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Disclaimer

As with the other articles in the ‘Notes from the book’ series, the primary reader I had in mind when writing this is me. I use these notes as an online Journal, with the act of writing a way to learn better, and the act of publishing, a driver to be very clearer in my views and to create an easy to access reference source from wherever I am.

You may find some of the quotations longer than a typical book review, and this is by design. The notes are those I highlighted when reading the book using my Amazon Kindle – I outline how I sync these to my publishing workflow in this article.

Introduction

To be honest, “Thinking, Fast and Slow” by Daniel Kahneman was a more challenging read than I anticipated. The topic is undoubtedly fascinating, but the book is lengthy and very academic. I persevered because so many brilliant thinkers hailed it as one of the best books they’ve read.

“This is a landmark book in social thought, in the same league as The Wealth of Nations by Adam Smith and The Interpretation of Dreams by Sigmund Freud.”

Nassim Taleb, author of The Black Swan

The central theme is the importance of psychology in decision-making and the profound impact of understanding it.

For a long time, I dismissed psychology as mind-bending mumbo jumbo. What changed my mind was reading “Poor Charlie’s Almanac”. In it, Charlie Munger outlines the key mental models that drove his success in investing, many of which are psychological – i.e. understanding behavioural and cognitive biases. This had such an impact on me that I visually documented all of Charlie’s mental models on my website here: Charlie’s Mental Models.

Kahneman’s book covers three core themes:

1. Two Characters – System 1 vs. System 2

We have two ways of thinking:

• System 1: The fast, automatic, and effortless brain (“thinking fast”) that we use all the time. However, it has several flaws that can lead to poor decisions.
• System 2: The slow, deep, deliberate, thinking brain (“thinking slow”) that we have to actively engage.

2. Two Species – Econs vs. Humans

Economics traditionally assumes people are rational and logical, not susceptible to biases and errors (the “fictitious Econs”). Kahneman, however, shows that people are often irrational and prone to biases and priming (the “Humans”). He presents various scenarios where the same choice can elicit completely different decisions based on how it is framed.

3. Two Selves – Experiencing vs. Remembering Self

We have two selves:

• Experiencing Self: Lives in the present moment.
• Remembering Self: Keeps score and makes decisions based on past memories. Kahneman demonstrates that our remembering self often misleads us, which creates issues in the pursuit of happiness.

For me, the key takeaway from Thinking, Fast and Slow is you need to understand the various cognitive minefields, so you can recognise situations where they are likely to appear and act. When identifying these scenarios, you can then take mitigating actions such as slowing down (engaging system 2), or using checklists / algorithms or formulas to overcome cognitive bias.

These principles are apply to almost every aspect of your life which requires decision making – investment decisions, career choices, health and fitness, negotiations, relationships, public policy, and leadership.

The below follows my detailed notes, but I suggest if you are interested you read the book.

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The five parts to the book

The book is written in five parts as set out below. I have arranged my long form notes from each of the 38 chapters into these five parts in the sections that follow.

Part 1: Two Characters / Systems

“System 1 generates suggestions for System 2: impressions, intuitions, intentions, and feelings. If endorsed by System 2, impressions and intuitions turn into beliefs, and impulses turn into voluntary actions. When all goes smoothly, which is most of the time, System 2 adopts the suggestions of System 1 with little or no modification. You generally believe your impressions and act on your desires, and that is fine—usually.”

Daniel Kahneman

1. The Characters of the Story

System 1

• Operates automatically and quickly, with little effort.
• Examples: Detecting distance, Orienting to sudden sounds, Completing phrases, Making a “disgust face., Detecting hostility, Answering simple math, Reading billboards, Driving on an empty road, Recognizing stereotypes.
• Quote: “System 1 generates suggestions for System 2: impressions, intuitions, intentions, and feelings.”

System 2

• Allocates attention to effortful mental activities.
• Examples: Bracing for a starter gun, Focusing in noisy rooms, Searching memory for surprising sounds, Counting letters in a text, Filling out a tax form.
• Quote: “System 2 takes over when things get difficult and normally has the last word.”

System Interactions

• Both systems are active when we are awake.
• Quote: “System 1 runs automatically and System 2 is normally in a comfortable low-effort mode.”

Conflicts and Illusions

• System 2 manages self-control, overriding System 1.
• Quote: “Continuous vigilance is impractical; recognizing situations where mistakes are likely is crucial.”

2. Attention and Effort

Mental Effort

• Pupil dilation indicates mental energy usage.
  • Much like the electricity meter outside your house or apartment, the pupils offer an index of the current rate at which mental energy is used. The analogy goes deep. Your use of electricity depends on what you choose to do, whether to light a room or toast a piece of bread…. A breaker trips when the demand for current is excessive, causing all devices on that circuit to lose power at once. In contrast, the response to mental overload is selective and precise: System 2 protects the most important activity, so it receives the attention it needs; “spare capacity” is allocated second by second to other tasks.
• Task energy demand decreases with skill.
• Quote:
  • “As you become skilled in a task, its demand for energy diminishes.”
  • “I won’t try to solve this while driving. This is a pupil-dilating task.”
  • “The law of least effort is operating here. He will think as little as possible.”

3. The Lazy Controller

Effortful Cognitive Work

• Cognitive work can be enjoyable.
• Quote:
  • “Flow is a state of effortless concentration.”
  • “The most surprising discovery made by Baumeister’s group shows, as he puts it, that the idea of mental energy is more than a mere metaphor. The nervous system consumes more glucose than most other parts of the body, and effortful mental activity appears to be especially expensive in the currency of glucose. When you are actively involved in difficult cognitive reasoning or engaged in a task that requires self-control, your blood glucose level drops.”

Busy and Depleted System 2

• Cognitive busyness leads to selfish choices and ego depletion
• Quotes:
  • “People who are cognitively busy are also more likely to make selfish choices, use sexist language, and make superficial judgments in social situations.”
  • “An effort of will or self-control is tiring.”

The Lazy System 2

• System 2 monitors and controls thoughts and actions.
• Quotes
  • “One of the tasks of System 2 is to overcome the impulses of System 1.”
  • “Intelligence is the ability to reason, find relevant material in memory, and deploy attention when needed.”
  • “Memory function is an attribute of System 1.”

Intelligence, control and rationality

• You can raise intelligence by increasing control of attention.
• Quotes: “Other research by the same group identified specific genes that are involved in the control of attention, showed that parenting techniques also affected this ability, and demonstrated a close connection between the children’s ability to control their attention and their ability to control their emotions.”

4. The Associative Machine

Associative Memory

• Ideas are nodes in a network called associative memory.
  • Psychologists think of ideas as nodes in a vast network, called associative memory, in which each idea is linked to many others. There are different types of links:
    • causes are linked to their effects (virus ➞ cold);
    • things to their properties (lime ➞ green);
    • things to the categories to which they belong (banana ➞ fruit).
    • One way we have advanced beyond Hume is that we no longer think of the mind as going through a sequence of conscious ideas, one at a time.
• Quote: “The notion that we have limited access to the workings of our minds is difficult to accept because, naturally, it is alien to our experience, but it is true: you know far less about yourself than you feel you do..”

Priming Effects

• Priming influences perceptions and behaviors unconsciously.
  • If you have recently seen or heard the word EAT, you are temporarily more likely to complete the word fragment SO_P as SOUP than as SOAP. The opposite would happen, of course, if you had just seen WASH. We call this a priming effect and say that the idea of EAT primes the idea of SOUP, and that WASH primes SOAP.
• Quotes:
  • “Reminders of mortality increase the appeal of authoritarian ideas.”
  • “The sight of all these people in uniforms does not prime creativity.”
  • “The world makes much less sense than you think.”

5. Cognitive Ease

Persuasive Messages

• Repetition makes statements more believable.
• The general principle is that anything you can do to reduce cognitive strain will help, so you should first maximize legibility. Compare these two statements:
  • Adolf Hitler was born in 1892.
  • Adolf Hitler was born in 1887.
  • Both are false (Hitler was born in 1889), but experiments have shown that the first is more likely to be believed.
• More advice: if your message is to be printed, use high-quality paper to maximize the contrast between characters and their background. If you use color, you are more likely to be believed if your text is printed in bright blue or red than in middling shades of green, yellow, or pale blue.
• If you care about being thought credible and intelligent, do not use complex language where simpler language will do.
• Quote:
  • “Anything you can do to reduce cognitive strain will help.”
  • “In addition to making your message simple, try to make it memorable. Put your ideas in verse if you can; they will be more likely to be taken as truth.”
  • “Familiarity breeds liking. This is a mere exposure effect.”

Strain and Effort

• Cognitive strain activates System 2.
• Quotes:
  • “Cognitive ease is associated with good feelings.”
  • “Let’s not dismiss their business plan just because the font makes it hard to read.”

6. Norms, Surprises, and Causes

System 1 and Norms

• System 1, which understands language, has access to norms of categories, which specify the range of plausible values as well as the most typical cases.
• Quote: “Automatic search for causality shapes our thinking.”

7. A Machine for Jumping to Conclusions

Bias to Believe and Confirm

• System 1 does not keep track of alternatives that it rejects, or even of the fact that there were alternatives. Conscious doubt is not in the repertoire of System 1; it requires maintaining incompatible interpretations in mind at the same time, which demands mental effort. Uncertainty and doubt are the domain of System 2.
• System 1 is gullible; System 2 manages doubt.
• Quote: “People are more influenced by persuasive messages when tired or depleted.”

Halo Effect

• Halo effect influences perception, leading to biased judgments.
• Quotes:
  • “System 1 generates a simpler and more coherent view of the world.”
  • “She knows nothing about this person’s management skills. All she is going by is the halo effect from a good presentation.”

8 How Judgments Happen

Face and Judgments

• Quick assessment of dominance and trustworthiness from faces.
• Quote: “The accuracy of face reading is far from perfect, but it confers a survival advantage.”

Speaking of Judgment

• “Evaluating people as attractive or not is a basic assessment.”

9 Answering an Easier Question

Substituting Questions

• System 1 substitutes easier questions for complex ones.
• Quote: “System 1 generates impressions, feelings, and inclinations.”

Characteristics of System 1

• Operates automatically and quickly.
• Generates impressions, feelings, and inclinations.
• Biased to believe and confirm.
• Suppresses doubt and ambiguity.
• Quote: “System 1 is more sensitive to changes than to states.”

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Part 2: Heuristics and Biases

“People tend to assess the relative importance of issues by the ease with which they are retrieved from memory—and this is largely determined by the extent of coverage in the media. This is the availability heuristic. For example, people estimate the probability of events by the ease with which instances or occurrences can be brought to mind. The availability heuristic substitutes one question for another: you wish to estimate the size of a category or the frequency of an event, but you report an impression of the ease with which instances come to mind. And the substitution is not made consciously.”

Daniel Kahneman

10. The Law of Small Numbers

Key Points

• We often misclassify random events as systematic.
• Small samples lead to exaggerated faith and causal explanations of chance events.
• Quotes:
  • “Jumping to conclusions is a safer sport in the world of our imagination than it is in reality.”
  • “The sample of observations is too small to make any inferences.”
  • “I plan to keep the results of the experiment secret until we have a sufficiently large sample.”

11. Anchors

Key Points

• Anchoring occurs when initial values influence subsequent estimates.
• Example: Asking whether Gandhi was more than 114 years old when he died affects age estimates.
• Quotes:
  • “Anchoring effects explain why arbitrary rationing is an effective marketing ploy.”
  • “Moving first is an advantage in single-issue negotiations.”
  • “Deliberately ‘thinking the opposite’ may be a good defense against anchoring effects.”

12. The Science of Availability

Key Points

• Availability bias: we remember our contributions more than others’.
• Example: Spouses overestimate their contributions to household tasks.
• Quote: “Awareness of your own biases can contribute to peace in marriages.”

13. Availability, Emotion, and Risk

Key Points

• Media coverage distorts perceptions of risk.
• The affect heuristic simplifies complex decisions by substituting feelings for thought.
• Quotes:
  • “The emotional tail wags the rational dog.”
  • “The world in our heads is not a precise replica of reality.”
  • “Our expectations about the frequency of events are distorted by the messages to which we are exposed.”

14. Tom W’s Specialty

Key Points

• Base-rate neglect: ignoring statistical information in favor of representativeness.
• Example: Assuming a person reading on the subway has a PhD.
• Quotes:
  • “When the evidence is weak, one should stick with the base rates.”
  • “Predicting rare events from weak evidence is a mistake.”
  • “We must allow for uncertainty in our thinking.”

15. Linda: Less is More

Key Points

• Conjunction fallacy: judging combined events as more probable than single ones.
• Example: Ranking “feminist bank teller” as more probable than “bank teller.”
• Quotes:
  • “System 2 is not impressively alert.”
  • “They constructed a very complicated scenario and insisted on calling it highly probable.”
  • “Less is more in this case.”

16. Causes Trump Statistics

Key Points

• Resistance to stereotyping is laudable but not costless.
• Quote: “Reliance on the affect heuristic is common in politically charged arguments.”

17. Regression to the Mean

Key Points

• Regression to the mean: extreme outcomes tend to be followed by more moderate ones.
• Example: Success = talent + luck; great success = a little more talent + a lot of luck.
• Quote:
  • “Our mind is strongly biased toward causal explanations and does not deal well with ‘mere statistics.’”
  • “Criticism is more effective than praise. What she doesn’t understand is that it’s all due to regression to the mean.”

18. Taming Intuitive Predictions

Key Points

• Extreme predictions and willingness to predict rare events from weak evidence are natural but often wrong.
• Quote: “Your intuitions will deliver predictions that are too extreme, and you will be inclined to put far too much faith in them.”

A Two-Systems View of Regression

• Regression is difficult for System 2 to understand and requires special training.
• Quote: “Matching predictions to the evidence is not only something we do intuitively; it also seems a reasonable thing to do.”

I have set out below a summary of all the Heuristics and Biases covered in Thinking, Fast and Slow.

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Part 3: Overconfidence

“Subjective confidence in a judgment is not a reasoned evaluation of the probability that this judgment is correct. Confidence is a feeling, which reflects the coherence of the information and the cognitive ease of processing it. It is wise to take admissions of uncertainty seriously, but declarations of high confidence mainly tell you that an individual has constructed a coherent story in his mind, not necessarily that the story is true.”

Daniel Kahneman

19. The Illusion of Understanding

Key Points

• Narrative fallacies: flawed stories shape our views and expectations.
• Halo effect: exaggerates consistency in evaluations.
• Illusion of understanding: we believe we understand the past, implying future predictability.
• Quote:
  • “Our almost unlimited ability to ignore our ignorance.”
  • “The mistake appears obvious, but it is just hindsight.”
  • “He has fallen for a narrative fallacy.”

20. The Illusion of Validity

Key Points

• Overconfidence in stock-picking skills despite evidence to the contrary.
• Financial pundits exploit hindsight to create a sense of predictability.
• Quote:
  • “High subjective confidence is not to be trusted as an indicator of accuracy.”
  • “The illusion that we understand the past fosters overconfidence in our ability to predict the future.”
  • “Errors of prediction are inevitable because the world is unpredictable.”

21. Intuitions vs. Formulas

Key Points

• Experts often inferior to algorithms due to inconsistency and complexity.
• Algorithms provide consistent, reliable decisions.
• Quote:
  • “Final decisions should be left to formulas, especially in low-validity environments.”
  • “Intuition adds value after disciplined collection of objective information.”
  • “Do not simply trust intuitive judgment—your own or that of others—but do not dismiss it, either.”

22. Expert Intuition: When Can We Trust It?

Key Points

• Intuition based on recognition of cues from past experience.
• Valid intuition requires a predictable environment and prolonged practice.
• Quotes:
  • “Intuition cannot be trusted in the absence of stable regularities in the environment.”
  • “Subjective confidence is not a good diagnostic of accuracy.”
  • “Experts often overestimate their skills in unpredictable environments.”

23. The Outside View

Key Points

• Inside view focuses on specific circumstances; outside view uses reference class forecasting.
• Planning fallacy: underestimating costs and overestimating benefits.
• Quote:
  • “The optimism of planners and decision makers is not the only cause of overruns.”
  • “Decision makers need a realistic assessment of costs and benefits before approval.”
  • “Organizations must control the tendency of executives to present overly optimistic plans.”

24. The Engine of Capitalism

Key Points

• Optimism bias: underestimating risks and overestimating personal control.
• Optimistic individuals shape our lives and take on significant risks.
• Quotes:
  • “Optimism is highly valued, socially and in the market.”
  • “Overconfidence leads economic agents to take risks they should avoid.”
  • “The main benefit of optimism is resilience in the face of setbacks.”

The Premortem: A Partial Remedy

• Conduct a premortem to identify potential threats and legitimize doubts.
• Quote: “The main virtue of the premortem is that it legitimizes doubts.”

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Part 4: Choices

“Prospect theory, which we introduced in 1979 as a psychologically realistic alternative to expected utility theory, is in part a reformulation of the standard theory. Prospect theory maintains that people evaluate potential losses and gains differently. Because losses loom larger than gains, they experience losses more intensely than gains of the same amount. This leads to risk-averse behavior in choices involving sure gains and to risk-seeking behavior in choices involving sure losses.”

Daniel Kahneman

25. Bernoulli’s Errors

Key Points

• People prefer sure things over gambles with equal or slightly higher expected value due to diminishing marginal utility.
• Quote: “The loss of 1 million causes a loss of 4 points of utility to someone who has 10 million and a much larger loss of 18 points to someone who starts off with 3 million.”

26. Prospect Theory

Key Points

• Loss aversion and diminishing sensitivity lead to different behaviors in gains and losses.
• Quotes:
  • “Loss aversion causes extremely risk-averse choices in mixed gambles.”
  • “Diminishing sensitivity causes risk-seeking in bad choices.”

27. The Endowment Effect

Key Points

• People value items they own more than equivalent items they do not own.
• Quotes:
  • “Losses loom larger than corresponding gains.”
  • “She didn’t care which of the two offices she would get, but a day after the announcement was made, she was no longer willing to trade. Endowment effect!”
  • “He just hates the idea of selling his house for less money than he paid for it. Loss aversion is at work.”

28. Bad Events

Key Points

• Loss aversion and negativity dominance affect human behavior and decision-making.
• Quotes:
  • “The brain responds quickly even to purely symbolic threats.”
  • “Negotiations are difficult because losses loom larger than gains.”
  • “Employers who violate rules of fairness are punished by reduced productivity.”

29. The Fourfold Pattern

Key Points

• People overweight improbable outcomes and underweight almost certain outcomes.
• Quotes:
  • “Improbable outcomes are overweighted—this is the possibility effect.”
  • “People take desperate gambles when faced with very bad options.”
  • “Businesses losing ground waste assets in futile attempts to catch up.”

30. Rare Events

Key Points

• Rare events are overweighted in decision-making.
• Quotes:
  • “Low-probability events are much more heavily weighted when described in terms of relative frequencies.”
  • “System 1 deals better with individuals than categories.”
  • “Rare probabilities are often misunderstood.”

31. Risk Policies

Key Points

• Broad framing improves decision-making and reduces loss aversion.
• Quotes:
  • “Reducing the frequency of checking investments improves both emotional quality of life and financial performance.”
  • “Think like a trader! You win a few, you lose a few.”
  • “Never buy extended warranties. That’s their risk policy.”

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Part 5: Two Selves

“The experiencing self does the living, and the remembering self keeps score and makes the choices. The remembering self is a construction of System 2, and it is subject to biases like duration neglect and the peak-end rule. These biases can lead to irrational decisions that favor the remembering self, even if they result in more pain or less happiness for the experiencing self. It does not make sense to evaluate an entire life by its last moments, or to give no weight to duration in deciding which life is more desirable. A theory of well-being that ignores what people want cannot be sustained, but a theory that ignores what actually happens in people’s lives is not tenable either. The remembering self and the experiencing self must both be considered, because their interests do not always coincide.”

Daniel Kahneman

32. Keeping Score

Key Points

• Money serves as a proxy for self-regard and achievement beyond economic needs.
• Quote: “We refuse to cut losses when doing so would admit failure.”

Mental Accounts

• We use different mental accounts for money, creating a form of narrow framing to maintain self-control.
• The disposition effect leads investors to sell winners and hold losers, contrary to rational decision-making.

Speaking of Mental Accounts

• “Driving into the blizzard because one paid for tickets is a sunk-cost error.”
• “Canceling the project will leave a permanent stain on the executive’s record.”

Regret

• Regret influences decisions, favoring conventional and risk-averse choices.

33. Reversals

Key Points

• Preferences can be incoherent when comparing objects from different categories.
• Quote: “Our world is broken into categories for which we have norms.”

34. Frames and Reality

Key Points

• Framing affects decision-making and emotional responses.
• Quotes:
  • “Losses evoke stronger negative feelings than costs.”
  • “People will more readily forgo a discount than pay a surcharge.”
  • “Our preferences are about framed problems, and our moral intuitions are about descriptions, not about substance.”

35. Two Selves

Key Points

• System 1 represents sets by averages, not sums.
• Quote: “System 1 represents sets by averages, norms, and prototypes, not by sums.”

36. Life as a Story

Key Points

• The remembering self composes stories based on significant events and memorable moments, not the duration.
• Quote:
  • “Duration neglect is normal in a story, and the ending often defines its character.”
  • “You seem to be devoting your entire vacation to the construction of memories.”
  • “He is desperately trying to protect the narrative of a life of integrity.”

37. Experienced Well-Being

Key Points

• Experienced well-being can be measured by the U-index, which tracks time spent in unpleasant states.
  • We called the percentage of time that an individual spends in an unpleasant state the U-index. For example, an individual who spent 4 hours of a 16-hour waking day in an unpleasant state would have a U-index of 25%.
  • The appeal of the U-index is that it is based not on a rating scale but on an objective measurement of time. If the U-index for a population drops from 20% to 18%, you can infer that the total time that the population spent in emotional discomfort or pain has diminished by a tenth.
• An individual’s mood at any moment depends on her temperament and overall happiness, but emotional well-being also fluctuates considerably over the day and the week. The mood of the moment depends primarily on the current situation. Mood at work, for example, is largely unaffected by the factors that influence general job satisfaction, including benefits and status. More important are situational factors such as an opportunity to socialize with coworkers, exposure to loud noise, time pressure (a significant source of negative affect), and the immediate presence of a boss (in our first study, the only thing that was worse than being alone…
• “The objective of policy should be to reduce human suffering. We aim for a lower U-index in society. Dealing with depression and extreme poverty should be a priority.” “The easiest way to increase happiness is to control your use of time. Can you find more time to do the things you enjoy doing?” “Beyond the satiation level of income, you can buy more pleasurable experiences, but you will lose some of your ability to enjoy the less expensive ones.”
• Quotes:
  • “The appeal of the U-index is that it is based not on a rating scale but on an objective measurement of time.”
  • “The objective of policy should be to reduce human suffering.”
  • “The easiest way to increase happiness is to control your use of time.”

38. Thinking About Life

Key Points

• The focusing illusion makes specific aspects of life seem more important when they are the focus of attention.
• Quote: “Nothing in life is as important as you think it is when you are thinking about it.”

Speaking of the Focusing Illusion

• “Any aspect of life to which attention is directed will loom large in a global evaluation.”
• “Adaptation to a new situation involves thinking less and less about it.”

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Conclusions

“I began this book by introducing two fictitious characters, spent some time discussing two species, and ended with two selves. The two characters were the intuitive System 1, which does the fast thinking, and the effortful and slower System 2, which does the slow thinking, monitors System 1, and maintains control as best it can within its limited resources. The two species were the fictitious Econs, who live in the land of theory, and the Humans, who act in the real world. The two selves are the experiencing self, which does the living, and the remembering self, which keeps score and makes the choices. In this final chapter I consider some applications of the three distinctions, taking them in reverse order. The ultimate purpose of this book is to improve the ability to identify and understand errors of judgment and choice, in others and eventually in ourselves, by providing a richer and more precise language to discuss them. I hope to enrich the vocabulary that people use when they talk about their own and other people’s decisions, and by doing so, to make conversations more informative and worthwhile.”

Daniel Kahneman

Summary and Key Points

Introduction Recap

• The book began with two fictitious characters, two species, and two selves.
  • Characters: System 1 (intuitive, fast thinking) and System 2 (effortful, slow thinking).
  • Species: Econs (theoretical beings) and Humans (real-world actors).
  • Selves: Experiencing self (does the living) and remembering self (keeps score and makes choices).

Two Selves

• Conflict: The interests of the experiencing self and the remembering self often conflict.
• Example: The cold-hand study illustrated how duration neglect and the peak-end rule lead to choices favoring the remembering self, even if they involve more pain for the experiencing self.
  • Quote: “It does not make sense to evaluate an entire life by its last moments.”

Well-being Theory

• A balanced theory of well-being must consider both the experiencing and remembering selves.
  • Quote: “The remembering self and the experiencing self must both be considered, because their interests do not always coincide.”

Econs and Humans

Rationality and Reasonableness

• Key Point: Rationality in economics means internal consistency, not reasonableness.
  • Quote: “A rational person can believe in ghosts so long as all her other beliefs are consistent with the existence of ghosts.”
• Humans are not always rational but can make reasonable decisions with the right help.

Libertarian Paternalism

• Concept: Policies should help people make better decisions without restricting freedom.
  • Quote: “Humans, unlike Econs, need help to make good decisions, and there are informed and unintrusive ways to provide that help.”

Two Systems

Interaction of Systems

• System 1 operates automatically and quickly, while System 2 is slow and effortful.
  • Quote: “System 2 articulates judgments and makes choices, but it often endorses or rationalizes ideas and feelings that were generated by System 1.”

Role of System 2

• System 2 can prevent many errors from System 1 but is not infallible.
  • Quote: “System 2 is not a paragon of rationality. Its abilities are limited and so is the knowledge to which it has access.”

Improving Judgments and Decisions

• Recognizing cognitive minefields and slowing down can help mitigate errors.
  • Quote: “The way to block errors that originate in System 1 is simple in principle: recognize the signs that you are in a cognitive minefield, slow down, and ask for reinforcement from System 2.”

Organizations vs. Individuals

• Organizations can avoid errors better than individuals through structured procedures and checklists.
  • Quote: “Organizations are better than individuals when it comes to avoiding errors, because they naturally think more slowly and have the power to impose orderly procedures.”