The father of behavioural economics considers the feeble human brain

Information is Not Knowledge.

Knowledge is Not Wisdom.

And Wisdom is Not Actionable Intelligence.

Our best course in life is to make the right decisions at the right time.

Action is just as important as being right.

Hopefully we have the rational basis to make good decisions, but even ignorant people can act correctly.

Give a stupid person a computer and you end up with a stupid person with a computer. There is no technological enlightenment. Visit a heated blog discussion.

A high tech society can suffer from retarded progress.

We should not seek knowledge as much as seek to develop our judgement. Our education system is too fixated at the former, and cannot comprehend the latter.

Two people can hear the exact same information but arrive at entirely different conclusions. Eye witnesses can be blind.

Up to 38% of Europeans have a diagnosable mental illness that cause some impairment in their lives. Mental illness probably causes more destruction of civilization today than war.

Mental illness affects judgement more profoundly than education.

Education is a form of insurance, but tragedies also happen to the heavily insured.

Errors will be made over a lifetime--hopefully they are small and recoverable.

Things should be accorded their proper attention according to consequence. No more or less. Don't sweat the small stuff. 90% of the stuff is small stuff.

Ignorance is bliss. But no one should aspire to ignorance.

Denial is not just a river in Egypt. It is the basis of rotten decision making processes.

The Truth has few friends.

There is no magic wand, miracle pill, or get-rich-quick scheme.

Nobody every died from hard work but many do not want to risk it.

How to lose weight: Eat Less and Exercise More.

How to become wealthy: Spend less than you make. Save. Invest.

For much in life, we all know what to do, but very few have the discipline to do it.

According to Einstein, the most powerful force in the universe is compound interest.

Half of all questions are statements, not questions.

Clever phrasing of a question can steer an answer as certain as a guided missile

Give people only a limited choice. More than four confuses them. Make two of the choices obviously bad. Let them make the last rationalization on their own. Now they own it and have a commitment.

There is no pure democracy.

And as much in life, luck has a role.

You don't need a Phd to have common sense.

Common sense is rarely common.

The human brain has two prime functions. The first is to process information adequately enough to permit survival and reproduction; the second is to enable the owner to feel good about him/herself. This second function requires a great deal of cognitive subterfuge so that we can perpetually hide from the reality of our shortcomings and errors, but it's generally essential that we maintain a favorable (if highly inaccurate) picture of ourselves because otherwise we'd function less adequately. People who are aware of their errors will feel badly about themselves and this will result in less favorable interactions with our environment. So basically we're hardwired to overlook our mistakes and think overly-highly of ourselves. In the ancestral environment the penalties of this species-wide "reality distortion field" were minor; in today's complex world they are very serious indeed. But of course I'm not to blame, I'm not making any egregious errors! It's all the fault of other people...

Can we finally drop the nonsense that financial markets ought to be left to regulate themselves ? I guess all of financial history wasn't enough proof; maybe the word of a Nobel economist will do.

I'm not exactly sure what this says about me, but I can honestly say that I highly doubt I would exhibit the behaviors described here, with the possible exception of walking slower when old-age is mentioned - I've never really paid attention to this so I have no idea if that subconscious predilection applies universally. The presentation of number of deaths caused by some disease has no greater effect if you are mentally converting into a percentage whenever you hear numbers like that quoted anyway. I also check my stock investments daily - but hold long term (I just like to see how they fluctuate based on world events and random chance).
I may be in the minority, but I think that some of the examples here are more a result of cultural imprinting than universal truths about human behavior. Maybe I'm just a new subspecies - Homo sapiens rationalis, or something.

"Males tended to make more quick and irrational decisions than females did." Well, as far as I can see, males make quick decisions not only for the economics issues, but also in other areas. Males tend to think that they are not supposed to waste their much time on making decisions.

Some thoughts in response to a couple of commenters:

CognitiveBias: Kahneman in fact mainly calls himself a psychologist rather than an economist; much of what you probably learn in those first psychology classes comes from his research.

jgress: The main insights from this research are not simply that humans are "not rational" (though that is still a useful reminder for many classical economic theorists) but in exactly _which_ ways they are not rational. The experiments show specific biases which are repeatable and predictable; by knowing about these we can get some very useful understanding of specifically how people behave.

attemptedobjectivity: A couple of chapters may be similar to "Blink" (though this book will cover much wider territory) but unlike Gladwell, Kahneman was one of the people who actually carried out a lot of this original research. I'm not sure how much it will add to hear it from the horse's mouth, but it will be interesting to find out.

nschomer: it might be worth participating in a few experiments to find out whether you are as rational as you think. One of the consistent findings in experimental psychology is that people think they behave more rationally than they in fact do. There are certainly variances in how "irrational" people are, and you may well be on the less cognitively biased end of the spectrum. But once you get beyond the more surface effects such as percentages versus absolute numbers, I suspect you'd find you are affected by many of the same heuristics as everyone else. Indeed, if you were not, it would be very hard for you to operate in the world, as it simply takes too long to make an accurate calculation before every one of the tens of thousands of decisions we make every day.

So if you got rid of system 2 we would go around doing the same things as usual controlled by system 1, except that we wouldn't be aware nor would we be be good at correcting mistakes.

That's (almost but not exactly) like saying you could peel much of the outside layer of our brain off and our primitive reptilian brain would carry on. It means we are much less in control of our selves than we thought. In fact we are primarily just observers of an automatic system. We think we are instigating actions based on conscious decisions but we are just observing actions that have already been decided upon by our more primitive automatic reptilian brains. It explains a lot.

I'm surprised that psychology graduates here don't know the use and effect of this kind of research on economics.

Hmm, subject for PhD huh.

None of this strikes me as surprising (easy to say after the fact I know). I think that the structure of our basic education systems need to take this kind of information much more into account if we are to have any hope of improving the situation over time.

Touché.

@ jgress

one of the things the book says is that we are quick to create a coherent story from only a few pieces of information, and from the coherence of that story we derive a sense of confidence in our opinions. we implicitly assume that those pieces of information that we know are sufficient for us to figure out the parts we don't know - the way you have just constructed a story about what this guy has to say without having read his book :) actually, you are missing most of the action. it's not the best book I've read, but very good food for thought.

In an Economist article I have previously read, it talked about how as far as financial decisions are concerned, males tended to make more quick and irrational decisions than females did. This was due to a chemical in the human body named cortisol, which is more active in males than females, so the article was insinuating that it may be a good idea to have females hold high positions in the economic world. This concept with cortisol ties in with this article, since it talks about the different decision making processes in humans and what influences them. The two-tier model of cognition is very interesting; since system one deals with quick and intuitive decisions, this is mostly the system that (according to the previous article, titled Rougue Hormones) applies to males. And since System two deals with contrast and a slow, deliberative decision making process it mostly applies to females. Since this article points out that some may be thinking what system one is good for, a notes that it is useful for rapid decision-making, it suggests that this is the kind of decision process that wild animals possess, since they are involved in life and death decisions every day that require quick thinking. If wild animals, as well as humans, only relied on the system two decision making process (slow and deliberative) they/we wouldn’t last long.

Why do this insight give you a nobel price in economics when the same stuff is thought in the first classes of psychology at college?

Having my degree in cognitive psychology I am concerned that these kind of observations is even treated within the economics discipline at all when its clearly in the realm of psychology.

Spectacular.

Explains much of human history.

Should be required reading for much of humanity--all 7 billion.

Homo economicus has always seemed to me like one of those irrational items itself. I never bought it. Like "junk DNA" in Biology, it was a useful abstraction that helped the field to move forward, but became dogma that later blocked innovation. Now, it is done. Homo Economicus is Dead! Long Live Homo Irrationalus! A new generation's worth of Ph.d's are waiting to be born!

It seems that this man's view of human rationality is a little more bleak than it should be, saying that human are not the models of rationality that we make ourselves out to be. While humans may not necessarily be as smart as they think they are, when compared when any other known species of organism, we have to be the model of rationality. The author makes a point that when humans see the stat that a disease kill 1280 people out of 10,000, they think it is worse than the disease killing 24.14% of the population. However, when I saw this stat, I did not think for one second that the first stat was worse. This is not to say that I am overly intelligent, its just that something like that is common sense. The author's opinion of human rationale is extremely low when it should not be.

All of these findings I feel like are reasonable. I don't think any of these are too crazy. Of course when people say you lost 30 dollars out of 50 instead of saying you gained 20 out of 50 you are going to react differently. This information could help the way we approach things. Making ourselves think different things and giving hope of each outcome by the way something is worded or by the environment can be pretty powerful.

We needed a high-paid academic to tell us that humans are not always rational, or that when forced to make snap decisions we don't have the benefit of careful deliberation and therefore make more mistakes? Gimme a break. Only an insular academic economist with no access to normal people or common sense would find this groundbreaking.

It appears to me that getting rid of system 2 would not do anything to help control the problem. It seems that system 1 would make us keep doing the same things over and over again, so what would be the point of getting rid of system 2. The only thing that I can foresee that would change is that we would not be as aware of what was going on.

I'm not quite sure this is breaking news. It is already known that we are capable of making quick decisions that are, most of the time, rational. There are those times when they aren't though. We are aware of the fact that we have working subconscious thoughts that do affect how we act and behave. We can be easily influenced of the environment without being aware. But other than that, I'm not sure I found too much new and significant information in the article. It was still intriguing to read none the less, but nothing surprising.