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I once considered writing a brief, Christmas-stocking-filler book called A Complete Guide to Human Folly (Abridged). It would have been a sort of ‘little book of stupid’ compendium of the main cognitive biases that humans are prone to, with examples taken from contemporary politics and media. Alas, the complete, unabridged guide to human folly has now been written: it is called Thinking: Fast and Slow, by the Nobel-prize-winning psychologist Daniel Kahneman.

Kahneman is the leading researcher in the 30-year-old field known as ‘behavioural economics’. This field has successfully shown how far humans are from the rational calculators of utility assumed by neo-liberal economics. In the words of another leading behavioural economist, Dan Ariely: “We’re less homo sapiens, and more Homer Simpson.”

The title of Kahneman’s book refers to the two systems which he suggests operate in our minds. System 1, as he calls it, tends to make rapid, emotion and intuition-driven judgements about the world. System 2 makes slower, more conscious, reflective and deliberative decisions. We like to think that System 2 is in charge, and that we’re steering a conscious and rational course through the world. In fact, System 1 calls most of the shots, and despite what Malcolm Gladwell argued in Blink, it consistently gets it wrong.

Thinking: Fast and Slow, which is Kahneman’s first book aimed at a popular audience, brings together the evidence on all the ways System 1 gets it wrong – all the myriad ‘cognitive biases’ which the mind is heir to. I’m still working my way through its 496 pages, but page by page you realise quite how often our intuitions are wrong, and how arrogant and hubristic we are in our assessment of rationality and expertise. It is one of the great works of the Skeptical tradition – up there with Nicholas Nassim Taleb’s Black Swan, Pascal’s Pensees, and Erasmus’ Praise of Folly (which, appropriately enough, was published 500 years ago this year).

Amusingly, the book continually poses you questions to show you how your own mind is just as prone to these mistakes. Even when I consciously tried to avoid the cognitive traps, I still found I fell into them. So even as you laugh at others’ folly, you realise you are just as deluded.

Try this, for example:

A bat and ball cost $1.10.
The bat costs a dollar more than the ball.
How much does the ball cost?

The quick judgement we make (or rather, our System 1 makes) is that the ball costs 10 cents. But it doesn’t – that would mean the bat costs $1.10, so the combined total would be $1.20. In fact, the ball must cost 5 cents, as maybe some of you got.

Or try this:

Linda is 30-years-old. She is outspoken, articulate and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice.

Now rank these potential future careers of Linda’s, in order of likelihood:

Linda is a teacher in an elementary school.
Linda works in a bookstore and takes yoga classes.
Linda is active in the feminist movement.
Linda is a social worker.
Linda is a bank teller.
Linda sells insurance.
Linda is a bank-teller and active in the feminist movement.

Kahneman and his long-term research partner, Amos Tversky, tried this experiment in the 1980s. Kahneman noticed, purely by chance, that 85% of participants rated it more likely that Linda worked as a bank-teller and was active in the feminist movement, than that Linda worked as a bank-teller – even though, of course, the first option is a subset of the second option.

Many of these cognitive biases have serious real world implications. Kahneman and Tversky found, for example, that there was very little correlation between the judgements of interviewers about applicants to universities, and how those applicants actually performed at university. As a consequence of this study, several universities, including the London School of Economics, have abolished interviews as part of their entrance process.

Behavioural economics has particularly stark implications for the world of business and finance. Researchers like Dan Ariely and Terrance Odean have highlighted, for example, how index tracker funds consistently outperform actively-managed funds – even though the fees on actively-managed funds are much higher. This is because of the ‘halo effect’ – we like to think that investment bankers or fund managers have great skill and expertise in picking stocks (this is their job, after all, for which they are extremely well rewarded). But they don’t.We grant them miraculous skills during booms, then their utter incompetence is brutally exposed during the busts (and yet banks still give them huge bonuses).

The same holds true for ‘political risk consultants’ – all those people paid to stare into crystal balls and tell the political future. Philip Tetlock carried out a 20-year study, interviewing 284 political risk consultants about trends in global politics, and asking them to assess if the trend would stay the same, increase, or decrease.

Kahneman writes: “The results were devastating. The experts performed worse than they would have if they had simply assigned equal probabilities to each of the three potential outcomes. In other words, people who spend their time, and earn their living, studying a particular topic produce poorer predictions than dart-throwing monkeys”.

And yet we are experts at hiding our own ignorance from ourselves. Fischoff and Beyth, two students of Kahneman’s, asked participants before president Nixon’s 1972 visit to China to assign probabilities to various potential outcomes of the visit. After the trip, they were asked to recall the probabilities they had assigned. They recalled assigning a much higher probability than they had in fact assigned to the events that actually transpired. We’re all geniuses in hindsight.

This is all very damning for human rationality in general, and for rational technocratic capitalism in particular, which is based on the ‘myth of management expertise’, and which celebrates the genius technocrat or CEO – Alan Greenspan, say, or Jack Welch – who is able to predict the future and bring about successful outcomes through his skill, intuition, scientific accuracy and chutzpah, like the shamans and sooth-sayers of old. In fact, we’re all of us in the dark, and those we herald as rational geniuses are probably just lucky, as is proven when their luck changes (is there any more pathetic figure, now, than Alan Greenspan, to whom we once granted an almost superhuman prescience?)

Of course, the million-dollar-question for behavioural economics (and, indeed, for humanity) is this: does learning about these cognitive biases make us any less likely to commit them? On this crucial point, there is surprisingly little research. So Kahneman instead gives us his intuition, which is…probably not. He says: “I’m still just as likely to make these mistakes, and I wrote this book. So it’s very unlikely to change anyone who reads it.” It’s a refreshingly pessimistic view in a world where other psychologists (like Martin Seligman) are resolutely hyping and marketing their own findings.

If this is true, it’s bad news for Socratic philosophy, which is based on the optimistic belief that we can use our reason to know ourselves, change ourselves, and become wiser and happier through rational self-reflection. Jonah Lehrer, reviewing Kahneman’s book in the New Yorker, decided that Kanheman’s book “has revealed the hollowness of a very ancient aspiration. Knowing thyself is not enough. Not even close.”

Yet I would suggest there is still some room for cautious optimism that Socrates was right that we can know ourselves and change ourselves, to some extent.

My optimism comes from a closely-related field of psychology – cognitive behavioural therapy (CBT). Behavioural economics was actually very influenced by CBT: in fact Aaron Beck, the founder of CBT, helped to create the modern theory of the automatic, unconscious mind that Kahneman and others use, through his experiments into ‘automatic self-talk’ in the 1970s. CBT shares with behavioural economics the idea that our minds are prone to a whole myriad of ‘cognitive biases': Beck and his cohorts identified certain typical biases that cause emotional disorders, such as catastrophising (‘this is a complete disaster’), black-and-white thinking (‘if I don’t get this job, I’m finished), the fortune teller’s error (‘I’ll never be happier’), and jumping to conclusions (‘he didn’t reply to my email because he hates me’).

CBT has proven that we can, in fact, learn to avoid habitual cognitive biases and thereby overcome the emotional disorders that they cause. We can do this through what Beck calls the ‘Socratic method’ – reflecting on our automatic and habitual judgements of the world, asking if they’re rational or accurate, and if not, challenging them and replacing them with wiser beliefs and opinions. We then have to practice these new ways of thinking and acting until they become habitual and automatic – until they become part of System 1, rather than merely System 2.

In other words, for Socratic philosophy to work and really change us, it has to work with both System 1 and System 2.

Firstly, we use System 2 (the conscious, rational, reflective system) to bring our unconscious beliefs into consciousness, to question them and consider if they make sense. Then we rehearse our wiser and more philosophical ways of seeing things, until they in turn become automatic, habitual, and part of System 1.

Clearly, this is very hard. It takes a lot of effort, energy and humility to accept that our automatic and habitual ways of interpreting the world might be wrong, and to change ourselves. This means we’re only likely to go through the hard process of changing ourselves if our habitual way of seeing things is causing us a great deal of suffering and personal damage. Only then, when it’s really costing us in terms of happiness and love, might we perhaps put in the effort to change ourselves. But in those very rare circumstances, a limited degree of self-knowledge and self-transformation is possible.

I put this to Kahneman when he came to speak in London last week. I asked, didn’t the success of CBT in teaching people to overcome their biases give us some cause for hope that we can change ourselves? He replied: “In the case of CBT, yes, clearly people can be trained and ‘System 1′ can be modified. In fact, we’re continuously learning and adapting. CBT is a way of teaching emotional responses to change. That can be trained. We can be trained to be slightly happier.”

Hardly a ringing endorsement of human rationality. And yet, if you’re suffering from depression or some other emotional disorder, then even this very slight ability to know yourself and change yourself can make a huge, huge difference. It is the difference between a life of utter misery, and a life of moderate happiness.


Here is an interview I did with Dan Ariely, another pioneer in behavioural economics.

And here is an interview I did with social psychologist John Bargh, who has been a key researcher on ‘automaticity’ and a leading critic of the ancient Greek idea that we can become ‘masters of our soul’.

And here is a piece I did for the Wall Street Journal on behavioural economics, which includes interviews with Ariely, Terrance Odean and other leading psychologists and investors.