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In a conversation the other day about the global economic crisis with a colleague, the colleague argued strongly for changing the incentives of the bankers who had put their institutions in jeopardy by making bets on the future of sovereign debt in Europe. "Bankers respond to incentives," he explained. "They're rational."

We know in fact that they are not, or at least they are no more rational than most human beings in the judgments and the choices that they make. We know this because of the seminal work of Daniel Kahneman and his colleagues, who have transformed our understanding of the way people make choices.

Economic rationality, Kahneman argues in his brilliant Thinking, Fast and Slow, is all about coherence and logical consistency. A rational person, he tells us, can prefer being hated over being loved, so long as her preferences are consistent. It is this concept of rationality that even today informs economics, grand strategy and much of contemporary thinking in public policy.

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A reasonable person, on the other hand, is open to argument and evidence and her preferences reflect her interests and her values. Human beings, Kahneman tells us, rarely meet the criteria of rationality even when they are reasonable. Many of the systems we have in place to think about ourselves and our world are simply wrong.

It is impossible to exaggerate the importance of Daniel Kahneman's contribution to the understanding of the way we think and choose. He stands among the giants, a weaver of the threads of Charles Darwin, Adam Smith and Sigmund Freud. Arguably the most important psychologist in history, Kahneman has reshaped cognitive psychology, the analysis of rationality and reason, the understanding of risk and the study of happiness and well-being. He is among a handful of founders of the field of behavioural economics, a branch of economics that is challenging long-standing economic theory and reshaping the making of public policy. Kahneman's work speaks to everyone who struggles to understand why human beings think the way they do.

In an engaging and often lighthearted summary of a lifetime of ground-breaking work, Kahneman shows us how our capacity for quick intuitive thought is the origin of so much of what we do right. Our associative memory allows us to distinguish the unusual from the expected in a tiny fraction of a second and almost instantaneously searches for a causal interpretation of the surprise as it is taking place. Moreover, we are hardly aware of this kind of evolved intuitive thinking. We just do it and move on, and it helps us cope thousands of times a day.

Our quick intuitive thinking is also the origin of much of what we do wrong. We are not very good at estimating probabilities. Many of us think that we are likely to die in an airplane crash, especially after the story of a horrific crash is splashed across the newspapers. Yet the likelihood of dying in an airplane accident is very low, far lower than the chances of dying on the highways. We pay far more attention to the likelihood of loss than we do to the likelihood of gain, in part because loss is so much more painful than an equivalent gain. Think how much more pain we feel when we lose $100 than pleasure when we find $100 on the street.

Our loss aversion, Kahneman tells us, is reinforced by the human tendency to value what is ours far more once it is ours. Perhaps that is what explains the longevity of most marriages. These kinds of errors are predictable and systematic. We can compensate for these errors with slow, effortful, conscious thinking, but we are lazy and not inclined to do so except under special circumstances. Our easy intuitive thinking does not warn us, moreover, when it becomes unreliable, and we are intuitively overconfident about the quality of our judgments. What can we do to compensate, to improve the quality of our judgments and choices?

Kahneman is not optimistic. Because these errors are predictable, decision-makers are beginning to design policies that "nudge" us toward better choices. But, Kahneman says, the voice of reason may be much fainter than the unambiguous voice of intuition. Organizations, he concludes, are better than individuals at avoiding large errors because they naturally think more slowly and, when they are functioning well, can impose checklists and procedures to minimize error.

Even here, Kahneman may well be too optimistic. Research in neuroscience in the past two decades has shown how intertwined thinking is with emotion. There is a growing consensus that emotions are first because they are automatic and fast, and that they shape the way we think and choose. We generally feel before we think and often act before we think. Not surprisingly, we then rationalize the behaviour that comes from automatic emotional processes as the outcome of conscious and careful thought. Behavioural economists, working in the tradition founded by Kahneman, think of utility as our lived experience. In this sense of emotion as lived experience, it is illogical to urge people to take the emotion out of their decision-making.

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Thinking, Fast and Slow is a magisterial work, stunning in its ambition, infused with knowledge, laced with wisdom, informed by modesty and deeply humane. If you can read only one book this year, read this one.

Janice Gross Stein is director of the Munk School of Global Affairs at the University of Toronto and, most recently, editor of Diplomacy in the Digital Age: Essays in Honour of Ambassador Allan Gotlieb.

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