There has been a great deal of interest in the publication of Daniel Kahneman’s new opus; Thinking Fast, and Slow. He and his collaborator, Amos Tversky, are the founders of the “cognitive bias” school of decision-making. Their work has had a great impact on the field of behavioral finance. Kahneman makes the central distinction between fast and slow processes, the former based on intuition, and the latter on rational calculation. The former works well in situations designed for fast responses, for example, finding the shortest path to run away from a predator, but poorly in situations requiring forethought; for example, predicting the likelihood that the price of oil will rise next year.
Interestingly, Freeman Dyson, the physicist, has reviewed this book in the New York Review of Books, and points out, toward the end of his review, that Kahneman's distinction echoes Freud’s’ distinction between the ego and id. He goes on to note that Freud’s contribution was literary rather than scientific, but suggests that Kahneman's theory may not shed sufficient light on situations that provoke strong feelings, while Freud’s does.
I think Dyson has it half-right. The better analogy is to what is called Freud’s’ topographic model, in which the unconscious, preconscious and conscious levels of awareness interact in shaping a decision. The conscious process is calculative, the preconscious is intuitive, and the unconscious channels thoughts along lines associated with strong feelings such as anxiety, ambition and desire.
One of the central features of unconscious mentation is that it is repetitive. It is the source of our decision-making “ruts” because we feel compelled to repeat strategies that give us some secondary gratification, while keeping us from taking the risks to be really successful. For example, it is why someone might prepare inadequately for a talk, with the unconscious belief that if even if his performance is inadequate, people should like him for just the way he is!
The topographic model suggests that there are emotional as well as cognitive biases. The latter, cognitive biases, trip up the preconscious when a train of associations stimulated by an intuition leads us for example, to focus on the most vivid example, rather than on the most typical. The preconscious is vulnerable to short cuts. But the former, the emotional biases, belong to the unconscious domain, where we live out our life scripts and enter into relationships based on a models of relating we learned as children.
Consider again the case of Jon Corzine at MF Global, a subject of an earlier blog. The Wall Street Journal published an article today suggesting that his colleagues had warned Corzine many months before the firm’s demise that his bet on Eurobonds was too risky. Yet he ignored them. Why? Was it because he was thinking too fast, as Kahneman suggests, or because his unconscious mentation --perhaps a fantasy of his “second coming” after his defeat in the New Jersey Gubernatorial race-- distorted his thinking process.
The cognitive bias literature is exemplary as science, but it may be exploring domains that lack salience, that are based as Dyson suggests at the end of his review on “parlor games.” We need to introduce the unconscious.