“We are prone to overestimate how much we understand about the world and to underestimate the role of chance in events.”

―Daniel Kahneman, Thinking, Fast and Slow

One of Kahneman’s most significant contributions to the field of behavioral science has been his exploration of the dual-process model. This is the idea that human decision making is driven by two distinct thinking systems: a fast, intuitive, and effortless “System 1” and a slower, more deliberate “System 2.” Kahneman was instrumental in refining this framework and applying it to areas of behavioral economics and cognitive psychology. 

In his work, Daniel Kahneman uses these two systems to explain how many of our decisions are made. He recognizes that these systems may or may not be reflected in our neurobiology, but either way, they are helpful tools to understand how we think—it’s intended as a metaphor, not a literal description of how the human brain is structured. His two systems also inform the title of his book, Thinking, Fast and Slow. In his book, Kahneman explores when and why people tend to rely on either System 1 or System 2 thinking. For example, System 1 operates when we casually read signs on the highway, walk or drive a route we know by heart, or have an easy conversation with someone we know well. We use System 2 thinking when we need to exert mental energy to handle more complex situations, such as doing long division, trying to follow new directions, or focusing intently on a high-stakes conversation.

We tend to see ourselves as System 2 thinkers because this is the system that is operating when we make difficult decisions, form beliefs, and engage in effortful thought. We live most of our lives, however, in System 1, going through automatic motions without thinking them through. Throughout his research, Kahneman identified several systematic biases that pop up when we switch between these two systems, often providing readers with real-world examples to show how System 1 thinking can lead to decision-making errors. Being aware of this dual-process model allows us to realize that many of the decisions we make are informed by mental shortcuts and may not even reach our System 2 for deep contemplation.

“The world makes much less sense than you think. The coherence comes mostly from the way your mind works.”

―Daniel Kahneman, Thinking, Fast and Slow

Kahneman came to this idea after years of behavioral science experiments he conducted with Amos Tversky. Together, they realized that when we exert mental energy trying to form a decision (using System 2), we are often overridden by our powerful but sometimes error-prone System 1. Designed to help us react quickly—and keep us alive in situations where slow, deliberate thought is too costly—System 1 relies on intuition and mental heuristics, which can sometimes lead to errors in judgment.

A great example of System 1 interfering with System 2 is the Stroop effect. Named after its pioneer, John Ridley Stroop, the Stroop effect occurs when subjects are asked to read the names of colors when they are written in non-corresponding colors. For example, a series of color words will flash across a screen (“blue,” “orange,” “yellow”), but the words will be written in colors other than the ones they describe (i.e., the word “blue” might be written in the color red, the word “orange” might be written in the color yellow, and the word “purple” might be written in the color blue.) The subjects are asked to say the color of the font, rather than the word written across the screen. Interestingly, people tend to take longer and make more mistakes when the ink is mismatched, suggesting that the fast, automatic process of reading (requiring System 1 thinking) interferes with the more controlled process of identifying the ink color (requiring System 2 thinking).

In other words, while your System 2 is trying hard to say the name of the color you see, your automatic System 1 is too quick to read the word before you. This example shows that although our System 1 is usually productive and beneficial, it can often interfere with the deeper mental processing that distinguishes humans from other organisms. It can impact our day-to-day decision-making in ways we might not always recognize or be able to control.

Most importantly, your System 1 is susceptible to a series of systematic heuristics and biases, which Kahneman played a key role in identifying. To learn more about how System 1 can shape your thinking, check out our full list of cognitive biases.

“Confidence is a feeling, which reflects the coherence of the information and the cognitive ease of processing it. It is wise to take admissions of uncertainty seriously, but declarations of high confidence mainly tell you that an individual has constructed a coherent story in his mind, not necessarily that the story is true.”

―Daniel Kahneman, Thinking, Fast and Slow

“A reliable way to make people believe in falsehoods is frequent repetition, because familiarity is not easily distinguished from truth. Authoritarian institutions and marketers have always known this fact.”

―Daniel Kahneman, Thinking, Fast and Slow

Kahneman is well-known for applying his insights about human judgment and decision-making to the field of behavioral economics. Alongside Tversky, he introduced the idea of prospect theory to explain how people make decisions when facing risk or uncertainty. Most importantly, he suggested that how options are presented can influence our decisions—meaning we often deviate from purely rational economic behavior. This differentiates prospect theory from traditional economic models, which assume that people are rational and always act in their best interest.

Here’s a quick thought exercise to demonstrate the difference between behavioral economics and traditional economics: if you are given the offer to flip a coin and, depending on the outcome, either win $40 or lose $20, would you take the risk? Basic economic theories like expected value theory predict that you would because your probability of gaining and losing is equal, and what you could potentially gain is higher than what you’d potentially lose.

“The idea that the future is unpredictable is undermined every day by the ease with which the past is explained.”

― Daniel Kahneman, Thinking, Fast and Slow

The problem is that these basic economic theories operate under the false presumption that humans are purely rational beings. To account for the theory’s reckless presumption, Kahneman and Tversky proposed prospect theory, and its extension, loss aversion. According to loss aversion, we tend to feel the pain of a loss more intensely than the joy of an equivalent gain, so we often prioritize avoiding losses over pursuing gains—even if it means missing out on promising opportunities. Prospect theory suggests that we do this because we consider potential outcomes relative to a reference point rather than absolute values. This is why saving $10 on a $100 purchase feels more significant than saving $10 on a $1,000 purchase, even though you’re saving the same amount of money either way.

According to the theory, the reference point from which you approach a problem influences how you will solve that problem. If you only have $60 in the bank, you will be less likely to take the gamble offered in the thought exercise above than someone with hundreds to spare. While this may seem obvious to you, it’s something unaccounted for in standard economic theories.

“Odd as it may seem, I am my remembering self, and the experiencing self, who does my living, is like a stranger to me.”

― Daniel Kahneman, Thinking, Fast and Slow

Similarly, the loss aversion extension of prospect theory states that the amount of sadness you endure when you lose $10 is greater than the amount of happiness you gain when you win $10. Unfortunate, isn’t it?

While it’s a shame that we can’t be more eager to celebrate our wins and forget our woes, prospect theory and loss aversion have huge implications for how the free market runs and why sellers and buyers negotiate prices. Loss aversion plays a key role in negotiations, as people who are giving something up—either because they made it or already own it—will always feel that loss more heavily than the buyer will feel the gain. 

In one study conducted in 1996, researchers explored people’s attachments to lottery tickets.¹⁶ They gave participants lottery tickets and then offered everyone the chance to exchange their ticket for another one, plus a monetary incentive to encourage the trade. Of course, this exchange would have allowed the lottery ticket holders to have the same chance of winning, just with a little more cash in their pockets. Logically, they could have even used the extra cash to buy more lottery tickets, increasing their chances of winning the lottery. On the surface, this seems like an easy deal, doesn’t it?

“This is the essence of intuitive heuristics: when faced with a difficult question, we often answer an easier one instead, usually without noticing the substitution.”

― Daniel Kahneman, Thinking, Fast and Slow

Remember, the human mind is not always entirely rational. Even though the lottery ticket buyers had no reason at all to believe they held the winning tickets, 50% of participants still refused to exchange their tickets. This was a clear example of loss aversion: participants knew that if they’d given the winning ticket away, the emotional price—in this case, regret—would be much higher than the small monetary gain they would be awarded for exchanging their ticket. Due to loss aversion, these people ascribed extra value to the ticket they already held and dismissed the potential value of the money they could gain.

This is a perfect example of loss aversion and even more so, of the human brain working irrationally. Try to remember this the next time you find yourself in a negotiation with someone. The lady at the flea market may not be intentionally overcharging you—she simply values her items more than you do.

Kahneman’s work has had a significant influence on the fields of economics, policymaking, marketing, and business. For example, his prospect theory cast new light on political decision-making, especially when leaders and the public are tasked with making decisions under high levels of uncertainty.⁷ His exploration of mental heuristics and cognitive biases has also helped us understand how people make biased judgments about the probability of events, which may be part of the reason political leaders often adopt sensationalist, fear-based, or populist policies. 

Beyond helping us understand human behavior and the potential biases that get in the way of rational decision-making, Kahneman’s research also ushered in many applications aimed at helping people make better decisions. For instance, inspired by principles of prospect theory and other behavioral science insights, many governments have established “nudge units” aimed at subtly guiding people’s behavior without restricting their freedom of choice.⁷ These nudge units tackle real-world issues like encouraging tax compliance, increasing organ donation rates, and supporting healthier lifestyles. Across various industries, incorporating insights from Kahneman’s work has made it possible to bridge the gap between behavioral science research and practical applications by designing behavior-based policies.

Kahneman has also influenced the way many businesses approach marketing. By debunking the idea that consumers make fully reasoned decisions, his insights helped marketers better understand consumer choice. Today, marketers frequently employ his theories to craft persuasive messaging, devise influential pricing strategies, and create user experiences that align with how people already think and behave. Marketing professional Peter Field sums it up nicely: “For a man that never set out to write a marketing text, in Thinking, Fast and Slow, Kahneman gave marketing by far the most valuable science that it has.”⁸

Despite his success—or perhaps because of it—Daniel Kahneman’s work has faced several critiques. His popular book, Thinking, Fast and Slow, bears the brunt of much of this criticism, with some readers pointing out that he relied on weak studies with small sample sizes to back up his points.⁹ Kahneman himself later admitted that he “placed too much faith in underpowered studies” when writing his book.⁹

Similarly, many of the studies cited in his book have faced replication problems, meaning that other researchers haven’t been able to replicate the findings.¹⁰ This is part of a broader “replication crisis” within the field of psychology, which points to the growing need for increased scrutiny over research practices and a focus on research strategies that ensure greater credibility, such as using large sample sizes and thoroughly tested measures.¹¹

That said, many of the studies in Kahneman’s book have been found reliable and replicable. One analysis suggests that some chapters in his book contain more reliable research than others, with chapters on behavioral science concepts like optimism bias, the availability heuristic, and regression to the mean receiving high marks regarding study credibility.¹² Kahneman is adamant that he still believes every study he cited and “would be happy to see each of them replicated in a large sample.”⁹ His willingness to respond to criticism reflects the essential self-correcting nature of science and the importance of open discourse, where ideas are constantly critiqued, tested, and refined. To this day, Kahneman’s work remains highly influential, inspiring many researchers to explore the factors that shape decision-making and expand our collective understanding of human behavior.

“A general ‘law of least effort’ applies to cognitive as well as physical exertion. The law asserts that if there are several ways of achieving the same goal, people will eventually gravitate to the least demanding course of action. In the economy of action, effort is a cost, and the acquisition of skill is driven by the balance of benefits and costs. Laziness is built deep into our nature.”

― Daniel Kahneman, Thinking, Fast and Slow

Kahneman was born in Tel Aviv in 1934 and lived in Paris as a young boy, where he survived the Holocaust. He received a bachelor’s degree in psychology and mathematics from the Hebrew University of Jerusalem.

After his military service, Kahneman moved to the US, where he earned his PhD in Psychology from the University of California, Berkeley. He then became a lecturer in the psychology department at his alma mater, Hebrew University. Kahneman also worked in his early years at the University of Michigan, Cambridge, and Harvard.

Kahneman’s early academic work focused on visual perception and attention, specifically the interplay between mental attention and effort. His initial research in 1965 explored pupil dilation as a measure of mental effort, discovering that people’s pupils dilate when they’re involved in mentally demanding tasks.¹³ This early research laid the foundation for Kahneman’s later work on cognitive load, attention, thinking styles, and decision-making. It was around this time that he reports hearing a “brilliant talk on experimental studies of attention” by psychologist Anne Treisman, who would become his wife 12 years later.¹³ He was so inspired by Treisman’s talk that he wrote a chapter on attention for a cognitive psychology handbook. Though the handbook was never published, this chapter would eventually become Kahneman’s first book, Attention and Effort, published in 1973.

Following his research on attention, Kahneman moved into the research field of judgment and decision-making, and later researched happiness and well-being. During his most productive years, Kahneman formed a professional partnership with Amos Tversky, who died in 1996. The two began collaborating in the late 1960s, conducting groundbreaking work on cognitive biases and decision-making. Kahneman and Tversky shared a common interest in understanding how people actually make decisions rather than how they should make decisions according to traditional economic models.

“The confidence that individuals have in their beliefs depends mostly on the quality of the story they can tell about what they see, even if they see little.”

―Daniel Kahneman, Thinking, Fast and Slow

Together, Kahneman and Tversky are best known for their famous article and later book, Judgment Under Uncertainty: Heuristics and Biases, which describes many of the heuristics and biases TDL explains on our website, including representativeness heuristic, availability heuristic, and anchoring bias. The pair is also well known for their development of prospect theory. These contributions have provided a foundation for modern-day behavioral science research. Kahneman and Tversky also had help from Richard Thaler, a young economist who was also questioning the basic assumptions of economic theory in explaining people's behavior.¹³ 

Despite having never taken a single economics course, Kahneman won the 2002 Nobel Memorial Prize in Economics “for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty.”¹⁴ Kahneman states that his collaboration with Thaler was a major factor in his receiving the Nobel Prize, as the economist was instrumental in integrating Kahneman’s behavioral science ideas into the field of economics.¹³

Winning the Nobel Prize was just one of several milestones in Kahneman’s impressive career. In 2007, Kahneman was presented with the American Psychological Association’s Award for Outstanding Lifetime Contributions to Psychology. Six years later, President Barack Obama awarded him the Presidential Medal of Freedom. 

Following the publication of his bestselling book, Thinking, Fast and Slow in 2011, Kahneman continued to conduct research in the fields of decision-making and economics. Some of Kahneman’s later research revolved around happiness and well-being. Alongside economist Angus Deaton, Kahneman published a popular paper in 2010 showing that an increase in income only leads to an increase in well-being up to a ceiling of $75,000, beyond which happiness seems to plateau.¹⁵ Interestingly, a 2021 study published by researcher Matthew Killingsworth suggested that well-being continues to rise with income beyond $70,000. In an adversarial collaboration, Kahneman and Killingsworth worked to analyze both sets of data from their respective studies. Together, they concluded that while additional income continues to boost happiness for most people, its impact eventually levels off for the least happy individuals.¹⁵

Even in his later years, Kahneman remained deeply engaged in research, collaborating with scholars and working alongside policymakers to apply his behavioral science insights to real-world challenges. He held titles as a senior scholar and faculty member emeritus at Princeton University, a fellow at Hebrew University, and a senior scientist at Gallup. Kahneman passed away on March 27, 2024, at the age of 90. Today, his legacy lives on through the thinkers who continue to research and apply his ideas to better understand human behavior.

Daniel Kahneman has written countless journal articles, all available at this link. Most of his research findings have been best summarized in the following books:

Attention and Effort (1973): Kahenman’s first book reinforced in cognitive science the association between attention and effort. His work explores topics such as selective attention, divided attention, and perception.

Judgment and Uncertainty: Heuristics and Biases (1982): This book, based on Kahneman and Tversky’s research from this 1974 journal article, has made waves in reconceptualizing human rationality, and it has grounded the two psychologists as pioneers in the discipline of behavioral economics. The paper and book investigate human decision making and how humans act, often irrationally, in the face of uncertainty.

Wellbeing: The Foundations of Hedonic Psychology (1999): Kahneman was an editor of this book featuring many top psychologists’ recent research and informed opinions on the nature of wellbeing.

Choices, Values and Frames (2000): This book of Kahneman and Tversky’s is the Prospect Theory Bible. It cites research and experiments by economists, psychologists, and decision theorists on prospect theory and conceptualizes why we so often make irrational economic decisions.

Heuristics and Biases: The Psychology of Intuitive Judgment (2002): This book is a follow-up to the 1982 work that cites more recent research in behavioral science, judgment and decision making, and heuristics and biases.

Thinking, Fast and Slow (2011): Thinking, Fast and Slow summarizes the main findings of Kahneman’s psychological research career, including his work on cognitive biases, prospect theory, and happiness. It provides detailed analysis of experiments that prove many patterns of irrational human thought. It is used as a textbook for some psychology university courses, and it won the National Academies Communication Award for best creative work that advances public understanding in topics of behavioral science, engineering, and medicine.

2010 TedTalk: Kahneman’s 2010 TedTalk, “The Riddle of Experience vs. Memory,” describes some unbelievable flaws in human memory, and proposes how our “experiencing selves” and our “remembering selves” may sometimes lead two completely separate lives.\

Noise: A Flaw in Human Judgment (2021): Co-authored with academics Olivier Sibony and Cass Sunstein, Kahneman’s final book explores the idea that human judgment and decision-making is burdened by “noise,” or an undesirable variability that causes us to make inconsistent evaluations of the same information.¹⁷

Behavioral Economics

This article dives deep into the concept of behavioral economics, exploring key concepts and controversies associated with the field as well as the many individuals who worked alongside Daniel Kahneman—or were inspired by his foundational ideas—to address the limitations of the rationality assumption in traditional economics.

System 1 and System 2 Thinking

Introduced by Daniel Kahneman, the concepts of System 1 and System 2 thinking have become highly influential in the study of human decision-making. Learn about the historical basis of the dual-process model and how Kahneman expanded on these early ideas to popularize the distinction between automatic and conscious thought processes.

1. Amos Tversky. (2002, May 1). Wikipedia, the free encyclopedia. Retrieved December 10, 2020, from https://en.wikipedia.org/wiki/Amos_Tversky.
2. Daniel Kahneman. (2003, January 5). Wikipedia, the free encyclopedia. Retrieved December 10, 2020, from https://en.wikipedia.org/wiki/Daniel_Kahneman.
3. Kahneman, D. (2010, February). The riddle of experience vs. memory. TED: Ideas worth spreading.<https://www.ted.com/talks/daniel_kahneman_the_riddle_of_experience_vs_memory?language=en#t-124358>
4. Kahneman, D. (2011). Thinking, Fast and Slow. Doubleday Canada.
5. MindfulThinks. (2017, April 11). How Fast Is Your Brain? The Stroop Task [Video]. YouTube. https://www.youtube.com/watch?v=gjesfzWozo4&ab_channel=MindfulThinks
6. Tversky, A., & Kahneman, D. (1974). Judgment Under Uncertainty: Heuristics and Biases. Science, 3-20. https://doi.org/10.1017/cbo9780511809477.002
7. Steinhauser, R. (2024, April 9). Daniel Kahneman: A psychologist who shaped economics, and the world. Lowy Institute. https://www.lowyinstitute.org/the-interpreter/daniel-kahneman-psychologist-who-shaped-economics-world 
8. Oakes, O. (2024, April 3). ‘He gave us our most valuable science’: Industry pays tribute to Daniel Kahneman. The Media Leader. https://uk.themedialeader.com/he-gave-us-our-most-valuable-science-industry-pays-tribute-to-daniel-kahneman/ 
9. McCook, A. (2017, February 20). “I placed too much faith in underpowered studies:” Nobel Prize winner admits mistakes. Retraction Watch. https://retractionwatch.com/2017/02/20/placed-much-faith-underpowered-studies-nobel-prize-winner-admits-mistakes/ 
10. Schimmack, U., Heene, M., & Kesavan, K. (2017, February 2). Reconstruction of a train wreck: How priming research went off the rails. Replicability Index. https://replicationindex.com/2017/02/02/reconstruction-of-a-train-wreck-how-priming-research-went-of-the-rails/ 
11. Replication Crisis. (n.d.). Psychology Today. https://www.psychologytoday.com/us/basics/replication-crisis 
12. Dickenson-Jones, G. (2023, March 30). The Replication Crisis: Thinking Fast and Slow. https://www.gilesd-j.com/2023/03/30/reproducibility-thinking-fast-and-slow/ 
13. Kahneman, D. (n.d.). Biographical. Nobel Prize Outreach 2025. https://www.nobelprize.org/prizes/economic-sciences/2002/kahneman/biographical/ 
14. Nobel Prize Outreach (2025). All prizes in economic sciences. NobelPrize.org. https://www.nobelprize.org/prizes/lists/all-prizes-in-economic-sciences/  
15. Princeton University. (2023, March 8). Kahneman resolves conflict on income-wellbeing study, finds point at which unhappiness stops decreasing for unhappy people. Behavioral Policy. https://behavioralpolicy.princeton.edu/news/DK_wellbeing0323 
16. Bar-Hillel, M., & Neter, E. (1996). Why are people reluctant to exchange lottery tickets? Journal of Personality and Social Psychology, 70(1), 17. https://doi.org/10.1037/0022-3514.70.1.17 
17. Kahneman, D., Sibony, O., & Sunstein, C. R. (2021). Noise: a flaw in human judgment. First edition. New York, Little, Brown Spark.