Book Summary: Thinking Fast and Slow
Summarized by Erik Johnson
Daniel Kahneman’s aim in this book is to make psychology, perception,
irrationality, decision making, errors of judgment, cognitive science,
intuition, statistics, uncertainty, illogical thinking, stock market gambles,
and behavioral economics easy for the masses to grasp. Despite his
charming and conversational style, this book was difficult for me because I
am accustomed to thinking fast. As a service to my fellow automatic,
intuitive, error-making, fast thinkers I offer this simple (dumbed down)
summary of what is a very helpful book. Writing this summary taught me how to think
harder, clearer, and with fewer cognitive illusions. In short, how to think slower. Now if
only I’d do it.
This book is about the biases of our intuition. That is, we assume certain things
automatically without having thought through them carefully. Kahneman calls those
assumptions heuristics 1 (page 7). He spends nearly 500 pages listing example after
example of how certain heuristics lead to muddled thinking, giving each a name such as
“halo effect,” “availability bias,” “associative memory,” and so forth.” In this summary I
list Kahneman’s heuristics to a list of errors of judgment.2
PART ONE: TWO SYSTEMS
CHAPTER ONE: THE CHARACTERS OF THE STORY
Our brains are comprised of two characters, one that thinks fast, System 1, and one that
thinks slow, System 2. System 1 operates automatically, intuitively, involuntary, and
effortlessly—like when we drive, read an angry facial expression, or recall our age.
System 2 requires slowing down, deliberating, solving problems, reasoning, computing,
focusing, concentrating, considering other data, and not jumping to quick conclusions—
like when we calculate a math problem, choose where to invest money, or fill out a
complicated form. These two systems often conflict with one another. System 1 operates
on heuristics that may not be accurate. System 2 requires effort evaluating those
heuristics and is prone error. The plot of his book is how to, “recognize situations in
which mistakes are likely and try harder to avoid significant mistakes when stakes are
high,” (page 28).
Synonyms include “rules of thumb,” “presuppositions,” “cognitive illusions,” “bias of judgment,” “thinking errors,”
“dogmatic assumptions,” “systematic errors,” “intuitive flaws.”
Kahneman did not number his list but I will do so for ease of understanding, citing page numbers as I go. My paragraph
summaries are clear but I of course encourage interested readers to go to the book itself to read up on each heuristic in more
Thinking Fast and Slow by Daniel Kahneman 2 Summarized by Erik Johnson
CHAPTER TWO: ATTENTION AND EFFORT
Thinking slow affects our bodies (dilated pupils), attention (limited observation), and
energy (depleted resources). Because thinking slow takes work we are prone to think fast,
the path of least resistance. “Laziness is built deep into our nature,” (page 35). We think
fast to accomplish routine tasks and we need to think slow in order to manage
complicated tasks. Thinking fast says, “I need groceries.” Thinking slow says, “I will not
try to remember what to buy but write myself a shopping list.”
CHAPTER THREE: THE LAZY CONTROLLER
People on a leisurely stroll will stop walking when asked to complete a difficult mental
task. Calculating while walking is an energy drain. This is why being interrupted while
concentrating is frustrating, why we forget to eat when focused on an interesting project,
why multi-tasking while driving is dangerous, and why resisting temptation is extra
hard when we are stressed. Self control shrinks when we’re tired, hungry, or mentally
exhausted. Because of this reality we are prone to let System 1 take over intuitively and
impulsively. “Most people do not take the trouble to think through [a] problem,” (page 45).
“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,” (page. 46). Accessing memory
takes effort but by not doing so we are prone to make mistakes in judgment.
CHAPTER FOUR: THE ASSOCIATIVE MACHINE
Heuristic #1: PRIMING. Conscious and subconscious exposure to an idea “primes” us
to think about an associated idea. If we’ve been talking about food we’ll fill in the blank
SO_P with a U but if we’ve been talking about cleanliness we’ll fill in the blank SO_P
with an A. Things outside of our conscious awareness can influence how we think. These
subtle influences also affect behavior, “the ideomotor effect,” (page 53). People reading
about the elderly will unconsciously walk slower. And people who are asked to walk
slower will more easily recognize words related to old age. People asked to smile find
jokes funnier; people asked to frown find disturbing pictures more disturbing. It is true:
if we behave in certain ways our thoughts and emotions will eventually catch up. We can
not only feel our way into behavior, we can behave our way into feelings. Potential for
error? We are not objective rational thinkers. Things influence our judgment, attitude,
and behavior that we are not even aware of.
CHAPTER FIVE: COGNITIVE EASE
Heuristic #2: COGNITIVE EASE. Things that are easier to compute, more familiar,
and easier to read seem more true than things that require hard thought, are novel, or
are hard to see. “Predictable illusions inevitably occur if a judgment is based on the
impression of cognitive ease or strain,” (page 62). “How do you know that a statement is
true? If it is strongly linked by logic or association to other beliefs or preferences you hold,
or comes from a source you trust and like, you will feel a sense of cognitive ease,” (page
Thinking Fast and Slow by Daniel Kahneman 3 Summarized by Erik Johnson
64). Because things that are familiar seem more true teachers, advertisers, marketers,
authoritarian tyrants, and even cult leaders repeat their message endlessly. Potential for
error? If we hear a lie often enough we tend to believe it.
CHAPTER SIX: NORMS, SURPRISES, AND CAUSES
Heuristic #3: COHERENT STORIES (ASSOCIATIVE COHERENCE). To make
sense of the world we tell ourselves stories about what’s going on. We make associations
between events, circumstances, and regular occurrences. The more these events fit into
our stories the more normal they seem. Things that don’t occur as expected take us by
surprise. To fit those surprises into our world we tell ourselves new stories to make them
fit. We say, “Everything happens for a purpose,” “God did it,” “That person acted out of
character,” or “That was so weird it can’t be random chance.” Abnormalities, anomalies,
and incongruities in daily living beg for coherent explanations. Often those explanations
involve 1) assuming intention, “It was meant to happen,” 2) causality, “They’re homeless
because they’re lazy,” or 3) interpreting providence, “There’s a divine purpose in
everything.” “We are evidently ready from birth to have impressions of causality, which
do not depend on reasoning about patterns of causation,” (page 76). “Your mind is ready
and even eager to identify agents, assign them personality traits and specific intentions,
and view their actions as expressing individual propensities,” (page 76). Potential for
error? We posit intention and agency where none exists, we confuse causality with
correlation, and we make more out of coincidences than is statistically warranted.
CHAPTER SEVEN: A MACHINE FOR JUMPING TO CONCLUSIONS
Heuristic #4: CONFIRMATION BIAS. This is the tendency to search for and find
confirming evidence for a belief while overlooking counter examples. “Jumping to
conclusions is efficient if the conclusions are likely to be correct and the costs of an
occasional mistake acceptable, and if the jump saves much time and effort. Jumping to
conclusions is risky when the situation is unfamiliar, the stakes are high, and there is no
time to collect more information,” (page 79). System 1 fills in ambiguity with automatic
guesses and interpretations that fit our stories. It rarely considers other interpretations.
When System 1 makes a mistake System 2 jumps in to slow us down and consider
alternative explanations. “System 1 is gullible and biased to believe, System 2 is in
charge of doubting and unbelieving, but System 2 is sometimes busy, and often lazy,”
(page 81). Potential for error? We are prone to over-estimate the probability of unlikely
events (irrational fears) and accept uncritically every suggestion (credulity).
Heuristic #5: THE HALO EFFECT. “This is the tendency to like or dislike everything
about a person—including things you have not observed,” (page 82). The warm emotion
we feel toward a person, place, or thing predisposes us to like everything about that
person, place, or thing. Good first impressions tend to positively color later negative
impressions and conversely, negative first impressions can negatively color later positive
impressions. The first to speak their opinion in a meeting can “prime” others’ opinions. A
list of positive adjectives describing a person influences how we interpret negative
Thinking Fast and Slow by Daniel Kahneman 4 Summarized by Erik Johnson
adjectives that come later in the list. Likewise, negative adjectives listed early colors
later positive adjectives. The problem with all these examples is that our intuitive
judgments are impulsive, not clearly thought through, or critically examined. To remind
System 1 to stay objective, to resist jumping to conclusions, and to enlist the evaluative
skills of System 2, Kahneman coined the abbreviation, “WYSIATI,” what you see is all
there is. In other words, do not lean on information based on impressions or intuitions.
Stay focused on the hard data before us. Combat over confidence by basing our beliefs not
on subjective feelings but critical thinking. Increase clear thinking by giving doubt and
ambiguity its day in court.
CHAPTER EIGHT: HOW JUDGMENTS HAPPEN
Heuristic #6: JUDGEMENT. System 1 relies on its intuition, the basic assessments of
what’s going on inside and outside the mind. It is prone to ignore “sum-like variables,”
(page 93). We often fail to accurately calculate sums but rely instead on often unreliable
intuitive averages. It is prone to “matching,” (page 94). We automatically and
subconsciously rate the relative merits of a thing by matching dissimilar traits. We are
prone to evaluate a decision without distinguishing which variables are most important.
This is called the “mental shotgun” approach (page 95). These basic assessments can
easily replace the hard work System 2 must do to make judgments.
CHAPTER NINE: AN EASIER QUESTION
Heuristic #7: SUBSTITUTION. When confronted with a perplexing problem, question,
or decision, we make life easier for ourselves by answering a substitute, simpler question.
Instead of estimating the probability of a certain complex outcome we rely on an estimate
of another, less complex outcome. Instead of grappling with the mind-bending
philosophical question, “What is happiness?” we answer the easier question, “What is my
mood right now?” (page 98). Even though highly anxious people activate System 2 often,
obsessing and second guessing every decision, fear, or risk, it is surprising how often
System 1 works just fine for them. Even chronic worriers function effortlessly in many
areas of life while System 1 is running in the background. They walk, eat, sleep, breath,
make choices, make judgments, trust, and engage in enterprises without fear, worry, or
anxiety. Why? They replace vexing problems with easier problems. Potential for error?
We never get around to answering the harder question.
Heuristic #8: AFFECT. Emotions influence judgment. “People let their likes and
dislikes determine their beliefs about the world,” (page 103). Potential for error? We can
let our emotional preferences cloud our judgment and either under or over estimate risks
PART TWO: HEURISTICS AND BIASES
CHAPTER TEN: THE LAW OF SMALL NUMBERS
Thinking Fast and Slow by Daniel Kahneman 5 Summarized by Erik Johnson
Heuristic #9: THE LAW OF SMALL NUMBERS. Our brains have a difficult time
with statistics. Small samples are more prone to extreme outcomes than large samples,
but we tend to lend the outcomes of small samples more credence than statistics warrant.
System 1 is impressed with the outcome of small samples but shouldn’t be. Small
samples are not representative of large samples. Large samples are more precise. We err
when we intuit rather than compute, (see page 113). Potential for error? We make
decisions on insufficient data.
Heuristic #10: CONFIDENCE OVER DOUBT. System 1 suppresses ambiguity and
doubt by constructing coherent stories from mere scraps of data. System 2 is our inner
skeptic, weighing those stories, doubting them, and suspending judgment. But because
disbelief requires lots of work System 2 sometimes fails to do its job and allows us to slide
into certainty. We have a bias toward believing. Because our brains are pattern
recognition devices we tend to attribute causality where none exists. Regularities occur
at random. A coin flip of 50 heads in a row seems unnatural but if one were to flip a coin
billions and billions of times the odds are that 50 heads in a row would eventually
happen. “When we detect what appears to be a rule, we quickly reject the idea that the
process is truly random,” (page 115). Attributing oddities to chance takes work. It’s easier
to attribute them to some intelligent force in the universe. Kahneman advises, “accept
the different outcomes were due to blind luck” (page 116). There are many facts in this
world due to chance and do not lend themselves to explanations. Potential for error?
Making connections where none exists.
CHAPTER ELEVEN: ANCHORS
Heuristic #11: THE ANCHORING EFFECT. This is the subconscious phenomenon of
making incorrect estimates due to previously heard quantities. If I say the number 10
and ask you to estimate Gandhi’s age at death you’ll give a lower number than if I’d said
to you the number 65. People adjust the sound of their stereo volume according to
previous “anchors,” the parents’ anchor is low decibels, the teenager’s anchor is high
decibels. People feel 35 mph is fast if they’ve been driving 10 mph but slow if they just
got off the freeway doing 65 mph. Buying a house for $200k seems high if the asking
price was raised from $180k but low if the asking price was lowered from $220k. A 15
minute wait to be served dinner in a restaurant seems long if the sign in the window says,
“Dinner served in 10 minutes or less” but fast if the sign says, “There is a 30 minute wait
before dinner will be served.” Potential for error? We are more suggestible than we
CHAPTER TWELVE: THE SCIENCE OF AVAILABIITY
Heuristic #12: THE AVAILABILITY HEURISTIC. When asked to estimate numbers
like the frequency of divorces in Hollywood, the number of dangerous plants, or the
number of deaths by plane crash, the ease with which we retrieve an answer influences
the size of our answer. We’re prone to give bigger answers to questions that are easier to
retrieve. And answers are easier to retrieve when we have had an emotional personal
Thinking Fast and Slow by Daniel Kahneman 6 Summarized by Erik Johnson
experience. One who got mugged over-estimates the frequency of muggings, one exposed
to news about school shootings over-estimates the number of gun crimes, and the one
who does chores at home over estimates the percentage of the housework they do. When
both parties assume they do 70% of the house work somebody is wrong because there’s no
such thing as 140%! A person who has experienced a tragedy will over estimate the
potential for risk, danger, and a hostile universe. A person untroubled by suffering will
under-estimate pending danger. When a friend gets cancer we get a check up. When
nobody we know gets cancer we ignore the risk. Potential for error: under or over
estimating the frequency of an event based on ease of retrieval rather than statistical
CHAPTER THIRTEEN: AVAILABIITY, EMOTION, AND RISK
Heuristic #13: AVAILABILITY CASCADES. When news stories pile up our statistical
senses get warped. A recent plane crash makes us think air travel is more dangerous
than car travel. The more we fear air travel the more eager news reporters are to
sensationalize plane crashes. A negative feedback loop is set in motion, a cascade of fear.
“The emotional tail wags the rational dog,” (page 140). Potential for error? Over reacting
to a minor problem simply because we hear a disproportionate number of negative news
stories than positive ones.
CHAPTER FOURTEEN: TOM W’S SPECIALTY
Heuristic #14: REPRESENTATIVENESS. Similar to profiling or stereotyping,
“representativeness” is the intuitive leap to make judgments based on how similar
something is to something we like without taking into consideration other factors:
probability (likelihood), statistics (base rate), or sampling sizes. Baseball scouts used to
recruit players based on how close their appearance resembled other good players. Once
players were recruited based on actual statistics the level of gamesmanship improved.
Just because we like the design of a book cover doesn’t mean we’ll like the contents. You
can’t judge a book by its cover. A start-up restaurant has a low chance of survival
regardless of how much you like their food. Many well run companies keep their facilities
neat and tidy but a well kept lawn is no guarantee that the occupants inside are
organized. To discipline our lazy intuition we must make judgments based on probability
and base rates, and question our analysis of the evidence used to come up with our
assumption in the first place. “Think like a statistician,” (page 152). Potential for error:
Evaluating a person, place, or thing on how much it resembles something else without
taking into account other salient factors.
CHATPER FIFTEEN: LINDA: LESS IS MORE
Heuristic #15: THE CONJUNCTION FALLACY (violating the logic of probability).
After hearing priming details about a made up person (Linda), people chose a plausible
story over a probable story. Logically, it is more likely that a person will have one
characteristic than two characteristics. That is, after reading a priming description of
Thinking Fast and Slow by Daniel Kahneman 7 Summarized by Erik Johnson
Linda respondents were more likely to give her two characteristics, which is statistically
improbable. It is more likely Linda would be a bank teller (one characteristic) than a
bank teller who is a feminist (two characteristics). “The notions of coherence, plausibility,
and probability are easily confused by the unwary,” (page 159). The more details we add
to a description, forecast, or judgment the less likely they are to be probable. Why? Stage
1 thinking overlooks logic in favor of a plausible story. Potential for error: committing a
logical fallacy, when our intuition favors what is plausible but improbable over what is
implausible and probable.
CHAPTER SIXTEEN: CAUSES TRUMP STATISTICS
Heuristic #16: OVERLOOKING STATISTICS. When given purely statistical data we
generally make accurate inferences. But when given statistical data and an individual
story that explains things we tend to go with the story rather than statistics. We favor
stories with explanatory power over mere data. Potential for error: stereotyping, profiling,
and making general inferences from particular cases rather than making particular
inferences from general cases.
CHAPTER SEVENTEEN: REGRESSION TO THE MEAN
Heuristic #17: OVERLOOKING LUCK. Most people love to attach causal
interpretations to the fluctuations of random processes. “It is a mathematically inevitable
consequence of the fact that luck played a role in the outcome….Not a very satisfactory
theory—we would all prefer a causal account—but that is all there is,” (page 179). When
we remove causal stories and consider mere statistics we’ll observe regularities, what is
called the regression to the mean. Those statistical regularities—regression to the
mean—are explanations (“things tend to even out”) but not causes (“that athlete had a
bad day but is now ‘hot’). “Our mind is strongly biased toward causal explanations and
does not deal well with ‘mere statistics,’” (page 182). Potential for error: seeing causes
that don’t exist.
CHAPTER EIGHTEEN: TAMING INTUITIVE PREDICTIONS
Heuristic #18: INTUITIVE PREDICTIONS. Conclusions we draw with strong
intuition (System 1) feed overconfidence. Just because a thing “feels right” (intuitive)
does not make it right. We need System 2 to slow down and examine our intuition,
estimate baselines, consider regression to the mean, evaluate the quality of evidence, and
so forth. “Extreme predictions and a willingness to predict rare events from weak
evidence are both manifestations of System 1. It is natural for the associative machinery
to match the extremeness of predictions to the perceived extremeness on which it is
based—this is how substitution works,” (page 194). Potential for error: unwarranted
confidence when we are in fact in error.
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PART THREE: OVERCONFIDENCE
CHAPTER NINETEEN: THE ILLUSION OF UNDERSTANDING
Heuristic #19: THE NARRATIVE FALLACY. In our continuous attempt to make
sense of the world we often create flawed explanatory stories of the past that shape our
views of the world and expectations of the future. We assign larger roles to talent,
stupidity, and intentions than to luck. “Our comforting conviction that the world makes
sense rests on a secure foundation: our almost unlimited ability to ignore our ignorance,”
(page 201). This is most evident when we hear, “I knew that was going to happen!” Which
Heuristic #20: THE HINDSIGHT ILLUSION. We think we understand the past,
which implies the future should be knowable, but in fact we understand the past less
than we believe we do. Our intuitions and premonitions feel more true after the fact.
Once an event takes place we forget what we believed prior to that event, before we
changed our minds. Prior to 2008 financial pundits predicted a stock market crash but
they did not know it. Knowing means showing something to be true. Prior to 2008 no one
could show that a crash was true because it hadn’t happened yet. But after it happened
their hunches were retooled and become proofs. “The tendency to revise the history of
one’s beliefs in light of what actually happened produces a robust cognitive illusion,”
(page 203). Potential for error: “We are prone to blame decision makers for good decisions
that worked out badly and to give them too little credit for successful moves that appear
obvious only after the fact. When the outcomes are bad, the clients often blame their
agents for not seeing the handwriting on the wall—forgetting that it was written in
invisible ink that became legible only afterward. Actions that seemed prudent in
foresight can look irresponsibly negligent in hindsight,” (page 203).
CHAPTER TWENTY: THE ILLUSION OF VALIDITY
Heuristic #21: THE ILLUSION OF VALIDITY. We sometimes confidently believe our
opinions, predictions, and points of view are valid when confidence is unwarranted. Some
even cling with confidence to ideas in the face of counter evidence. “Subjective confidence
in a judgment is not a reasoned evaluation of the probability that this judgment is correct.
Confidence is a feeling, which reflects the coherence of the information and the cognitive
ease of processing it” (page 212). Factors that contribute to overconfidence: being dazzled
by one’s own brilliance, affiliating with like-minded peers, and over valuing our track
record of wins and ignoring our losses. Potential for error: Basing the validity of a
judgment on the subjective experience of confidence rather than objective facts.
Confidence is no measure of accuracy.
CHAPTER TWENTY-ONE: INTUITIONS VS. FORMULAS
Heuristic #22: IGNORING ALGORITHMS. We overlook statistical information and
favor our gut feelings. Not good! Forecasting, predicting the future of stocks, diseases, car
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accidents, and weather should not be influenced by intuition but they often are. And
intuition is often wrong. We do well to consult check lists, statistics, and numerical
records and not rely on subjective feelings, hunches, or intuition. Potential for error:
“relying on intuitive judgments for important decisions if an algorithm is available that
will make fewer mistakes,” (page 229).
CHAPTER TWENTY-TWO: EXPERT INTUITION: WHEN CAN YOU TRUST IT?
Intuition means knowing something without knowing how we know it. Kahneman’s
understanding is that intuition is really a matter of recognition, being so familiar with
something we arrive at judgments quickly. Chess players “see” the chess board, fire
fighters “know” when a building is about to collapse, art dealers “identify” marks of
forgeries, parents have a “sixth sense” when their kids are in danger, readers “read”
letters and words quickly, and friends “are familiar” with their friends from a distance.
Kids become experts at video games, motorists become expert drivers, and chefs become
intuitive cooks. How? Recognition—either over long periods of exposure, or quickly in a
highly emotional event (accidents). Intuition is immediate pattern recognition, not magic.
Heuristic #23: TRUSTING EXPERT INTUITION. “We are confident when the story
we tell ourselves comes easily to mind, with no contradiction and no competing scenario.
But ease and coherence do not guarantee that a belief held with confidence is true. The
associative machine is set to suppress doubt and to evoke ideas and information that are
compatible with the currently dominant story,” (page 239). Kahneman is skeptical of
experts because they often overlook what they do not know. Kahneman trusts experts
when two conditions are met: the expert is in an environment that is sufficiently regular
to be predictable and the expert has learned these regularities through prolonged
practice. Potential for error: being mislead by “experts.”
CHAPTER TWENTY-THREE: THE OUTSIDE VIEW
Heuristic #24: THE PLANNING FALACY means taking on a risky project—litigation,
war, opening a restaurant—confident of the best case scenario without seriously
considering the worst case scenario. If we consult others who’ve engaged in similar
projects we’ll get the outside view. Failure to do this increases the potential for failure.
Cost overruns, missed deadlines, loss of interest, waning urgency all result from poor
planning. Potential for error: “making decisions based on delusional optimism rather
than on a rational weight of gains, losses, and probabilities,” (page 252). In other words,
poorly planned grandiose projects will eventually fail.
CHAPTER TWENTY-FOUR: THE ENGINE OF CAPITALISM
Heuristic #25: THE OPTIMISTIC BIAS. We are prone to neglect facts, others’ failures,
and what we don’t know in favor of what we know and how skilled we are. We believe the
outcome of our achievements lies entirely in our own hands while neglecting the luck
factor. We don’t appreciate the uncertainty of our environment. We suffer from the
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illusion of control and neglect to look at the competition (in business start-ups for
example). “Experts who acknowledge the full extent of their ignorance may expect to be
replaced by more confident competitors, who are better able to gain the trust of clients,”
(page 263). Being unsure is a sign of weakness so we turn to confident experts who may
be wrong. Potential for error: unwarranted optimism which doesn’t calculate the odds
and therefore could be risky.
PART FOUR: CHOICES
CHAPTER TWENTY-FIVE: BERNOULLI’S ERRORS
Heuristic #26: OMITTING SUBJECTIVITY. We often think an object has only
intrinsic objective value. A million dollars is worth a million dollars, right? Wrong.
Magically making a poor person’s portfolio worth a million dollars would be fabulous!
Magically making a billionaire’s portfolio a worth a million dollars would be agony! One
gained, the other lost. Economists have erred by failing to consider a person’s
psychological state regarding value, risk, anxiety, or happiness. 18th century economist
Bernoulli thought money had utility (fixed worth) but he failed to consider a person’s
reference point. Potential for error: Making decisions on pure logic without considering
Heuristic #27: THEORY-INDUCED BLINDNESS. “Once you have accepted a theory
and used it as a tool in your thinking, it is extraordinarily difficult to notice its flaws. If
you come upon an observation that does not seem to fit the model, you assume that there
must be a perfectly good explanation that you are somehow missing,” (page 277). When
the blinders fall off the previously believed error seems absurd and the real
breakthrough occurs when you can’t remember why you didn’t see the obvious. Potential
for error: Clinging to old paradigms that have outlived their validity.
CHAPTER TWENTY-SIX: PROSPECT THEORY
Kahneman’s claim to fame is Prospect Theory (for which he won the Nobel prize in
economics). Economists used to believe that the value of money was the sole determinant
in explaining why people buy, spend, and gamble the way they do. Prospect Theory
changed that by explaining three things: 1) the value of money is less important then the
subjective experience of changes in one’s wealth. In other words, the loss or gain of $500
is psychologically positive or negative depending on a reference point, how much money
one already has. 2) We experience diminished sensitivity to changes in wealth: losing
$100 hurts more if you start with $200 than if you start with $1000. And 3) we are loathe
to lose money!
Heuristic #28: LOSS AVERSION. “You just like winning and dislike losing—and you
almost certainly dislike losing more than you like winning,” (page 281). System 1
thinking compares the psychological benefit of gain with the psychological cost of loss
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and the fear of loss usually wins. Potential for error: passing by a sure win in order to
avoid what we think might be a possible loss even when the odds are in favor of winning.
CHAPTER TWENTY-SEVEN: THE ENDOWMENT EFFECT
Heuristic #29: THE ENDOWMENT EFFECT. An object we own and use is more
valuable to us than an object we don’t own and don’t use. Such objects are endowed with
significance and we’re unwilling to part with them for two reasons: we hate loss and it
has a history with us. Thus we won’t sell a beloved, useful object unless a buyer offers
significant payment. Objects we don’t like or use sell for less (or we even give them away).
Potential for error: Clinging to objects for sentimental reasons at considerable loss of
CHAPTER TWENTY-EIGHT: BAD EVENTS
Heuristic #30: LOSS AVERSION. People will work harder to avoid losses than to
achieve gains. Golfers putt for par to avoid bogeys (loosing points for going over par) than
for birdies (gaining points by putting under par). Contract negotiations stall when one
party feels they’re making more concessions (losses) than their disputant. People will
work harder to avoid pain than to achieve pleasure. Even animals fight more fiercely to
maintain territory than to increase territory. Potential for error: under estimating our
own and other’s attitudes toward loss/gain. They are asymmetrical.
CHAPTER TWNETY-NINE: THE FOURFOLD PATTERN
Heuristic #31: THE POSSIBILITY EFFECT. When highly unlikely outcomes are
weighted disproportionately more than they deserve we commit the possibility effect
heuristic. Think of buying lottery tickets.
Heuristic #32: THE CERTAINTY EFFECT. Outcomes that are almost certain are
given less weight than their probability justifies. Think of lawyers who offer a “less than
perfect” settlement before the trial which would result in an “almost certain victory.”
Heuristic #33: THE EXPECTATION PRINCIPLE. The two heuristics above have this
in common: “decision weights that people assign to outcomes are not identical to the
probabilities of these outcomes, contrary to the expectation principle” (page 312).
95% chance to win $10,000. Fear of
disappointment, risk averse, accept
95% chance to lose $10,000. Hope to
avoid loss, risk seeking, reject
5% change to win $10,000. Hope of large
gain, risk seeking, reject favorable
5% chance to lose $10,000. Fear of
large loss, risk averse, accept favorable
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This means people attach values to gains and losses rather than wealth, and decision
weights assigned to outcomes are different from probabilities. The fourfold pattern of
preferences accounts for this. Potential for error:
1. People are risk averse when they look at the prospects of a large gain. They’ll lock
in a sure gain and accept a less than expected value of the gamble.
2. When the result is extremely large, such as a lottery ticket, the buyer is indifferent
to the fact that their chance of winning is extremely small. Without the ticket they
cannot win, but with the ticket, they can at least dream.
3. This explains why people buy insurance. We’ll pay insurance because we’re buying
protection and peace of mind.
4. This explains why people take desperate gambles. They accept a high probability
of just making things worse, for a chance of a slight ray of hope of avoiding the loss
they are facing. This type of risk taking can just turn a bad situation into a
CHAPTER THIRTY: RARE EVENTS
Heuristic #34: OVERESTIMATING THE LIKELIHOOD OF RARE EVENTS. It
makes more sense to pay attention to things that are likely to happen (rain tomorrow)
than about things that are unlikely to happen (terrorist attacks, asteroids, terminal
illness, floods and landslides). We tend to overestimate the probabilities of unlikely
events, and we tend to overweight the unlikely events in our decisions. This heuristic
joins forces with the availability cascade (#13) and cognitive ease (#2) heuristics above.
We are more likely to choose the alternative in a decision which is described with explicit
vividness, repetition, and relative frequencies (vs. how likely). Potential for error:
succumbing to fear mongers who manipulate data in favor of their cause.
CHAPTER THIRTY-ONE: RISK POLICIES
Heuristic #35: THINKING NARROWLY. Most of us are so risk averse we avoid all
gambles. This is wrong, says, Kahneman, since some gambles are clearly on our side and
by avoiding them we lose money. One way to decrease risk aversion is to think broadly,
looking at the aggregate wins over many small gambles. Thinking narrowly, looking only
at short term losses, paralyzes us. But thinking broadly is non-intuitive. It’s a System 2
task that takes work. We therefore are wired by System 1 to think irrationally
economically (saying no to easy money). The limit of human rationality is so stark
Kahneman calls it a “hopeless mirage” (page 335). The ideal of logical consistency is not
achievable by our limited minds. Potential for error: passing by risks in our favor.
CHAPTER THIRTY-TWO: KEEPING SCORE
Many have a System 1 calculator in their head that “keeps score” not only of the
potential financial gains and losses of a transaction but also of the emotional risks,
rewards, and possible regrets of our financial decisions. “The emotions that people attach
Thinking Fast and Slow by Daniel Kahneman 13 Summarized by Erik Johnson
to the state of their mental accounts are not acknowledged in standard economic theory,”
Heuristic #36: THE DISPOSITION EFFFECT. We are often willing to sell moneyearning
stocks because it makes us feel like wise investors, and less willing to sell losing
stocks because it’s an admission of defeat. This is irrational since we’d earn more money
by selling the losers and clinging to the winners.
Heuristic #37: THE SUNK COST FALLACY. To avoid feeling bad about cutting our
losses and being called a failure, we tend to throw good money after bad, stay too long in
abusive marriages, and stay in unhappy careers. This is optimism gone hay-wire.
Heuristic #38: FEAR OF REGRET. Regret is an emotion we’re familiar with and we
do well to avoid making decisions that lead to regret. However, we’re terrible at
predicting how intense those feelings of regret will be. It often hurts less than we think.
CHAPTER THIRTY-THREE: REVERSALS
Heuristic #39: IGNORING JOINT EVALUATIONS. We make decisions differently
when asked to make them in isolation than when asked to make them in comparison
with other scenarios. For example, a victim in a robbery will be awarded a higher
compensation when there are poignant factors involved (the victim was visiting a store
he rarely visited), but will be awarded a lower compensation if harmed while in his usual
shopping location. When locations are compared (joint evaluation) we realize the victim’s
location is insignificant and we reverse our original compensation amount. “Joint
evaluations highlights a feature that was not noticeable in single evaluations but is
recognized as a decisive when detected,” (page 359). Potential for error: making decisions
in isolation. We should do comparison shopping, compare sentences for crimes, and
compare salaries for different jobs. Failure to do so limits our exposure to helpful norms.
CHAPTER THIRTY-FOUR: FRAMES AND REALITY
Heuristic #40: IGNORING FRAMES. How a problem is framed determines our choices
more than purely rational considerations would imply. More drivers sign the “donate
organ” card when they have to check the opt-in box, than drivers who must check the optout
box. We are more willing to pay extra for gas when using a credit card (vs. cash) if
the fee is framed as “loss of cash discount” than “added credit card surcharge.” Doctors
prefer interventions where outcomes are a “one month survival rate of 90%” than to
interventions where outcomes are, “10% mortality rate.” Both sentences mean the same
thing statistically but the frame of “survival” has greater emotional value than “mortality
rates.” “The meaning of a sentence is what happens in your associative machinery while
you understand it…In terms of the associations they bring to mind—how System 1 reacts
to them—the two sentences really ‘mean’ different things,” (page 363). “Reframing is
effortful and System 2 is lazy,” (page 367). Potential for error: Thinking we make
Thinking Fast and Slow by Daniel Kahneman 14 Summarized by Erik Johnson
decisions in an objective bubble when in fact there are subjective factors at work about
which we are unaware.
PART FIVE: TWO SELVES
CHAPTER THIRTY-FIVE: TWO SELVES
Heuristic #41: IGNORING OUR TWO SELVES. We each have an “experiencing” self
and a “remembering” self. The latter usually takes precedence over the former. That is, I
can experience 13 days of vacation bliss but if on the 14th day things go bad I tend to
remember the vacation as negative. My memory overrides my experience. Same with a
40 minute blissful record which ends with a scratch. We remember the scratch sound, not
the 39 previous minutes of musical enjoyment. “Confusing experience with the memory
of it is a compelling cognitive illusion—and it is the substitution that makes us believe a
past experience can be ruined. The experiencing self does not have a voice,” (page 381).
Heuristic #42: THE PEAK END RULE. How an experience ends seems to hold greater
weight in our memory than how an experience was lived. Similar to the previous
heuristic, the peak end rule is shorthand for remembering only how an experience felt at
its end not at this worst moment.
Heuristic #43: DURATION NEGLECT. Another corollary of the two selves: the
duration of an unpleasant or pleasant experience doesn’t seem to be as important as the
memory of how painful or pleasurable the experience was.
CHAPTER THIRTY-SIX: LIFE AS HISTORY
Heuristic #44: NARRATIVE WHOLENESS (my user friendly name). When we
evaluate how well ours and others’ lives have been lived we do well to consider the whole
narrative and not just the end. But because of the previous three heuristics we are prone
to devalue a long, sacrificial, generous life if at the end (or even after death) we discover
episodes of selfishness, etc. “A story is about significant events and memorable moments,
not about time passing. Duration neglect is normal in a story, and the ending often
defines its character” (page 386). Potential for error: paying more attention to longevity
than quality, making decisions based on how memorable it will be rather than how
exciting and enriching the experience itself will be, and experiencing a moment of
pleasure and forfeiting our reputation of integrity.
CHAPTER THIRTY-SEVEN: EXPERIENCED WELL BEING
Heuristic #45: VALUING A REMEMBERING SELF OVER AN EXPERIENCING
SELF. Since most of us rely on unreliable memories we do well to keep in mind what our
experiences were like during them, not just at their conclusion. How many of our waking
moments are spent in unpleasant emotions or negative states? They are hard to recall!
“Our emotional state is largely determined by what we attend to, and we are normally
Thinking Fast and Slow by Daniel Kahneman 15 Summarized by Erik Johnson
focused on our current activity and immediate environment,” (page 394). A person stuck
in traffic can still be happy because they’re in love, or a person who is grieving may still
remain depressed while watching a comedy. Potential for error: not paying attention to
what we are doing, letting experiences happen without reflection, and going with the flow
with no attempt to alter our schedules, activities, or experiences.
CHAPTER THIRTY-EIGHT: THINKING ABOUT LIFE
Heuristic #46: AFFECTIVE FORECASTING. Which factor leads to a happier life
duration: or experiences? Would a 20 year life with many happy experiences be better
than a 60 year life with many terrible experiences? Which would you rather be: happy or
old? We are terrible at predicting what will make us happy. When asked the very
difficult question, “Overall, how happy is your life?” we substitute an easier question,
“How happy am I right now?” (See heuristic #7). “…the responses to global well-being
questions should be taken with a grain of salt” (page 399). People make decisions based
on what will make them happy in the future but when it’s achieved the happiness doesn’t
last. We don’t know our future selves very well.
Heuristic #47: THE FOCUSING ILLUSION. “Nothing in life is as important as it is
when you are thinking about it,” (page 402). This means when we’re asked to evaluate a
decision, life satisfaction, or preference we err if we focus on only one thing. How we
answer, “What would make you happy?” depends on many factors and rarely is one factor
determinant. Yet folks regularly focus on one issue—income, weather, health,
relationships, pollution, etc.—and ignore other important factors. “How much pleasure do
you get from your car?” Depends on how much you value the stereo, mileage, looks, age,
cost, comfortable seats, tilt of steering wheel, etc. The fact is, our evaluations are often
based on the heuristic that while we are thinking of a thing we generally think better of
it, forgetting how infrequently we actually think about those things (income, weather,
health, stereo, mileage, looks, etc). What initially strikes our fancy is absorbed into daily
living, we adapt, we acclimate, we experience the initial pleasure less intensely as time
progresses. “The remembering self is subject to a massive focusing illusion about the life
that the experiencing self endures quite comfortably,” (page 406).
Heuristic #48: MISWANTING. (Daniel Gilbert’s phrase). We exaggerate the effect of a
significant purchase or changed circumstances on our future well-being. Things that are
initially exciting eventually lose their appeal.
SUMMARY OF THE TWO SELVES. It’s absurd that people willingly choose more pain
for longer periods of time that end pleasantly over periods of less pain of shorter duration
and end terribly. But such are the powers of heuristics #s 41, 42, 43, and 45.
SUMMARY OF ECONS AND HUMANS. Kahneman made infrequent mentions of
“econs and humans” so I do not emphasize them in my book summary. Here’s the gist of
Thinking Fast and Slow by Daniel Kahneman 16 Summarized by Erik Johnson
his complaint. Economists (“the Chicago school”) operate on the assumption that
consumers are rational (“internally consistent,” “logically coherent,” “adhering to rules of
logic,” page 411) and always will do the rational thing. If not, that’s their loss. Kahneman
as a behavioral economist of course disagrees and suggests that heuristics influence our
choices which are irrational and counter intuitive; we need help making better choices.
The Chicago School are libertarians who want government to keep out of the way and let
people make their own choices, good or bad (provided they don’t hurt others). Economic
behaviorists suggest giving people a nudge is sometimes necessary (regulation, writing
clearer contracts, truth in advertising, etc).
SUMMARY OF TWO SYSTEMS. “This book has described the workings of the mind as
an uneasy interaction between two fictitious characters: the automatic System 1 and the
effortful System 2,” (page 415).