People have two distinct styles of thinking, and both systems have flaws.

The two styles provide the book’s title. The fast style, which Kahneman calls System 1, represents intuition. System 2 is called upon when System 1 gets out of its depth, but System 2 is “lazy.” Both systems make mistakes. System 1 often substitutes feeling for reason, or substitutes an easy question for a hard one, or leaps to a conclusion based on stereotypes. Often such habits of thought are routine enough to be called heuristics—rules of thumb that make thinking easier but lead to predictable kinds of errors.

Both systems are liable to focus on certain facts to the exclusion of others, and both systems are fond of narrative, especially in the form of causal explanations, even in situations where the true story is about the actions of blind chance. Neither system has a deep understanding of probability or statistics, but System 2 can at least be trained. Unfortunately, the deficiencies of Systems 1 and 2 do not lead to humility; on the contrary, people tend to be blind to their errors and overconfident in their judgments.

The standard model of rational choice doesn’t reflect how real people decide what to do.

Economics, as taught in most introductory textbooks, assumes that human beings seek to maximize expected utility, which is almost, but not quite, the same thing as maximizing expected monetary payoff. According to prospect theory, Kahneman’s alternative account of choice, real human beings differ in several respects from the ideal choosers described by expected utility theory. Real human beings:

(1)    Grow attached to the status quo and prefer it over what might otherwise be seen as an equally good alternative.
(2)    Discriminate more finely between small gains and losses, relative to the status quo, than between large ones.
(3)    React more strongly to losses than to equal-sized gains, a behavior called “loss aversion.”

Real human beings also give too much weight to rare events, especially ones that are easily and vividly imagined (perhaps because of media coverage of such events). Finally, real human beings are poor judges of their own happiness. Their memories of past events fail to reflect the actual mix of enjoyment and unhappiness they experienced at the time. Consequently, people are not good at choosing what will bring them the most pleasure.

Organizations can encourage practices that foster more rational judgments and choices.

Although Kahneman catalogs dozens and dozens of mistakes people are prone to, he is not merely pessimistic. Organizations and governments can adopt and encourage practices that foster more rational judgments and choices and thereby make people better off. For example, an organization can promote rational planning by mandating review of how similar projects have turned out, and by inviting planners to imagine how the project could fail (an exercise called a “premortem”).

An organization can also improve its projections of future employee performance by relying less on interviewers’ intuition and more on simple, algorithm-based evaluations. Both organizations and governments can optimize the outcomes of many individual decisions by framing decisions properly. For example, participation in a company 401(k) plan, or in a voluntary organ donor program, can be encouraged by making participation the default, with a cost-free opt-out option.

Take a Study Break