Humans are irrational beings. We allow ourselves to be led by intuition and gut feeling and often make choices that are totally inexplicable. Why do we let ourselves be fooled so easily? Because, according to Kahneman, we often only take account of information that is immediately available. We don’t see things like (historical) perspective, context, motives or background information. Consequently, we don’t bear them in mind in our decisions. So very often we are deceiving ourselves.
Kahneman describes two systems in our brain that determine our motives. One is an intuitive system that works quickly and relies on emotion. The second system tries to look further than the information before us. It checks things, makes carefully considered choices and is more rational. But this second system takes us a lot more trouble than the first, so people tend to follow the decisions of system one. And so we are happy to be taken in by our own brain.
The author describes mechanisms such as priming – we allow ourselves to be led too much by previous experiences – loss aversion – losing goes far deeper than winning – and cognitive ease – that which is familiar, feels good. Exactly how this works is demonstrated with a series of anecdotes and tests that back up his positions.
Because it is important for entrepreneurs to know how their customers think and how the decision-making process goes. Should you offer your customers expensive insurance when they buy a washing machine? The chance that it will break down within the foreseeable future is small and what’s more, the consequences of that are not so great. But a lot of people will assess this chance as being far higher than it is. And so they take out the expensive insurance.
Or they systematically underestimate how much their kitchen renovation will cost. Or they go on losing money on projects that they should have abandoned far sooner. Or even: they are far more likely to believe things when they are written in bold type, even though they don’t stand up to scrutiny.
Daniel Kahneman won the Nobel Prize in Economic Sciences (officially: the Swedish National Bank’s Prize in Economic Sciences in Memory of Alfred Nobel) in 2002 for the way in which he integrated psychological insights into modern economic thinking. Together with his colleague and friend Amos Tversky, he is one of the founders of behavioral economics. He demonstrated that, contrary to what was previously thought, people seldom act rationally and on a reasoned basis, but are far more likely to allow themselves to be led by irrational motives.
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