Tag Archives: thinking fast and slow

04 – Intelligence, Control, Rationality

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Intelligence, Control, Rationality

One research is done on the four-year-old children. They have given one marshmallow and told them to eat it anytime but if they wait for the 15 minutes then they will get one more.

Video of marshmallow

Ten or fifteen years later, a large gap had opened between those who had resisted temptation and those who had not. Those who show higher self-control, those also have scored higher in intelligence test during the adult time.

Stanovich has talked about two minds of system 2. One of these minds (he calls it algorithmic) deals with slow thinking and demanding computation. These measures calculation skills and intelligence. Second is rational thinking.

The Associative Machine

When we listen or see or read something disgusting than our mind immediately connects it and start preparing pictures of it. The mind will start associating a word with many different elements and we temporarily fall under those emotions. If we have heard the highway accident, then our mind starts preparing some pictures, incidents of it and we stay away for some period from it. This concept is known as associative activation.

These responses occurred quickly, automatically and effortlessly. System 1 shows those words as a reality and our body starts reacting on it. These words activate some thoughts, that activates other thoughts. When we have read or listened to the news of recession in the automobile industry in the year 2019. Our mind starts creating an image of it so that we stay away from investing in the automobile industry. But if we use system 2 and make a rational decision then scenario can be entirely different for us.

The Marvels of Priming

When we see some puzzling things then we connect it with recent activities which we have performed or something is in our mind currently. If you have recently seen or heard the word EAT, you are temporarily more likely to complete the word fragment SO_P as SOUP than as SOAP. The opposite would happen, of course, if you had just seen WASH. We call this a priming effect and say that the idea of EAT primes the idea of SOUP, and that WASH primes SOAP.

If you were primed to think of old age, you would tend to act old, and acting old would reinforce the thought of old age. So that we behave the way we get primed.

Primes That Guide Us

Our surroundings are also responsible for build primes in us. For example, if we surrounded by money-minded people, our behaviour starts becoming money minded. What we see, listens are also affects our behaviour.

System 1 provides the impressions that often turn into your beliefs, and is the source of the impulses that often become your choices and your actions.

System 1 creates a story and system 2 believes it. So that later on it becomes our belief.

When we surrounded by short term oriented, traders mentality, lazy, etc. then system 1 starts creating a story and our behaviour starts forming like our surroundings. Thus, if you want to become an investor then you have to keep distance with people who have a trader mindset otherwise trading will get priming to our mind and we will get diverted towards trading activities.

Cognitive Ease

Whether we are conscious or not, there are lots of calculations and thinking of running in our brain. These all done through system 1. These calculations through system 1 keep on assessing various situations, survival, threats etc.

These works in a range of easy and strain.

Easy is a sign that things are going well—no threats, no major news, no need to redirect attention or mobilize effort. Strained indicates that a problem exists, which will require the increased mobilization of System 2.

Cognitive ease happens when we are in a good mood, sentence which we read is in clear fonts, proper colour, etc. and reversely cognitive strain happens when we are in a bad mood, sentence which we read are poorly written, not clear fonts, poor colour combination, etc.

When we are into cognitive ease state, we are in good mood, we believe what we hear, trust intuition, be creative etc. But when we are into cognitive strain state then we are effortful, suspicious, feel less comfortable, make fewer errors, etc. When we have invested in a particular company and the price of it keeps raising, we start staying in cognitive ease so that we do not focus on the fundamental side. Whereas when prices not raising then only people get cognitive strain and focus on fundamental parts.

This entire series will be review with various examples from books which are “Thinking, Fast and Slow” and “The Art of Thinking Clearly“.

03 – System 2 efforts

Posted on by under Behavioral Finance

Attention and Effort

System 2 is effortful and one of its main characteristics is laziness, a reluctance to invest more effort than is strictly necessary. System 2 efforts and self-control help us to overcome intuitions and impulses of System 1.

Mental Effort

For testing of our system 2, we have a game which helps us to know the efforts of our system 2. We prepare a few cards and on which we write the four-digit number. Then we pick up cards randomly and add-1 to each number written on a card. For example, if the number on the card is 1125 then answer will be 2236. We find it easier so now, we can try it with more difficulties and use add-3. That means if the number on the card is 1125 then answer will be 4458. 

Our pupils are sensitive indicators of mental efforts so whenever we put any mental efforts to think our pupil size gets change. When we start working on any problems our pupils get larger in size and as we get solutions or give up then pupil size start contracting.

Switching from one task to another is also requires mental efforts and which uses system 2.

Modern tests of working memory require the individual to switch repeatedly between two demanding tasks, retaining the results of one operation while performing the other. People who do well on these tests tend to do well on tests of general intelligence. We generally tend to break down works in a smaller part to perform it well. We generally use the law of least efforts.

The Busy and Depleted System 2

When we are putting mental efforts means system 2 is busy in thinking so that system 1 take charge of our immediate decisions. If someone asked us to select food during that time, system 1 mostly go with temptation food, go with sweet foods. There can be selfish decisions. Higher the demand for system 2, higher the self-control which is depleting and unpleasant.

Sometimes when we have put efforts in one task, we tend to avoid putting efforts on others. And sometimes, we accept to put efforts on others. When we have a strong incentive to do so.

When you are actively involved in difficult cognitive reasoning or engaged in a task that requires self-control, your blood glucose level drops. So, giving glucose to the brain helps to put more mental efforts. That’s why sweet foods, temptation foods and activities which we love to perform getting demanded when we have put huge mental efforts and we get tired mentally. These things help to give energy and rest to system 2 so that system 2 is getting ready for another mental effort. 

The Lazy System 2

Many people are overconfident in nature and also that have an overconfident on their intuition. So that they avoid taking decision by taking the help of system 2.

When people believe a conclusion is true, they are also very likely to believe arguments that appear to support it, even when these arguments are unsound.

Similarly, while making an investment, we majority times use system 1 and avoid uses of system 2. So, we reach the conclusion and accept the arguments which support our investment though it’s correct or not. Though we have invested wrongly, we do not listen to it and just seek for supporting arguments. 

Those who do not fall under such a trap and uses system 2 whenever required. They are more rational. So that we should not be biased with our investment and keep collecting information which is against our original hypothesis.

This entire series will be review with various examples from books which are “Thinking, Fast and Slow” and “The Art of Thinking Clearly“.

02 – Conflict, Illusions and Useful Fictions

Posted on by under Behavioral Finance

Conflict

System 2 is an in-charge of self-control. It helps us while we are losing our control, focus, emotions. While we are reading a book and found something boring in it and start losing focus towards continuing with a book then system 2 bring back our focus to the point. When System 1 indicates that it’s boring then system 2 brings back our focus.

When we have invested in business and stock price of that company not moving then we start getting boring with time. But system 2 help us to guide that business has improved in performance and there are not any fundamental issues. Focus on our process and sticking with it is the work of system 2.

Illusions

At the first instance, we have reached the conclusion that the second line is larger in size compared to the first one. But when we measured both the horizontal lines, we found that both are identical in size.

Here, system 1 has accepted view of the second line is larger than the first one and when we have measured, system 2 took control. But system 1 prevents us from believing that both lines are equal, it’s illusions. Though we have measured and know the size of both the line, we cannot stop system 1 from performing. When we can work on accepting that both lines are identical, we will not again get fooled by multilayer illusions.

There are illusions of thoughts along with visual illusions and that called as a cognitive illusion.

Many times, a person does not accept the reality and try to stay in the illusion, means their system 1 only works and they do not accept what system 2 indicates. System 1 has intuitive errors and biases which system 2 is not aware of. Errors can be prevented only by the enhanced monitoring and effortful activity of System 2. But it seems impractical to continue monitoring of thoughts and go slow on routine works. It will be inefficient if we replaced system 1 by system 2. We have to identify where mistakes are likely to happen and then have to give control to system 2. It’s difficult to identify your own mistakes compared to others.

Example – when we analyse the company and see a few characteristics which we like about the company then we stop focusing on others which can have a negative impact on the future prospects of the company. Dividend-paying companies are good which is stored in system 1 so that when we look at the company which is continuously paying out a dividend. We do not focus on other aspects and make an investment. But when system 2 take control, it will analyses whether the company has the ability to keep dividend continue in future, does company paying dividend from free cash flow or from raising external funding. 

We should use system 1 where rules are predefined such as we are not eligible to get a dividend if we purchase shares on or after ex-date. But analyzing the longevity of dividend, we need to use system 2. 

Useful Fictions

System 2 required a mental calculation so that we should not use it with other tasks.

When we are driving on a similar road frequently since long, our system 1 works automatically. It will suggest that when to take turns, at which area have slowdown speed, etc. It will not be going to ask for system 2 helps. We can drive on a known road while making a conversation. But the same does not happen when we drive on an unknown road. Our system 2 take control and if we make conversation while driving on an unknown road, we may meet accidents or miss with target place.

Anything that occupies our working memory reduces our ability to think. So that we have to be careful to perform multitasking. When people get involved in both trading and investment than both require the involvement of system 2 so that it will become difficult for the human brain to make a wise decision to cover all aspects. And that can result in missing out of something at both the area.

01 – The character of the story

Posted on by under Behavioral Finance

We all know that temperament is one of the most important quality not only in the investment field but also in our life. If we work on our emotional biases then we can win any battle. To excel in temperament, first, we need to be aware of the various biases. So now onwards, I will illustrate various biases and how we can excel it and use it in our life. This entire series will be review with various examples from books which are “Thinking, Fast and Slow” and “The Art of Thinking Clearly“.

When we look at the face of woman, we immediately responded that she is angry and we also assume that what she can do next. This thinking is known as fast or intuitive thinking.

But what happens when any mathematical problem comes?

17*24

Now, we come to know that we have to do a calculation to reach out with a true answer as well as to reject a false answer.

Here, we realize that this problem is of multiplication and then we start implementing it. This step by step procedure slows down our response. Deliberate, effortful and orderly procedures are the prototype of slow thinking. When we face such problems then not only our mind works but heartbeat changes, blood pressure rate changes, etc. So that body also experiences it. When we are into known situation or problem, we can easily handle it and our mind, body, heartbeat does not change so rapidly. But when we are into the unknown situation which requires huge mental efforts then our mind starts processing it slowly, heartbeat, the body will feel that unknown situation.

Why does such a difference happen?

System 1 works on patterns and system 2 works on thoughts construction in an orderly manner. So that when we have seen the face of woman, our mind has searched for different patterns which we have experienced in the past and our brain throw matched pattern quickly which comes as a conclusion that woman is angry. While the mathematical problem is not storing under our mind and that requires to perform a calculation which slows down brain work.

We have been kept on learning about various things over a period, those learning got stored under memories and it comes out automatically when a similar recognizable pattern occurs. Such memories come as a conclusion without any intention and efforts.

System 2 also have abilities such as system 1. For that, we have to set our mind. For example, when we search our name in the merit list, we search with our initial. Those activities demand our efforts, we generally do not perform it with other activities. And which activities are automatically coming, naturally happens, we can perform other activities with it.

When some situations demand our attention, we generally do not see or hear anything else.

For example – We need to count ball passes by one to another person in below video.

Video

Majority of us have missed something unusual which has occurred in the video, come out of a gorilla. Majority of us have not noticed because we have given a task of counting passes. This counting requires an effort and that makes us blind to focus on coming out of a gorilla. This event indicates that we can be blind to the obvious, and we are also blind to our blindness. We are not aware of our inability to observe things happening surrounding while we perform some task which requires mental efforts.

When we have put efforts on price moments of particular stock then we going to be blind with what happening towards the business side. Management of the company who is engaged towards the stock price then he will lose focus towards the business and that will fail in business.

System 1 runs automatically with giving suggestions to system 2 and many times system 2 accept the suggestion of system 1. But when system 1 faces difficulties, it calls system 2 for support. System 2 continuously monitor our behaviour and work on control it. It comes in attention when it finds error about to happen. Arrangements of system 1 and 2 works on minimizing efforts and optimization of performance.