1. What is the main argument of Kahneman?

Locate the paragraph which sums up his

argument in the text.
The main argument of Kahneman is that the rationality assumed in economics is bounded thus
making the rational-agent model psychologically unrealistic. The paragraph which sums it is
the fourth one in the eighth section. His argument can be presented in the following way:

1. There is a general assumption of rationality in economic theorizing (p. 1456),

represented by the rational-agent model.
2. Most choices and judgements are made intuitively (p. 1450) and are prone to errors that
alter their rationality (all the following being proved experimentally):
a. People often process information superficially, without involving reason.
b. People are susceptible to accepting a certain framing, which violates
invariance an essential aspect of rationality (p. 1458).
c. People would give a higher value to the same product if they lost it than if
they gained it, due to loss aversion (Section III. Changes or States: Prospect
Theory).
d. Heuristics such as representativeness, and cognitive biases are systematic in
peoples judgements (p. 1462).
e. People often involve attitudes and emotions, choosing by liking which is
not always coherent (p. 1463) rather than choosing by rule (p. 1467).

C: The rationality assumed in economics is bounded thus making the rational-agent model
psychologically unrealistic.
2. What are the two systems of cognition? What are they used for?
The two systems of cognition described in the text are intuition and reasoning, also known as
System 1 and System 2, respectively. System 1 lets people make fast, unconscious, automatic
decisions. It is used in day to day situations, such as deciding where to sit in public transport
or what brand of butter to buy in a shop. In other words, the utility of System 1 is that its
effortless operating spares us of additional unnecessary thinking - even in multi-tasking
situations. The automatism of its functionality resorts to habits and stored concepts (p. 1452);
also because of them this system is quite static- slow-learning, as it is indicated in Figure 1 -
and difficult to control or modify. System 2 is the opposite of System 1 - it is effortful,
deliberate, slow, and provides explicit judgments. It is usually activated in the process of
making complex decisions or answering complicated questions. System 2 also relies on
conceptual representation (fig.1, p. 1451) and knowledge gathered throughout time; the
difference is that it is more flexible depending on the situation. Besides, System 1 is responsible
for employing emotions when evaluating or making choices; this is not the case for System 2,
which is rule-governed and more objective. There is a discrepancy between when these systems
should be used and when they are actually used. Because people are not accustomed to
thinking hard (p. 1450), they will most probably choose the most reasonable judgement that
comes to mind, usually provided by System 1 and not revised by System 2 (e.g. the bat-and-
ball puzzle). Nonetheless, that is also influenced by the accessibility of some attributes and
factors that affect it, all of which are rigorously discussed by Kahneman.
3. Kahneman claims that economic models make cognitive assumptions about actors.
What are such assumptions? Are his claims reasonable?
There are several cognitive assumptions that economic models make about actors. One of the
first Kahneman addresses is what he called Bernoullis error that the utility of choices is
determined by the final asset positions and therefore are reference-independent (p. 1455).
This theory has been adopted for almost 300 years because it is compatible with the general
assumption of rationality in economic theorizing (p. 1456). Another cognitive assumption is
invariance (p. 1458), which presumes that our preferences are not affected by the way they are
described i.e. by the framing effects. A particularly unrealistic assumption of the rational-
agent model (p. 1459) is that actors have all the relevant information about their situation and
about all the other consequential aspects that can affect their decisions - future opportunities
and risks (p. 1459). In the same vein, the general cognitive assumption made by economic
models about actors is that they make rational choices, monitored by a single cognitive system
that has the logical ability of a flawless System 2 and the low computing costs of System 1
(p. 1469). He is relying on widely known economic theories, such as the rational choice theory
or the theory of expected utility, formulated by D. Bernoulli. Thus, his claims are reasonable.
4. How do Kahneman and Tverskys discoveries impact how we understand choice and
preference?
In my opinion, the impact Kahneman and Tverskys discoveries on how we understand choice
and preference consists in that we are more aware of what influences our decisions. These
researches are extremely useful for market analysts and businesses, since they can adjust their
policies according to the natural psychological propensities of consumers. Also, even though
our final judgements are likely to remain anchored on the initial intuitive impression (p.
1468), we are still able to train our ability of detecting errors, not only on some occasions (p.
1467). Probably becoming more aware could help us transfer some abilities to System 1 and
make our intuition more reliable, as in the cases of skilled decision-makers (p. 1469) or of the
master chess player (p. 1450), by making full use of this marvellous creation (p. 1454).