Author: Daniel Kahneman
Daniel Kahneman is one of the most influential thinkers of our time with a long list of accomplishments and accolades. He was educated in psychology but has applied it to many economic problems and ended up getting the highest recognition in the field by winning the Nobel prize in economics in 2002. This book was highly anticipated by folks from all walks of life, and anyone who harbors illusions of being intellectual, must read this book.
The book summarizes Dr. Kahneman's discoveries from the last two decades on judgement and decision making. It is a scholarly work and reads more like a text book. Before you embark on this journey that will mess with your mind, make sure that you have plenty of time to digest the many different theories that Dr. Kahneman lays out in this book.
Dr. Kahneman describes our decision making process with the help of two simple entities:
Daniel Kahneman is one of the most influential thinkers of our time with a long list of accomplishments and accolades. He was educated in psychology but has applied it to many economic problems and ended up getting the highest recognition in the field by winning the Nobel prize in economics in 2002. This book was highly anticipated by folks from all walks of life, and anyone who harbors illusions of being intellectual, must read this book.The book summarizes Dr. Kahneman's discoveries from the last two decades on judgement and decision making. It is a scholarly work and reads more like a text book. Before you embark on this journey that will mess with your mind, make sure that you have plenty of time to digest the many different theories that Dr. Kahneman lays out in this book.
Dr. Kahneman describes our decision making process with the help of two simple entities:
- System 1 : which is the fast process that we commonly refer to as intuition
- System 2 : our conscious attempt to process information, often with considerable effort.
The interplay between these two systems and the insights into their workings are the subject of a large portion of this book.
System 1 is the primary subject of the book, and is best characterized by this quote "A remarkable aspect of your mental life is that you are rarely stumped. You like or dislike people long before you know much about them; you trust or distrust strangers without knowing why; you feel that an enterprise is bound to succeed without analyzing it. Whether you state them or not, you often have answers to questions that you do not completely understand, relying on evidence that you can neither explain or defend."
System 2 is the conventional thought process that we are used to and requires focus and attention. Dr. Kahneman goes so far as to say that our System 2 operation is lazy and often-times eager to accept the results of System 1. The book highlights some cases where this happens, so we can be prepared for this, and guard against this type of error. For example there is the much celebrated case of Israeli parole judges whose verdict grant parole was highly correlated with their state of hunger.
In the limited experience of my life, I have come across many individuals ( and I am sure I am guilty as well) who have a strong tendency to associate an outcome with their view / belief of the individual's behavior. This book develops a scientific theory and explains the psychology behind this kind of thinking in human beings. There are many interesting little puzzles and experiments that undescore the theory that is laid out. I list some of them here, not so much for the purpose of a book review, but rather to jog my memory in the event I come back to this at some point and try to recall what I learned from this book.
One notion that is quite popular today is called "priming". For instance, if we have a "fill-in-the-blanks" type of test and conduct it with a subject who is hungry or been exposed to food related objects, there is a good likelihood that the words that will be filled in, will be related to food. The way to think about this is by imagining that the system 1 entity in our brain has an associative scratch-pad that it uses to process information. This scratch pad gets filled with sensory information around us and influences the result of a system 1 computation.
When faced with a difficult problem, or insufficient information, System 1 will answer an easier question. What is remarkable is that it will make this substitution unbeknownst to System 2, which in its laziness will accept it as an answer to the original question. "We are far too willing to reject the belief that much of what we see in life us random". Our brain has a tendency to see patterns in randomness and a desire to ascribe a notion of causality to random events. The author describes the now famous encounter he had with a school of Israeli air pilots to explain the phenomenon of "regression to the mean".
Kahneman is most known for his work with Amos Tversky on Prospect Theory, which describes how we make decisions when we have to choose between alternatives that involve risk. It turns out that we don't necessarily place equal weights on gain and loss and in general we have a tendency of risk aversion when it comes to gain, in contrast to a risk appetite when it comes to loss. The book goes into great depth exploring this behavior with several illustrative examples.
Another notion that is explored is that of "anchors". To put it in everyday terms, our bid on a house is influenced by the asking price. Our notion of whether something is a good deal at the store, is influenced by the "regular" price that is listed next to the item. When we need to make an estimate, we subconsciously work our way (up or down) from the anchor.
There are many more interesting subjects that are dealt with in scientific manner in this very educative book. I highly recommend it to anyone who is a student of behavioral economics.
System 2 is the conventional thought process that we are used to and requires focus and attention. Dr. Kahneman goes so far as to say that our System 2 operation is lazy and often-times eager to accept the results of System 1. The book highlights some cases where this happens, so we can be prepared for this, and guard against this type of error. For example there is the much celebrated case of Israeli parole judges whose verdict grant parole was highly correlated with their state of hunger.
In the limited experience of my life, I have come across many individuals ( and I am sure I am guilty as well) who have a strong tendency to associate an outcome with their view / belief of the individual's behavior. This book develops a scientific theory and explains the psychology behind this kind of thinking in human beings. There are many interesting little puzzles and experiments that undescore the theory that is laid out. I list some of them here, not so much for the purpose of a book review, but rather to jog my memory in the event I come back to this at some point and try to recall what I learned from this book.
One notion that is quite popular today is called "priming". For instance, if we have a "fill-in-the-blanks" type of test and conduct it with a subject who is hungry or been exposed to food related objects, there is a good likelihood that the words that will be filled in, will be related to food. The way to think about this is by imagining that the system 1 entity in our brain has an associative scratch-pad that it uses to process information. This scratch pad gets filled with sensory information around us and influences the result of a system 1 computation.
When faced with a difficult problem, or insufficient information, System 1 will answer an easier question. What is remarkable is that it will make this substitution unbeknownst to System 2, which in its laziness will accept it as an answer to the original question. "We are far too willing to reject the belief that much of what we see in life us random". Our brain has a tendency to see patterns in randomness and a desire to ascribe a notion of causality to random events. The author describes the now famous encounter he had with a school of Israeli air pilots to explain the phenomenon of "regression to the mean".
Kahneman is most known for his work with Amos Tversky on Prospect Theory, which describes how we make decisions when we have to choose between alternatives that involve risk. It turns out that we don't necessarily place equal weights on gain and loss and in general we have a tendency of risk aversion when it comes to gain, in contrast to a risk appetite when it comes to loss. The book goes into great depth exploring this behavior with several illustrative examples.
Another notion that is explored is that of "anchors". To put it in everyday terms, our bid on a house is influenced by the asking price. Our notion of whether something is a good deal at the store, is influenced by the "regular" price that is listed next to the item. When we need to make an estimate, we subconsciously work our way (up or down) from the anchor.
There are many more interesting subjects that are dealt with in scientific manner in this very educative book. I highly recommend it to anyone who is a student of behavioral economics.
No comments:
Post a Comment