What we learned about effective decision making from Nobel laureate Daniel Kahneman

System 1 and system 2. Those four words in Daniel Kahneman's 2011 classic work of psychology Thinking, Fast and Slow helped revolutionize how we think about human behaviour and shaped behavioural economics.

The book distilled the late Nobel laureate's life's work into a simple dichotomy: fast, intuitive thinking, and slow, rational thinking.

Despite never taking a course in economics, Kahneman was awarded the Nobel memorial prize in economics in 2002 “for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty”.

Before Kahneman, and his work with long-time collaborator Amos Tversky, economic theory had been based on the understanding that people were “rational actors” able to evaluate choices clearly.

But Kahneman showed that instinct often plays a role in decision-making.

Nearly 10 years ago, as Professor Emeritus at Princeton's Woodrow Wilson School, Kahneman spoke to the World Economic Forum about the two thinking systems and how they inform decision-making.

"I use Systems 1 and 2 as a metaphor. I use System 1 to describe automatic thinking. You’re almost the spectator of the way those thoughts come to mind.

"I use System 2 to describe more deliberate thinking. I feel I’m the author of my actions and my thoughts when they come from System 2, much more than System 1.

"System 1 provides suggestions. When endorsed by System 2 they become the beliefs that we have, the decisions that we make and the actions that we take."

Tversky and Kahneman explained in this 2007 paper that heuristics (instinctive, problem-solving shortcuts) are "quite useful, but sometimes they lead to severe and systematic errors" or biases.

In his interview with the Forum, Kahneman offered some advice on the decision-making process for businesses and how to manage dissent.

"If there is something that you really want to do, then you are probably overly optimistic about it. Optimism is the source of everything that’s good, but it’s also the source of a great many failures.

"The worst danger for many organizations is that towards the end, when it becomes very critical to check on a decision, everybody has to be on board. So how to manage dissent without paralysis is the name of the game.

"My key advice is to keep track of the process… and querying the sources of information is well worth doing."

He said to manage dissent, it might be useful to start meetings by asking people to jot down their opinions on paper.

"It protects dissent, because if there is a minority view it’s going to be expressed. Whereas somebody who hears that everybody else is thinking another way, may actually not do it. It’s essential to tap the knowledge and the energy of the group.

"An experienced decision-maker will know not to narrow decision-making prematurely. My key recommendation is to view decisions as a product that gets manufactured in a certain way in an organization. And viewing it as a product, you want to question the manufacturing process."