Of Clocks and Systems and Risk Decisions

You probably have had the somewhat jarring experience of glancing at a digital clock and a clock with hands one after another.  The feeling can be a little unsettling, if not mildly irritating.  There’s a good reason why, and it tells us something important about how we make decisions.  What’s going on here?

Suppose a digital clock says the time is 2:42. You probably do a quick mental calculation and think “OK, I have about 20 minutes until my 3 o’clock appointment.”  But if you look at an analog clock, you probably don’t even bother with the minute-level of precision because you immediately have an intuition of how much time is left until 3.   The digital readout demands just a little bit of cognitive effort, while the analog readout is immediately intuitive.  Some analog clocks don’t even have numbers.

Psychologists have discovered that people have two ways of making decisions, called System 1 and System 2.  System 1 depends on experience and intuition.  It is relatively fast, comfortable, and effortless.  System 2 is more like the scientific method. It relies on data gathering, logic, analysis, and cognitive work.  A lot of people do not like System 2 thinking because it is more work.  “I’m not a math person; I go with my gut.”

There is a time for System 1 and a time for System 2.  System 1 is what you want if you are being chased by a bear. You don’t have time for analysis and you have plenty of hormonal intuition about fight or flight. Forget the analysis, run! 

But System 1 can get you into a lot of trouble.  They are bad for investment decisions and bad for deciding when to go to war.  That’s when you need System 2.  Facts, data, analysis, logic, formal models.

In making risk decisions, when should we use System 1 vs System 2?  If the consequences of being wrong are small, and we have good intuition, or we must make an immediate decision, System 1 is probably the ticket.  Otherwise, the effort of System 2 will likely have a good payoff. 

But using System 2 is not necessarily hugely burdensome.  Sometimes a quick back-of-the-envelope analysis, or a moment of reflection, is all you need.  After all, that is what you did in reading the digital clock. You can train for it.

For more on Systems 1 and 2, there is no better source than Thinking, Fast and Slow, by Daniel Kahneman.