Thinking Fast and Slow By Daniel Kahneman

Do you think you make your own decisions? Is it easy to manipulate you?. Before you answer let me show you something I will describe the characteristics of two persons each of them.

Good and bad decisions

I will say five words. While I say the words try to decide who is evil and who is a good person, please note the first answer that comes to your mind: okay, ready… first person, love care, ordinary, take dark. Second person dark: take ordinary care love.

I’m sure that most of you thought that the first person is good and the second one is evil, but the words I said for both persons are the same. I simply change the order of the words and you made a completely wrong decision in order to explain why we can be so easily manipulated and make wrong decisions.

I will review the book called Thinking Fast and Slow written by Daniel Kahneman. Kahneman, is an economist and psychologist who won the Nobel prize in 2002 for his work in the field of economy. Information in the book is simply mind-blowing the cost of not reading this book is very high, regardless of your profession.

System 1 and system 2

In life, it can save you from making bad decisions and losing tons of money, the author starts the book by introducing the concepts of system 1 and system 2. In order to make it simple, let me explain it to you this way.

There are two people sitting in your brain: the first person is called system one and the second person is called system 2.

System one, works automatically, intuitively, involuntarily and effortlessly. Imagine system 1 as your schoolmate, who always talks a lot in the class, does not think before he speaks knows very little but rushes to answer every question.

In contrast, system 2 is very slow. He requires focusing on computing, analyzing, and taking deliberate actions and system 2 is like another schoolmate who sits in the corner, silently is not very social, usually does not speak a lot, but he is very smart, from an evolutionary point of view both systems are important.

For example, if we do not have system 1, then we would not run away automatically when we saw a bear and if we did not have system 2, then we would not be able to focus and solve complex problems.

Each system has its own place, but problems happen when we apply the wrong system, the majority of the time it is system 1, which always gets in front of the system 2 and leads us to make wrong decisions.

This is mainly because system 2 is very slow and he does not want to wake up and work, after introducing system 1 and system 2, the author talks about different biases that cause contradiction between these two systems.

Priming

One of the biases that Kahneman talks about is called priming. Priming simply means being exposed to one thing that affects your behavior and decision for the subsequent thing. For example, the small experiment we did at the beginning of the video is a perfect example.

The first word primed how you would think making a decision when you heard the first word for the first person, you are 90% sure that this person is a good person after the second and third words, you are already 100% sure and made your final decision word. Four and five had almost no impact on your final decision. The same thing happened with the second person.

There is a famous vine experiment, where, on some days they played French music in the restaurant and people started to buy more French wine on other days they played German music and people bought more German wine.

A simple change in music completely changed the buying behavior of people. Now let us see how we can use priming for our benefit in our daily life. For example, when you wake up and look around in your room, do you see the things that make you feel good and happy? If not, then it will affect your whole day after you wake up.

If you spend two minutes and show gratitude for the things you already have, such as your family, your health and your friends, it can change your attitude about how you handle the problems.

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When you go to an interview and meet someone, important pay close attention to how you say: hello, how you handshake, and how you look, as you saw in the above example, the first one or two things are enough for us to make a final decision.

If you have a website or you are selling something, then study, what are the two things that a customer sees and how it makes them feel.

In order to show the power of priming, I will give you an example from my own experience when I was buying a flat. I did not use any real estate agent or any other external service for evaluating the flats, because of this I knew the sellers can easily hide some problems from me.

So I decided to apply the priming principle to make the sellers act honestly and morally, I think, of every conversation with a seller.

I always started with this sentence thanks a lot for your time. I hope we will reach a fair agreement at any time. You feel that I am being unfair or saying something that is not correct. Please stop me and we will discuss it again. I simply want a fair and ethical agreement for both of us.

This might sound like a simple sentence, but it had a huge impact on the behavior of the sellers. Whenever I started the conversation with this sentence, sellers were more careful about the things they were telling me during the entire meeting. I could see that they were trying very hard, not to lie in some cases.

They even told me about the problems that might happen after five years, even two sellers openly recommended not to buy their flats because they thought that, based on my situation, it would not be a good fit for me.

This simple sentence did not just save me thousands of dollars. It also turned every meeting into a pleasant experience. Priming can also be negative, for example, when you constantly criticize yourself and say you are not good enough, you can’t do that you’re, priming yourself for failure.

You don’t notice it, but these words turn into a behavior very quickly. Priming works on a subconscious level and you completely fail to see its effects. For example, research shows that asking people simply to read words associated with impolite behavior subsequently influences them to behave rudely and interrupt another’s conversation.

Now, just think for a moment, If simply reading and polite words influence your behavior badly, then can you imagine what negative thoughts do to you? Thoughts are much more powerful than reading words because they involve imagination and emotions.

Now let us talk about loss aversion, bias imagine I come to you and offer you to play a game, in which I am going to flip the coin and if you win, I will give you ten thousand dollars, but if you lose, I will give me ten thousand dollars. You have a fifty percent chance to win and a fifty percent chance to lose. Would you play such a game? I’m sure your answer will be no.

Even though the amount of money you are going to win and lose is equal, I have to offer a much higher reward in order to make you play such a game. The amount of space for negative emotions in our brains is three times larger than the space for positive emotions.

Negative feelings coming from the loss are much stronger than the positive ones coming from the gain, putting it even shorter. Well, we we simply hate losing and that creates loss of version bias. Let us see how we can use this knowledge in our favor.

For example, if you are convincing someone to do something, then don’t always talk about the gains. They will get also tell them about the losses they will face. Loss aversion can be very dangerous and limit us from acting, especially when it comes to starting a new idea or business.

When we think about the risks we will face, we get paralyzed. One way to reduce the effects of loss. Aversion is to look at the long-term benefits, rather than focusing on the short-term and its problems.

Sunk, cost sunk cost is any past cost that has already been paid and cannot be recovered. For example, let’s say you buy a ticket to a concert on the day of the event you catch a cold, even though you’re sick, you decide to go to the concert because otherwise, you would have wasted your money.

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The exact same thing happens with our business or project, despite the losses, we continue putting money and effort into the business just because we have spent money on it in the past. We continue staying in a bad relationship because we have spent so much effort building it.

Logically speaking, what you spent until this point has no correlation with the future success or failure of your business or relationship right now, you might think that you are logical and your past spending does not affect your future decisions. If this is the case, then why do you still keep all of those clothes you don’t wear?

They occupy tons of space in your wardrobe, but you don’t want to throw them away because you paid good money for them. Why don’t you throw away the old furniture that occupies a big space in your room? Is it worth something where’s it just you paid money for it in the past.

Why don’t you throw away the candies you bought in the past, even though you are on a diet right now in order to make all these decisions, we need system 2 to work, but unfortunately it is too lazy, framing bias. Let us say you feel sick and go to the doctor.

After the checkup, the doctor tells you that there is a 10% chance that you will die and then you go to another doctor, and this one tells you that there is a 90% chance that you will live from this statistical point of view. Both doctors told you absolutely the same thing however, you would feel much worse when you hear that you have a 10% chance to die, this is called framing.

Kahneman says that the choices we make are heavily influenced by the way they are introduced to us. Different wordings, settings, and situations will have a powerful effect on how we make a decision. It works as a physical frame on a picture.

If you put the painting in a red frame, it brings out the red in the painting. Putting the same painting in a blue frame brings out the blue.

The halo effect

Attractive people are perceived to be smarter, funnier and more likeable than less attractive. If two women committed the exact same crime, we tend to give lighter punishment to the more attractive one.

It absolutely makes no sense, but our system, one gets influenced by the physical appearance and other irrelevant characteristics that have nothing to do with the decision we are making. For example, if the employer views the applicant as attractive or likable, they are more likely to also rate the individual as intelligent, competent and qualified.

So next time, when you are choosing a business partner or when you are taking advice from someone ask yourself if the person really has valuable skills and knowledge or you are just being impacted by their appearance and other irrelevant things such as nice car, rich lifestyle, etc.

Anchoring

Anchoring, let us say you want to buy a leather jacket and find a very nice one in the shop. You check the price and see that it is 400 and think that that is expensive.

So you decide to put it back, but when you put it back, you notice that you had checked the wrong price and the real price is actually 250 suddenly the jacket will look cheaper to you because of the initial number you saw, even if it was the wrong number.

This is called anchoring, humans tend to rely heavily on the first piece of information they hear or see and then make further judgments.

This is one of the reasons why car dealerships put their most expensive models at the front of the display room so that when you pass them and see other normal priced cars, they suddenly look cheaper to you again. Logically speaking previous numbers or things, we should not influence our decisions, but it does a lot.

One way to protect yourself against anchoring is to have a limit in your mind before you start doing work. For example, if you’re going shopping, set a mental amount of how much you’d be willing to pay and then check the price tag.

If it’s more than your limit you’re out of luck, the endowment effect, the endowment effect is an emotional bias that says that, once we own something or have a feeling of ownership, we irrationally overvalue it regardless of its objective value.

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This is the principle behind test driving cars and letting consumers play with the products. The longer people spend interacting with a product, the greater the sense of ownership becomes.

The same thing goes for free trials with software products and online services too, the more time people spend using and customizing them, the greater the sense of ownership becomes and the harder it is to give up.

The endowment effect

The endowment effect is one of the reasons we love Ikea. Furniture when we buy furniture from Ikea, we spent time building it, and all of a sudden it becomes something we created and because of that, we love it, even more, endowment bias influences our decisions.

A lot so always ask yourself: if things you are supporting, are worth supporting, or is it because it is yours? Is the old Ikea furniture you want to sell worth the price you are asking, or are you being influenced by the endowment effect?

Is the idea you are defending in your team is a really good idea or you are supporting it because it came from you.

Confirmation bias

Three years ago I was trading on one of the trading platforms and after several days somewhere, I read that the company that I’m trading with is a scam, so I jumped on my computer and typed this term.

Is this company a scam and guess what I found a bunch of people saying that it is a scam? So I panicked and withdrew all of my money out even lost a lot of money, because I exited my positions.

Early after several days, I was researching other trading platforms and realized that there are many similar bad comments for a majority of these companies which started to look suspicious because not all of them could be bad.

Later, I learned that the company is not a scam. It is just I googled a biased question and only read bad comments that support my suspicions and beliefs in psychology this kind of behavior is called confirmation bias.

Confirmation bias is the tendency to search for and find evidence that supports our opinions, and beliefs, and disregard the rest. We humans interpret all new information in a way that our previous beliefs and conclusions stay intact. Simply say, we forget that a coin has two sides and only focus on one side which supports our beliefs.

If you want to believe in something you’ll find evidence to support it, you can even find videos that tell you that the earth is flat.

If you believe in flat earth theory, confirmation bias affects all of us and it’s everywhere. For example, people generally prefer to spend more time looking at information that supports their political point of view, while neglecting the rest of the information that contradicts their view.

Confirmation bias can cause doctors to search for new information in a manner to confirm their initial diagnosis while ignoring the signs that can prove their diagnosis wrong. It’s very difficult to combat confirmation bias.

However, we can reduce its dangers by following the next three steps. First, except that it exists to solve a problem, you first need to accept that you have a problem. Second, always seek contrary advice. It is usually painful to listen to someone who has the opposite view, but it can help.

You see the red flags, maybe your greatest business idea really sucks, but you want to succeed so bad that you only see the positive signs and ignore the lack of demand and go ahead without validating the idea and testing it properly.

Three, don’t ask confirming questions as I did in the above example. Try asking more neutral questions instead,

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