Thinking, Fast and Slow

High-Level Thoughts

Kahneman who is a Nobel prize winner is able to take complex concepts on psychology and make them easy to understand and intuitive to anyone through examples and practical applications. After finishing the book I have started seeing the way that I make decisions and deal with bias begin to change. I've read the book twice, and I know for a fact that will continue referring to it because of the invaluable lessons I continue to use in my daily life. I highly recommend this book to everybody, because nobody is unaffected by bias even the people who research it.

Thinking, Fast and Slow Summary

Part 1: Two Systems

Ch 1 The Characters of a Story

Two systems of cognition (or thinking) guide determine how we see the world and guide our behavior.

Kahneman describes these systems as two characters. The first character is System 1 who works automatically and operates with little effort on our part. The second character is System 2 who requires attention and helps us with activities that require a lot of effort. These two systems guide guide our everyday thinking but they can also cause to make grave mistakes.

Ch 2 Attention and Effort

When people engaged in a mental sprint, the become blind.

As you become skilled in a task, its demand for energy decreases. James Clear also mentions this in Atomic Habits. People at the top of any field have automated their skills and habits to focus on higher level thinking.

Task switching takes extreme effort, which is why multitasking should be avoided.

Ch 3 The Lazy Controller

"People who are cognitively busy are also more likely to make selfish choices, use sexist language, and make superficial judgements in social situations."

Controlling behaviors and thoughts is one of the tasks that System 2 performs.

Ch 4 The Associative Machine

Ideomotor effect -> influencing of an action by the idea.

You are likely to be rewarded by actually feeling calm and kind.

Ch 5 Cognitive Ease

Familiarity can not easily confused with the truth.

Crazy example: stocks with pronounceable tickers do better over time.

A happy mood dramatically improve accuracy. Good mood, intuition, gullibility, creativity and increased reliance on System 1 form a cluster.

However when in a good mood, people become less vigilant and more prone to logical errors -> your loosening the control of System 2.

Ch 6 Norms, Surprises, and Causes

Main job of System 1 is to update and maintain a model of your personal world, which represents what the norm is.

"inborn readiness to separate physical and intentional causality explains the near universality of religious beliefs."

Ch 7 A Machine For Jumping to Conclusions

People are more easily influenced by empty persuasive messages (ex commercials) when they are tired and depleted.

Halo effect -> tendency to like everything about a person, including things you have not observed. This effect increases the weight of first impressions.

WYSIATI = What you see is all there is -> helps explain some biases of judgement and choice. Facilitates the achievement of coherence and of the cognitive ease that causes us to accept a statement as true. Explains why we can think fast.

Ch 8 How Judgements Happen

When making judgements,  we attempt to match the underlying scale of intensity across dimensions or we often either compute much more information than we need.

Ch 9 Answering an Easier Question

heuristic -> a simple procedure that helps find adequate, though often imperfect, answers to difficult questions.

We subsitute a complex question with a related question that is easier to answer.

affect heuristic -> people let their likes and dislikes determine their beliefs about the world. Your political preference determines the arguments that you find interesting.

Part 2 Heuristics and Biases

Ch 10 The Law of Small Numbers

Extreme outcomes both small or low are more likely to be found in small than in large samples.

Large samples are more accurate than small samples.

System 1 is not prone to doubt

Chapter 11: Anchoring Effects

Anchoring effect -> occurs when people consider a particular value for an unknown quantity before estimating that quantity, as a result the estimates stay close to the number that people considered.

Powerful anchoring effects are found in decisions that people make about money, such as when they choose how much to contribute to a charity or cause.

"thinking the opposite" may be a good strategy in negating the anchoring effect.

Chapter 12: The Science of Availability

The availability heuristic, substitutes one question for another: you wish to estimate the size of a category or the frequency of an event, but you report an impression of the ease with which instances come to mind.

"Awarness of your own biases can contribute to peace in marriages and probably in other pursuits."

Maintaining one’s vigilance against biases is a chore—but the chance to avoid a costly mistake is worth the effort.

Chapter 13: Availability, Emotion, and Risk

"The affect heuristic is an instance of substitution, in which the answer to an easy question (How do I feel about it?) serves as an answer to a much harder question (What do I think about it?)."

Experts sometimes measure things more objectively, weighing total number of lives saved, or something similar, while many citizens will judge “good” and “bad” types of deaths.

An availability cascade is a self-sustaining chain of events, which may start from media reports of a relatively minor event and lead up to public panic and large-scale government action.

In today’s world, terrorists are the most significant practitioners of the art of inducing availability cascades.

Chapter 14: Tom W’s Specialty

Frowning, generally increases the vigilance of System 2 and reduces both overconfidence and the reliance on intuition.

The representativeness heuristic is involved when someone says "She will win the election; you can see she is a winner" or "He won’t go far as an academic; too many tattoos."

The essential keys to disciplined Bayesian reasoning can be simply summarized:

• Anchor your judgment of the probability of an outcome on a plausible base rate.
• Question the diagnosticity of your evidence.
  

Chapter 15: Linda: Less is More

The word fallacy is used when people judge a conjunction of two events to be more probable than one of the events in a direct comparison.

Representativeness belongs to a cluster of closely related basic assessments that are likely to be generated together. The most representative outcomes combine with the personality description to produce the most coherent stories.

The most coherent stories are not necessarily the most probable, but they are plausible, and the notions of coherence, plausibility, and probability are easily confused by the unwary.

Ch 16: Cause Trump Statistics

Stereotypes, both correct and false, are how we think of categories

The test of learning psychology is whether your understanding of situations you encounter has changed, not whether you have learned a new fact.

Chapter 17: Regression to the Mean

An important principle of skill training: rewards for improved performance work better than punishment of mistakes. This proposition is supported by much evidence from research on pigeons, rats, humans, and other animals.

Kaheman's favorite equations:

• success = talent + luck
• great success = a little more talent + a lot of luck

Correlation and regression are not two concepts - they are different perspectives on the same concept.

Extreme groups regress to the mean over time.

Chapter 18: Taming Intuitive Predictions

Recall that the correlation between two measures—in the present case reading age and GPA—is equal to the proportion of shared factors among their determinants. What is your best guess about that proportion? My most optimistic guess is about 30%. Assuming this estimate, we have all we need to produce an unbiased prediction. Here are the directions for how to get there in four simple steps:

• Start with an estimate of average GPA.
• Determine the GPA that matches your impression of the evidence.
• Estimate the correlation between your evidence and GPA.
• If the correlation is .30, move 30% of the distance from the average to the matching GPA.

A rational person will invest large sum in an enterprise that is most likely to fail if the rewards of success are large enough, without deluding herself about the chances of success.

Part 3: Overconfidence

Chapter 19: The Illusion of Understanding

From Taleb: narrative fallacy: our tendency to reshape the past into coherent stories that shape our views of the world and expectations for the future. As a result, we tend to overestimate skill, and underestimate luck.

Outcome bias: our tendency to put too much blame on decision makers for bad outcomes vs. good ones.

This both influences risk aversion, and disproportionately rewarding risky behaviour (the entrepreneur who gambles big and wins).

At best, a good CEO is about 10% better than random guessing. Dismantles the book Built to Last.

Chapter 20: The Illusion of Validity

Educated guesses are no more accurate than blind guesses

The illusion of skill is maintained by powerful professional cultures.

Experts/pundits are rarely better (and often worse) than random chance, yet often believe at a much higher confidence level in their predictions.

Chapter 21: Intuitions vs. Formulas

A number of studies have concluded that algorithms matched or exceeded the accuracy of experts.

The research suggests a surprising conclusion: to maximize predictive accuracy, final decisions should be left to formulas, especially in low-validity environments.

Do not simply trust your intuitive judgement - your own or that of others - but do not dismiss it either.

Chapter 22: Expert Intuition: When Can We Trust It?

Intuition is nothing more and nothing less than recognition.

When can we trust intuition/judgements? The answer comes from the two basic conditions for acquiring a skill:

• an environment that is sufficiently regular to be predictable
• an opportunity to learn these regularities through prolonged practice

We care confident when the story we tell ourselves comes easily to mind, with no contradiction and no competing scenario.

Expertise is not a single skill; it is a collection of skills. pg 241

Whether professionals have a chance to develop intuitive expertise depends essentially on the quality and speed of feedback, as well as on sufficient opportunity to practice.

Chapter 23: The Outside View

The inside view -> when we focus on our specific circumstances and search for evidence in our own experiences. Also when you fail to account for unknown unknowns.

The outside view -> when you take into account a proper reference class/base rate.

Planning fallacy: plans and forecasts that are unrealistically close to best-case scenarios could be improved by consulting the statistics of similar cases.

The treatment for the planning fallacy -> Reference class forecasting

Chapter 24: The Engine of Capitalism

You should be both happy and wary if you are temperamentantally optimistic.

Optimism bias -> always viewing positive outcomes or angles of events.

A optimistic attitude is largely inherited. If you were allowed one wish for your child consider wishing that he or she is optimistic.

When action is needed, optimism, even of the mildly delusional variety, may be a good thing.

Danger:  losing track of reality and underestimating the role of luck, as well as the risk involved.

Part 4: Choices

Chapter 25: Bernoulli’s Error

"The agent of economic theory is  rational, selfish, and his tastes do not change."

theory-induced blindness -> once you have accepted a theory and used it as a tool in your thinking, it is extraordinarily difficult to notice its flaws.

Chapter 26: Prospect Theory

Loss aversion -> You dislike losing a lot more than you like winning, 1.5 to 2.5 times more.

There are three cognitive features at the heart of prospect theory. They play an essential role in the evaluation of financial outcomes and are common to many automatic processes of perception, judgment, and emotion. They should be seen as operating characteristics of System 1.

A principle of diminishing sensitivity applies to both sensory dimensions and the evaluation of changes of wealth.

Chapter 27: The Endowment Effect

Endowment effect -> for certain goods, the status quo is preferred, particularly for goods that are not regularly traded or for goods intended “for use” - to be consumed or otherwise enjoyed.

Chapter 28: Bad Events

Professional golfers putt more accurately for par than for a birdie. Golfers putt more successfully when working to avoid a bogey than to achieve a birdie.

The brains of humans contains a mechanism that is designed to give priority to bad news.

Success of a relationship depends far more on avoiding the negative than on seeking the positive.

People tend to be much more easygoing when they bargain over an expanding pie.

Chapter 29: The Fourfold Pattern

Overweighting of small probabilities increases the attractiveness of both gambles and insurance policies.

Certainty effect -> at high probabilities, we seek to avoid loss and therefore accept worse outcomes in exchange for certainty, and take high risk in exchange for possibility.

Possibility effect -> at low probabilities, we seek a large gain despite risk, and avoid risk despite a poor outcome.

When you take the long view of many similar decisions, you can see that paying a premium to avoid a small risk of a large loss is costly.

Chapter 30: Rare Events

Unless the rare event comes to your mind explicitly, it will not be overweighted. And when there is not overweighting, there will be neglect.

Emotion and vividness influence fluency, availability, and judgments of probability—and thus account for our excessive response to the few rare events that we do not ignore.

Chapter 31: Risk Policies

Narrow framing -> a sequence of two simple decisions, considered separately

Broad framing -> a single comprehensive decision, with four options.

Humans are by nature narrow framers and the combination of loss aversion and narrow framing is a costly curse.

Broad framing was obviously superior in this case. Indeed, it will be superior (or at least not inferior) in every case in which several decisions are to be contemplated together.

A risk policy is a broad frame that embeds aa particular risky choice in a set of similar choices.

Chapter 32: Keeping Score

Agency problem: when the incentives of an agent are in conflict with the objectives of a larger group, such as when a manager continues investing in a project because he has backed it, when it’s in the firms best interest to cancel it.

Regret is a punishment we inflict on ourselves.

People expect to have stronger emotional reactions (including regret) to an outcome produced by action than to the same outcome when it is produced by inaction.

Personal hindsight-avoiding policy -> is to be either very thorough or completely casual when making a decision with longer-term consequences.

Chapter 33: Reversals

Comparative judgment, which necessarily involves System 2, is more likely to be stable than single evaluations.

You should make sure to keep a broad frame when evaluating something; seeing cases in isolation is more likely to lead to a System 1 reaction.

Chapter 34: Frames and Reality

A bad outcome is much more acceptable if it is framed as the cost of a lottery ticket that did not win than if it is simply as losing a gamble.

Your moral feelings are attached to frames, to descriptions of reality rather than to reality itself.

The best single predictor of whether or not people will donate their organs is the designation of the default option that will be adopted without having to check the box.

Part 5: Two Selves

Chapter 35: Two Selves

Peak-end rule -> The global retrospective rating was well predicted by the average of the level of pain reported at the worst moment of the experience and at its end.

But the experience was not actually ruined, only the memory of it.

Duration neglect -> The duration of the procedure had no effect whatsoever on the ratings of total pain.

Chapter 37: Experienced Well-Being

It appears that a small fraction of the population does most of the suffering.

Religious participation also has relatively greater favorable impact on both positive affect and stress reduction than on life evaluation. However, religion provides no reduction of feelings of depression or worry.

The easiest way to increase happiness is to control your use of time.

One way to improve experience is to shift from passive leisure (ex: TV watching) to active leisure, including socializing and exercising.

The second-best predictor of feelings of a day is whether a person did or did not have contacts with friends or relatives.

Higher income increases happiness and well-being but only up to a certain threshold, after that it doesn't matter.

Chapter 38: Thinking About Life

Experienced well-being is on average unaffected by marriage, not because marriage makes no difference to happiness but because it changes some aspects of life for the better and others for the worse (how one’s time is spent).

One reason for the low correlations between individuals’ circumstances and their satisfaction with life is that both experienced happiness and life satisfaction are largely determined by the genetics of temperament. A disposition for well-being is as heritable as height or intelligence, as demonstrated by studies of twins separated at birth.

The people who wanted money and got it were significantly more satisfied than average; those who wanted money and didn’t get it were significantly more dissatisfied. The same principle applies to other goals—one recipe for a dissatisfied adulthood is setting goals that are especially difficult to attain.