02 – Conflict, Illusions and Useful Fictions

Conflict

System 2 is an in-charge of self-control. It helps us while we are losing our control, focus, emotions. While we are reading a book and found something boring in it and start losing focus towards continuing with a book then system 2 bring back our focus to the point. When System 1 indicates that it’s boring then system 2 brings back our focus.

When we have invested in business and stock price of that company not moving then we start getting boring with time. But system 2 help us to guide that business has improved in performance and there are not any fundamental issues. Focus on our process and sticking with it is the work of system 2.

Illusions

At the first instance, we have reached the conclusion that the second line is larger in size compared to the first one. But when we measured both the horizontal lines, we found that both are identical in size.

Here, system 1 has accepted view of the second line is larger than the first one and when we have measured, system 2 took control. But system 1 prevents us from believing that both lines are equal, it’s illusions. Though we have measured and know the size of both the line, we cannot stop system 1 from performing. When we can work on accepting that both lines are identical, we will not again get fooled by multilayer illusions.

There are illusions of thoughts along with visual illusions and that called as a cognitive illusion.

Many times, a person does not accept the reality and try to stay in the illusion, means their system 1 only works and they do not accept what system 2 indicates. System 1 has intuitive errors and biases which system 2 is not aware of. Errors can be prevented only by the enhanced monitoring and effortful activity of System 2. But it seems impractical to continue monitoring of thoughts and go slow on routine works. It will be inefficient if we replaced system 1 by system 2. We have to identify where mistakes are likely to happen and then have to give control to system 2. It’s difficult to identify your own mistakes compared to others.

Example – when we analyse the company and see a few characteristics which we like about the company then we stop focusing on others which can have a negative impact on the future prospects of the company. Dividend-paying companies are good which is stored in system 1 so that when we look at the company which is continuously paying out a dividend. We do not focus on other aspects and make an investment. But when system 2 take control, it will analyses whether the company has the ability to keep dividend continue in future, does company paying dividend from free cash flow or from raising external funding. 

We should use system 1 where rules are predefined such as we are not eligible to get a dividend if we purchase shares on or after ex-date. But analyzing the longevity of dividend, we need to use system 2. 

Useful Fictions

System 2 required a mental calculation so that we should not use it with other tasks.

When we are driving on a similar road frequently since long, our system 1 works automatically. It will suggest that when to take turns, at which area have slowdown speed, etc. It will not be going to ask for system 2 helps. We can drive on a known road while making a conversation. But the same does not happen when we drive on an unknown road. Our system 2 take control and if we make conversation while driving on an unknown road, we may meet accidents or miss with target place.

Anything that occupies our working memory reduces our ability to think. So that we have to be careful to perform multitasking. When people get involved in both trading and investment than both require the involvement of system 2 so that it will become difficult for the human brain to make a wise decision to cover all aspects. And that can result in missing out of something at both the area.

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