Effective at Thinking Slow

My first economics class in 2001 opened with the teacher sarcastically stating, "Economics is a very precise discipline that relies only on the "minor" assumption that human beings act rationally." The whole class laughed. I still wonder how that introduction led me to become an economist years later.

Daniel Kahneman, a psychologist, dedicated his career to understanding this "irrationality" and won a Nobel Prize in Economics for pioneering "Behavioral Economics." He passed away three weeks ago, at 90, leaving a significant legacy. Much of what I've learned about self-development can be attributed to his findings. Today's post is dedicated to him and his work, hoping that you can appreciate his legacy and apply some of his insights.

Effective at Thinking Slow

In 2002, Kahneman won a Nobel Prize for developing prospect theory, challenging traditional economic assumptions of rationality. Traditional economic theory assumes rational decision-making aimed at maximizing utility, but this research shows our choices are often complex and irrational due to cognitive biases, subjective perceptions, and emotions. Prospect theory mainly explains how we perceive gains and losses differently, leading to suboptimal outcomes. For example, many struggle to sell stocks at a loss compared to when making a profit.

In his book "Thinking Fast and Slow," Kahneman defined two mental systems. System 1 is our intuitive, automatic mode of thinking, which operates quickly and effortlessly. It is the one that activates when asked what is "2 + 2". However, it's prone to many biases like availability or optimism biases. System 2 is our analytical, deliberate mode of thinking. It requires conscious effort and is the one activated when asked what is "47 x 24." There's a resemblance between these systems and the analogy I used about us being either Homer Simpson or Mr. Spock. Despite its flaws, System 1 often dominates, shaping our decisions and actions unconsciously.

Kahneman also discussed our two selves. The experiencing self lives in the present moment, directly experiencing sensations and emotions as they happen. Meanwhile, the remembering self reconstructs past experiences in our minds and shapes our perceptions of happiness based on memory. The experiencing self seeks immediate pleasures, while the remembering self finds happiness in life narratives. Endings significantly influence memories, often outweighing the overall experience. For example, some people stated to have had a better experience during a 25-minute colonoscopy that ended with low pain vs. an 8-minute one with fewer overall pain but ending on a peak. This gap between experiencing and remembering selves complicates our understanding of happiness.

Kahneman once asked a crowd to envision a dream vacation. Think of something...ready? Now, consider that all your photos and memories will be erased. Would you pick the same spot? This reveals whether you prioritize your experiencing or remembering self (I believe Disney Parks heavily relies on our remembering selves).

What actions can you take?

• Establish decision criteria beforehand to minimize bias. Whether initiating an experiment at work or selecting a new home, assign a weight to essential factors beforehand. Then, objectively evaluate options. Otherwise, your answer may be biased by the time taken on the experiment or touring a particular property.

• Slow down decision-making. Recognize biases, conduct a pre-mortem analysis to identify potential failures, (answer the hypothetical question: "If all went wrong, what was the main cause?").

• Engage System 2 in planning using methods like Weekly Planning, Personal Quarterly Review, or Meal Prep Sundays for deliberate decision-making towards your goals (e.g. what to eat, how to invest, when to do physical activity).

• Make it easy for System 1. Eliminate obstacles for desired behaviors and introduce barriers for undesired ones. For example, keep gym clothes by your bed for morning exercise, or store chocolate out of sight.

• Apply the peak-end rule for lasting impressions. Conclude activities positively, like a work presentation or a family day-trip. It's what participants remember most. Personally, I end presentations with jokes.

After taking 210 thousand steps during my 13 days in Japan, my remembering self is very much in debt with my experiencing self.

Behaviorally,

Jorge Luis Pando

"People would rather believe than know." - Daniel Kahneman

PS: Daniel Kahneman once provided the specific example that "Moving to California won't make you happy". As someone who moved to California more than two years ago and is planning a beach-day this Sunday, the only thing I'll say is that I guess he never came to *Southern* California.