Dr. Daniel Kahneman, winner of the 2002 Nobel Prize in economics, joins us to discuss his book, Thinking, Fast and Slow. 

In this video segment, Daniel describes two types of thinking -- system one, which is fast and reactionary, and system two, which is slow and deliberate. A full transcript follows the video.

Morgan Housel: Is System One my gut, and System Two is my head? Is that a fair way of putting it?

Daniel Kahneman: Well, System One is extraordinarily clever. System One knows about the world. Your knowledge about the world, all your skills, are in System One.

You drive without paying attention. That's System One, because you have learned to drive. You maneuver social situations without getting into too much trouble most of the time. That's System One, and it demands a lot of alertness to cues.

The "gut" -- to say System One is the gut -- that suggests that there is no thinking there. The best thinking we do is System One. Creativity is stuff that comes from your memory. It's in that sense System One.

It doesn't work the way we think it works, but it's not that System Two is more elevated than System One. Actually, it's ... I don't want to say the reverse, but System One is much better at what it does than System Two is good at what it does. That is, the automatic memory system really does an awful lot of stuff very quickly.

Morgan: When does paying attention to System One lead me astray and cause me to make bad decisions when I should have been paying attention to System Two?

Daniel: Well, there are situations in which System One will lead you astray.

The point is, and that's another theme in the book, is that those conditions are knowable. There are kinds of judgments that we do badly, or that we don't do as well as we should. In principle, those mistakes happen in particular circumstances and for particular types of judgments.

The key thing that we did in our work was develop the notion of a bias. A bias is a systematic error, and a systematic error is very different from a random error. Systematic error is something that you can identify, when does it occur and, in principle, you can correct for it.

If there is anything to be learned from the book in the applied sense, it's when to slow down. It is when to call in System Two to correct for System One.

Morgan: Is there the opposite side to that? When will System One help me make better judgments, when I should ignore System Two?

Daniel: I think, in general, when you're operating in a domain in which you're skilled, then trust yourself. It happens anyway.

When golfers want to correct their swing, they bring in System Two and they ruin their performance for a while. That's the way that you correct your swing. It's that making yourself conscious of what you're doing, in order to do it differently.

There are many -- by and large, your advice -- if you're a good golfer, just golf. Don't ask yourself exactly what you're doing while you're doing it. Many situations where you want to trust in System One. Not always.

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