System 1 vs System 2 Thinking for Businesses

To repeat the core concept:

Everyone’s mind operates on two levels, System 1 & System 2. We all use System 1 most of the time. It’s fast, “intuitive” and able to cope with the huge volume of decisions we have to make every day. But to be so fast, it has to skip something—analysis.

It may seem strange to regard a business as though it also has a brain that is wired for the same modes of thinking, but I have found it useful to look at all sorts of organizations this way. Organizations are composed of people. As a result, each organization develops its own personality. That includes habits about decision making.

Sometimes the pattern is driven by demands of the industry. You can’t safely build or fly airplanes or spaceships with a group style based on System 1 thinking. If you try, physics will knock your flying machines out of the sky or shatter them during takeoff.

But in many industries, there is a choice. The decision about whether to use System 2 analytical thinking a lot is typically made by leaders (Board of Directors and/or top executives). Managers and workers who go along with that decision fit in. Those who don’t end up leaving. Over time, the entire organization generally tends to “go with the flow” of whichever style the leaders chose. If the leaders tend to analyze and make decisions rationally, so will subordinates, and mistakes will tend to be less frequent and perhaps less severe than they would be without so much forethought. If the leaders are freewheeling, so are subordinates, and everyone will expect to have to scramble more often to compensate for errors. It may be worthwhile where creativity is a primary need.

The rub? It isn’t easy to change that style once it has taken root. When your business is accustomed to flying by the seat of its pants, getting everyone to switch from System 1 all the time to using more deliberate System 2 analysis is difficult. For many businesses, that transition is part of the threshold to cross if they want to go from small to bigger, heftier, more of a presence in the market. Spur of the moment intuitive decisions that make a startup nimble become a source of chaos, inefficiency and box canyons as the company grows.

Sometimes a business owner tells me that they like keeping the business below a particular size because it is more agile, or because they like to know every employee, or because they don’t want to be bothered by regulations that would kick in at a larger size. Although I’ve always heard reasons that skirt this core desire, at the center of the reasons they cite is their desire to use easy, quick, intuitive System 1 thinking most of the time. It’s understandable. System 2 takes more self-discipline. They would not say they would rather change tactics to recover from mistakes than make the effort to plan ahead and make fewer mistakes, but that is a consequence of their choice.

What does this mean for you when you are starting or acquiring a business, or taking on a leadership role in any type of organization?

To borrow a trite phrase, it means you can grow the organization more readily if you “start as you mean to carry on.” Of course if you are doing something dangerous like rocket science, realistically, you can’t minimize your use of System 2. If your ambition is to become big, lots of System 2 thinking from the start will reduce growing pains later. If your ambition is to stay small, you can establish a leadership style based on mostly System 1 thinking or using lots of System 2, depending upon your preferences and how willing you are to live with the higher risk of System 1 decisions causing a mistake that may not be recoverable.