Thinking, fast and slow has long been lauded as a book to improve one’s psychological state and emotional discipline towards becoming a better person, better decision maker, and better investor. Many readers of psychology frequently list it as a top 5 book in psychology to read. Written by Nobel Prize winner Daniel Kahneman, he emphasizes using our system 2 thinking when making important decisions, the part of us that goes slowly and uses logic and reason. We are otherwise dominated by system 1 thinking, which is fast paced snap judgment, and frequently, incorrect. By slowing down and taking the time to think through important decisions, we end up making far better decisions. I certainly wish I had understood this advice much earlier compared to just reading it and knowing it.
-we are not always right or justified. Identifying and interpreting things that are correct and not correct for watercooler conversations is the key.
-people overestimate professionals and studies around them, and then get lazy and don’t do any anecdotal research themselves
-by consuming too much media, people’s minds are controlled by certain topics and dogma.
-people act on their fast, emotional irrational human nature part of the brain rather than the rational, slow part, for the most part. For one to succeed, they must act on the rational side.
-Our intuition comes from past experiences and memories from them. Therefore, our intuition can only be trusted if our deduction of past experiences was correct, and based on true, tangible experiences. Many people who call themselves professionals do not have such experience and as such have no intuition and expertise. They lack the real world experience.
-System 1 thinking: fast, emotional, irrational, automatic
-System 2 thinking: slow, rational, statistical, effortful
-Most people make most decisions based on system 1, when it should be 2, for example stock market investing, who to marry, etc
Part 1 – two systems
Chapter 1
-system 2 requires immense effort and cannot be multi tasked with other system 2 or 1 efforts. Likewise, system 2 immense concentration leads to blindness to the obvious, as well as blindness to the blindness. Hence why people who pursue higher education are often blind to what is obvious, and are lacking in Street smarts. E.g. passing a ball and missing the appearance of a gorilla.
System 1 thus influenced system 2, correctly or incorrectly. People thus default system 1 (short term orientation) unless they feel the need for system 2 to get involved as that is more tiring. System 2 is in charge of self-control. However system 1 is automatic and can never be turned off. System 2 in conflict with 1 is right. However, it would be too tiring and slow to always make decisions with system 2 and always thinking in system 2. Therefore, the best way to do things is for important things to use system 2 and where cognitive or intuitive reads from system 1 would be incorrect, and non-important (most of life) use system 1. It is easier to recognize mistakes in other people than our own (system 1 vs 2). If you are a psychologist and you get a student who says he has multiple failed treatments with multiple other psychologists, but they tell you they think you are different, special, understand them better, you should stay away as they are likely a psychopath with psychopathic charm. We cannot help but feel sympathy as our system 1 feeling. Strong attraction to someone with a negative history is a danger sign. Avoid those with baggage, those lacking empathy or those trying to push the pace or trying to manipulate you.
Chapter 2 – attention and effort
-The eyes are the window to the soul
-our pupils dilate with arousal, effort, or concentration, they shrink back if we found a solution or if we give up. Additionally, when under mental concentration, in those situations one is most blind to what’s happening around them. Intelligence and skill leads to less effort – we take the path of least resistance and most efficiency, as laziness is at the core of human beings. Thus using shopping lists is good as it preserves system 2, the only one that makes deliberate choices, comparisons, follows rules. Difficult tasks like stock evaluation must thus be written down, so that it can translate to system 1, freeing the mind up to do more thinking.
Chapter 3 – the lazy controller
-flow: effortless concentration due to enhanced skill, talent, experience, lack of switching or distractions
-self-control and smart and good efforts are forms of mental work
-all energy, whether cognitive, emotional or physical, draw on a pool of energy. Therefore, when one engages in cognitive activity, they have less energy for self-control, since that requires energy. Therefore, those that are “busy” are likely to be more selfish, sexist languages and make superficial judgments on people, in social situations. This is due to being busy and energy expended on themselves, leading less energy to consider others, which is the very definition of selfish. Ego-depletion, where one does not always want to give in, and will eventually give in to temptation.
-do the hard stuff early in the day after a meal (but not a big meal), when you have had a good night of sleep, sufficient food, and rest. Doing stuff when tired decreases ability (such as driving late at night)
-Many people are overconfident about their intuition and don’t think things through
-the key then is to do life calmly and act swiftly when opportunities arise
-those who cannot delay gratification do worse in life
Chapter 4 – associative machine
-we know far less about ourselves than we think we do
-Priming effect: act calm and kind regardless of how you feel. If exposed or acting negative, it is a rippling effect, and will affect other things we do and how we think in the same manner, whether negative or positive.
-Money primed cultured lead to individualism: a reluctance to be involved with others, depend on others or accept demands from others. More independent and more selfish
5 – cognitive ease
-As humans are lazy, negative in nature, slow, short term oriented, use repetition, familiarity, simplicity, harmony, rhythm and flow to have ideas be remembered
-“A mind at ease puts a smile on the face”
-A happy mood and comfort increased system 1 capabilities, including our intuition (it is ok to let one’s guard down – only happens in good marriages). Being uncomfortable and unhappy decreases our system 1 capability, losing our intuition (sense of a threat, keeping guard up). Be in a good place emotionally and find people in a good place emotionally.
-Familiarity breeds liking, mere exposure effect
6- norms, surprises, and causes
-we normalize behavior that we saw previously in our memory and it is constituted as normal after a few times of shock, even if it isn’t. Normalization effect. That’s why it’s key to stay away from toxic environments or communities, as you end up believing those are normal
-system 1 draws causations and quick judgments that system 2 accepts, incorrectly or correctly
-people try and seek to create coherence and closure, even drawing conclusions that are unrelated or where there is no relation between factors at play. “Curiosity killed the cat”
7-a machine for jumping to conclusions
-don’t jump to conclusions in uncertain times, unfamiliar times, where stakes are high (such as for marriage). Take things slow and get to know them
-we make interpretations based on our experiences, recent memory, which may be entirely wrong, if the conclusions drawn from them were entirely wrong
-when system 2 is engaged, we are more likely to be selfish and system 1 is also off, since lack of energy. Therefore, people in system 2 more likely to be tricked (intelligent people)
-Halo effect: assuming all good or all bad based on the first impression.
-first independent thinking, then work together. If work together first, thoughts are influenced by others that lead to a lack of independence
-intuition: jumping to conclusions based on limited evidence can lead to pre determined incorrect decisions or very correct decisions
-framing effect: falling for things framed from the positive side, than the negative side
-WYSIATI: what you see is all there is, frequently leads to overconfidence
8- how judgments happen
-good mood and cognitive ease are the human equivalents of assessments of safety and familiarity
-judgment heuristics; people vote and judge on appearances, and can’t go beneath the surface. Avoid these kinds of judgmental people.
-people don’t care about stats, they care about feelings.
9- answering an easier question.
We often like or dislike people while not knowing much about them, trust or distrust people without knowing why, have a feel for what company could or could not succeed with little analysis; we cannot explain this easily or defend; our intuition
-when people are faced with a question that they believe is too difficult, they in their minds substitute and answer a similar sounding question. This is why my questions in life aren’t answered, as people are actually not answering the question and answering another one.
-Affect heuristic: people or things we like we overamplify the positives and downplay the negatives. And, our system 2 will find reasons to support system 1 (become even more close minded) that, unless suffer negatively, become values, beliefs, attitudes. The only thing that prevents closemindedness is extreme failure or setbacks causing the person to think and reflect more closely instead of quick judgmental decisions
Part 2 – heuristic and biases
10 – the law of small numbers
-large samples are more precise than small samples. Small sample sizes can lead to extreme results, not necessarily representative
-people prefer certainty over doubt, even if that certainty is based on small sample sizes and is wrong
-much of what we see in life is random, not systematic
11 – anchoring
-people do anchoring, regardless of the numbers presented to them and whether they were false or not. They make decisions around those numbers; takes energy to use system 2 to not fall for it. Additionally, people of higher intelligence and trained individuals believe they are less likely to fall for anchoring, even though they also do so. Again, too much education and intelligence combined leads to arrogance and bad life skills, and only good book skills.
-Anchoring has a high effect on people. Mobilize system 2 if important (preserve health, cognitive ease and emotional mood)
12- the science of availability
-Availability heuristic: we exaggerate and act on our experiences and significant memories as being more frequent.
-everyone believes they contribute more than their fair share.
-People guided by system 1 more are more likely to fall to biases than those who remain vigilant in system 2
-13; availability, emotion, and risk
-Affect heuristic: people are guided by emotions. The inability to have a healthy fear of bad consequences is a disastrous flaw
-the emotional tail wags the rational dog
-people as they get older turn into black and white scenarios, polarized, close-minded
-all measures of risk are subjective, even to “experts”
-people either massively under react to small or potential risks (coronavirus) or way over react, and nothing in between. They typically underreact short term followed by overreact long term, leading to even more media coverage which overreacts even more. Since so much people consume so much media, the media controls people and push narratives. This is evident in stock market investing, to do the opposite action of what the media is selling to profit.
-14; Tom W’s specialty. One should not go away from statistics just because of certain observations and then start stereotyping. That is the incorrect way to do life. Do not assume. Use system 1 and 2 together for important decisions.
-15; less is more
Linda description to be a feminist, then people think it’s more likely she’s a feminist and a bank teller vs just a bank teller (nonsense). In the case of conflicting intuition, our system 2 and intuition fails us. I.e. when we experience cognitive dissonance and see two different messages (almost like flip flopping, or a two faced person). So in some instances intuition fails us. Logic and rationality leads to the right (though not necessarily fair) answer over intuition and feelings
16 – causes trump statistics
–Disregarding accurate stereotypes inevitably results in less-than-optimal judgments.
-teaching psychology is most probably a waste of time. Mostly one learns from experiences and then understands. Additionally one sort of has to have it.
-we are more likely to learn from individual cases and examples, especially occurring directly to us (and hopefully also vicariously), than from learning a new statistic.
-17; regression to the mean
-People will regress to the average of their results if they recently outperformed. This also applies between parents and children (parents who outperform will likely have underperforming children)
-Because we are nice to other people when they please us and nasty when they don’t, people typically get punished for being nice and rewarded for being nasty
-people often confuse correlation and causation
18- taming intuitive predictions
-correlation amongst two measures is equivalent to number of shares factors
-people find it difficult to quantify their qualitative analysis. If they don’t know how to answer the questions, they make up a question in their mind and answer it
-we must consider base statistical rates as well as be sensitive to quality of information, such as news about coronavirus
–Intuitive forecasts often display overconfidence and excessive extremity.
-By making extreme predictions, one will be very right or very wrong, and remain aware of being in self-indulgence. The rational prediction is the average, the middle ground, regression to the mean. However, in investing, this would mean accepting average returns in an index.
-have faith in your intuitions, but not too much as they are short sighted, quick decisions, which can turn out to be very wrong
-if we interviewed two candidates, and one appeared more attractive from the interview but worse credentials, system 1 would choose the one with better sales, worse substance. While system 2 would choose the one with worse sales, better substance.
Part 3 – overconfidence
19; the illusion of understanding
-narrative fallacy; people tell flawed stories and use selective remembering of the past to incorrectly influence our future
-assign halo effect to heroes too much
-the more luck is involved the less there is to learn
-people try to make the world sound simple and easy to understand when it’s not
-common bias; hindsight bias. The worse the outcome, the greater the bias
-outcome bias; if outcome good, everything is good. If outcome is bad, everything is bad
-risk takers who get lucky are given crowns and treated amazing, while critics who doubted are seen as mediocre and weak
20 – the illusion of validity
-confidence in our judgments is the best and the worst
-intuition offers more than nothing, but is not the be all end all
-often times in the stock market doing nothing is better than consistently buying and selling. Hang on to winners for the long run, sell losers
-Corporate executives are even more arrogant; most stock pickers performance is from luck
-Has a business priced in all available news?
-Experts were only slightly better than regular people. And, those who have more knowledge are actually less reliable. Reason being overconfidence, likely to become more stubborn. However, both sides on average still tend to do poorly.
21; intuition vs formula
-trust proven formulas over intuition. This goes for all areas of life, including investing. Especially trust formulas over intuition for difficult, inconsistent decisions. Even marriage partner. The qualities that lead to high chance of success, look for those via a mechanical checklist and marry that. Qualities that are red flags or do not fit the criteria for a marriage, do not marry even if intuition had said so.
-Mechanical rational decisions make more sense than gut based emotional decisions
-people right now are against algorithms but eventually will appreciate and use them
-however also do not dismiss intuition. Intuition improves with age, especially if previous intuition was verifiably correct
-pick 5-6 traits and give ratings 1-5 each. Pick the one with the highest overall rating
22 – when can we trust expert intuition?
-intuition is based on past experiences, particularly more emotional ones
-one’s own confidence is not an indicator of accuracy or validity
-stock picking has nearing zero validity as the conditions about it are constantly changing
-intuition cannot be trusted in a changing environment with no constants. Intuition can be trusted if environments are unchanging
-experts are often overconfident because they don’t know the limits of their circle of competence and then go around assuming their knowledge in one area leads to the same ability in all areas of life, which is not the case
-immediate feedback leads to a higher opportunity to learn, and increase intuition skills in a non-changing environment. Intuition with people is a real thing (old wives tales), because people, particularly after certain ages, do not change
23 – the outside view
-when we plan we do not set enough time aside for tasks, and under budget
-on the inside, we give up rationality rather than give up the enterprise
-planning fallacy; only planning for best case scenarios
-inside view vs outside view; get an outsiders view on something before doing it as inside view is biased towards the extreme optimistic
-compare against similar situations where there are many constants and same scenarios
-people take on risky projects because they are overly confident
-try and look at the outside or get outside view
24- engine of capitalism
-optimists should be both happy and wary. Optimists are individual stock pickers, pessimists are funds and indexes.
-Those who have the greatest influence over others are optimistic and overconfident
-Optimism is widespread, stubborn and costly. It leads to doubling down, even in losing situations
-most people achieve higher returns by being employees than being self-employed
-people when starting businesses do not consider competition and only consider themselves and inside perspective. They don’t take a outside perspective and consider what’s happening around them
-CFOs have no idea where stocks go for the general market either
-social and economic pressures favor overconfidence, even if it leads to very negative outcomes. People don’t like uncertainty and prefer “acting on pretended knowledge”
-Optimism can lead to taking credit for successes and deflecting blame for failures
-the best way to mitigate overconfidence is memorable failure, which is best done when young as the consequences in aggregate are less severe (less people to suffer from, and easier to recover from)
-persistence optimism is required to avoid giving in to failure
Part 4 – Choices
-25, Bernoulli’s errors
-disbelieving is hard work; if one presents a model as the correct way, people will take it as the correct way. Refuting it requires system 2, more difficult
-law of diminishing effect. People will pick the choice that will help them relatively to their current position.
26, prospect theory
-people are risk-averse in nature, it helps identify threats and survive. 2x more risk averse than risk gaining on average. The first incremental means a lot then the future not so much. This leads to people selling stocks that gained early, and hanging on to losers. It should be the opposite, hang on to winners and sell losers (against human nature).
-Regret and disappointment are two powerful drivers of decision making, which lead to safe decisions in the long run, after short term overconfidence
27 – the endowment effect
-because of loss aversion, we usually prefer status quo unless a change is viewed as clearly better. Losing something is worse than gaining something (even the same thing). First changes are significant or gains, then taper off in the future (similar as loss)
-with more trading experience, people move away from loss aversion or endowment effect, and are more likely to trade without dwelling in past sink cost anchoring effect stock prices.
28 – bad events
-we prioritize bad news or perceived bad news as it could threaten our existence. Consequently we also unconsciously prioritize mating opportunities.
-Bad emotions is way stronger than good. It takes years of good to build a relationship, a moment of bad to ruin it. That’s why those negatively affected when young and grew up in a bad family can not overcome it.
-A stable relationship needs to be positive 80% of the time to sustain itself over time. 80-95%; cannot exceed 95% per John Gottman as it leads to relationship stagnation
-People will try more to avoid losses more than to achieve gains. Leads to minimal change which is good and bad. Good because it keeps us stable in marriages, jobs, relationships. Bad because loss aversion keeps us in bad places. People like engaging in altruistic punishment (bandwagoning hate on a social media platform) as it gives genuine pleasure. If one has a wage they unhappy to get a decrease but won’t be unhappy if the starting wage was lower.
-People fight harder in a shrinking pie than in a growing pie. Avoid those who think in scarcity and look for those who think in plentitude
29- the fourfold pattern
-people overestimate and overweight unlikely scenarios, yet underweight and underestimate likely scenarios (everyday life)
-people will want certainty in good situations and low or no risk in uncertain scenarios; possibility and certainty effects
-fourfold pattern – we want to maximize gains now and make losses go to zero, even if the odds are against us. The right way is to use the statistically highest EV play, regardless of probabilities and consider the final value (high reward, high certainty we will settle for a guaranteed profit, and low risk, high damage we want to eliminate risk).
-system 1 leads to overweighting unlikely scenarios (love life in another country from someone met in exchange)
30 – rare events
-People overestimate odds of a rare event occurring and make life centred around it. Meanwhile, high odds of life occurring events are given less attention and weight (for some reason)
-entrepreneurs and investors overestimate their ability and estimates
-people remember vivid events more, and assign higher value to those, even if the expected value decreases or is negative (lottery). People forget denominator and only remember numerator (e.g. 1 in 100000 terrorist attacks)
-people overweight choice in description, while underweighting choice in experience. This explains why people gain knowledge but lack of wisdom still, as they don’t reflect on and learn from their experiences
31- risk policies
-gains we are risk averse, losses we are risk seeking. In investing, hang on to winners, sell losers (only if it doesn’t hamper one economically. If it does, wait 2-3 years and see what happens). Additionally, do not keep checking stock prices as you will feel emotionally bad from it, since losses are 2x worse
-tip: have a risk policy in place, a checklist of what you’re looking for and what you won’t accept.
32- keeping score
-people use money just to keep score in life rather than to sustain themselves
-competitive, business type, Econ types, sales people typically do not have friends
-Sunk-cost fallacy; leads people to stay too long in poor jobs, unhappy marriages, or failed research projects
-incorrectly, people will feel more regret from taking an action than from an inaction. Or more regret when actions deviate from their normal behavior. Therefore, develop good behaviours as those will feel normal and bad behaviours will lead to feeling not normal. The pains of the action are felt more short term, but reduced long term. Inaction leads to less short term pain, but leads to far more long term regret. Thus, action takers have more short term pain but long term gain. Choosing pain led to pleasure, whereas many people who play it safe lead to long term pain.
-Regret is what leads to inaction
-people mainly try to avoid emotional pains in life rather than seeking to gain
33 – reversals
-joint evaluation vs single evaluation. When people are presented with one thing, they just consider that one. However, with more than one choice, they by nature compare choices, using each other as anchors incorrectly. This can lead to salespeople deliberately showing you bad homes first then a better home all along with the intention to pick the last home. Look at things from a global, statistical perspective as that leads to higher odds of being correct with a larger sample size, rather than considering only one case or a few.
34- frames and reality
-human minds are rarely bounded to reality
-rational people show enhanced frontal brain that can combine emotion and logical decisions better
-depending on how an issue is framed, people feel differently emotionally. Frame things from the positive outcome rather than the flip side negative outcome. If negative side is shown first, that framing will not lead to agreement.
Part 5 – two selves
35 – two selves
-people are based on pain or pleasure
-experiencing self and remembering self. People remember experiences based on the peak or end of those experiences. So, to increase positive memory, end things on a good note or have a nice high in the middle, that should be higher than the low
-we do and remember stuff based on the remembering self
-with variable interest rewards, people can get addicted to that and disregard everything else if it triggers a section of the brain. E.g. Social media, gambling
-cold hand experiment; we cannot fully trust our choices reflect our interest. Our choices are shaped by memory, and memory can be wrong!! Because of remembering vs experiencing self. It’s more relevant to do things based on the experiencing self, but requires system 2 to do that. We don’t take into account duration.
36 – life as a story
-peaks and ends matter but duration does not. That is why people blindly believe in retiring when old as the end is good, even if the majority of life was terrible. Do not fall for this trap; happiness should be seeked now, and have urgency, rather than accepting mediocrity like everyone else
-this explains photo taking. People care about remembering memories more than actually experiencing them
-our experiencing self is like a stranger to ourselves
37- experienced well-being
-resistance to interruption is a sign of having a good time
-U index of life; most people are fine, a few are suffering significantly. American women suffer more from spending time with their own children than doing housework (wow).
-Go from passive things (traffic, TV) to active lifestyle (exercise, socializing, reading)
-Happiness is the experience of spending time with people you love and people who love you
-educational attainment leads to higher evaluation of one’s life but leads to higher stress
-having children increases stress and anger
-religious participation has good impact on stress reduction and a positive effect, but religion does not reduce depression or worry
-money buys more pleasurable experiences, but dilutes the enjoyment of small pleasures. It leads to higher evaluation of life but not higher happiness. People’s subjective indication of life happiness is not an accurate representation
38 – thinking about life
-a bad marriage can lead to life satisfaction after year 5 and later to be worse than being single!
-Experienced well-being is unaffected by marriage as it makes some things better and others worse. Women spend more time doing household things and taking care of children married and less time with friends. If the man is not better than friends, and they are career-oriented and do not like kids, it’s no wonder many women don’t want to get married, as in that case it would be worse.
-Goals in life affect life satisfaction, even superficial goals like money. If one sets goals and achieves them, such as high income, it increases life satisfaction. If one sets goals and does not achieve them, it substantially reduces life satisfaction. Most people do not set goals and live as such an okay life.
-Nothing in life is as important as you think it is
–The focusing illusion can lead individuals to misjudge their present state of well-being as well as future happiness, and others happiness. Bent overly positively, this will make one over inflate in all facets, which differs from actual happiness (lower). This causes depression.
-Marriage is a part-time state as many people are married but do not participate in their own marriage
-we underestimate and neglect long term things, such as investing and marriage, while overestimating short term events that are exciting and offer novelty
-we make bad choices on miswanting, wanting the wrong things based on wrong forecasting
-we set ourselves up for failure
Conclusion
–Observers tend to have fewer cognitive demands and a greater receptivity to information compared to active participants.
The book is written oriented to critics and gossipers rather than decision makers. It’s easier to identify the errors in others than myself.
It’s easier to imagine the voices of others, critics and gossipers, to making decisions, than to try to spell out my own doubts
Disclaimer
This is not Financial Advice. This article is meant only for educational and perhaps entertainment purposes.