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05/01/2013

Book Review: Thinking, Fast and Slow


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Cogito, ergo sum.  Whether or not you agree with Descartes’ proposition, “I think, therefore I am,” is immaterial.  In Thinking, Fast and Slow, Nobel Prize winner Daniel Kahneman explores exactly how the human mind works. There are two systems that control the way we think.  System 1 allows us to make split-second decisions and is based on emotion (“fast thinking”), whereas System 2 is more calculating and logical (“slow thinking”).  Be prepared to learn exactly how much of our thought is based on System 1 (it is much more than you believe) and techniques that can be used to force our brains into a System 2 environment.  By the end of the book, Kahneman may have you believing that economic actors are not as rational as economic theory assumes.

Write down your answers to these two questions:

  • Question 1: Would you rather (A) receive $900 with 100% probability or (B) receive $1,000 with 90% probability?
  • Question 2: Would you rather (A) lose $900 with 100% probability or (B) lose $1,000 with 90% probability?

If you are like most people, then you answered (A) for Question 1 and (B) for Question 2.  Your answer contributed to Kahneman winning the Nobel Prize for prospect theory, which theorizes that people become risk seeking when facing a loss and risk averse when facing a gain. Welcome to the world of behavioral economics.

As a leader in the field, Kahneman seeks to answer why people do not always make rational decisions and how economic models can better predict human behavior. Kahneman explores multiple topics in behavioral economics including prospect theory, the substitution heuristic, and the framing effect. Understanding human behavior and the thinking processes behind it will help you gain an edge in such things as deciphering market psychology, negotiating, and thinking probabilistically—all of which are of importance to the finance professional.

The winner of the National Academy of Sciences Best Book Award in 2012 and one of the New York Times’ best books of 2011, Thinking, Fast and Slow, will illuminate the thought processes of the mind through Kahneman’s research and numerous thought experiments. Kahneman’s clear writing style makes the work easily digestible and entertaining for those without a psychology background.  At the end of Kahneman’s path to discovery, you will find yourself with a better understanding of why we all make the decisions we do and gain deeper insight into the mind’s decision-making process.

-Kevin M. Weinman is a contractor at The Blackstone Group.

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Comments

The best recommendation on the book I have ever read.

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