Daniel Kahneman earned the Nobel Prize in economics for the years of work he did with Amos Tversky (who died before the prize was given). Over years, sustained by curiosity and Tversky’s humor, these two and others investigated that age old economics question, what do people want? That old operating assumption, people as rational actors, hasn’t ever been confirmed.
System 1 vs System 2
System 1 thinking operates automatically and quickly with little or no effort and no sense of voluntary control.
System 2 allocates attention to the effortful mental activities that demand it, including complex computations. The operations of System 2 are often associated with the subjective experience of agency, choice, and concentration.
Given this image
even when we know that both segments are the same length, our intuitive self, System 1 still sees the bottom line as longer.
Given the math problem,
A bat and ball cost $1.10.
The bat costs one dollar more than the ball.
How much does the ball cost?
System 1, our intuitive thinking, produces a cost of 10 cents.
How often does our System 2 thinking, which does the checking, get called into play? It only takes a few seconds in this example. More than half of students at Harvard, MIT, and Princeton failed to check their System 1 response. At less selective colleges, failure to check exceeded 80%.
It really doesn’t matter to us much how much the bat costs. But how much effort do most people allocate to issues we do care about, such as the financial integrity of our nation, or climate change?
Answering the wrong question
Often people answer irrelevant questions, or questions very different from what was asked. For example, years ago a chief investment officer of a large financial firm invested tens of millions of dollars in Ford. The question for stock investment is this: is the stock underpriced? The question he answered was this: do I like the product?
And what do you think?
I will prepare a few blogs as I make my way through the book. There are still a few more hundred pages.