System 1 Vs System 2 Thinking Essay

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Psychologist, Daniel Kahneman describes two methods of cognitive processes at work when individuals make decisions. The two-system approach to judgment and choice is described as System 1 and System 2 thinking. System 1 is the fast, automatic, associative and emotional process of decision making. System 2 is described as a slower, serial, effortful and deliberately controlled process. The System 1 process is intuitive and governed by habit and instinct, while System 2 thinking is more methodical, requires reasoning and governed by rules. Most thoughts originate in System 1, although System 2 takes over when more reasoning is required. The ease with which mental contents come to mind is referred to as accessibility. Several factors influence the accessibility of information, both in perception and in judgment. For example, natural assessments such as size, distance, similarity or the difference between good and bad don’t require much effort to assess. This type of information is processed immediately. Some operations of accessibility require more effort and time due to experience, or lack thereof, and skill. The importance of the information and the way the information is displayed influences the …show more content…

Due to this passive view or narrow framing, people fail to understand the totality of a give situation. The rational-agent model assumes that investors make their choices in a comprehensively inclusive, broad framing manner, which factors all relevant details, including future opportunities and risk. In reality, investors have the tendency to evaluate their portfolios based on an extremely short time horizon. In addition, investor decisions about a particular investment are often considered in isolation of the total portfolio, especially if a loss occurs, as opposed to a comprehensive manner. Ultimately, short-term evaluations lead to excessive trading, increased portfolio expenses and

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