a team of talented writers come together to improve financial literacy in India.
April 16, 2021
Human psychology has always fascinated me. “Thinking Fast and Slow” by Daniel Kahneman is possibly one of the best books I have read on demystifying human behaviour and understanding the complexity of decision making process going on within our heads. The book delineates rational and non-rational motivations and triggers associated with each type of thinking process, and how they complement each other.
A bit about Daniel Kahneman. He is an Israeli psychologist and economist and was awarded the 2002 Nobel Memorial Prize in Economic Sciences for his groundbreaking work in applying psychological insights to economic theory, particularly in the areas of judgment and decision-making under uncertainty. His empirical findings challenge the assumption of human rationality prevailing in modern economic theory. With Amos Tversky and others, Kahneman established a cognitive basis for common human errors that arise from heuristics and biases, – something they called prospect theory.
The book would be extremely interesting for investment professionals, brand marketers, advertising professionals but having said that book is insightful and has some big life lessons for everyone.
The book starts with the premise that our decision making is essentially governed by two systems: System 1 and System 2. System 1 is the fast and intuitive system whereas System 2 is the slow, deliberate, and analytical part. For most of the day-to-day decisions in life – like choosing clothes for example, we use System 1. Even for most of our shopping decisions, we rely heavily on System 1 – which is fast and easy.
Throughout the book, Kahneman asks you questions, which help you understand how these systems work together. Here’s an example. Remember your immediate response as you read it.
A bat and ball cost $1.10. The bat costs one dollar more than the ball. How much does the ball cost?
Did you answer that the ball costs $0.10? That was incorrect (the correct answer is $0.05). What happened here? System 1 — the fast, reptilian part of your brain that works on intuition — made a snap, “good enough” answer. It was only when System 2 — the slow, analytical part of your brain — was activated that you could calculate & understand why $0.05 is the correct answer.
Does this mean you are bad at Math? Don’t beat yourself up, most of the people answer 0.10. This is your brain working exactly as it is supposed to and we will delve deeper into this as we progress.
“A general “law of least effort” applies to cognitive as well as physical exertions. The law asserts that if there are several ways of achieving the same goal, people will eventually gravitate to the least demanding course of action. In the economy of action, effort is a cost, and the acquisition of skill is driven by the balance of benefits and costs. Laziness is built deep into our nature.”
Human beings are inherently lazy and it reflects in our decision making as well. Our brains hate to consume energy and prefer to be relaxed and at ease. When we use our brain, we tend to use the minimum amount of energy possible for each task. It likes things that are familiar, it likes things that are simple to understand. It is drawn to things that make it feel like it’s in a safe environment. This is Cognitive Ease.
We have an inherent survival instinct because during primitive days being in familiar environment meant safety from predators and other dangers. It was easier to be in familiar environment as opposed to being in some unknown territory and our brain is hard wired to think like that. Therefore, your brain prefers familiar things. It prefers things that are easy to see, and simple to understand.
This has huge implications particularly when it comes to persuasion, marketing, and influence because this means that Cognitive Ease can be induced!
“A reliable way to make people believe in falsehoods is frequent repetition, because familiarity is not easily distinguished from truth.”
We already know that our brain is hardwired to prefer things that are familiar and easy. We also know that people like to take the path of least resistance when faced with decision-making. In fact almost 80% of our decision making happens on autopilot, where we are not in conscious control of our thoughts.
For years, brand marketers have used these principles to steer us to buy products which seem familiar to us. In fact this is the reason why brand advertising exists, as it primes people into believing the brand promises.
Let’s understand priming a little better using an example.
If I say, L O_E R, it probably means nothing to you. Now if I talk about it in context of a date. You would probably think of LOVER and if I possibly give you context of a cricket match, then you would end up thinking of it as LOSER.
Priming occurs whenever exposure to one thing can later alter behaviour or thoughts. Priming can completely influence the way we behave or act. For e.g:- If green is associated with eco-friendly, then you would most liking pick up something with green packaging assuming its eco-friendly even without reading the label. Incredibly, the priming of actions and thoughts is completely unconscious; we do it without ever realising.
What priming therefore shows is that despite what many argue, we are not always in conscious control of our actions, judgments and choices. We are instead being constantly primed by certain social and cultural conditions.
“Authoritarian institutions and marketers have always known this fact. But it was psychologists who discovered that you do not have to repeat the entire statement of a fact or idea to make it appear true”
“This is the essence of intuitive heuristics: when faced with a difficult question, we often answer an easier one instead, usually without noticing the substitution.”
This is one idea I personally found extremely fascinating and I have been catching myself doing this every time when I am faced with any difficult decision. Let’s understand this with a few examples:-
I want to access how well a woman candidate will do as a pilot. This would require fairly complex decision making and activation of system 2. So instead we would substitute the question in our mind to “Does this woman look like someone who will make a good pilot?” Now this question is a lot easier to answer.
Implications are everywhere, do I want to invest in stock of Microsoft? Instead my brain will replace it to a question – “Do I like Microsoft products?”
We might activate system 2 for some serious decisions in life – like choosing a life partner, though not sure many do that also. But in most of the cases, we simply swap the question to an easier question which can be answered by system 1.
“Odd as it may seem, I am my remembering self, and the experiencing self, who does my living, is like a stranger to me.”
We tend to rely on what we have seen in the past rather than on our current experiences. Our minds don’t remember experiences in a straightforward way. We have two different systems, called memory self & experiencing self, both of which remember situations differently. First, there is the experiencing self, which records how we feel in the present moment. It asks the question: “How does it feel now?” Then there is the remembering self, which records how the entire event unfolded after the fact. It asks, “How was it on the whole?” The experiencing self gives a more accurate account of what occurred, because our feelings during an experience are always the most accurate. But the remembering self, which is less accurate because it registers memories after the situation is finished, dominates our memory.
This is one of the reasons why marketers invest so heavily in building awareness for the brands.
“The world makes much less sense than you think. The coherence comes mostly from the way your mind works.”
Our minds have a natural tendency to simplify things and to do this we use mental pictures to explain ideas or concepts. For e.g. when I say apple – a shiny red apple on the plate is constructed as an image. When I say summers – I picture myself on a beach on a hot sunny day, eating an ice-cream. This phenomenon of using mental pictures to explain situations is called cognitive coherence.
But more than understanding jargons, it’s important to understand that we use these mental pictures while making decisions. We use these mental pictures to build certain assumptions and then use them to simplify our decision making process. For e.g.: If I am told that it’s raining in X place, I would imagine puddles of water and possibly take raincoats & rain proof shoes while packing.
This example is fairly simple but we also rely on these images while making complex decisions and problem occurs when we place too much faith in these images. Despite of having data which disagrees with this mental image, we tend to stick to these images to guide is. For e.g.: A woman applies for a role of operations manager. Our mental image always brings up a man for this role and despite of having all the evidence that she can be successful, we might end up refusing a good candidate.
To cut the long story short, we are overconfident about these mental images and maybe do not even realise that they are faulty. But there are ways to overcome this overconfidence and start making better predictions. One way to avoid mistakes is instead of making judgments based on your rather general mental images, use specific historical examples to make a more accurate forecast. Like in the above example, was the woman successful in last few roles as operation manager?
“Mood evidently affects the operation of System 1: when we are uncomfortable and unhappy, we lose touch with our intuition.
These findings add to the growing evidence that good mood, intuition, creativity, gullibility, and increased reliance on System 1 form a cluster. At the other pole, sadness, vigilance, suspicion, an analytic approach, and increased effort also go together. A happy mood loosens the control of System 2 over performance: when in a good mood, people become more intuitive and more creative but also less vigilant and more prone to logical errors.”
We already know that our moods have a huge impact on our decision making as well as our ability to be creative. The energy we expend in thinking depends on the task at hand. Most of our simple decisions in day to day life, we take in a state of cognitive ease. It is a known fact that almost 80% of our decisions are on autopilot. Yet, there are decisions in life where we would need to utilise more energy and rely on system 2. This is when brain enters in a state of cognitive strain.
These changes in the brain’s energy levels have dramatic effects on how we behave.
When we are in state of cognitive ease, system 1 is active. Which means we are fast, intuitive and maybe more creative and happier. But it also means that system 2 has taken a back step and we are prone to making logical errors.
However in case of cognitive strain, system 2 is active and operating. We are in state of heightened awareness and we would double-check our judgements. However we are far less likely to be creative but we might end up making far fewer mistakes as well.
By repeating the same information again and again, we induce our brain to operate in a state of cognitive ease by invoking all that is familiar.
However when we see confusing messages or something hard to understand or something unfamiliar, we enter a state of cognitive strain and our minds perk up and increase their energy levels in an effort to comprehend the problem, and therefore we are less likely to simply give up.
“The easiest way to increase happiness is to control your use of time. Can you find more time to do the things you enjoy doing?”
Everyone in the world is trying to find happiness. Especially in current times where we are so stressed, the search for happiness is ever more so important. According to Daniel, there is one easy formula to happiness
Enjoyment X Time= Happiness
If you are able to spend time doing things which you really enjoy doing, happiness will follow. The more you can control your time and more you can add activities which you enjoy, happier you are likely to be.
“Nothing in life is as important as you think it is when you are thinking about it.”
Let’s think about current situation. Everywhere in media, there is talk about pandemic. We believe that this is the most important and crucial situation in life. Fact that media keeps talking about it makes it even more larger than life. But what makes it more important is us focussing our energies on it or thinking about it.
Daniel talks about an amazingly simple but powerful idea that by focusing on something, we elevate its importance. This is one of the most interesting cognitive biases and an enormously powerful one. It’s one of the things that makes it really hard for us to evaluate our own happiness and well-being or that of other people. We might think that buying a bigger house or a new car will make our life better or maybe relocating to a new place will make you happier. However if you pause and think about it you will realise that it is only while thinking about it do these things seem so important. After getting them, do we really feel those were the most important things in our life?
Summarising this we have intuitive system 1 which guides us but we also have a system 2 which is slow, thinking and logical. We need both the systems to make effective decisions in life.
The first acts instinctively & is effortless and while second is more deliberate and requires much more of our attention. Our thoughts and actions vary depending on which of the two systems is in control of our brain at the time.
Anything that helps you improve your decision making abilities & reduce unforced errors in thinking is usually a great use of time.
Thinking, Fast and Slow is one of the best books on decision making, but just prep yourself. It’s a dense read, which discourages many from getting the most value from the book.
While reading the book do think about how our day to day decisions can be better honed and guided by a bigger plan we can create for ourselves. Our creation of a perfect decision making pattern, is the map that leads to the treasure, without it, we would be wandering aimlessly and digging a lot of pointless shallow holes.