This is a concept that individuals have two different sets of decision-making processes. The first is impulsive, fast and acts without thinking.
- The first is impulsive, fast, emotional and acts without thinking – but relies on heuristics and past knowledge/experience.
- The second element of our decision-making system is a more cognitive, deliberate, thinking process which can take in a greater range of data than just our own experience.
It suggests that if our impulsive nature reacts strongest, then individuals can pursue irrational decisions. For example, purchasing ‘impulse buys’ which offer a poor return.
The concept was developed by Daniel Kahneman and popularised in his book Thinking, fast and slow (2011).
Examples of Dual-system theory
Consumer purchases. Standard consumer behaviour assumes that consumers are rational utility maximisers. In an ideal world, consumers would evaluate the marginal benefit of a good and consume when marginal utility is greater than or equal to the marginal cost. If we use the second – thinking cognitive decision-making process then this rational choice model is realistic. However, in the real world, this cognitive decision-making process may be over-ridden by the impulsive self. For example, buying expensive new vacuum cleaner because we are impressed by a door-to-door salesman. A decision we may later regret.
Importance of Dual-system theory
Thinking fast and slow. For important purchases and decisions, it may be important to make sure we engage both aspects of our decision-making process. Rather than relying on just ‘intuitive feel’ we may need to take a more measured approach. This means we look beyond our simple rules of thumbs but try to think from a different perspective.
“Jumping to conclusions is efficient if the conclusions are likely to be correct and the costs of an occasional mistake acceptable. Jumping to conclusions is risky when the situation is unfamiliar, the stakes are high and there is no time to collect more information”
- Daniel Kahneman
Being aware of our inherent optimism bias. Kahneman notes that our quick decision-making mind often bases its decisions on past experiences – e.g. driving fast has not caused accidents in the past, so it’s OK to keep speeding. The optimistic mind thinks accidents can’t happen to us. However, if we are aware of our mind’s optimism bias, we should think and be aware of the real chance of accidents from speeding. Weighing up the costs and benefits of speeding will lead to different decision making than relying on the non-thinking aspect.
Government nudges. Given that consumers may purchase expensive products under impulse purchase, many products and services have a mandatory cooling off period where a consumer can change his/her mind. If we regret the impulse purchase, we are in a position to change our mind after we have had time to think about it.
Some argue the separate decision-making systems are, in fact, closer than we may think with the emotional side of our nature influencing the more deliberate aspect and vice-versa. The two processes are linked with our impulsive side learning from past mistakes and deliberations.