I plan to write my essay on Kahneman’s Thinking, Fast and Slow, which examines how the brain’s meager grasp of statistics can lead to poor choices. Kahneman essentially separates the brain into two parts: System 1, which makes quick, intuitive assessments based on associative memories, and System 2, which deals with more involved decisions. The inherent laziness of System 2, a function of its limited resources, leads the brain to make often-inaccurate judgements – especially in the realms of logic, probability, and causation.
Of course, the two systems typically work well together, at least from an evolutionary perspective. Defaulting to System 1 not only allowed our ancestors to run away from hungry predators, but it also gives modern humans the courage to ask their romantic interests out. Nevertheless, the dichotomy between the two Systems has led humans to what traditional economic theory might call “irrational” behavior – particularly when framing the same problem in different ways leads to different decisions.
Because of System 1’s power, typically “wise” people may make “unwise” choices when faced with numbers or small probabilities. (Indeed, Kahneman won a Nobel Prize in Economics for elucidating Prospect Theory, …show more content…
(The suggestions given are not even limited to credit card debt – they could also refer to student and car loans with a few modifications.) Because swiping a credit card involves less work than counting (and more importantly, parting with) cold, hard cash, a person armed with a credit card arguably spends more. A person’s lazy System 2 certainly is not going to keep track of expenses by default – in fact, according to the Journal of Experimental Psychology, credit card users often spend about 12% more than they would otherwise. Combined with high interest rates, credit cards can often quickly ruin a person’s financial
Of course, the two systems typically work well together, at least from an evolutionary perspective. Defaulting to System 1 not only allowed our ancestors to run away from hungry predators, but it also gives modern humans the courage to ask their romantic interests out. Nevertheless, the dichotomy between the two Systems has led humans to what traditional economic theory might call “irrational” behavior – particularly when framing the same problem in different ways leads to different decisions.
Because of System 1’s power, typically “wise” people may make “unwise” choices when faced with numbers or small probabilities. (Indeed, Kahneman won a Nobel Prize in Economics for elucidating Prospect Theory, …show more content…
(The suggestions given are not even limited to credit card debt – they could also refer to student and car loans with a few modifications.) Because swiping a credit card involves less work than counting (and more importantly, parting with) cold, hard cash, a person armed with a credit card arguably spends more. A person’s lazy System 2 certainly is not going to keep track of expenses by default – in fact, according to the Journal of Experimental Psychology, credit card users often spend about 12% more than they would otherwise. Combined with high interest rates, credit cards can often quickly ruin a person’s financial