Book Reviews,  Economy

Thinking, Fast and Slow

How do we make decisions?

Daniel KAHNEMAN [1]

When Daniel Kahneman and Vernon L. Smith had won the Nobel Prize in Economics, in 2002, I was impressed with their point of view and contribution. I was a fresh graduate at those times and had strict doubts about the rationality principle of humans as actors and decision makers in the economy related areas. Kahneman and his colleagues have integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty. 

Years later I have re-read Kahneman’s this work in a “Bestseller” form and all I can say is that; “It is enlightening”. The book expresses how and why we make the choices, how works our mind and how it fails to fulfill the basic consistency notion in the process. According to the New York Times “It is a major intellectual event … a crucial pivot point in the way we see ourselves”.

All these comments may sound to you like an exaggeration, but I would say those are probably an understatement. Until we realise that our judgments are actually not independent from the environmental factors, our culture, formulation effects, framing of outcomes, etc. we believe that our decisions are solid and consistent, even rational. Therefore we do want to keep the status quo and resist to change the way we think. Sometimes we accept the failure of our decisions and we try to look for a reason, culprit or an excuse to get rid of the burden. But eventually we make the same mistakes again and again, only in different forms in various other opportunities, without perceiving that the motivation behind is always the same.  

Starting with questioning almost 300 years-old Utility Theory, which is one of the essential cornerstones of the economics, and alleging that Bernouilli’s model lacks a reference point, Kahneman und Tversky built the Prospect Theory, which is today widely accepted and utilised in many fields of decision making. 

I think that is the salient peculiarity of this book. But it is to me just like an iceberg, that is needed to be deeply and throughly examined. In this regard, book develops around; “introducing two fictitious characters, discussing two species, and ending with two selves. The two characters are the intuitive System 1, which does the fast thinking, and the effortful and slower System 2, which does the slow thinking, monitors System 1, and maintains control as best it can within its limited resources. The two species were the fictitious Econs, who live in the land of theory, and the Humans, who act in the real world. And finally, the two selves are experiencing self, which does the living, and remembering self, which keeps score and makes the choices.” 

For further understanding and improving the way in which decisions are made, I advice this masterpiece to everyone, who wants to comprehend the underlying factors of decision making process. In this vein I would be happy to conclude with a quote from the book: 

“We make better choices when we trust our critics to be sophisticated and fair, and when we expect our decision to be judged by how it was made, not only by how it turned out.”   

I wish you a pleasant reading.

Ergun UNUTMAZ, 20.05.2019

[1] Daniel KAHNEMAN, Penguin Books, Penguin Random House UK, 2012.