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.