There’s no way around it: if you think you and others behave rationally all, or even most, of the time, you’re wrong.

If you think you make major decisions rationally, you’re wrong.

The sooner we all understand this, the sooner the world will improve—through better decisions and, through better understanding of how people make decisions, better messages. The effect can be incredible: more sales, better outcomes, bold action on seemingly intractable problems.

It might be hard to believe that such dramatic change is possible, but when I started digging into this topic, I was amazed at how immense its implications are and yet how few people think about it. I’ve been addicted to this topic ever since reading the psychologist Robert Cialdini’s bestselling book Influence: The Psychology of Persuasion about a year ago. I couldn’t believe what I read so I read it again.

Fundamental Human Nature

What amazed me about the book was Cialdini’s explanation that, although there are thousands of different persuasion tactics employed by what he calls “compliance practitioners,” the majority fall in six categories, each of which “is governed by a fundamental psychological principle that directs human behavior and, in so doing, gives the tactics their power.”

The tactics are:

Consistency
Reciprocation
Social proof
Authority
Liking
Scarcity

Thinking fast and slow

But that book was only getting things started because shortly after I read it, the psychologist Daniel Kahneman, who won the Nobel Prize in economics, released his book Thinking Fast and Slow.

The book is tremendously well-written. I’ve developed this funny intuition (which Kahneman actually explains) about what I’m reading: I’ll often know when there is much more depth to something than I’m actually getting. In Kahneman’s case, as I read each page of incredible insights about our brain, I knew that I was just scratching the surface. It’s dismaying because it makes you realize just how poorly our brains functions. Reading it, I realized just how many massive errors in the world could be explained by shortcomings of our thinking process.

Kahneman is so respectful about the nature of the human mind that he structures his book accordingly. He admits that even he, having dedicated his life to studying the errors of the human brain, falls prey to the errors he describes all the time. So he doesn’t position the book as a self-help book. He knows we can’t fix these parts of ourselves. Rather, he aims to create a framework with which to assess the decisions of others. Knowing that social pressures are among the most potent drivers of change, his aim is that once we generally begin to assess decisions through these lenses, only then will people start to change.

The fundamental idea in the book is that we have two modes of thinking and often switch between them without realizing. One is fast—System 1. The other is slow—System 2. He describes them very simply as follows

System 1 operates automatically and quickly, with little or no effort and no sense of voluntary control.

System 2 allocates attention to the effortful mental activities that demand it, including complex computations. The operations of System 2 are often associated with the subjective experience of agency, choice, and concentration.

When we think of ourselves, we identify with System 2, the conscious, reasoning self that has beliefs, makes choices, and decides what to think about and what to do. Although System 2 believes itself to be where the action is, the automatic System 1 is the hero of the book. I describe System 1 as effortlessly originating impressions and feelings that are the main sources of the explicit beliefs and deliberate choices of System 2. The automatic operations of System 1 generate surprisingly complex patterns of ideas, but only the slower System 2 can construct thoughts in an orderly series of steps. I also describe circumstances in which System 2 takes over, overruling the freewheeling impulses and associations of System 1. You will be invited to think of the two systems as agents with their individual abilities, limitations, and functions.

It sounds so simple and obvious, but I can’t stress how important this all is. It has obvious implications for explicit decisions, most obviously how we investors make decisions. But it has broader implications as well. Kahneman goes on to explain how System 1 can be trained, and how it can lead to incredibly intuitive leaps, explaining the miraculous judgments of experts. I think this explains the origins of groundbreaking entrepreneurial ideas—the ones that are truly visionary in nature.

I’m going to write about that and other implications of Kahneman’s framework in future posts. I’m also going to start cataloguing the heuristics Cialdini, Kahneman, and others write about. (Heuristics is a fancy word for mental shortcuts.)