This book published in 2011 is already considered a classic by many. Daniel Kahneman is a Psychologist who did a lot of work with his partner Amos Tversky in the areas of decision making pertinent to economics. For his trailblazing work, he received an Economics Nobel in 2002 (since Tversky passed away in 1996, he didn't get one). Their work questioned the traditional models of economics and subsequently lead to the formation of behavioral economics as a field.
The model used by traditional economists envisions human beings, and by extension the market place, to be perfectly rational entities devoid of emotions. They believe that even if humans are emotional beings, their behavior will be very logical and rational when it comes to how they evaluate, price, purchase products and services in life. So, they presumed/expected the market on the whole to be perfectly balanced, bringing out the true value of any entity it evaluates. Those who don't agree with this view have opined that traditional economists didn't know how to model and study the vagaries of human behavior and so they conveniently chose a model that works well mathematically to study. Reminds you of the Streetlight Effect. :-)
Kahneman's thesis elaborated in this book is that we all possess two systems inside us. There is System 1 that uses a lot of instincts, very quickly evaluates any give person, product, scenario and comes to a conclusion. This is thinking fast. Then there is System 2 that takes lot more time & effort to properly analyze and estimate the value/effect of things. This is naturally thinking slow. Since working with System 2 takes more effort, we often tend to depend on System 1 to get by. But if pushed, System 2 will kick in and provide a more rational evaluation. Nowadays this idea is fairly well understood and accepted. The field of behavioral economics is an extension of this notion that explains all the irrational, inconsistent, emotional behavior often seen in the way individuals act or the market place behaves. The value of this understanding cannot be overstated and Kahneman has dozens, if not hundreds of experiments to explore this idea and put together results and literature. But as you read through the book, it feels like the same idea is explained over and over and over with minutely differing situations. Individually each one is interesting for the researcher and is useful to add additional material to the field. But for a reader to read it in a book, it is not so useful or interesting.
Book is segmented into five parts. First one titled Two Systems explains the System 1 & System 2 model that maps to the title of the book. This part is good and useful as it summarizes the main thesis of the book. Part 2, titled Heuristics and Biases discusses how our opinions get skewed due to our personal experiences, perceptions and anecdotal evidences though contradicting data may be sitting right in front of us. Part3, titled Overconfidence deals with incorrect and very optimistic predictions and estimates we repeatedly make. This often leads to disastrous consequences. Most large public sector projects (like the Big Dig in Boston) can serve as good examples. Kahneman cites his own experience as an embarrassing example of this over confidence when he headed a committee to design a new text book. His committee estimated that they could get the book out in about three years, while the industry standard is about seven years. In the end it took them more than eight years, despite the fact that he and his committee members were aware of this overconfidence notion. Part 4 titled Choices discusses notions like Prospect Theory (loss aversion) and Endowment Effect where you tend to associate a larger value to something you own (from real estate to coffee mugs) though you know the market price of the item is far lower. Part 5 titled Two Selves tries to tie the ideas together again with System 1 & System 2 summary.
I think any give ten pages of the book will make an interesting article that gives unintuitive insights into human psyche or organizational behavior. For a simple example, a case of a large company with 20 subdivisions is considered. Each subdivision chief can either choose to do a project or reject it that is offered to them. Each project has a 50/50 chance of success/failure. In case of success, the division will make a million dollars in profit. Failure will result in half a million dollar loss. In this scenario individual division chiefs tend to pass the opportunity since half a million dollar loss sounds too big to take up at 50% chance. (This one event choice, one person view is referred to as Narrow Framing.) But the company CEO can easily see that if all 20 division chiefs take up all the 20 projects, even if half of them fail and result in 5 million dollar loss, the successful half will yield 10 million profit resulting in a safe 5 million total profit for the whole company (referred to as Broad Framing). Gaining these insights and being able to nudge individuals and organizations in the right direction to make the right decision in subtle ways can thus have enormous positive impact. Gaining such understanding can be put to use for nefarious purposes as well. These takeaways are very good. But in a 450 page long book, successive sections feel like a repetition of the same ideas stated via different experiments. May be if there had been a ruthless editor that had halved the size of the book, it might have become a much more interesting piece of work. Richard Thaler's book on behavioral economics titled Misbehaving can be considered sort of a sequel to this book. That one was lot more fun to read.
Packing Energy and Civilization: A History by Vaclav Smil for a vacation read. Will see how it turns out. :-)
The model used by traditional economists envisions human beings, and by extension the market place, to be perfectly rational entities devoid of emotions. They believe that even if humans are emotional beings, their behavior will be very logical and rational when it comes to how they evaluate, price, purchase products and services in life. So, they presumed/expected the market on the whole to be perfectly balanced, bringing out the true value of any entity it evaluates. Those who don't agree with this view have opined that traditional economists didn't know how to model and study the vagaries of human behavior and so they conveniently chose a model that works well mathematically to study. Reminds you of the Streetlight Effect. :-)
Kahneman's thesis elaborated in this book is that we all possess two systems inside us. There is System 1 that uses a lot of instincts, very quickly evaluates any give person, product, scenario and comes to a conclusion. This is thinking fast. Then there is System 2 that takes lot more time & effort to properly analyze and estimate the value/effect of things. This is naturally thinking slow. Since working with System 2 takes more effort, we often tend to depend on System 1 to get by. But if pushed, System 2 will kick in and provide a more rational evaluation. Nowadays this idea is fairly well understood and accepted. The field of behavioral economics is an extension of this notion that explains all the irrational, inconsistent, emotional behavior often seen in the way individuals act or the market place behaves. The value of this understanding cannot be overstated and Kahneman has dozens, if not hundreds of experiments to explore this idea and put together results and literature. But as you read through the book, it feels like the same idea is explained over and over and over with minutely differing situations. Individually each one is interesting for the researcher and is useful to add additional material to the field. But for a reader to read it in a book, it is not so useful or interesting.
Book is segmented into five parts. First one titled Two Systems explains the System 1 & System 2 model that maps to the title of the book. This part is good and useful as it summarizes the main thesis of the book. Part 2, titled Heuristics and Biases discusses how our opinions get skewed due to our personal experiences, perceptions and anecdotal evidences though contradicting data may be sitting right in front of us. Part3, titled Overconfidence deals with incorrect and very optimistic predictions and estimates we repeatedly make. This often leads to disastrous consequences. Most large public sector projects (like the Big Dig in Boston) can serve as good examples. Kahneman cites his own experience as an embarrassing example of this over confidence when he headed a committee to design a new text book. His committee estimated that they could get the book out in about three years, while the industry standard is about seven years. In the end it took them more than eight years, despite the fact that he and his committee members were aware of this overconfidence notion. Part 4 titled Choices discusses notions like Prospect Theory (loss aversion) and Endowment Effect where you tend to associate a larger value to something you own (from real estate to coffee mugs) though you know the market price of the item is far lower. Part 5 titled Two Selves tries to tie the ideas together again with System 1 & System 2 summary.
I think any give ten pages of the book will make an interesting article that gives unintuitive insights into human psyche or organizational behavior. For a simple example, a case of a large company with 20 subdivisions is considered. Each subdivision chief can either choose to do a project or reject it that is offered to them. Each project has a 50/50 chance of success/failure. In case of success, the division will make a million dollars in profit. Failure will result in half a million dollar loss. In this scenario individual division chiefs tend to pass the opportunity since half a million dollar loss sounds too big to take up at 50% chance. (This one event choice, one person view is referred to as Narrow Framing.) But the company CEO can easily see that if all 20 division chiefs take up all the 20 projects, even if half of them fail and result in 5 million dollar loss, the successful half will yield 10 million profit resulting in a safe 5 million total profit for the whole company (referred to as Broad Framing). Gaining these insights and being able to nudge individuals and organizations in the right direction to make the right decision in subtle ways can thus have enormous positive impact. Gaining such understanding can be put to use for nefarious purposes as well. These takeaways are very good. But in a 450 page long book, successive sections feel like a repetition of the same ideas stated via different experiments. May be if there had been a ruthless editor that had halved the size of the book, it might have become a much more interesting piece of work. Richard Thaler's book on behavioral economics titled Misbehaving can be considered sort of a sequel to this book. That one was lot more fun to read.
Packing Energy and Civilization: A History by Vaclav Smil for a vacation read. Will see how it turns out. :-)
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