Kahneman earned a Nobel Prize in Economics in 2002, and I say earned after reading his book, “Thinking, Fast and Slow”. It’s a masterpiece in understanding the human psyche and how behavorial psychology ties in with economics.
I took a long time to read this book, in part because of the identity theft issue that took up most of July, and in part because the book is a little on the dry side. Some of the key takeaways I found were:
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The division of the mind between a “System 1”, or the primal, fast-calculating, and sometimes-wrong part of the brain, and a “System 2”, the sentient, slow-calculating, and facts-parsing part of the brain. “System 1” is used when snap judgements need to be made (e.g. I’m the prey and that over there is the predator), while “System 2” is used to calculate and reason about difficult problems (e.g. how to trap a mammoth). The interactions between “System 1” and “System 2” produce the combination of rationality and irrationality that frustrates classical economics.
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We use diagrams and graphs (“scientific evidence”) to lull ourselves into thinking we can confidently produce a description of a certain economic behavior, but it is not always true. For example, the commonly accepted intro-to-economics law of demand states how if the price of a good rises, the demand for it falls. This doesn’t hold true, however, for Veblen goods like luxury automobiles and Giffen goods like Irish potatoes. Since people view the price of a Veblen good as a desirable trait increase their consumption upon a price increase. At the other end of the scale, if the price of a Giffen good increases, those consuming it cannot afford to purchase superior goods and must increase their consumption. Another example with a better tie-in to behavorial economics is Kahneman explaining the change in utility along an indifference curve depends on the history of how you arrived at the state you are at along the indifference curve, vis-a-vis the endowment effect. To me, this was like when quantum physicists tell you to throw away your understanding of classical physics because it’s wrong.
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In the conclusion, Kahneman tells us how to avoid the fallacies and cognitive minefields that come with a conscious or unconscious dependency on our “System 1”. Some methods include the use of a wider vocabulary (e.g. as in the medical field, where specific medical terms may recall symptoms, diagnoses, and effects associated with that term), the use of routines (e.g. pilot pre-flight checklists), and attention to statement framing or how you say things.
While this book may be a tad tedious at times, it is full of new ideas that challenge your existing mode of thinking. Every chapter starts off the way you may expect and ends in a way you don’t.