The New York Times Bestseller, acclaimed by author such as Freakonomics
author Steven D. Levitt, Black Swan author Nassim Nicholas Taleb and Nudge
author Richard Thaler, Thinking Fast and Slow offers a whole new look at the way
minds work, and how we make decisions.
Why is there more chance we'll believe something if it's in a bold type face?
Why are judges more likely to deny parole before lunch?
Why do we assume a good-looking person will be more competent?
The answer lies in the two ways we make choices: fast, intuitive thinking, and slow,
rational thinking. This book reveals how our minds are tripped up by error and prejudice
(even when we think we are being logical), and gives you practical techniques for
slower, smarter thinking. It will enable to you make better decisions at work, at home,
in everything you do.
» Read the first pages of Thinking Fast and Slow by downloading the
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'Daniel Kahneman is among the most influential psychologists in history and certainly
the most important psychologist alive today. He has a gift for uncovering remarkable
features of the human mind, many of which have become textbook classics and part of the
conventional wisdom. His work has reshaped social psychology, cognitive science, the study
of reason and of happiness, and behavioral economics, a field that he and his collaborator
Amos Tversky invented. The appearance of Thinking, Fast and Slow is a major event,'
Steven Pinker, author of The Better Angels of our Nature
'This is a landmark book in social thought, in the same league as The Wealth of
Nations by Adam Smith and The Interpretation of Dreams by Sigmund Freud,'
Nassim Nicholas Taleb, author of The Black Swan
'There have been many good books on human rationality and irrationality, but only one
masterpiece. That masterpiece is Daniel Kahneman's Thinking, Fast and Slow.Kahneman, a
winner of the Nobel Prize for economics, distils a lifetime of research into an
encyclopedic coverage of both the surprising miracles and the equally surprising mistakes
of our conscious and unconscious thinking. He achieves an even greater miracle by weaving
his insights into an engaging narrative that is compulsively readable from beginning to
end. My main problem in doing this review was preventing family members and friends from
stealing my copy of the book to read it for themselves...this is one of the greatest and
most engaging collections of insights into the human mind I have read,' William
Easterly Financial Times
'Daniel Kahneman is one of the most original and interesting thinkers of our time.
There may be no other person on the planet who better understands how and why we make the
choices we make. In this absolutely amazing book, he shares a lifetime's worth of wisdom
presented in a manner that is simple and engaging, but nonetheless stunningly profound.
This book is a must read for anyone with a curious mind,' Steven D. Levitt, co-author
'Absorbing, intriguing...By making us aware of our minds' tricks, Kahneman hopes to
inspire individuals and organisations to identify strategies to outwit them,' Jenni
Russell, Sunday Times
'This book is a tour de force by an intellectual giant; it is readable, wise, and deep.
Buy it fast. Read it slowly and repeatedly. It will change the way you think, on the job,
about the world, and in your own life,' Richard Thaler, co-author of Nudge
'Thinking, Fast and Slow is a masterpiece - a brilliant and engaging intellectual saga
by one of the greatest psychologists and deepest thinkers of our time. Kahneman should be
parking a Pulitzer next to his Nobel Prize,' Daniel Gilbert, Professor Of Psychology,
Harvard University, author of Stumbling On Happiness, host of This Emotional
THE ILLUSION OF STOCK- PICKING SKILL
In 1984, Amos and I and our friend Richard Thaler visited a Wall Street firm. Our host,
a senior investment manager, had invited us to discuss the role of judgment biases in
investing. I knew so little about finance that I did not even know what to ask him, but I
remember one exchange. “When you sell a stock,” I asked, “who buys it?” He answered with a
wave in the vague direction of the window, indicating that he expected the buyer to be
someone else very much like him. That was odd: What made one person buy and the other
sell? What did the sellers think they knew that the buyers did not?
Since then, my questions about the stock market have hardened into a larger puzzle: a
major industry appears to be built largely on an illusion of skill. Billions of
shares are traded every day, with many people buying each stock and others selling it to
them. It is not unusual for more than 100 million shares of a single stock to change hands
in one day. Most of the buyers and sellers know that they have the same information; they
exchange the stocks primarily because they have different opinions. The buyers think the
price is too low and likely to rise, while the sellers think the price is high and likely
to drop. The puzzle is why buyers and sellers alike think that the current price is wrong.
What makes them believe they know more about what the price should be than the market
does? For most of them, that belief is an illusion.
In its broad outlines, the standard theory of how the stock market works is accepted by
all the participants in the industry. Everybody in the investment business has read Burton
Malkiel’s wonderful book A Random Walk Down Wall Street. Malkiel’s central idea is
that a stock’s price incorporates all the available knowledge about the value of the
company and the best predictions about the future of the stock. If some people believe
that the price of a stock will be higher tomorrow, they will buy more of it today. This,
in turn, will cause its price to rise. If all assets in a market are correctly priced, no
one can expect either to gain or to lose by trading. Perfect prices leave no scope for
cleverness, but they also protect fools from their own folly. We now know, however, that
the theory is not quite right. Many individual investors lose consistently by trading, an
achievement that a dartthrowing chimp could not match. The first demonstration of this
startling conclusion was collected by Terry Odean, a finance professor at UC Berkeley who
was once my student.
Odean began by studying the trading records of 10,000 brokerage accounts of individual
investors spanning a seven- year period. He was able to analyze every transaction the
investors executed through that firm, nearly 163,000 trades. This rich set of data allowed
Odean to identify all instances in which an investor sold some of his holdings in one
stock and soon afterward bought another stock. By these actions the investor revealed that
he (most of the investors were men) had a definite idea about the future of the two
stocks: he expected the stock that he chose to buy to do better than the stock he chose to
To determine whether those ideas were well founded, Odean compared the returns of the
stock the investor had sold and the stock he had bought in its place, over the course of
one year after the transaction. The results were unequivocally bad. On average, the shares
that individual traders sold did better than those they bought, by a very substantial
margin: 3.2 percentage points per year, above and beyond the significant costs of
executing the two trades.
It is important to remember that this is a statement about averages: some individuals
did much better, others did much worse. However, it is clear that for the large majority
of individual investors, taking a shower and doing nothing would have been a better policy
than implementing the ideas that came to their minds. Later research by Odean and his
colleague Brad Barber supported this conclusion. In a paper titled “Trading Is Hazardous
to Your Wealth,” they showed that, on average, the most active traders had the poorest
results, while the investors who traded the least earned the highest returns. In another
paper, titled “Boys Will Be Boys,” they showed that men acted on their useless ideas
significantly more oft en than women, and that as a result women achieved better
investment results than men.
Regret is an emotion, and it is also a punishment that we administer to ourselves.
The fear of regret is a factor in many of the decisions that people
make (“Don’t do this, you will regret it” is a common warning), and the actual
experience of regret is familiar. The emotional state has been well described
by two Dutch psychologists, who noted that regret is “accompanied
by feelings that one should have known better, by a sinking feeling, by
thoughts about the mistake one has made and the opportunities lost, by a
tendency to kick oneself and to correct one’s mistake, and by wanting to
undo the event and to get a second chance.” Intense regret is what you experience
when you can most easily imagine yourself doing something other
than what you did.
Regret is one of the counterfactual emotions that are triggered by the
availability of alternatives to reality. After every plane crash there are special
stories about passengers who “should not” have been on the plane— they
got a seat at the last moment, they were transferred from another airline,
they were supposed to fl y a day earlier but had had to postpone. The common
feature of these poignant stories is that they involve unusual events—
and unusual events are easier than normal events to undo in imagination.
Associative memory contains a representation of the normal world and its
rules. An abnormal event attracts attention, and it also activates the idea of
the event that would have been normal under the same circumstances.
To appreciate the link of regret to normality, consider the following
Mr. Brown almost never picks up hitchhikers. Yesterday he gave a
man a ride and was robbed.
Mr. Smith frequently picks up hitchhikers. Yesterday he gave a man
a ride and was robbed.
Who of the two will experience greater regret over the episode?
The results are not surprising: 88% of respondents said Mr. Brown, 12%
said Mr. Smith.
Regret is not the same as blame. Other participants were asked this
question about the same incident:
Who will be criticized most severely by others?
The results: Mr. Brown 23%, Mr. Smith 77%.
Regret and blame are both evoked by a comparison to a norm, but the
relevant norms are different. The emotions experienced by Mr. Brown and
Mr. Smith are dominated by what they usually do about hitchhikers.
EXAGGERATED EMOTIONAL COHERENCE (HALO EFFECT)
If you like the president’s politics, you probably like his voice and his appearance
as well. The tendency to like (or dislike) everything about a person—
including things you have not observed— is known as the halo effect. The
term has been in use in psychology for a century, but it has not come into
wide use in everyday language. This is a pity, because the halo effect is a good
name for a common bias that plays a large role in shaping our view of people
and situations. It is one of the ways the representation of the world that
System 1 generates is simpler and more coherent than the real thing.
You meet a woman named Joan at a party and find her personable and
easy to talk to. Now her name comes up as someone who could be asked to
contribute to a charity. What do you know about Joan’s generosity? The correct
answer is that you know virtually nothing, because there is little reason
to believe that people who are agreeable in social situations are also generous
contributors to charities. But you like Joan and you will retrieve the
feeling of liking her when you think of her. You also like generosity and
generous people. By association, you are now predisposed to believe that
Joan is generous. And now that you believe she is generous, you probably
like Joan even better than you did earlier, because you have added generosity
to her pleasant attributes.
Real evidence of generosity is missing in the story of Joan, and the gap
is filled by a guess that fits one’s emotional response to her.
Amos and I once rigged a wheel of fortune. It was marked from 0 to 100,
but we had it built so that it would stop only at 10 or 65. We recruited students
of the University of Oregon as participants in our experiment. One of
us would stand in front of a small group, spin the wheel, and ask them to
write down the number on which the wheel stopped, which of course was
either 10 or 65. We then asked them two questions:
Is the percentage of African nations among UN members larger or smaller
than the number you just wrote?
What is your best guess of the percentage of African nations in the UN?
The spin of a wheel of fortune— even one that is not rigged— cannot possibly
yield useful information about anything, and the participants in our experiment
should simply have ignored it. But they did not ignore it. The average
estimates of those who saw 10 and 65 were 25% and 45%, respectively.
The phenomenon we were studying is so common and so important in the
everyday world that you should know its name: it is an anchoring effect. It occurs
when people consider a particular value for an unknown quantity before
estimating that quantity. What happens is one of the most reliable and robust
results of experimental psychology: the estimates stay close to the number
that people considered— hence the image of an anchor. If you are asked
whether Gandhi was more than 114 years old when he died you will end
up with a much higher estimate of his age at death than you would if the
anchoring question referred to death at 35. If you consider how much you
should pay for a house, you will be influenced by the asking price. The same
house will appear more valuable if its listing price is high than if it is low,
even if you are determined to resist the influence of this number; and so
on— the list of anchoring effects is endless. Any number that you are asked
to consider as a possible solution to an estimation problem will induce an