Friday, November 8, 2013

Thinking, Fast and Slow (TFS part 1)

I am reading Thinking, Fast and Slow, by Daniel Kahneman. In this series I will summarize key parts of the book and supply some comments and reflections on the material.

Part I: Two Systems
Introduction, Chapters 1-2

Summary: Kahneman is a psychologist who dabbles in areas of interest to economists (he won the Nobel Prize in Economics a few years back). This book is mostly a summary of the current (as of 2011) state of research in the topics that interest him. Most of it isn't his own research, but is related to it.

Kahneman likes maintaining the following useful fiction: You are two agents, System 1 and System 2. System 1 is the automatic system which relies on intuition and heuristics to make quick, automatic, low cost decisions. System 2 is the effortful system, which is slow and requires conscious, mental effort to reason to a decision. Paying attention really is costly, so shortcuts (using System 1 first) are often necessary to navigate the world. Much of what interests Kahneman are systematic biases in decisions System 1 makes to our detriment (bonus if it's not what an economic actor would do in basic econ models) and what we do when these two systems are in conflict. Kahneman makes it absolutely clear that System 1 and System 2 are useful fictions -- not little people battling in our head -- but makes the statements of what research shows a lot easier to digest by allowing the use of simple, active language.

My thoughts: Economists could do better at explaining why "utility maximizing" is a useful fiction in the same vein. That's not really how individuals make decisions, but it is a useful fiction that makes explaining things a lot simpler. It avoids having "as if", aggregation, or "on average" statements everywhere and lets us focus on what's really important.

To me the biggest difference between economics and psychology is the level of focus. Psychology is really interested in how YOU, PERSONALLY make decisions. How the actual individual "works." And at it's most basic level, Thinking, Fast and Slow is a self-help book for the academically minded. Economists care much more about market level, group behavior, and allocations of scarce stuff (who gets what and why). In order to talk about these things coherently, economists need to over-simplify the individual's decision process and motives because it's one level down from what we actually care about. Of course, there is no hard line drawn, and there is much overlap between the fields; usually as a result of either economists or psychologists taking themselves too seriously. Hence the existence of fields like behavioral economics.

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