Thursday, 10 May 2012

Of Two Minds

“I’m of two minds.” You’ve heard the expression before, usually used when someone can’t decide which option or route to take (Should I buy a new computer now? Or wait until the new model comes out? Should I take a break and have lunch now? Or wait until I finish writing this document?). According to Daniel Kahneman, author of the new book Thinking, Fast and Slow, it’s really true. Or at least, you have two very different ways of processing information and making decisions.

Most of us know this intuitively. When a dog runs in front of the car, we slam on the brakes almost before it seems our brain has registered the event—that’s our “fast” brain working, making a split-second emotional decision and causing a resultant reaction based on limited information. That’s a very useful ability in certain situations. Kahneman calls this form of decision-making “system 1”.

On the other hand, when playing chess or filling out your tax form, a slower and more careful part of the brain attempts to analyse all of the available data to help you make ‘best choice’ decisions. This, too, is a useful skill. Kahneman calls this form of decision-making “system 2”.

Kahneman, a psychologist and Nobel Laureate in economics, is a huge fan of rationality—the slower and more time-consuming thought processes of system 2—especially when evaluating economic situations. In his book, he identifies many ways in which we think irrationally, relying too much on the ease of system 1. For example, when given a choice whether to join a company pension plan, for example, most people choose the default option. So if you are automatically enrolled in the plan and have to “choose” to opt out, most people will take the default and allow themselves to be enrolled. If, on the other hand, you have to “choose” to join, most people will take the default option and not join—even if all that is needed to opt for the non-default option is to tick a box.

Another example of irrational thinking that Kahneman shares: When two sets of dinnerware are offered for sale, and Set A contains 40 pieces of which 9 (cups and saucers) are broken, and Set B contains 24 pieces, all in good condition (but no cups and saucers included), people were found to pay more for the intact set of dishes (Set B), even though they would get 7 extra dishes (some cups and saucers) with Set A.

In this Time interview with Kahneman, he answers 10 questions about his book and his theories.

I found the book to be interesting and thought-provoking, and a good reminder that we often make irrational decisions as consumers and investors without even realizing it. No doubt this book will be studied and savoured by economists and marketers, as they seek to eek our dollars from us with many simple tricks and manipulations (like the opt-in, opt-out example given above). As consumers, we’d be wise to do the same. Some knowledge of statistics, and an interest in the many ways numbers can be statistically manipulated, is useful to fully appreciate Kahneman’s book. However, simply dipping in here and there for his interesting stories makes it fun even for a simple browse if an in-depth read of this sort of thing isn’t your cup of tea.

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