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Daniel kanheman Thinking Fast and Slow

- There are two systems that govern how we think: system 1 which is fast, automatic, and intuitive and system 2 which is slow, rational, and deductive. - System 1 relies on heuristics and is prone to cognitive biases like anchoring. It makes quick judgments that can be influenced by irrelevant factors. - Prospect theory shows that people value gains and losses differently relative to a reference point and that losses loom larger than equivalent gains due to loss aversion. People are also less sensitive to changes as values increase. - To avoid errors from system 1, one should slow down, recognize risky judgment situations, and engage system 2 for more careful and deliberative thinking.

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Thinking fast thinking slow
• Everything about how you think including the falsehood of expertise, the state of flow, jumping to conclusions and more!
• There are two ways we make choices: • fast, intuitive, automatic thinking (System 1) • slow, rational, calculating thinking (System 2)
Thinking Activity Quick…make a decision…! Oh…what’s his name…!
Two Minds • System 1 • Automatic • Hot emotional system • Intuitive • Right hemisphere • System 2 • Deliberative • Cool cognitive • Analytical • Left hemisphere
System 1 Characteristics • All our thoughts & actions originate here • Simple, automatic, little or no effort, fast • Cognitive Ease • Continuously assess situations • Continuously monitors thoughts • Intuition & Creativity live here • Accepts all propositions as true • Needs causal relationships to be able to make sense of environment • So, it categorizes things/events for quick recall
System 2 Characteristics • Employed when things get difficult • Allocates attention & effort • Complex, effortful, reflective , slow • Assesses options w.r.t. goals • In charge of Self control & behaviour • Usually has the last word • Uncertainty & doubt live here
Exercise LEFT left right RIGHT RIGHT left LEFT right upper lower LOWER upper UPPER lower LOWER upper
Intuition What Was I Thinking? Kahneman Explains How Intuition Leads Us Astray • Tool for decision making especially in uncertainty. • Central component of Heuristics • “An informal unstructured mode of reasoning”- DK &AT 1982 • “Drawing inferences so quickly that reasoning seems to be absent” – Bunge 1962 • aka – gut feeling, hunch, sixth sense, vibes • The confidence that people have in their intuitions is not a reliable guide to their validity. • Intuition cannot be trusted in the absence of stable regularities in the environment.
• When information is scarce, which is a common occurrence, System 1 operates as a machine. • The combination of a coherence-seeking System1 with a lazy system2 will endorse many intuitive beliefs, which closely reflects the impressions generated by System1
Heuristics • What? - “Rule of Thumb” • How? - Intuition & Experience • Why? - Cognitive Ease & speed • Associative reasoning & Uncertainty  substitution • Emotions & reason – Limit the no. of options – Limit aspects of environment considered • Driven by Motivation – Utility Maximization – Psychological Hedonism
Cognitive biases • In the first, he and Tversky did a series of ingenious experiments that revealed twenty or so “cognitive biases” — unconscious errors of reasoning that distort our judgment of the world.. • Typical of these is the “anchoring effect”: our tendency to be influenced by irrelevant numbers that we happen to be exposed to.
Exercise • Was Gandhi more or less than 144 years old when he died? • How old was Gandhi when he died?
Exercise • Is the height of Mt. Everest more or less than 18,000 feet? • What is the height of Mt. Everest?
Anchor • Reference point for comparison • How do you identify your anchor? – System 1 or System 2 • Examples – donations, auctions, online trading • Why do you need it?
Anchoring • In the decision making process an anchor serves as a reference point against which propositions are compared. • Widely used for decisions regarding purchases, estimation of risk and uncertainty and predictions of future preferences. Why? • Where an anchor value is not easily accessible tendency to substitute with an anchor of a more familiar proposition. Why?
Anchoring effect • Final estimations are biased in the direction of the initial anchor - mental effort required • Influenced by the individual’s thresholds for accepting or denying values that come to mind.
• Anchoring and adjustment: People who have to make judgments under uncertainty use this heuristic by starting with a certain reference point (anchor) and then adjust it insufficiently to reach a final conclusion. • Example: If you have to judge another person’s productivity, the anchor for your final (adjusted) judgment may be your own level of productivity. Depending on your own level of productivity you might therefore underestimate or overestimate the productivity of this person.
Adjustment • Anchor values serve as reference points and therefore estimations made using the anchoring and adjustment heuristics rely heavily on the effortful process of adjustment. • Produced by psychological processes: • 1) the individuals capacity to access an anchor and • 2) the ability to accurately adjust from the accessed anchor • Jumping or Sliding • Plausibility Check • Arrive at an estimate
Types of Heuristics • Affect Heuristic – Judgments are guided by feelings – “How do I feel about it?” v “What do I think about it?” – Affect proceeds and influences cognition – Anticipated feelings vs. Immediate feelings – Affect affects perception ex. risk – “Halo Effect” – Little or no deliberation – System 2 endorses System 1
Exercise • Tom is a student at SIU. He is of high intelligence, although lacking in creativity. He has a need for order and clarity, and for neat and tidy systems in which every detail finds its appropriate place. His writing is rather dull and mechanical, occasionally enlivened by corny puns and flashes of imagination of the sci-fi type. He has a strong drive for competence. He seems to have little feel and sympathy for others & does not enjoy interaction with others. But he does have a deep moral sense.
Exercise • Rank the following fields using 1 as most likely & 9 as least likely – Business Administration – Computer Science – Engineering – Humanities – Law – Medicine – Library Science – Physical & Life sciences – Social Science & Social work
Types of Heuristics for Probability & Prediction • Representativeness Heuristic – Evaluation of the probability of the degree to which an object is representative of a particular case – Comparison of stereotype – Causal base rates v Statistical Base rates • Limitations – Neglect of Base rate – Similarity vs Probability - substitution – Misconceptions of chance – “gamblers fallacy” – Insensitivity to prior probability of outcomes i.e. base rate frequency – willingness to predict unlikely events
Types of Heuristics • Availability Heuristic – judgments or evaluations are made by the ease with which similar instances or occurrences come to mind – Ease of recall  higher probability rating – Availability cascade ex. media • Limitations – irretrievability of instances – effectiveness of a search set – Imaginability – ease of reconstruction – Probability ignored
Substitution • “Answering one question in place of another” – DK • Why? – to simplify judgment of probability – Cognitive ease – Imprecise control over targeting our responses to target questions – To answer difficult questions
Substitution 1. How much would you contribute to save an endangered species? 2. How happy are you with life these days? 3. How should rapists be punished? 4. How popular will the PM be 6 months from now? 1. How much emotion do I feel when I think of a dying dolphin? 2. What is mood right now? 3. How much anger do I feel when I think of rapists? 4. How popular is the PM right now?
Problem • Problem 1 Suppose you have been given Rs.1000. – Option A : Keeping Rs. 700 for sure – Option B: Gamble with a 50/50 chance of keeping or losing the whole Rs 1000. Problem 2 – Option A Loosing 300 for sure – Option B Gamble with a 50/50 chance of keeping or losing the whole Rs.1000.
Prospect Theory Today Bunty and Babli each have a wealth of Rs.5 cr. Yesterday, Bunty had Rs.1 cr. and Babli had Rs. 9 cr. Are they equally happy? Do they have the same utility?
Prospect Theory 3 cognitive features play an essential role in evaluation of financial outcomes. (Operating characteristics of System 1) • Evaluation – outcome relative to a reference point. Ex. Status quo/expected outcome – Gains - outcomes better than reference point – Losses – outcomes below the reference point
Prospect Theory • Principle of Diminishing Sensitivity – Evaluation of changes in wealth – Ex. subjective diff between 900 & 1000 is smaller than 100 & 200 • Loss Aversion – When directly compared against each other: Losses loom larger than gains Psychological value of gains and losses are the Carriers of Value in Prospect Theory
• (Tversky and Kahneman 1979) • Prospect theory proposes that the utility of a decision is attached to positive or negative outcomes. • The value function is concave for gains and convex for losses and is steeper for losses than for gains
Loss Aversion • When directly compared with each other losses loom larger than gains – this effect is known as Loss Aversion • Mixed option - Risk of loss vs Opportunity for Gain • Implies that the impact of a difference in the location of the reference point is greater when the difference is evaluated as a loss than as a gain • Reference levels play a large role in determining preferences. • The manner in which gains and losses are framed influence a person’s value function.
Loss Aversion • Loss aversion ratio is 1:2 • The coefficient of loss aversion can vary across dimensions and the coefficient reflects the importance or prominence of these dimensions • Ex. 1 Safety is more important than money and income is more important that leisure • Ex. 2 Endowment Effect
Thinking Fast and Slow Conclusions • When these conditions are fulfilled, skill eventually develops, and the intuitive judgments and choices that quickly come to mind will mostly be accurate. All of this is the work of System 1, which means it occurs automatically and fast. A marker of skilled performance is the ability to deal with vast amounts of information swiftly and efficiently.
Thinking Fast and Slow Conclusions  The way to block errors that originate in system one us a simple in principle: recognize signs that you are in a cognitive minefield, slow down and ask for reinforcement from System 2.
Thinking Fast and Slow Conclusions • What can be done about biases? How can we improve judgments and decisions, both our own and those of the institutions that we serve and serve us?
Thinking Fast and Slow Conclusions • The short answer is that little can be achieved without considerable investment of effort. As I know from experience System 1 is not readily educable. • Except for some effects that I attribute mostly to my age, my intuitive thinking is just as prone to overconfidence, extreme predications, and the planning fallacy as it was before I made a study of these issues.