascinating exposition of human psychology leaves one stunned but satisfied too. However, a word of caution remains- the book needs a slow and careful reading. Make notes along the way, finish your projects, read a dozen thrillers and other books simultaneously, get married and become parents, but slowly and surely, absorb each page and get enthralled. People say that the most personal of all possessions is the toothbrush- never shared. I am adding this book to the list. Buy your own copy. The metaphors and adjectives seem unstoppable!
RANDOM MUSINGS 