Difference between System 1 and System 2?

Video explanation:

Written explanation for the video above:

If you want to improve your conversion rates, you’re going to have to understand the mind of the shopper. And if you want to understand the mind of a shopper, you need to understand how the shopper’s brain works. And in order to understand the shopper’s brain, I can think of one simple model that really simplifies our understanding. That is to imagine the brain as a two-part system: System 1 and System 2.

System 1 is impulsive and fast. System 2 is slow and methodical. Really, when you think about it from the perspective of a shopper, they’re always trying to activate System 2, because System 2 is what helps you see the world for how it is. System 1 is the way you see the world from the perspective of what your aspirations are.

I’ve thought a lot about a simpler way of explaining System 1 and System 2. Recently, while walking, had a breakthrough of sorts.

Think of System 1 as your finance department, and think of System 2 as your accounting department. So, System 2 looks at the world as black and white, just like an accountant does. Finance, on the other hand, is all about the future implication of an investment today. That’s exactly what System 1 is always focused on.

Again, this is not a perfect analogy because really System 1 does not look into the future, but I think the way System 1 makes decisions is more akin to a finance person, versus an accountant. So, let’s understand what is the difference between finance and accounting. If you would open a new retail store, let’s say that you knew that Santa Monica is a growing market and you want to open a retail store.

You’re going to have to spend a lot of money to open a retail store, you’re going to have to spend a lot of money to get licenses, you’re going to have to spend a lot of money to train people, and it’s going to take at least a year before the store is getting the right kind of foot traffic, you know, you’ve worked out all the kinks, you’ve trained your staff, all of that good stuff.

Now, from an accounting perspective that is a black hole. An accountant would simply look at your finances and say, “Look, you have spent one year on this location in Santa Monica, this is the rent, this is how much we’re paying for training,” and they’re looking at it purely from a cost perspective, and you will get one version.

However, the finance department will look at it differently. They will look at the growth of the demographics in the Santa Monica area, they will look at the trend lines for foot traffic, they will look at trend lines for returns, they will look at the impact of word-of-mouth, they look at all of these other metrics that give you an idea about the future, and likely draw a totally different conclusion.

So, that’s how you should think about System 1 and System 2. These are two different parts of the brain. Hopefully, this analogy has given a better insight into how System 1 makes decisions versus how System 2 makes decisions. If you have any questions, comment below and I’ll be happy to answer them.

 

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