Wednesday, February 22, 2012

Thinking, fast & slow: A landmark book in intuitive thinking & decision making

"What is E=mc2 of this century?", our son Kabir asked me a few days after we watched the NOVA film "Einstein's big idea" together sometime last year. I thought about it for a few moments and said, "Psychology is the physics of 21st century, Kahneman is the Einstein and his work on happiness is like E=mc2". My answer and speed with which it came surprised me more than it surprised Kabir. I was clearly under the spell of Kahneman. Who is this Kahneman? And what is his work about? If you want to know, your best bet is to read Nobel Laureate Daniel Kahneman's bestselling book "Thinking, fast and slow". It has come out a couple of months back in India. It is a landmark among the psychology literature intended for layman, more specifically about intuitive thinking and decision making under uncertainty. It covers a vast spectrum. Let me articulate a few nuggets of wisdom from it.

Answering an easier question: When I look back at my answer to Kabir's question, it is clear that the answer was given off-the-cuff. In fact, I was in no position to answer the original question because I am clueless about most of the recent breakthrough developments in various sciences including those in psychology. Then what happened here? Kahneman explains it in chapter 9 titled "Answering an easier question". Whenever we are asked a question whose answer we don't know, the fast thinking mode answers an easier question. And unless the slow thinking mode checks & rejects the answer, it is given out like it happened with me. In my case the easier question that got answered was, "Among the scientific results I know, which one appeals to me the most?" Kahneman calls such shortcuts "heuristics" and we use them all the time. They work mostly and trick us real bad occasionally. When we are asked, "How happy are you with life these days?" we tend to answer the easier question, "What is my mood right now?"

Expert intuition: when can we trust it? I wrote an article last month about mathematician Srinivas Ramanujan and the marvels of his expert intuition. The article also highlighted how the intuition tricked Ramanujan occasionally creating incorrect results. In chapter 22 which is titled "Expert intuition: when can we trust it?" Kahneman presents the exact criteria under which experts develop real expertise. You acquire skill when (a) you have an environment that is sufficiently regular to be predictable and (b) you have an opportunity to learn these regularities through prolonged practice. In some cases like that of stock analysts, the environment isn't sufficiently regular. On the other hand, chess players and basketball players do develop real skills.

Illusion of understanding: Kodak filed for bankruptcy protection last month. All the related stories published in Economist, Wall Street Journal, Wharton School of Business, an HBR blog had one thing in common. None of them contained the phrase "bad luck". Most of them sited some story or the other related to poor management decision making, the most common being the Kodak's invention of digital camera and how Kodak didn't pursue it's development etc. Implicit in these articles was an assumption that bad management decisions cause bad outcomes like bankruptcy and randomness or bad luck plays insignificant role. Kahneman calls these generalizations where randomness is substituted by causation "illusions of understanding" (chapter 19). It stems from 3 things: (1) We believe that we understand the past. However, in reality, we know a story of the past constructed from very limited information easibly accessible to us. (2) We can't reconstruct the uncertainty associated with the past events. It leads to things like the HBR blog suggesting Kodak should have created a photo sharing social network. (3) We have a strong tendency to see causation where there is none. Many times a single story such as Kodak's digital camera story is good enough for us to label Kodak management as the root cause of its debacle. I don't know how much of strategy literature suffers from "illusion of understanding".

Kahneman's law of happiness: Ask yourself "How special is your car to you?" and then ask yourself "How much do you enjoy the commute?" Psychologists have found a decent correlation (0.35) between the first question and the blue book value of the car. And, they have found zero correlation between the second question and the blue book value of the car. Such observations have led Kahneman to formulate the following law - Nothing in life is is as important as you think it is when you are thinking about it. Your car's importance to you is exaggerated only when you think about it. Unfortunately, you spend significantly more time driving it than thinking about it.

Kahneman's confession about the book: "I don't think reading this book will prevent any of you from making any significant mistake. Because even writing it hasn't helped me." said Kahneman in an interview. Then what does he hope to achieve? Well, Kahneman wants to see more sophisticated water cooler gossip about biases in decision making, mostly of others. I love the book and I am sure I will come back to it again and again in the future.


  1. That was illuminating... Would have never heard or read something like this if it were not for your blog. Thanks.