My cousin Val, a prominent NY psychologist, just sent me a book which is slightly outside my traditional OM reading — and yet, provides wonderful insight into how managers make decisions that affect all of their operations. Titled 
Thinking, Fast and Slow (Farrar, Straus & Giraux, 2011), Princeton Nobel Laureate Daniel Kahneman looks at the mental errors we all make, and asks if they can be overcome. The answer, unfortunately, is no.
When managers face uncertainty, instead of using data and statistics, they lean towards “mental shortcuts”, skipping serious analysis — and indicating that we are not nearly as rational decision makers as we would like to think. Kahneman’s series of simple experiments show that our brains use a lot of bad habits that easily lead to unnecessary risks and bad choices.
Here is one such experiment. Try it out on your students. “A bat and ball together cost $1.10. The bat costs $1 more than the ball. How much does the ball cost?” The majority of people (including Harvard, Princeton and MIT students) answer quickly, and with confidence, that the ball costs 10 cents. This obvious answer is wrong–it’s 5 cents.
The reason: Kahneman defines 2 types of mental systems. System 1 refers to quick, automatic thought (like 10 cents for the ball). System 2 is a higher energy thought process we rely on only when we need to or want to. Since we don’t want to think rigorously and since our System 1 hates doubt and ambiguity, he points out that our intuitions are generally wrong.
In business, fund managers charge high fees to manage portfolios, yet there is almost zero correlation to performance. Professional investors routinely think they know what others don’t. Entrepreneurs typically overstate their chance of success by 25%. CEOs who hold more company stock (a sign of self-confidence) make more irresponsible decisions in acquisitions and mergers. And even homeowners have this System 1 bias. On kitchen remodels, they expect to spend about $18,500 , where the actual cost averages $39,000.
The economic implications are of Thinking are gripping.