What you could learn from ‘Thinking fast and slow’ by Daniel Kahneman (2012, xxx pages)
What is intuition? How do humans think? Are humans rational or irrational and can we predict them?
Historically economist built models that assumed that human beings are perfectly rational (joking called ‘homo economus’). Daniel Kahneman showed that humans are highly irrational, but often the irrationality is predictable.
Daniel proposes that there are two decision-making systems that humans use – System 1 and System 2. Through a lifetime of experiments, he shows that humans
System 1 (intuition) is automatic, emotional and fast. It is your first response and often triggered by stress and is usually the first response to a new situation.
System 2 (rational thinking) is deliberate, logical and slow. System 2 thinking takes effort and time.
Through a life time of eperiments Daniel, and his partner XXXX, were able to demonstrate that huamns use System 1 which rlies on heurisits (rules of thumb) and can be very biased.
te key finding were:
- The “anchoring effect” names our tendency to be influenced by irrelevant numbers. Shown higher/lower numbers, experimental subjects gave higher/lower responses
- The availability heuristic is a mental shortcut that occurs when people make judgments about the probability of events on the basis of how easy it is to think of examples
- substituting a difficult question with a simpler one
- Kahneman writes of a “pervasive optimistic bias“, which “may well be the most significant of the cognitive biases.” This bias generates the illusion of control, that we have substantial control of our lives.
- Framing is the context in which choices are presented. Experiment: subjects were asked whether they would opt for surgery if the “survival” rate is 90 percent, while others were told that the mortality rate is 10 percent. The first framing increased acceptance, even though the situation was no different.
- Rather than consider the odds that an incremental investment would produce a positive return, people tend to “throw good money after bad” and continue investing in projects with poor prospects that have already consumed significant resources. In part this is to avoid feelings of regret
- Overconfidance. It suggests that people often overestimate how much they understand about the world and underestimate the role of chance in particular.
How should think book change what you do?
- Be honest with yourself on your level of expertise – have you spent over 10,000 hours honing your skill in an environment with high-quality and rapid feedback?
- Understand you environment. Is you environment determinasit and stable (is it easy to link cause and effect)?
- Are you aware of the biases and heurisits you use?
- If you have expertise in a stable and deterministic environment – use your intution
- If you reasle you lack expertise or are in an unstable or dynamic environment ensure you take the time
- Relfect on your decisions, one day, one week, one month out. Are you right consistantly? If not, you need to re-think your apporach
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