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Portfolio > Economy & Markets > Economic Trends

Discovering Daniel Kahneman’s Insights on Human Behavior

By Mike Patton

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In last week’s blog I mentioned my recent trip to the Rocky Mountain Economic Summit in Jackson Hole, Wyoming (my reporting on the Summit will appear on ThinkAdvisor starting early this week). Although, I don’t do a great deal of traveling, when I do, two things tend to occur. First, I meet some of the most interesting people and second, I find some of the best books in the airport book stores. This trip was no exception. 

During my trip I met an international pilot for Delta. He had many stories about living in the area near the Green Bay Packers and how he bought a condo from one of the Lambeaus of  Lambeau Field fame. Being a closet Detroit Lions fan, I kept the conversation away from football. I also met a retired economics professor from Denmark who was traveling with his wife and grandson. We had an interesting conversation as that happens to be one of my favorite subjects. I also found a book entitled, “Thinking Fast and Slow,” by Daniel Kahneman. 

In case you are unfamiliar with the author, he won the Nobel Prize in Economics in 2002. He is noted for his work in behavioral economics, cognitive biases and decision-making. This book deals with all three. If you’ve ever wondered why people hold certain erroneous conclusions, this book will shine light on the subject. In short, it’s one of the most amazing books I’ve ever read on the subject of the human behavior.

The underlying theme of the book is that we all have two systems: System 1 and System 2. The first is the spontaneous part of ourselves and the second is the more thoughtful, effortful part. We have no control over System 1 as it’s what we do instinctively. If I ask you to complete the equation: 2+2, you would have no problem providing the correct answer. This and other simple tasks are a product of System 1.

However, if I asked you to multiply 587 x 61 (in your head) it would take much more effort. Most of us would probably just give up. These type of tasks are governed by System 2.

System 2 tasks require more time, more effort, and more glucose from the brain. The book explains that we have no control over System 1. System 2, on the other hand, is potentially under our control. I say potentially because it’s not automatic and requires much effort. Many have a lazy System 2, as he puts it, while others are able to focus on complex tasks more easily. The more you do it, the easier it will become. 

Kahneman’s conclusions are backed by empirical research. For example, one study proved that whenever we are faced with complex, System 2 tasks, our pupils dilate. The book is filled with numerous examples and delineates which conclusions are fact and which are still being studied.

If you would like to understand why we and clients do some of the things we do, this book is a real eye-opener. It’s also a great book to help understand why and how we arrive at false conclusions, which is something that all humans do regularly.

Until next week, thanks for reading and have a great week.

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