Does the title sound familiar? Does it sound famous? Well, of course it is. It is a masterpiece in behavioral economics written by the master himself, Daniel Kahneman. No, I am not doing a book review. I came across this legendary book just because it was a part of my syllabus. Confused? I was, at the beginning, too... I had a subject on behavioral economics in my second semester of my executive MBA and "Thinking Fast and Slow" was my course book. When the professor asked us what the course meant to us, none of us had any idea about what it was. We said economics means numbers and we hope it doesn’t boil down to just that. Well, he laughed out aloud and said "Welcome to the world of biases. You just stereotyped economics and that's a bias."
The book talks about conscious and unconscious thinking that Kahneman calls System 1 and System 2 thinking. System 1 is the lazy controller who acts just based on what is stored on your memory. If you drive the car on a tired evening on a regular road or draw something on the paper while answering phone calls, that's system 1 in action. If you are trying to solve a math problem and get irritated because of interruptions, that's system 2 in action. When you have used up your system 2 thinking for the day, you become ego depleted and start acting weird, aggressive, and tired. When system 1 does its thing, we fall for a series of unconscious cognitive biases and fallacies.
Each session in this course was fascinating as we understood how biased we were as humans. I was fooling and being fooled every day. It’s true for you too and for everybody out there. Each concept that I learnt could be applied to real life. We learnt about tragedy of the commons, prospect theory and loss aversion, cognitive biases, price anchoring and Neuroscience, just to name a few concepts. There were so many examples that I found in my daily life, some of which I would like to share here.
Every time I see the news about Russia and Ukraine now, I cannot avoid thinking about the prisoner’s dilemma and the strategy of the opponent.
Whenever I see a French music playing in a store, I scan for people picking French wines.
Well, on the evening after giving the exam on this course, we decided to go out for dinner as a class. We went to a famous burger place near the university. We immediately calculated the price of individual items being offered in a bundle, just to see if there was a real advantage in bundling.
A friend of mine logged into eBay to sell the stuff that she doesn’t use anymore. Seeing the price she set, I told her, „It’s the endowment effect. You are pricing it high because it's yours and you value it. If it was something you were looking to buy, you value it much lower". Well, she was perplexed at first, she thought I became a lunatic and could not accept what I just said. Eventually, a few YouTube videos later, she convinced that it was true, and it all made sense to her.
I was losing heavily on a share that I had bought last year. I was feeling very low, and I got rid of it despite the huge loss. This was my “loss aversion” acting. The pain of losing the money was more to me than the happiness I could have gained from receiving money.
I was shopping last week at Peek & Kloppenburg. There was a row of Hugo Boss with hefty price tags. Then there was Tom Tailer with mid ranged products, placed hand in hand with the Boss line of clothes. A Tom Tailor or an S.Oliver looked cheap next to the Hugo Boss, that many people actually ended up buying it including me. Did you just widen your eyes? Well, you fell for anchoring, just like I did. Hugo Boss is the anchor which hooks you to a so-called "cheaper" Tom Tailor.
I could keep going on and on about this fascinating world of psychology. It is a learning for my life that I will always cherish. Here are a few takeaway notes I made for myself from this course:
Try to be aware of what's going on around you, if you are being tricked into something or not
On the other side, if you are a marketing and salesperson, anchoring could be a great way to boost your sales. Endowment effect, loss aversion and prospect theory could be your boon, dear insurance agents. Hindsight bias, Halo effect and cognitive biases are what that makes you vote for the same leader time and again.
You cannot avoid your superstitions but be aware of it
You are right, I mentioned Neuroscience at the beginning which I skipped in this article altogether. Are you interested to know what it was?
Wait for the next one!!! Until next time!!
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