“The confidence that individuals have in their beliefs depends mostly on the quality of the story they can tell about what they see, even if they see little.”

System 1 comprises the oldest parts of the brain. It operates automatically and involuntarily. This system is always functioning and is responsible for most of the day-to-day activities. It is also responsible for our reactions to danger, novelty, and intuition.System 2 allocates attention and completes tasks that require effort. System 2 is a newly evolved part of the brain, and only humans have a highly developed prefrontal cortex.

Understanding 2 Systems

Anchors are arbitrary values that we consider for an unknown quantity before encountering that quantity.Anchors are known to influence many things, including the number of money people are willing to pay for products they have not seen. So before choosing the anchors, just research about the thing then decide.

Anchoring Effect

Ask yourself “If I flipped a coin and could lose $100 on tails or win $150 on heads, would you take the bet?” Did you feel a slight hesitation to the gamble? Most people do, even though it’s a reasonable bet to take.Losses loom larger than gains - relative to a reference point, a loss is more painful than a gain of the same magnitude.

Loss Aversion 

“Our comforting conviction that the world makes sense rests on a secure foundation: our almost unlimited ability to ignore our ignorance.”

“Intelligence is not only the ability to reason; it is also the ability to find relevant material in memory and to deploy attention when needed.”

System 1 loves to use limited information to form quick judgments and then block out conflicting information. The author Daniel Kahneman calls it W‐Y‐S‐I‐A‐T‐I (What You See Is All There Is). Kahneman explains that System 1 sees two or three pieces of information and then “infers and invents causes and intentions then neglects ambiguity and suppresses doubt.”Just try to ask “Why might the opposite be true?”

Tunnel Vision Bias

In this type of case you just need to use your system 2 and spend some time with it. And you will get the answer as $1.05 for bat and 5 cent for the ball.Now the ball is $1 more than the bat.

Answer To Bat & Ball Problem

“Nothing in life is as important as you think it is, while you are thinking about it”

Within WYSIATI, people will be quick to seize on limited evidence that confirms their existing perspective. And they will ignore or fail to seek evidence that runs contrary to the coherent story they have already created in their mind.Just ask yourself - "Why do we have certain beliefs or perspectives?"

Confirmation Bias

“A reliable way to make people believe in falsehoods is frequent repetition because familiarity is not easily distinguished from truth. Authoritarian institutions and marketers have always known this fact.”

The bias of availability happens when we give too much weight to recent evidence or experience.If we don’t check for the ‘Availability Bias’ (or what psychologists call the mere‐exposure effect) prior to an important decision, then our preference will be based on environmental conditioning.So before each decision just ask “Is this the best option or just the option I've been frequently exposed to?”

Availability Bias

Imagine that there is an outbreak of a deadly disease that will kill 600 people and you must choose between the two options -  <ul><li>Option 1: Guarantees that 200 people will live.</li><li>Option 2: Provides a one-third probability that all 600 people will live, but it also comes with a 1/3 probability that no one will survive.</li></ul>You may choose option 1 due to loss aversion. If you think through the choices, you can see that the probabilities of each are identical. This is called the framing effect.

Framing Effect

System 1 defaults to choices that maintain the status quo because System 1 psychologically weighs losses twice as much as gains (loss aversion). System 1 is emotionally attached to objects it owns or invests in (the endowment effect) and overvalues the status quo.You can ask yourself - “What opportunities do I lose by maintaining the status quo?” (or, “If I continue to say yes to this, what am saying no to?”)

Status Quo Bias

Try to solve this problem -<blockquote>"A bat and a ball cost $1.10 in total. The bat costs $1.00 more than the ball. How much does the ball cost?"</blockquote><blockquote>- </blockquote><blockquote>- </blockquote><blockquote>-</blockquote><blockquote>If you say $1 for the bat and 10 cent for the ball, then it's wrong because you just used the system - 1.</blockquote><blockquote>(Answer is given in the last idea of the article.)</blockquote>

Bat and Ball Problem

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Behavioral Economics, Explained

Major New York Times bestseller Winner of the National Academy of Sciences Best Book Award in 2012 Selected by the New York Times Book Review as one of the ten best books of 2011 A Globe and Mail Best Books of the Year 2011 Title One of The Economist's 2011 Books of the Year One of The Wall Street Journal's Best Nonfiction Books of the Year 2011 2013 Presidential Medal of Freedom Recipient Kahneman's work with Amos Tversky is the subject of Michael Lewis's The Undoing Project: A Friendship That Changed Our Minds In the international bestseller, Thinking, Fast and Slow, Daniel Kahneman, the renowned psychologist and winner of the Nobel Prize in Economics, takes us on a groundbreaking tour of the mind and explains the two systems that drive the way we think. System 1 is fast, intuitive, and emotional; System 2 is slower, more deliberative, and more logical. The impact of overconfidence on corporate strategies, the difficulties of predicting what will make us happy in the future, the profound effect of cognitive biases on everything from playing the stock market to planning our next vacation—each of these can be understood only by knowing how the two systems shape our judgments and decisions. Engaging the reader in a lively conversation about how we think, Kahneman reveals where we can and cannot trust our intuitions and how we can tap into the benefits of slow thinking. He offers practical and enlightening insights into how choices are made in both our business and our personal lives—and how we can use different techniques to guard against the mental glitches that often get us into trouble. Winner of the National Academy of Sciences Best Book Award and the Los Angeles Times Book Prize and selected by The New York Times Book Review as one of the ten best books of 2011, Thinking, Fast and Slow is destined to be a classic.

Major New York Times bestseller Winner of the National Academy of Sciences Best Book Award in 2012 Selected by the New York Times Book Review as one of the ten best books of 2011 A Globe and Mail Best Books of the Year 2011 Title One of The Economist's 2011 Books of the Year One of The Wall Street Journal's Best Nonfiction Books of the Year 2011 2013 Presidential Medal of Freedom Recipient Kahneman's work with Amos Tversky is the subject of Michael Lewis's The Undoing Project: A Friendship That Changed Our Minds In his mega bestseller, Thinking, Fast and Slow, Daniel Kahneman, the renowned psychologist and winner of the Nobel Prize in Economics, takes us on a groundbreaking tour of the mind and explains the two systems that drive the way we think. System 1 is fast, intuitive, and emotional; System 2 is slower, more deliberative, and more logical. The impact of overconfidence on corporate strategies, the difficulties of predicting what will make us happy in the future, the profound effect of cognitive biases on everything from playing the stock market to planning our next vacation—each of these can be understood only by knowing how the two systems shape our judgments and decisions. Engaging the reader in a lively conversation about how we think, Kahneman reveals where we can and cannot trust our intuitions and how we can tap into the benefits of slow thinking. He offers practical and enlightening insights into how choices are made in both our business and our personal lives—and how we can use different techniques to guard against the mental glitches that often get us into trouble. Winner of the National Academy of Sciences Best Book Award and the Los Angeles Times Book Prize and selected by The New York Times Book Review as one of the ten best books of 2011, Thinking, Fast and Slow is destined to be a classic.

Daniel Kahneman (born 5 March 1934) is an Israeli-American psychologist and winner of the 2002 Nobel Memorial Prize in Economic Sciences, notable for his work on behavioral finance and hedonic psychology.With Amos Tversky and others, Kahneman established a cognitive basis for common human errors using heuristics and biases (Kahneman & Tversky, 1973, Kahneman, Slovic & Tversky, 1982), and developed Prospect theory (Kahneman & Tversky, 1979). He was awarded the 2002 Nobel Prize in Economics for his work in Prospect theory. Currently, he is professor emeritus of psychology at Princeton University's Department of Psychology.

DANIEL KAHNEMAN

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