1 min. 30 sec. read
By Daniel Kahneman
Professional decision makers Bill Gates, Ray Dalio, Marc Andreessen, and Naval Ravikant, (all billionaires) recommend this book. Non billionaire Barack Obama also recommends this book. (Halo Effect here)
Daniel Kahneman is considered one the greatest and most influential living psychologist in the world. He is a professor at Princeton University. He is known for his work on psychology of judgement and decision making. In 2002, he won the Nobel Prize for his work on how biases and heuristics affect Economic Theory.
This book is about how we make decisions, and why we make errors in decision making. Kahenman describes two modes of thoughts when we make decisions. He calls them System 1 and System 2. When you use System 1, your thoughts are fast, automatic, and intuitive. When you are using System 2, your thoughts are slow, calculative, and effortful.
For most of our daily lives, we use System 1, and it usually works pretty well. But sometimes System 1 makes systematic errors. We aren’t even aware of these errors. These errors are called Biases and Heuristics.
Early in Kahneman’s career, he wondered why he often made faulty decisions, and why he was blind to see them. He wondered if other experts made the same bias mistakes he did. He analyzed experts such as statisticians, stock analysts, doctors, judges, CFO’s, and political experts. These highly intelligent people made the same bias mistakes he made. Many of them refused to believe they made bias decisions, even after being shown empirical data!
Although Kahneman wasn’t the first to discover many of the biases, he was the first to label, publish, and explain why we have them. He teaches you how to lessen these biases. He also teaches you how to put yourself in the best position to avoid these biases in the first place.
While most decisions we make are not that important, there are times when making bias decisions can have huge consequences. For example, if you are starting a company, planning a project, hiring a professional, or making an investment, you want to make sure your decisions are sound and rational. Most likely your decision was made with bias and it could have huge financial consequences.
Example of faulty thinking due to a Bias (Representativeness Bias):
“Steve is very shy and withdrawn, invariably helpful but with little interest in people or in the world of reality. A meek and tidy soul, he has a need for order and structure, and a passion for detail.” (p. 7)
Is Steve more likely to be a librarian or a farmer?
You probably guessed librarian. This is the wrong answer.
Your intuition (system 1) used the description of Steve to make a conclusion that the description most likely matches a librarian. If you used a slower way of thinking (system 2), you would realize that farmers outnumber librarians 20-1. So by simple probability, the answer needs to be farmer. Yes, there are farmers that are shy, withdrawn, meek and tidy too!
Optimism Bias, -Optimistic people, good or bad?
How to plan a business without Bias
Intuition, when can you trust it?