Systems 1 & 2

Psychologist Daniel Kahneman is considered one of the "godfathers of behavioral economics". Awarded the Nobel Prize in Economics in 2002, Kahneman's groundbreaking work, carried out with Amos Tversky, integrated psychological insights into economics, with particular focus on judgment and decision-making.

One of the key concepts, as explained in Kahneman's best-selling book Thinking Fast and Slow, is that our brain has two operating systems when it comes to making decisions: System 1 and System 2. Here are the main differences:

System 1:

• Fast, intuitive, instinctual, unconscious, automatic

• With no self-awareness or control

• Makes up ~ 95% of all our thinking

We rely on System 1 to instinctively avoid danger – for example, when crossing a busy road or seeing an angry face. System 1 also activates when we are faced with a simple math equation like 2+2 or when we're making a split-second product choice at the supermarket.

System 2:

• Slow, rational, deliberate, conscious, effortful

• With self-awareness or control

• Makes up ~ 5% if all our thinking

System 2 helps us with mental activities that require effort and concentration, like doing complex math problems, navigating unfamiliar surroundings, or planning a budget.

These two systems work in a highly efficient way; they minimize effort and optimize performance.

What is incredible is that System 1 has been shown to carry out 95% of our decision-making processes. While this arrangement may work out well most of the time, it's also very prone to biases and systematic errors (check the post on biases and heuristics for more details).

To hear Daniel Kahneman's explanation about System 1 and System 2, you can watch the short video below.