by I.K. Mullins
Copyright©2015 I.K. Mullins. All Rights Reserved. No part of this book may be reproduced or retransmitted in any form or by any means without the written permission of the author.
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Daniel Kahneman, the American psychologist and winner of the Nobel Prize in Economics, began his career in the early 1970s with a series of ingenious experiments that he set up together with Amos Tversky, a cognitive and mathematical psychologist. In the experiments, the two researchers identified about twenty cognitive biases. These biases represent unconscious errors in reasoning that distort our judgments about the real world.
Kahneman and Tversky demonstrated that when people have to make decisions in uncertain situations, they do not behave in a way that traditional economic models presume. The two psychologists found that “systematic errors in the thinking of normal people” are incorporated in people’s evolved ways of thinking. After the death of Tversky, Kahneman also explored “hedonic psychology,” which is the study of happiness and well-being.
In 2002, Daniel Kahneman won the Nobel Prize in Economics for the Prospect Theory, which he developed together with Amos Tversky. The Prospect Theory is a behavioral economic theory. It describes how people make choices between probabilistic options, which involve risk, in situations where the probabilities of outcomes are known. According to the theory, people make decisions based on their evaluation of potential gains and losses, and they estimate the gains and losses using certain mental shortcuts.
In his book, Kahneman sums up the research on Prospect Theory and cognitive bias that he and Tversky conducted, as well as his research on happiness. The central theme of Kahneman’s book is the discussion of two profoundly different modes of thinking that the human brain uses in order to apprehend the world. These two different ways of thinking— System 1 and System 2—have been described in various “dual-process” theories of the brain.
System 1 is fast, intuitive, associative, metaphorical, automatic and imprecise. System 1 is responsible for many of the choices and judgments that we make, and it cannot be turned off. System 2 is slow and deliberate. Its operation requires significant mental effort and attention. System 2 takes over System 1, somewhat reluctantly, when things become challenging. Using the results of the research, Kahneman comes to a conclusion that people are too confident in their judgments.