The Two-Track Brain – Rationality and Bias

Thinking Fast and Slow -  Daniel Kahneman   Decision Making, Finance, Medicine, Political Economy

A simple maths problem: If a bat and a ball cost $1.10 and the bat is $1.00 more expensive than the ball, how much does the ball cost? Half a Harvard class got the wrong answer in a written test!!!

Author: Daniel Kahneman
Author: Daniel Kahneman

Economics Nobel Prize winning psychologist Daniel Kahneman argues that we have two systems of thinking. System-1 is intuitive and fast while System-2 is logical, slow and lazy. Moreover, contrary to the commonly held assumption of humans as rational, it is the intuitive System-1 thinking which dominates. As with all animals, survival requires speedy thinking System-1 to defend against predators and to get out of dangerous situations. Humans are undoubtedly rational and arguably the most rational of all the animals, but not as rational as often though, certainly not as rational as is assumed in traditional Economics, and unfortunately clunkier, slower and less rational than the intelligent machines that are being developed in Silicon Valley and elsewhere.

Kahneman has been described as the most important psychologist since Freud; his work has been (and maybe still is) the most cited work in Social Science; he never studied Economics, but he won the Nobel Prize in the discipline; and his work has led to a new sub-discipline known as Behavioural Economics.

  • Why are people willing to pay more for a policy package which insures against both death and death by terrorism than by a simple policy which insures only against death?

    Podcast Source
    Podcast Source
  • Why do people stay wedded to their beliefs?
  • Why is there a difference between an opt-in and an opt-out choice?  Ought not rational information-seeking individuals make the same choice either way?
  • Why do organ donations rates and savings rates for retirement vary across countries?
  • Does it make a difference if you ask people to opt-in to something like an organ donation scheme  or ask them to opt out?
  • What are the biases that even the smartest people on the planet (medicos and Nobel Prize winners) get trapped by?

In the practical world, Kahneman’s work has led to the establishment of government “Nudge Units”  in government departments and the dominance of Marketing in the Corporate world. A nudge involves manipulating/managing information to elicit a desired voluntary response from a target audience – a soft form of control without compulsion or violence and only minimal deceit. As with most insights, this can be used for good or for evi – liberating or enslaving.

A “nudge” as a soft form of non-coercive control and management which others might view as self-enslavement. Does Kahneman’s work challenge the assumptions which underlie our understanding of democracy and capitalism as well as the Enlightenment project itself ? After all, if we are not rational, why organise ourselves as if we are? But, how else can we manage 7 Billion people on a plant with limited resources?

Podcast Source: London School of Economics
Podcast Source: London School of Economics

Kahneman answers these question in interviews at the London School of Economics which complement the LongNow Foundation podcast above.

In conversation with Paul Dolan at LSE:
In conversation with Anthony Layard at LSE:

Kahneman’s Thinking, Fast and Slow is an easy read because he shows rather than tells – describing  day-to-day matters which we can all relate to: shopping, health care, financial advice, real estate agents and form-filling. The podcast is a start but the book is essential reading for anyone under the misapprehension that they are logical and unbiased.

By the way, the ball cost 5 cents. Kahneman reckons that if you thought it was10 cents, it wasn’t because you are stupid -you were simply lazy, wanted to move on quickly and therefore didn’t bother to check the answer or use pencil and paper to solve the algebra – you relied on intuition.

Podcast Source
Podcast Source
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