The last entry laid out the foundations for a conceptual model of how we make decisions. System 1 is fast thinking, intuitive and is responsible for subconscious monitoring and calculation. System 2 is methodical, deliberate and responsible for understanding information and undertaking activities which require some level of attention.
The interaction between these two systems create what we know as our behaviour in decision-making. S1 can calculate single digit math problems without any effort, but when challenged with something even slightly more cumbersome (17 x 24), it calls upon S2 to assign adequate attention from a limited supply to fully engage in the problem at hand.
Laziness
The problem is that S2 is categorically lazy. All S2 activities are all associated with cognitive load and mental effort, and it has a reluctancy to assign more effort than is strictly necessary to reach an acceptable (not accurate) conclusion. Sometimes the decisions chaired and championed by S2 are actually just the conclusions drawn from S1.
This, I believe happens when our brains are stretched across so many different problems, to the point where we can’t think straight anymore. When the task at hand requires a lot of focus — maybe you’re studying for an exam — but your also dealing with some other problems — maybe car, money, work, or social problems — it can be really hard to hone in on any answers to either of them. Rather than assigning the required attention to either one, systematically work it out and move on to the next problem, we half-ass both acitivities, and accept mediocre effort in return. Key word here is: accept. S2 accepts and endorses solutions. S1 might present a solution which is intuitive, and S2 will overlooks any inaccuracies. When our efforts are stretched, and our solutions aren’t thought out, this is where we make mistakes.
Substitution
What I find really interesting is that, even when faced with a very complex question, we rarely are ever completely stumped at providing an answer. We can determine if we like, dislike, hate, love, trust, distrust or admire someone long before we have ever gotten to really know someone. Really we can figure it out within our first interactions with them. Maybe with the exception of the first 10 seconds of a daily NYTimes connections session, we have an unbelievable ability to provide an opinion about almost anything, with pretty much zero information.
Dr. Kahneman provides an account of how our intuitive opinions on complex matters could be driven by something called substitution. When a satisfactory answer to a complex question doesn’t arise immediately, S1 will substitute the complex question with a simple one, and just answer that. For example, say we’re asked what are the prospects of Apple’s financial performance and overall success in the future. Without all the forecasting, modelling and DCFs, it’s quite hard to come up with a satisfactory answer, and even with all of that we can’t guarantee anything. So instead we might subconsciously substitute this complex question for a simple one: What has been my experience with Apple products? This is how we generate such an intuitive answer. If we have had great experiences with Apple products, customer service and all their offerings, we’re pre-disposed to generate positive opinions about their future prospects.
The S2 path of least effort causes us to forming opinions on complex topics based on simple questions leading us down a road of either excellent intuition or grave judgement. Much of this can be ironed out through systematic, careful reasoning. But that’s just too much work. Right?
Overconfidence
As we already now understand, S1 draws conclusions from our intuition. Our natural instincts have a tendency to over-simplify complex scenarios and the world around us to make us feel like we know what’s going on. Simple inputs, simple outputs are the bread and butter of S1. Careful reasoning would have us test our intuitions for it’s validity, but the simple, coherent stories produced from substitution can lead us to a lethal subjective confidence in our own ability. Sometimes we might produce and answer, and search for evidence to support it after the fact, and it is the ease it creates which we use to validate our own estimate.
When we become wrapped in our own self-importance, maybe we’ve had a good few picks in the stock market, maybe we’ve created a business that’s become successful, we start to become over-reliant on the quick and sharp voice in the back of our heads. As we’ve mentioned a few times in the newsletter, everything worth doing has less then 100% chance of working out. In something as volatile and unpredictable in something like the stock market, the reliance on intuition is a cause for concern. Everyone can get lucky. Most people regress to the mean. You only hear about the winners because they’re always the loudest. For someone to be a buyer, you have to have a seller. When everything’s landing, when everything’s going right, when S1 is firing and S2 is kicking back and watching the show remember that you aren’t invincible. Intuitive judgement in regular and predictable environments is called skill, intuitive judgement in sporadic and unpredictable environments is at best delusional.
Closing
This newsletter showcases two of the many biases and limitations our mind produces. Complexity calls upon effort, and it is within our nature to seek the path of least resistance. Applying the least amount of effort required to develop coherent and seemly accurate stories is an excellently delusional way to navigate life. This is not correct living. Intuition is great when paired with careful deliberation. With enough practice we can find that our instincts might be right most of the time. But there’s no need to be complacent. Our decisions impact ourselves, and they impact others. Leaning on your own ability to put your mind at ease is a poor way to repay the position of power you hold.
What system do you rely on?
Just Something To Consider.
🔗 Sources
Kahneman, D. Thinking Fast and Slow. Penguin Books.