The impact of loss aversion and overconfidence on business strategies, the difficulties of predicting what will make us happy in the future.

Behavioural skills

Daniel Kahneman System 1 and 2

In Thinking, Fast and Slow, Daniel Kahneman reveals the pervasive influence of intuitive impressions on our thoughts and behaviour.

The impact of loss aversion and overconfidence on business strategies, the difficulties of predicting what will make us happy in the future.

Kahneman believes we apprehend the world in two opposed ways, [the “dual-process” model of the brain]  employing two different modes of thought: “System 1” and “System 2”.

System 1 is fast; it’s intuitive, associative, metaphorical, automatic, impressionistic, and it can’t be switched off. Its operations involve no sense of intentional control.

System 2 is slow, deliberate, effortful. Its operations require attention. (To set it going now, ask yourself the question “What is 13 x 27?” And to see how it hogs attention.

System 2 takes over, rather unwillingly, when things get difficult. It’s “the conscious being you call ‘I'”, and one of Kahneman’s main points is that this is a mistake. You’re wrong to identify purely with System 2, for you are also and equally and profoundly System 1.

System 2 is slothful, and tires easily (a process called “ego depletion”) – so it usually accepts what System 1 tells it. It’s often right to do so, because System 1 is for the most part pretty good at what it does; it’s highly sensitive to subtle environmental cues, signs of danger, and so on. It kept our remote ancestors alive. It does, however, pay a high price for speed. It loves to simplify, to assume WYSIATI (“what you see is all there is”).

System 1 is hopelessly bad at the kind of statistical thinking often required for good decisions, it jumps wildly to conclusions and it’s subject to a fantastic suite of irrational biases and interference effects.

The impact of loss aversion and overconfidence on business strategies, the difficulties of predicting what will make us happy in the future.
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