Think Slow

By Scott Galloway, No Mercy/No Malice, @profgalloway

Audio Recording by George Hahn

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Daniel Kahneman, who died last month, leaves an extraordinary intellectual legacy. Few people have unpacked our behaviors with greater insight than Kahneman and his longtime collaborator, Amos Tversky. In the wake of his passing, we’ve been reflecting on the many ways his work has shaped our thinking. Something I wish I’d figured out when I was younger is that greatness is in the agency of others. I have often tried to identify a guide or sherpa for different aspects of my life. Jesus and Muhammed Ali are my Yodas around social issues (love the poor, be fearless and poetic) and Peter Drucker informs my views on the economy (the purpose of an economy is to create a middle class), etc. Professor Kahneman helps me navigate the strait between instinct and decision. Some thoughts:

Homo Irrational

Kahneman studied how humans make decisions, and the shortcuts our minds take, unbeknownst to us. These shortcuts are efficient; they foster a key skill for survival, the ability to make rapid decisions with incomplete information. We have to make thousands of decisions every day, and we couldn’t leave the house if we had to objectively analyze every choice: breakfast, outfit, route, music, etc.

Our efficiency comes at the cost of accuracy: Many instinctual decisions will be poorly calibrated (i.e., wrong). To facilitate the requisite speed, our brain buttresses our decisions with artificial confidence. Kahneman’s body of work demonstrates that we are often wrong but frequently confident. These shortcuts and mistakes are present in the structure of our brains, and impossible to avoid, but recognizing them helps us discern between trivial and important decisions and invest the appropriate intellectual capital. Put another way, take a beat and you increase the likelihood of making a better decision.

Though he was a psychologist by training, Kahneman got his Nobel Prize for economics. Before him, economists “relied on the assumption of a ‘homo œconomicus,’” as the prize committee wrote, a self-interested being capable of rational decision-making. But Kahneman “demonstrated how human decisions may systematically depart from those predicted by standard economic theory.” That dry language obscures an intellectual nuclear detonation. Expectations about human decisions — whether to work at a certain job, how much to pay for a specific good — are the foundation of economic theory. Kahneman showed those expectations were incorrect.

Loss Aversion

One of Kahneman and Tversky’s earliest insights was the simple observation that we feel the pain of loss more intensely than the pleasure of profit. It’s irrational to an economist, but we put more value on not losing $100 than we do on gaining $100.

We also have a skewed perception of probable gains and losses: We overestimate the likelihood of unlikely things. Insurance is a profitable business because people would rather suffer a series of guaranteed small losses (premiums) to avoid the risk of a single but unlikely catastrophic loss. The healthy profit margins of insurance companies reflect our tendency to overestimate the likelihood of calamities. Overestimating an unlikely outcome is also the secret behind the lotto, which offers terrible odds. Some examples of how this has influenced my actions. (Note: I am not claiming these are the right way to put Kahneman’s insights to use, just my way.) What I’ve done:

I actively limit the number of decisions I have to make to preserve neuron power for the key ones. I have other people order for me at restaurants; I have a uniform for work/working out, wearing the same thing every day, and someone else buys my clothes. I delegate the majority of decisions at Prof G Media — I participate in a one-hour weekly editorial meeting and check in with my executive producer 2x per month on business issues. I have not planned a vacation in 20 years or put anything on my calendar in 10. Despite having made more than 30 investments in private firms over the past decade, I review few documents, and rarely even sign them. (That’s all handled by counsel.) I try to reserve the largest possible cache of gray matter for research, thinking, storytelling (writing, presentations, etc.), and investment decisions. Over the next five years, I plan to outsource all investment decisions so I can focus on storytelling.

Seven years ago, I canceled all my insurance coverage — health, life, property, flood, etc. I don’t own a car, but when I did, we purchased the minimum amount required by law. This is a position of privilege (don’t cancel your health insurance), as there is no disease or property loss that would cause me financial strain. Since adopting this strategy, I’ve saved $1.4 million in premiums.

My belief in the market’s collective loss aversion has reshaped my investment portfolio over the past decade. The majority (90+%) of my investments used to be in publicly traded stocks. That share is now less than 20%. Instead, I lean into my access to private companies, as I can absorb big losses and withstand illiquidity. Per Kahneman, there have been periods of real pain. In the last 12 months I’ve registered four wipeouts — four investments that dropped to zero. However, two other investments registered a 4x and 25x return. My net return has beaten the market, but it’s been more taxing (emotionally) than just investing in SPY, as I have trouble shaking the big losses — again, making Kahneman’s point.

Take a Beat

Prospect theory won Kahneman his Nobel, but he’s best known for his seminal book, Thinking, Fast and Slow. The titular concept — that we have two thinking systems, a fast one for intuitive, emotional insights, and a slow one for logical, calculated decisions — is something that has saved me from … me, dozens of times.

Our fast thinking system is an incredible tool. It allows us to drive cars, compare prices, recognize friends at a distance, and play sports. But its availability makes us lazy. Why do the hard work of thinking through a problem when we can just “go with our gut”? In any decision of consequence, it’s good policy to slow down, get out of the stimulus-response cycle, and let your slow thinking catch up. That’s not to say we should disregard our gut — just don’t let it take the wheel.

Specifically, I try to be vigilant about not letting my fast system make decisions that merit the attention of my slow system. Often these are reactions to things that upset me. Last week, a journalist who’s active on social media posted on Threads that Jonathan Haidt and I were “grifters,” and that I did not care about young people. This pissed me off.

Feeling threatened, my lizard brain took over, and I saw the situation as a conflict, a threat to my standing in the community. That framing, courtesy of my instinctive, fast thinking system, dominated my consciousness for the next four hours, distracting me from my kids and vacation. I drafted an angry response to counter the threat.

Then I shared the situation with several members of my team. Able to evaluate the situation dispassionately, they were universal in their response. “Let it go.” I was just playing into an attempt to draw attention with ad hominem attacks the algorithms love. (e.g. Trump or Musk.) The learning, other than social media is a cancer? Speaking to others, before acting, is a great way to slow your thinking.

Happiness, Diminishing Returns, and Taxes

In 2010, Kahneman and another Nobel winner, Angus Deaton, published a study which appeared to show conclusively that income was strongly correlated with happiness at low income levels, but that income above $75,000 had no impact on happiness. The study was widely celebrated, but in 2021 a much less famous academic, Matthew Killingsworth at Wharton, published a paper reaching a contrary conclusion, based on a sophisticated smartphone-based happiness tracking system.

Rather than ignore the unknown academic challenging him, or using his global fame to undermine the upstart, as is the norm in Congress or pretty much anywhere else, Kahneman teamed up with Killingsworth. They engaged in a collaboration alongside a third academic neutral to the dispute — a process Kahneman pioneered. Working together, they found that Kahneman’s original study had measured the decrease in unhappiness but hadn’t captured the upside high-income people enjoyed. When more carefully measured, happiness did continue rising with income. However, there were dramatic diminishing returns. There were real gains to happiness in moving from $100,000 income to $200,000, but to see that same gain again required another doubling of income to $400,000. Extend the curve, and it flattens further.

I believe this should influence tax policy. A substantial increase in the progressivity of income tax would offer a net positive in overall well-being. According to the IRS, 26,576 U.S. households reported income of over $10 million in 2020, totalling $824 billion in income. We collected $210 billion income tax from these filers, or 25% of their income. If we collected an additional 25% of just the income over $10 million, there would be little impact on the lifestyle or happiness of these taxpayers.

But the additional $140 billion in revenue could cut child poverty in half ($100 billion) and end homelessness ($20 billion). These investments would generate a massive increase in the well-being of our commonwealth and a huge economic boon. (These societal ills cost us trillions in lost productivity.) Plus, we’d have enough left over to pay for most of NASA ($25 billion). And rich people love space.

Disassociate

Ideas are yours to play with, disassemble, shape, and apply where needed. I’ve taken the idea of “slowing down” and mixed it with atheism and stoicism to enhance my personal relationships. When my kids are disagreeable (i.e., awful), or my partner is upset/angry, I often respond as if it’s a threat to my authority or value. I reflexively escalate and get back in their face(s). I now try to disassociate. What I mean by that: I take myself out of my “self” and see someone I care about upset. Being an observer, vs. being in the line of fire, inspires different emotions.

When my kid is agitated, I recognize it’s more about what they are experiencing elsewhere, and they know that — no matter how unreasonable they are — I will still love them unconditionally. When my partner is upset, my role is to notice it, to give witness to their life. Their emotions matter, regardless of my ego or the perceived criticism. I can take arrows, get shot in the face, and never lose sight of my role as their protector. I am the man of the house. If that sounds like we digress to traditional gender roles, trust your instincts. I’ve slowed down, thought about it, and determined it works for us.

Life is so rich,