16 of 16 people found the following review helpful
5.0 out of 5 stars
17 cents per "Aha", Feb. 4 2012
Investors are often criticized for making irrational decisions, as if it were possible through hard work and discipline to reach some kind of idealized rational state. According to psychologist and Nobel laureate Daniel Kahneman, author of Thinking, Fast and Slow, it doesn't quite work that way. People can be trained to make more thoughtful decisions but, ultimately, the anatomical structure and evolutionary history of the human brain calls the shots. And that brain tells us to make quick, intuitive judgments with identifiable biases. Our more reflective processes, more often than not, line up to support these judgments.
If this sounds familiar, it should. In 2005, Malcolm Gladwell published the bestseller Blink: The Power of Thinking Without Thinking. Gladwell wrote detailed case studies about intuitive judgments. On rare occasions, such as the case of a chess master with several thousand hours of training, intuitions can be remarkably accurate. At other times, when we use physical traits like a square jaw to judge a politician's leadership capabilities, they are just plain dumb.
But, Thinking, Fast and Slow is a much richer book than Blink. Kahneman has written the organized, referenced big brother of Blink and other books like Freakonomics by Steven Levitt and Stephen Dubner and Moneyball by Michael Lewis. All of these titles owe their existence to the intellectual framework developed by Kahneman and others.
The author, who has spent five decades studying the way we make decisions, is seen as a pioneer in the field of behavioural finance. He was the first psychologist to be awarded the Nobel Memorial Prize in Economics for his co-authorship, with Amos Tversky, of Prospect Theory. Among the insights derived from Prospect Theory is loss aversion, where people overweight losses in their decision-making.
To help readers better understand the complex interplay between our slower, reflective processes and our quick, intuitive processes, Kahneman writes about two systems: System 1 and System 2. System 1 is described as uncontrolled, effortless, associative, unconscious and skilled. When you see a photo of an angry person's face, System 1 generates an automatic response ' something like, 'Yikes!' System 2 is controlled, effortful, deductive and slow. It goes to work when you are presented with a problem like, 'What is 34 times 13?'
Through MRIs and measurements of pupil dilation during mental tasks, researchers have physical evidence of fundamentally different processes at work. And, over the years, a sizeable body of research has developed about biases, heuristics and decision errors. One of the most common patterns is that we substitute an easy question for a hard one. When asked what we think of a politician, we substitute the question, 'Does she look like a leader?' System 1 comes up with a quick answer: 'Of course she does!' System 2 would have to perform a difficult analysis to provide the real answer: 'What are her policies on various issues and how do they compare with those of her rivals?' Since System 2 tries to conserve energy, the System 1 substitution takes place, and then System 2's supporting points are brought in after the fact. It is completely lame and we all do it.
If the value of a book were measured in 'Aha!' moments, Thinking, Fast and Slow would represent a tremendous bargain. At $34 retail (and you will almost certainly pay less than that), each 'Aha!' costs about 17 cents. Examples: 'Aha! So that's why mega-projects routinely come in wildly over-budget.' Or, 'Aha! That's why it's harder to putt for birdie than for par.' Or, 'Aha! That's why CEOs of businesses facing losses often take high-risk, capital-destroying gambles.' Or, 'Aha!, that's why caps on civil liabilities favour large companies over small ones.'
One note of caution about Thinking, Fast and Slow: it is dense and it requires you to think. The author has gone to heroic lengths to make it readable, but each chapter requires thoughtful participation, often beginning with a word problem or exercise. The effort, however, is worthwhile. Unless you are a researcher in experimental psychology and know the content already, it will probably change the way you think. But it won't make you rational.