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Social Sciences - Economics

The study of economics has a lot to do with money, prices, and purchasing. Combine these with a bit of psychology, and we get the relatively new field of behavioral economics. This field deals with the reasons behind people’s decision-making, especially when it involves buying stuff.

One major proponent of behavioral economics is a guy named Daniel Kahneman. In his book entitled Thinking Fast and Slow, Kahneman detailed his research and his theory regarding how human brains make decisions. He said that the brain has two distinct modes of thinking, or systems as he called it, conveniently dubbed System 1 and System 2.

System 1 is what Kahneman calls the “fast-thinking” brain. It allows people to make decisions in a heartbeat, relying on intuition and previous experience to judge a situation. Emotional decisions, for instance, are driven by System 1. These decisions are usually haphazard and do not involve a careful analysis of facts. Kahneman implies that people are very vulnerable to System 1 decision-making most of the time, like when they are in department stores and they see something they like.

System 2, on the other hand, is known as the “slow-thinking” brain. It does not make decisions without first considering facts and figures. System 2 relies on higher logic and reasoning skills, which is why decisions take longer. However, decisions that are made by System 2 are usually more sound, and these are the types that people consider to be “good” decisions.

According to Kahneman, System 2 decision-making is not the brain’s “default state.” Rather, it always defaults to System 1 thinking in every situation, just like the fight-or-flight response. This is good in high-stakes, life-or-death situations, but it is not good for purchasing decisions.

Thus, Kahneman recommends that people be more aware of their brain’s own bias for System 1 thinking. With that awareness, people can then voluntarily activate System 2 decision-making so that they don’t get swayed into spending money carelessly.