System 1 vs. System 2: How knowing this helps you make better decisions.



Standard economics suggests that our decisions are rational. It is under the presumption that our decisions are based on logic and are carefully calculated at all times. What it fails to recognise is that humans are not like atoms and the universal laws cannot predict human behaviour.


For example, economics believes that outcomes drive value, as in $50 is $50 whether it is a gain or a loss. Psychologists proved that value is very much driven by the psychological process, not by outcome: on average losses are valued twice as much as equivalent gains. If this came as a surprise to some economists who thought this was irrational (meaning inconsistent), it would not surprise English speakers from medieval times who knew the true ‘utility function’ because a bird in hand is worth two in the bush. It is evidently clear that preferring what we have that we could lose more than what we could obtain does not bear the hallmark of irrationality (as in making no sense).”


This implies that the decisions we make are governed not by rationale but by the context or the information presented to us at that point of time. Humans on a daily basis make almost 35,000 decisions, and expecting them to have a perfect reason behind all of them is in itself irrational.


Now the question is, how do we make decisions?


As explained by Daniel Kahneman in his book, Thinking fast and slow; the founding father of modern behavioural economics; explains that our minds are divided into two systems which results in two modes of thinking i.e. system 1 and system 2.


Daniel Kahneman thinking fast and slow. System 1 vs System 2

System 1 or if I may say the more intuitive side of our brain, is active, automatic and takes decisions almost instantaneously. You can also say that it “jumps to conclusion.” However, this system is not irrational, and to call it so will not be entirely accurate. This system is based on heuristics and a reference line called the “normal.”


In an experiment, people were asked to rate the taste of wine and they were presented with two bottles of wine. However, the wines in the bottles were exactly the same, but one was labelled California wine and the other was labelled North Dakota.


When asked which is better, people preferred California wine twice as much as the North Dakota one. Now, for someone who is very well aware of the wine taste, it may be different, they may view the glass at an angle, swirl it and then sense the flowery, fruity aroma and conclude which is better. Otherwise, people’s decision just depends on what they know, and the information they had at that moment, which here is the location the wine is supposedly from. Their decisions are based on what they associate the place with and not the wine.


System 1 active on tasting wine. Emotions guide our decisions.

Now let us talk about the more hard-working system 2. The one that we try to associate ourselves with. This is the one that is more methodical, it takes time, assesses the situations, reflects on them, conceptualises and then derives at a conclusion. This is what we mostly use when we are solving logarithmic equations.


At any given point we have both system 1 and system 2 active, but system 2 is more active when we are doing tasks that do not come naturally to us and require some amount of deliberate thought. System 2 is logical, slow and analytical, hence when this is active we are more likely to take decisions which are in coherence with the rational norms.


Conclusion


From a marketer's perspective, knowing this is supremely important while trying to understand consumer behaviour. Our surveys and questionnaires usually test system 2 and not system 1, which is active while making decisions. This will paint a picture which seems accurate but is not representative of what goes in our minds while making decisions. Thus, the role of marketing is to facilitate choice, for which a marketer needs to understand the relationship between both the systems and their influence in decision making.


As a marketer we heavily focus on data and market research. It is indeed important, but what we overlook is the fact that behind numbers and tons of data is a simple plain old human being, and the only intention of research is to uncover the motivation, the biases the problems that a customer faces. For which one needs to go beyond the confines of data and seek to understand the actual reasons behind why people do what they do. The way to do that is through understanding the system 2 of our mind, it is through understanding the human psyche and behaviour.


There’s a quote supposedly said by David Ogilvy on the problem with market research


The problem with market research is that people don't think how they feel, they don't say what they think, and they don't do what they say.
Thus, the role of marketing is to facilitate choice, for which a marketer needs to understand the relationship between both the systems and their influence in decision making.

References


The perils of equating system 1 with emotion and irrationality, Ipsos, Australia

https://www.ipsos.com/sites/default/files/2017-03/IpsosMarketing_POV_PerilsOfEquatingSystem1.pdf


Consumer insight part 2, the 5 implicit forces, BVA, European brand association

http://www.nudgingforgood.com/course/consumer-insight/


Daniel Kahneman explains the machinery of thought, Fanam Street

https://fs.blog/2014/07/daniel-kahneman-the-two-systems/



Written by Reetika Swaroop Srivastava

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