Thinking, Fast and Slow - a book report

Some interesting ideas from Thinking, Fast and Slow by Daniel Kahneman.

I was visiting with some friends the other day, and because of the conversation, I felt morally obliged to introduce them to this book:  Thinking, Fast and Slow by Daniel Kahneman.  I would be negligent if I did not also point the few readers of this blog in the same direction.

This is a VERY interesting book. I learned more from it than any I have read of late.  I actually created a “cheat sheet” of the main ideas to help me remember them.  Let me give you a bit of an overview of the contents, to entice you to read it.  

Overview

The author of this book is a psychologist, who has been researching how we make decisions for decades. He won the Nobel Prize for economics for his explanation into how humans really make economic decisions. The basic insight is that we are barely rational. Most of our decisions are from our gut, our instinct. He calls that our “fast brain”. We react to things quickly, and instinctually, because evolution tuned us to do that as a survival mechanism. For really complex problems we do engage our “slow brain”, but it is a lot of work, we can’t do it when we are tired, or have been thinking a lot, or are hungry, etc.  The book is full of experiments that give great insight into how we actually make decisions.

Why is this a big deal?  Because most people are making economic and political decisions that affect ALL of us from their gut instinct, not from any rational argument or thinking. And the result is what you might expect – this is not a rational way to deal with our economic and political reality.

Here are a couple of short hand examples, just to entice you to read the whole book.

1.      Election prediction.  People were shown two pictures of candidates running for a political office, and asked which one won.  They guessed the winner correctly in 70% of the cases, by just looking at the pictures for a fraction of a second. The winners tend to have a strong chin and a confident smile.

2.      Libertarian Economics. The Austrian School of economics, or the Libertarians (think Mises, Ayn Rand and Ron Paul) are working on the premise that humans make rational, economic decisions. We should, therefore, let them make decisions that are free from other constraints as much as possible. It’s called the free market. In fact, most economists are working on the same premise. But humans are not really rational about their economic decisions. We are persuaded by fears, prejudices, recent history, misinformation and outright lies much more than by any rational argument. Any policy based on these abstract theoretical economic theories is doomed to failure.

3.      Investments. We have something called an illusion of understanding or expertise. If I know a lot about a topic, I am persuaded that I make good decisions in that realm. Facts will not persuade me otherwise. In the investment world, it becomes the “illusion of stock picking skill”. In fact, based on mountains of statistical evidence, everyone is absolutely wretched about identifying good investments, or predicting any future event, because our rational thinking is so clouded by this illusion.  Based on one chapter of this book, I dropped my “advisor” approach to managing my investments with a broker, saving myself several thousand dollars per year in fees. I adopted a low cost approach, and feel much more comfortable about my investment strategy. This is not really news to anyone – it is a purely random walk, a dart throw – you name it.

4.      Cognitive Ease.  If we have heard something before, even if we knew it was a lie or wrong at that time, we are much more predisposed to believe it the next time we hear it. I think our political candidates understand this one all too well.

That should be enough to entice you to read the book.  Trust me on this.  Remember, I’m pulling for you.  We’re all in this together.

Update:  2015.07.31
Just to entice you further, here's a nice summary of some of the key ideas in this book, complete with illustrations of the cartoon type - you might find it equally interesting.
https://blog.bufferapp.com/thinking-mistakes-8-common-mistakes-in-how-we-think-and-how-to-avoid-them