ECON30019 Chap.6 System 1 and System 2 Thinking
System 1 and System 2 Thinking
A heuristic is a shortcut people fall back on when a judgement has to be made, and the subject presents it as a genuine trade-off rather than a defect: shortcuts reduce the time and effort a judgement takes, and they can lead to biases, meaning errors that repeat in a knowable direction.
That second phrase is what makes the topic economic, since an error that ran at random would average out across a market while a patterned one does not.
The chapter sets out the two-process account of cognition as a functional description of when judgement arrives immediately and when it has to be assembled, then turns to salience, where a vivid risk is substituted for a larger one that is harder to picture, and finally to the separation of bias from noise.
That last distinction determines which remedy could possibly work, which is why it belongs in an economics subject rather than only in psychology.
What this chapter covers
- 01
Heuristics as a trade-off: what they save and what they cost
- 02
Two modes of processing, and what each is good at
- 03
Cognitive ease and cognitive strain as a signal about which mode produced an answer
- 04
Why knowing better does not correct the fast process
- 05
Gut feelings setting the starting point of subsequent reasoning
- 06
Identified and statistical descriptions of the same quantity
- 07
Risk substitution, and a case where the substitution had a measurable price
- 08
Choosing a baseline, and why excess counts are the honest measure
- 09
Bias and noise: two ways to be wrong, and only one is visible without a benchmark
- 10
Why the diagnosis decides the remedy
Diagnose the error and choose the remedy
- 1Classify the pattern: wide disagreement between reviewers on the same proposals is scatter, so the system is noisy.
- 1Check the other quantity: the closeness of the average to the expert benchmark says the errors have no consistent direction, so the system is not biased.
- 1Assess the remedy: adding a constant addresses direction, so it shifts every score equally and leaves the disagreement untouched.
- 1State the consequence: the same proposal is still funded or rejected depending on which reviewer drew it, so nothing the manager cares about has changed.
- 1Propose remedies matched to noise: several independent reviews aggregated, defined criteria scored separately, and scores committed before discussion.
Key terms
- Heuristic
- A shortcut people fall back on when a judgement has to be made. It reduces time and effort and can produce biases, meaning errors that repeat in a knowable direction.
- Cognitive ease
- The felt sense that a judgement was effortless, which is itself information about which process produced it and the condition under which a bias most easily passes unexamined.
- Risk substitution
- Avoiding a vivid risk by accepting a less vivid one, which can be larger in aggregate. The classic case is substituting road travel for air travel after a widely reported event.
- Bias
- Error with a consistent direction relative to a known benchmark. It can in principle be measured and subtracted, which is why it is the easier of the two problems to fix.
- Noise
- Scatter in judgements of the same case. It is visible even when the correct answer is unknown, and subtracting an average does nothing for any individual case.
System 1 and System 2 Thinking FAQ
Is the two-process account an explanation of the biases?
No, and treating it as one is a common way to lose marks. It is a vocabulary for organising mechanisms, not a mechanism itself. Answers earn credit by naming the specific shortcut and the direction it pushes: which easier question was substituted, which cue was anchored on, which base rate was ignored.
Why is the distinction between bias and noise worth an economics lecture?
Because it determines which remedy can work. A biased panel can be corrected by measuring the bias and subtracting it. A noisy panel cannot: the same case still receives different judgements depending on who handles it, so the fix has to be procedural, through defined criteria, independent judgements and aggregation.
What makes the road-deaths figure a cost of a shortcut rather than of the event itself?
The additional deaths came from the response to the risk, not from the risk. People substituted road travel for air travel, and in the twelve months that followed, the additional road deaths exceeded the total number of passengers on the aircraft involved. The vivid risk was avoided by accepting a larger one that was harder to picture.
Exam move
This is the least quantitative chapter in the subject, which makes it the easiest to read and the easiest to write badly about. Practise turning each case into a named mechanism with a direction, and refuse to let yourself write the words fast thinking as an explanation.
For the bias and noise material, build a two-by-two table from memory and place four real examples in it, one per cell, since classification questions here give you a scenario and expect the diagnosis and the remedy in the same answer.
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