Here is a very simple puzzle for you. It’s so simple the answer will probably just spring to mind.
- A bat and ball cost $1.10. The bat costs one dollar more than the ball. How much does the ball cost?
It is quite likely that your intuitive response was that the ball cost ten cents. Now think about it a bit more and do the calculations. If the ball cost ten cents that means the bat cost $1.10 and the combined total was $1.20. The correct answer was of course that the ball costs five cents and the bat $1.05.
Psychologist Daniel Kahneman reports that thousands of university students have answered this bat and ball question and most get it wrong when giving their intuitive response.
In his book “Thinking, Fast and Slow” Kahneman describes our two systems of thinking:
- System 1 which “operates automatically and quickly, with little or no effort and no sense of voluntary control.” This is thinking fast.
- System 2 which “allocates attention to the effortful mental activities that demand it, including complex computations.” This is thinking slow.
Our System 1 thinking is what allows us to do things as diverse as drive a car, play table tennis or sum up danger in an instant. The good news is that our System 1 thinking works well most of the time. But, as the example with the bat and ball calculation shows, it does make mistakes including many we’re never usually aware of.
Another good example of a System 1 mistake is what Kahnemann calls the anchoring effect. An example of anchoring directly relevant to accountants is preparing a forecast after first reviewing benchmarking information. If benchmarking data suggests this type of business has an average $1 million turnover and $300,000 profit those figures become our anchor, even after interviewing the client and hearing what they have to say about their specific circumstances. Kahnemann shows that we find it hard to move from what our System 1 thinking first anchors us to.
Kahneman also discusses many other issues ranging from how to evaluate potential employees through to how to give customer’s options that give you the best chance of getting the results you want.
If you’re looking for a great book to read try “Thinking, Fast and Slow”.
John Haylock is Practice Performance Manager at BankLink. Email [email protected]
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