I couldn’t resist buying a copy of Daniel Kahneman’s best-seller when returning from holidays. Several friends and colleagues told me it was a great book; it got great reviews; and Kahneman’s journal articles are invariably a good read, so I was curious.

Its general message is simple and intuitively appealing: Kahneman argues that people use two distinct systems to make decisions, a fast one and a slow one. System 1, the fast one, is intuitive and essentially consists of heuristics, such as when we without much thought finish the nursery rhyme ‘Mary had a little…’. The answer ‘lamb’ is what occurs to us from our associative memory. The heuristic to follow that impulse gives the right answer in most cases but can be lead astray by phrases like ‘Ork, ork, ork, soup is eaten with a …’. Less innocuous examples of these heuristics and how they can lead to sub-optimal outcomes are to distrust the unfamiliar, to remember mainly the most intense and the last aspect of an experience (the ‘peak-end rule’), to value something more after possessing it than before possessing it (the ‘endowment effect’) and to judge the probability of an event by how easily examples can come to mind.

System 2, the slow way to make decisions, is more deliberative and involves an individual understanding a situation, involving many different experiences and outside data. System 2 is what many economists would call ‘rational’ whilst System 1 is ‘not so rational’, though Kahneman wants his cake and eat it by saying that System 1 challenges the universality of the rational economic agent model whilst nevertheless not wanting to say that the rational model is wrong. ‘Sort of wrong sometimes’ seems to be his final verdict.

Let me below explore two issues that I have not seen in the reviews of this book. The first is on whether or not his main dichotomy is going to be taken up by economics or social science in the longer-run. The second, related point, is where I think this kind of ‘rationality or not’ debate is leading to. Both issues involve a more careful look at whether the distinction between System 1 and 2 really is all that valid and thus the question of what Kahneman ultimately has achieved, which in turn will center on the usefulness of the rational economic man paradigm.

 

Will Kahneman’s dichotomy be a winner? I very much doubt it. Mainly, it has to compete with much more intuitive dichotomies already floating around in the social science literature: conscious versus unconscious; gut versus brain; heart versus head; emotional versus analytical; positive versus normative; and individualistic versus communal. ‘System 1 and System 2’ doesn’t have quite the same intuitive appeal to it, does it now? If you like, it requires System 2 to understand and apply the dichotomy, which kills it as a term used by a whole discipline. Too many other things could also be System 1 and 2.

More importantly, Kahneman does not in fact have a very clear idea as to what the difference between those two systems is, even admitting himself that it is short-hand for a continuum of decision-making facilities rather than a straight dichotomy. Now, nearly all dichotomies are simplifications but good ones have only a small range of phenomena that are in between. To see this, take the concept of gender, which is a very popular simplification: yes, there are some humans that are hard to classify as either male or female but for the vast majority of humans the simple male/female dichotomy works perfectly well.

When it comes to decisions, the grey areas are large between these two systems. Mainly, it seems unlikely that most decisions are taken by just one of these two Systems. Someone learning to play piano is for instance partially using motor-reflexes and partially analysing notes, using both ‘Systems’ simultaneously. What does ‘fast and slow’ then mean in that situation? Even reading an equation involves both simple pattern recognition of symbols and conventions (such as x²=x*x= some variable multiplied by some variable) as well as deeper understanding of what is implied by that equation. Both Systems are thus often ‘on’ at the same time, making it hard to really talk about one of them as getting tired too easily or only being used for some problems.

Also, System 2 is not simply on or off: someone can for instance pay various degrees of attention to what is said. Again, that does not lend itself to the simple ‘slow’ label: paying only half attention is what, half slow? Indeed, one can argue that System 2 is never really off. The subconscious (normally labelled as part of the emotional System 1) can sometimes be surprisingly analytical and alert the conscious to found regularities that would normally require some time from a conscious System 2, such as when you suddenly realise that Mexico is not the 53^rd state of America even though you didnt make that connection when you heard it earlier that day. Now, one can argue that this simply shows that the activation of System 2 can be subconscious and does not prove it is always ‘on’ but if one takes that excuse then this would mean that an individual would not even know which system is in use, making it even harder to label System 2 as rational and hard to say for any outside observer when it is on or off.

We can think about this issue deeper by pondering out loud how to formally model these Systems, something that Kahneman conspicuously neglects to do.

From an economic point of view, there are several options I can think of to model the distinction between System 1 and 2. If I had to write down a simple model I could solve then it would center around beliefs. The mind would then be involved in the recognition of the true type of a good we come into contact with, whereby System 2 represents a time investment in order to reduce the odds of attaining a wrong belief and System 1 is nothing other than the current set of beliefs arrived at in the past. So individuals could either go with their existing estimate or update it, involving more costly effort. It is easy to see how one can write this down and what the bits and bobs are to make it work as a model. Mainly, it would need some kind of ‘subconscious alerting rule’ based on expected value that determines whether an individual’s System 2 gets activated. That is a kind of meta-rule that itself would be subject to revision.

Whilst this model describes some of Kahneman’s examples such as the evaluation of the likelihood of something or the word that finishes the sentence ‘Mary had a little…’, it doesn’t fit many of Kahneman’s important examples of mental habits such as the peak-end rule or the endowment effect. Those latter habits are more like heuristics about beliefs rather than beliefs themselves. So my first-flush model would neither really describe what System 2 does, nor does the concept of beliefs capture the notion of ‘heuristics’, which are a set of rules as to how to approach a problem rather than a prior belief about a problem.

Suppose we then take the language of heuristics seriously and envisage Kahneman’s Systems as a series of ‘mental checks’ via which a belief gets updated. We then get a more expanded notion of these two Systems. What one then says about System 1 and 2 is that System 2 comes up with new heuristics about how to handle certain situations (like an expanded set of prior examples to compare a situation with) as well as meta-heuristics about which sub-heuristic to have running at what time. System 1 just applies the heuristics learned by System 2 at some point in the past.

Apart from fitting most of Kahneman’s examples, this kind of framework allows for big differences across people, which is useful when considering actual empirical work. Within this kind of framework, one doesn’t need to generalise over a whole population how smart System 1 and 2 are: the unconscious of one person can be very smart if it employs a lot of ‘good’ heuristics thought up by that person previously. Hence it allows individuals to differ in terms of all the heuristics they have up and running ‘normally’, thus allowing for ‘fast and smart’ as well as ‘slow and dumb’. It would for instance allow for people who can do statistics very quickly without much effort or for the whom the peak-end rule is not an unalterable given, something Kahneman seems to think is impossible.

This appealing ‘heuristic maker’ versus ‘heuristic implementer’ story is not quite satisfactory either though because it begs the question of whether there in fact is something like a distinct rational System 2 at all: perhaps deep thought itself is nothing more than applying more meta-heuristics simultaneously rather than less. Alerting the conscious mind to the importance of solving a problem is then rallying the motivation to let loose more available heuristics on an issue in order to re-evaluate and thus over-write existing heuristics. This would mean there is no clean distinction at all but merely a matter of degrees of effort thrown at a problem in which case you could throw away the distinction between System 1 and 2 and replace it with the much simpler labels ‘a little effort’ and ‘a lot of effort’.

Even if we were to stick to the heuristics interpretation and were willing to say there is an ‘on’ switch to the ‘heuristics maker’ so that we can speak of two more or less distinct situations, this lends itself much more to the existing ‘learning versus applying’ dichotomy than a cumbersome System 1 and 2 labelling.

The next step again is to envisage whole sets of heuristics as a ‘mental model’ and that individuals select the mental model for every problem they encounter based on meta-rules of association, whereby System 1 is simply the application of these meta-rules and System 2 is both a re-evaluation of some meta-rules as well as the learning of new basic mental models. This fits in much better with the ‘categorisation’ theory of memory and thinking that is popular in cognitive psychology and neuroscience.

A problem with that kind of interpretation though is that the subconscious too is known to continuously make and apply mental models from a very early age, most notably of other people: humans are very good at very quickly predicting what other people will do and thus system one ‘recognises’ whether someone is hostile or not, something that requires the subconscious to have built up a mental model of another person. The fact that kids aged 2 can read the emotions in others makes it clear that building mental pictures of the motivations and actions of others is a continuous activity in itself that is hardly the domain of some super-rational System 2. At least, it would lead one to the situation of saying that young kids who can’t even talk or add up 2 plus 2 in many ways are more System 2 active than adults!

What the above attempts at thinking of possible formalisations show is that as soon as one tries to come up with a simple distinction between System 1 and System 2, one invariably arrives at other labels to describe the decision-making process. ‘Heuristics’, ‘Categorisation’, ‘Mental models’, ‘Meta-rules’, etc. then come to mind as more descriptive labels for what is going on. So it is those terms that I see having a future. At best, ‘System 1 and 2’ only has a limited future until the literature decides on a deeper interpretation.

In terms of the whole rationality debate, the main contribution that Kahneman makes with this book, and that he in my opinion has made throughout his career, is to keep economists honest. This is a very valuable thing to do and this book once again does a great job of doing it.

Kahneman’s value derives from the great temptation amongst economists, particularly those of a strong theoretical bent, to fall in love with their abstractions and to pretend they are accurate descriptions of how things really work. Whereas the early economists were explicit about how their view of ‘rational economic man’ was merely an abstraction, later generations have far too often taken that abstraction and other closely associated ones (such as the whole notion of stable preferences, discount rates, loss-aversion, risk-aversion, etc.) literally. The number of economists I know who pretend to their students and themselves that things ‘derived’ from these abstractions, like the Welfare theorems, ‘prove’ things about the real world is astoundingly high. That pretence cannot be confronted and belittled often enough. Our models are derivative of an understanding of the real world, not the ultimate source of that understanding.

Good models are like good maps: reflections of a lot of measurement and observation. Some maps might be of what a piece of land would look like if re-shaped in a particular way, like a map of a yet to be built canal, drawing on observations of gravity and rainfall. But no good map of the Manhattan area pretends New York is not really there because it is inconveniently non-convex and displays adaptive preferences! Similarly, to say on the basis of a map of Mars that this proves the earth has big craters is silly beyond belief, yet some of our teaching is precisely of that ilk, with the Welfare Theorems that are rammed down each generation’s throat being a good case in point. It doesn’t matter how beautiful or elegant those maps of Mars are, they still don’t describe or prove anything about Earth and it takes people like Kahneman to remind us that none of our maps are perfect and some distinctly look like Mars.

To philosophers of science or even to any well-read economist, the fact that humans do not behave perfectly rationally in many important situations is nothing new and Kahneman is not telling them anything that they couldn’t find in writings of centuries ago. Unfortunately, it is a point that cannot be made often enough as our vanity urges us on, every generation anew, to pretend that our assumptions are not abstractions that loosely describe some aspect of the real world, but the undoubted truth of how Earth looks or could look. Kahneman in that sense plays the vital role of this generation’s small child who points at the map in front of him and says ‘yes, Earth is also round like the planet on this map, but it is not blue everywhere’. Not only do we need him this generation, but we will need another one like him the next generation and the next. So I recommend this book precisely to all those who hate reading stuff like this: the map-drawers who don’t look out of the window enough.

Will Kahneman affect the maps of the future, i.e. will the mainstream economic view of human decision making be expanded to include some of his pet concerns? I don’t actually think any of the ‘System 1 foibles’ that Kahneman points to will make it because ultimately economics is about how to explain as much as possible with as little mental effort as possible and from that point of view, the question is not which mental foibles we have but rather which important areas of human behaviour are poorly illuminated within the mainstream. It is that ‘potential additional market for economic advice’ which will determine what gets taken up in the standard canon, not any ex ante appraisal of the internal life of the mind. To use the map analogy, the question for those who refine the maps of whole planets is not the details of each shrub, but rather whether there is a market for maps that include continents not yet on it.

The area of most fruitful expansion for economics and hence where I expect map building to venture next is the whole business of the loyalties that underpin families, teams, and even countries. But that discussion should be had another day!