5. Two Minds
• System 1
• Automatic
• Hot emotional
system
• Intuitive
• Right hemisphere
• System 2
• Deliberative
• Cool cognitive
• Analytical
• Left hemisphere
6. System 1
Characteristics
• All our thoughts & actions originate here
• Simple, automatic, little or no effort, fast
• Cognitive Ease
• Continuously assess situations
• Continuously monitors thoughts
• Intuition & Creativity live here
• Accepts all propositions as true
• Needs causal relationships to be able to make sense of
environment
• So, it categorizes things/events for quick recall
7. System 2
Characteristics
• Employed when things get difficult
• Allocates attention & effort
• Complex, effortful, reflective , slow
• Assesses options w.r.t. goals
• In charge of Self control & behaviour
• Usually has the last word
• Uncertainty & doubt live here
9. Intuition
What Was I Thinking? Kahneman Explains How
Intuition Leads Us Astray
• Tool for decision making especially in uncertainty.
• Central component of Heuristics
• “An informal unstructured mode of reasoning”- DK &AT
1982
• “Drawing inferences so quickly that reasoning seems to
be absent” – Bunge 1962
• aka – gut feeling, hunch, sixth sense, vibes
• The confidence that people have in their intuitions is
not a reliable guide to their validity.
• Intuition cannot be trusted in the absence of stable
regularities in the environment.
10. • When information is scarce, which is a
common occurrence, System 1 operates as a
machine.
• The combination of a coherence-seeking
System1 with a lazy system2 will endorse
many intuitive beliefs, which closely reflects
the impressions generated by System1
11. Heuristics
• What? - “Rule of Thumb”
• How? - Intuition & Experience
• Why? - Cognitive Ease & speed
• Associative reasoning & Uncertainty substitution
• Emotions & reason
– Limit the no. of options
– Limit aspects of environment considered
• Driven by Motivation
– Utility Maximization
– Psychological Hedonism
12. Cognitive biases
• In the first, he and Tversky did a series of
ingenious experiments that revealed twenty
or so “cognitive biases” — unconscious errors
of reasoning that distort our judgment of the
world..
• Typical of these is the “anchoring effect”: our
tendency to be influenced by irrelevant
numbers that we happen to be exposed to.
13. Exercise
• Was Gandhi more or less than 144 years old
when he died?
• How old was Gandhi when he died?
14. Exercise
• Is the height of Mt. Everest more or less than
18,000 feet?
• What is the height of Mt. Everest?
15. Anchor
• Reference point for comparison
• How do you identify your anchor?
– System 1 or System 2
• Examples – donations, auctions, online trading
• Why do you need it?
16. Anchoring
• In the decision making process an anchor
serves as a reference point against which
propositions are compared.
• Widely used for decisions regarding
purchases, estimation of risk and uncertainty
and predictions of future preferences. Why?
• Where an anchor value is not easily accessible
tendency to substitute with an anchor of a
more familiar proposition. Why?
17. Anchoring effect
• Final estimations are biased in the direction of
the initial anchor - mental effort required
• Influenced by the individual’s thresholds for
accepting or denying values that come to
mind.
18. • Anchoring and adjustment: People who have
to make judgments under uncertainty use this
heuristic by starting with a certain reference
point (anchor) and then adjust it insufficiently
to reach a final conclusion.
• Example: If you have to judge another
person’s productivity, the anchor for your final
(adjusted) judgment may be your own level of
productivity. Depending on your own level of
productivity you might therefore
underestimate or overestimate the
productivity of this person.
19. Adjustment
• Anchor values serve as reference points and therefore
estimations made using the anchoring and adjustment
heuristics rely heavily on the effortful process of
adjustment.
• Produced by psychological processes:
• 1) the individuals capacity to access an anchor and
• 2) the ability to accurately adjust from the accessed
anchor
• Jumping or Sliding
• Plausibility Check
• Arrive at an estimate
20. Types of Heuristics
• Affect Heuristic
– Judgments are guided by feelings
– “How do I feel about it?” v “What do I think about
it?”
– Affect proceeds and influences cognition
– Anticipated feelings vs. Immediate feelings
– Affect affects perception ex. risk
– “Halo Effect”
– Little or no deliberation – System 2 endorses System
1
21. Exercise
• Tom is a student at SIU. He is of high intelligence,
although lacking in creativity. He has a need for
order and clarity, and for neat and tidy systems in
which every detail finds its appropriate place. His
writing is rather dull and mechanical, occasionally
enlivened by corny puns and flashes of
imagination of the sci-fi type. He has a strong
drive for competence. He seems to have little feel
and sympathy for others & does not enjoy
interaction with others. But he does have a deep
moral sense.
22. Exercise
• Rank the following fields using 1 as most likely &
9 as least likely
– Business Administration
– Computer Science
– Engineering
– Humanities
– Law
– Medicine
– Library Science
– Physical & Life sciences
– Social Science & Social work
23. Types of Heuristics for Probability &
Prediction
• Representativeness Heuristic
– Evaluation of the probability of the degree to which
an object is representative of a particular case
– Comparison of stereotype
– Causal base rates v Statistical Base rates
• Limitations
– Neglect of Base rate
– Similarity vs Probability - substitution
– Misconceptions of chance – “gamblers fallacy”
– Insensitivity to prior probability of outcomes i.e. base
rate frequency – willingness to predict unlikely events
24. Types of Heuristics
• Availability Heuristic
– judgments or evaluations are made by the ease with
which similar instances or occurrences come to mind
– Ease of recall higher probability rating
– Availability cascade ex. media
• Limitations
– irretrievability of instances
– effectiveness of a search set
– Imaginability – ease of reconstruction
– Probability ignored
25. Substitution
• “Answering one question in place of another”
– DK
• Why?
– to simplify judgment of probability
– Cognitive ease
– Imprecise control over targeting our responses to
target questions
– To answer difficult questions
26. Substitution
1. How much would
you contribute to
save an endangered
species?
2. How happy are you
with life these days?
3. How should rapists
be punished?
4. How popular will the
PM be 6 months
from now?
1. How much emotion
do I feel when I think
of a dying dolphin?
2. What is mood right
now?
3. How much anger do I
feel when I think of
rapists?
4. How popular is the
PM right now?
27. Problem
• Problem 1
Suppose you have been given Rs.1000.
– Option A : Keeping Rs. 700 for sure
– Option B: Gamble with a 50/50 chance of keeping
or losing the whole Rs 1000.
Problem 2
– Option A Loosing 300 for sure
– Option B Gamble with a 50/50 chance of keeping
or losing the whole Rs.1000.
28. Prospect Theory
Today Bunty and Babli each have a wealth of
Rs.5 cr.
Yesterday, Bunty had Rs.1 cr. and Babli had Rs. 9
cr.
Are they equally happy? Do they have the same
utility?
29. Prospect Theory
3 cognitive features play an essential role in
evaluation of financial outcomes. (Operating
characteristics of System 1)
• Evaluation – outcome relative to a reference
point. Ex. Status quo/expected outcome
– Gains - outcomes better than reference point
– Losses – outcomes below the reference point
30. Prospect Theory
• Principle of Diminishing Sensitivity
– Evaluation of changes in wealth
– Ex. subjective diff between 900 & 1000 is
smaller than 100 & 200
• Loss Aversion
– When directly compared against each other:
Losses loom larger than gains
Psychological value of gains and losses are the
Carriers of Value in Prospect Theory
31. • (Tversky and Kahneman 1979)
• Prospect theory proposes that the utility of a
decision is attached to positive or negative
outcomes.
• The value function is concave for gains and
convex for losses and is steeper for losses
than for gains
32. Loss Aversion
• When directly compared with each other losses loom
larger than gains – this effect is known as Loss Aversion
• Mixed option - Risk of loss vs Opportunity for Gain
• Implies that the impact of a difference in the location
of the reference point is greater when the difference is
evaluated as a loss than as a gain
• Reference levels play a large role in determining
preferences.
• The manner in which gains and losses are framed
influence a person’s value function.
33. Loss Aversion
• Loss aversion ratio is 1:2
• The coefficient of loss aversion can vary
across dimensions and the coefficient reflects
the importance or prominence of these
dimensions
• Ex. 1 Safety is more important than money
and income is more important that leisure
• Ex. 2 Endowment Effect
34. Thinking Fast and Slow
Conclusions
• When these conditions are fulfilled, skill
eventually develops, and the intuitive
judgments and choices that quickly come to
mind will mostly be accurate. All of this is the
work of System 1, which means it occurs
automatically and fast. A marker of skilled
performance is the ability to deal with vast
amounts of information swiftly and efficiently.
35. Thinking Fast and Slow
Conclusions
The way to block errors
that originate in system
one us a simple in
principle: recognize signs
that you are in a
cognitive minefield, slow
down and ask for
reinforcement from
System 2.
36. Thinking Fast and Slow
Conclusions
• What can be done about biases? How can we
improve judgments and decisions, both our
own and those of the institutions that we
serve and serve us?
37. Thinking Fast and Slow
Conclusions
• The short answer is that little can
be achieved without considerable
investment of effort.
As I know from experience
System 1 is not readily educable.
• Except for some effects that I attribute mostly to my
age, my intuitive thinking is just as prone to
overconfidence, extreme predications, and the
planning fallacy as it was before I made a study of these
issues.