BOOK REVIEW: "Thinking, Fast and Slow" by Daniel Kahneman (2011)

Thinking Fast and Slow is one of Amazon’s best sellers at the moment. Deservedly, so. This book is the summary of the research done by Nobel Prize winner Daniel Kahneman for the past 40 years in behavioral economics.

Behavioral what? Don’t switch off just yet. The book is easy to read and a lot of fun. Have you ever thought that you were being a bit lazy (intellectually speaking, that is?) This book will explain why and a whole lot more. It gives any business person a sharp insight into how irrational decisions can be made by some very intelligent people. Kahneman is a brilliant scholar and an absolute delight to read.

Key words

Psychology, cognitive science, cognitive processes, behavioral economics, stereotyping, business

Summary

Worry less about the plane ride and more about the chocolate cake you just ate.

This book could be considered a summary of a lot of the work that Daniel Kahneman has done over the past few decades. The book explains why CEOs and managers in general can become overconfident in their ability to make judgments and to predict the future. It shows how prices can be manipulated through the process of anchoring and how the Halo Effect stops us from making rational decisions about people. Kahneman even has the modesty to show how poor his own judgment was when he interviewed people for a job.  Kahneman gives a lot of rich insights into general daily behavior that might seem illogical, and some excellent advice for more efficient management. The book even gives a little summary at the end of each chapter based on work practices.

The reader to System 1 (the automatic, involuntary part of our brain) and System 2 (which does the difficult mental calculations.) It explains at what moments we use each part of the brain and from there why as humans we sometimes get things spectacularly wrong.

Of course, a lot of this is already known to marketing managers. People are more attracted to meat that is 90% fat free rather than meat than contains 10% fat, even though it is exactly the same product.

Emotions and fatigue can also affect our judgment. When asked, people think that accidents cause 300 times more deaths than diabetes. In fact, diabetes kills 400 times more people each year. Since accidents have more emotional impact though, we remember them more. You might want to think about putting a bit of emotion into you next business presentation rather than just a lot of facts. Perhaps you should also stop worrying about getting on that plane and more about the chocolate cake you just ate. 

It will also help you to understand how you can present your ideas so that they get remembered, how to be a better negotiator, how you can score better on tests etc.

Reading this book will make you think about just how logical your own behavior is. It is a delight to read. Like most truly brilliant scholars, Kahneman has the intelligence to make simple for the rest of us.

Interesting quotes from the book:

Companies with pronounceable names do better than others for the first week after the stock is issued, though the effect disappears over time. Stocks with pronounceable trading symbols (like KAR or LUNMOO) outperform those with tongue-twisting tickers like PXG or RDO.

Framing effects: cold cuts described as “90% fat-free” are more attractive than when they are described as “10% fat.

Framing effects: cold cuts described as “90% fat-free” are more attractive than when they are described as “10% fat.

A salient event that attracts your attention will be easily retrieved from memory. Divorces among Hollywood celebrities and sex scandals among politicians attract much attention, and instances will come easily to mind. You are therefore likely to exaggerate the frequency of both Hollywood divorces and political sex scandals.

An experiment about marriages, spouses were asked: “How large was your personal contribution to keeping the place tidy, in percentages?” Availability bias: both spouses remember their own individual efforts and contributions much more clearly than those of the other, and the difference in availability leads to a difference in judged frequency.

“They added a cheap gift to the expensive product, and made the whole deal less attractive. Less is more in this case.“

Stereotyping is a bad word in our culture. Some stereotypes are perniciously wrong, and hostile stereotyping can have dreadful consequences, but the psychological facts cannot be avoided: stereotypes, both correct and false, are how we think of categories. (London 2012: The Olympic Closing Cermony and understanding stereotypes..)

 In The Black Swan, Taleb introduced the notion of a narrative fallacy to describe how flawed stories of the past shape our views of the world and our expectations for the future. Taleb suggests that we humans constantly fool ourselves by constructing flimsy accounts of the past and believing they are true.

Why are experts inferior to algorithms? One reason, which Meehl suspected, is that experts try to be clever, think outside the box, and consider complex combinations of features in making their predictions.

People who have information about an individual case rarely feel the need to know the statistics of the class to which the case belongs.

The chances that a small business will survive for five years in the United States are about 35%. But the individuals who open such businesses do not believe that the statistics apply to them. A survey found that American entrepreneurs tend to believe they are in a promising line of business: their average estimate of the chances of success for “any business like yours” was 60% – almost double the true value.

Fully 81% of the entrepreneurs put their personal odds of success at 7 out of 10 or higher, and 33% said their chance of failing was zero. The observation that ‘90% of drivers believe they are better than average’ is a well-established psychological finding. A good photo here?

The pain of losing $900 is more than 90% of the pain of losing $1,000. These two insights are the essence of prospect theory.

If in his best years Tiger Woods had managed to putt as well for birdies as he did for par, his average tournament score would have improved by one stroke and his earnings by almost $1 million per season

If in his best years Tiger Woods had managed to putt as well for birdies as he did for par, his average tournament score would have improved by one stroke and his earnings by almost $1 million per season.

 You read that “a vaccine that protects children from a fatal disease carries a 0.001% risk of permanent disability.” The risk appears small. Now consider another description of the same risk: “One of 100,000 vaccinated children will be permanently disabled.”

You read that “a vaccine that protects children from a fatal disease carries a 0.001% risk of permanent disability.” Now consider another description of the same risk: “One of 100,000 vaccinated children will be permanently disabled.”

Except for the very poor, for whom income coincides with survival, money is a proxy for points on a scale of self-regard and achievement.

We found that American women spent about 19% of the time in an unpleasant state, somewhat higher than French women (16%) or Danish women (14%).

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See also:

    

Other Book Reviews

Two Brains Running

NY Times: ““Thinking, Fast and Slow” is an astonishingly rich book: lucid, profound, full of intellectual surprises and self-help value. It is consistently entertaining and frequently touching, especially when Kahneman is recounting his collaboration with Tversky.“

Thinking, Fast and Slow by Daniel Kahneman – review

The Guardian: “An outstandingly clear and precise study of the ‘dual-process’ model of the brain and our embedded self-delusions.“

Thinking, Fast and Slow

Financial Times: “There have been many good books on human rationality and irrationality, but only one masterpiece. That masterpiece is Daniel Kahneman’s Thinking, Fast and Slow.”

    

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The Independent: “Mark Thomas about the Kahneman’s book: “A delight to read. Like most truly brilliant scholars, Kahneman has the intelligence to make it simple for the rest of us. The book explains why managers can become overconfident in their ability to make judgments and to predict the future. It also gives excellent advice for more efficient management.”

Seven Facts about Studying: The A-B-C of your Brain

Student Achievement Program: “The same rule holds when you memorize information for a test. Trust that your brain will reason its way to the right answer by connecting the dots. Understand that all that information is not stored in one place in your brain – it really, physically is not. Rather, information is scattered acros your cortex, much like the stars are scattered across the universe.”

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Student Achievement Program: “We know (for a fact) that positive reinforcement of behavior is a key driver in developing habits. This means that positively rewarding behavior which leads to substandard academic performance, in the long run leads to impoverished academic development. And this is exactly what is happening to most students today.”

      

Great book. Advocates the creation of a learning organization as a way of achieving sustainable competitive advantage over your competitors.	If you only ever read one personal development book in your life, read this.	Learn about The IKEA Effect, The Baby Jessica Effect and why large bonuses make CEOs less effective.

 

A fun book that show why humans don’t always behave in a rational manner.	An excellent history of finance. Easy to read and lots of interesting examples.	Discussion on some of the key issues in strategic management. The book requires some background knowledge of the subject.