Thinking, Fast and Slow - Reflection and Summary

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FINE 690 - Behavioural Finance

Professor: Ken Lester

Mid Term Paper

“Thinking, Fast and Slow -

Reflection and Summary”

By Andre Koski

Reflection:

        Thinking, Fast and Slow, by Kahneman makes the case that too often we suffer mental errors because we are too quick to accept the information that comes to our brain. This is due to heuristics, which are simple and efficient rules that we often use to form judgments and make decisions. Furthermore, heuristic are mental shortcuts that usually involve focusing on one aspect of a complex problem while ignoring others. These rules work well under most circumstances, but in a few occasion they can lead to systematic deviations from logic, probability or rational choice. The resulting errors (deviations) are called "cognitive biases" and many different types have been documented in the book. As an example errors of substitution, stereotyping, WYSIATI (what you see is all there is), causal explanations, the halo effect, the framing effect, the anchoring effect, narrative fallacy, and overconfidence in what we think we know, to name a few,  are all cognitive biases. The book defines these terms among others and gives several examples in an attempt to give people a new way of thinking about such mental fallacies.   Kahneman hopes that readers will recognize these errors in others and then in themselves and learn how to correct them.  

        In the second section of the book, Kahneman compares those who live in the land of theory and those who live in the real world. Basically, he is comparing the way economists look at people as opposed to how psychologists do. The people in the land of economic theory, he calls the econs, while those who act in the real world are referred as humans. Econs are always logical and rational while Humans are illogical and irrational because their thinking is flawed. The latter ignores statistical information and live their lives based on causal connections and explanations. Theoretically, Econs tend to see things as black or white with no choices in between. Although in reality, humans are not Econs and see a range of options before them.

        In the last section on the book, Kahneman compares the experiencing self and the remembering self.   Kahneman proposes an alternate measure that assesses pleasure or pain sampled from moment to moment, and then summed over time. Kahneman called this “experienced” well-being. He distinguishes this from the “remembered” well-being. He found that these two measures of happiness diverge. His main discovery is that the remembering self does not care about the duration of a pleasant or unpleasant experience. Rather, it retrospectively rates an experience by the peak of the experience, and by the way it ends. Further, the remembering self dominated the patient's ultimate conclusion. In the last few chapters of the book, Kahneman talks about how we experience happiness and the well being. As humans focus their attention on specific moments and neglect what happens at others, we have a distorted view of what happiness is. The author describes well being as what occurs when people’s lives are filled with experiences they would rather continue than stop. Resistance to interruption is a sign that someone is experiencing well being. According to Kahneman, the easiest way for people to increase happiness is to control how they use their time. Finding more time to do the things they really enjoy will increase their happiness (note to myself!). Affective forecasting, the focusing illusion, and the passing of time all influence how people are satisfied with their lives. The reference points of which they compare their lives to, also contribute to how much happiness they actually experience.

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