Photo from the Nobel Foundation archive
Two weeks ago, the Israelian-American psychologist Daniel Kahneman died. He was one of the most well-known psychologists of this time. He is especially known for his contributions to the theory of rationality. His studies had a deep impact on the development of the field of economic psychology, and therefore he was rewarded with the Nobel Prize in Economics. To his mind, he should have shared it with his friend Amos Tversky, but Tversky had already died, when Kahneman received the Nobel Prize. Though some see him as the father of Economic Psychology, he sees himself as the grandfather, and his colleague and friend Richard Thaler as the person who really developed the field.
In my blogs, now and then I have paid attention to Kahneman’s studies. Here I’ll mention some of his main contributions to psychology.
- Many people believed that humans are rational beings and economists even have built their theories on this idea. However, they aren’t, or rather only for a part they are (compare the third point below). Kahneman and Tversky have shown that humans often display non-rational behaviour. One of their best-known studies showing this is what they call the “Asian disease problem”. In short it is this: An unusual Asian disease is expected to kill 600 people. There are two things you can do: If program A is adopted, 200 people will be saved, while if program B is adopted, there is a one-third probability that 600 people will be saved and a two-thirds probability that nobody will be saved. Most people prefer program A, so they prefer the certain option over the gamble. However, a second group of people has to choose between the next options: If program C is adopted, 400 people will die, and if program D is adopted, there is a one-third probability that nobody will die and a two-thirds probability that 600 people will die. Now most people prefer the second option (D), so they prefer the gamble over the certain option. However, option A vs. option B is exactly the same as C vs. D! What is different is the wording of the problem, but the consequences of programs A and C or B and D are identical. The choice is determined by the way the problem is framed and not by a rational choice based on the differences between the cases. Experts do not do better than lay people!
- Losses that people may suffer count by far more than possible gains. The loss aversion theory says that people do much more to avoid losses than to get gains, even if the gains may be more profitable. “Losses loom larger than gains”, so Kahneman and Tversky.
- Humans have two thinking systems in their minds for making decisions: System 1 and System 2. Although this is not a discovery of Kahneman (the terms “System 1 and System 2 come from Keith Stanovich and Richard West), the theory has been further developed and explained by him. Most of what we do is not rationally and consciously considered but we just do. We simply follow our intuition and feelings. If so, then we use System 1. It operates automatically and quickly, with little or no effort and no sense of voluntary control. However, it can happen that we must think actively and explicitly about what to do or decide, for example if our actions and decisions are not routine but complicated and require attention, or if we have the time. Then we use System 2. It allocates attention to effortful mental activities like complex computations.
- Taking part in a book writing project with others, Kahneman asked one of them, a planning expert, what was the chance that the project would fail and how long the project would yet last according to him. The answer was 40% and six years. If so, the participants would have stopped the project, but they thought that they could do it within two years. In the end, it took yet seven years and then nobody was interested in the book any longer. According to Kahneman, they had here “stumbled on a distinction between two profoundly different approaches to forecasting, which Amos [Tversky] and I later labelled the inside view and the outside view.” This distinction, so Kahneman, is important for avoiding the “planning fallacy”, a term coined by Tversky and Kahneman. It is the erroneous prediction of future task duration. Participants in a project or people doing individual tasks tend to underestimate the length and costs of the project or task, because they tend to overestimate their skills and capabilities and ignore possible risks and uncertainties, even if they know them. People who must estimate the success chances of their own work are usually simply too optimistic. They depend too much on the inside view. However, the planning fallacy is not unescapable. We can do something about it, or at least we can mitigate it by taking the outside view. This involves asking expert opinions about the likely costs and length of a project or task; comparing your project or task with historical cases; using objective criteria to judge whether your plan is realistic; etc. In short, do not use subjective inside information to judge your planning, but assess it objectively with the help of outside information in order to get a realistic idea how it will develop.
Kahneman did not keep his views for an inner circle of scholars and scientist but explained them in a way that everybody could understand. Everybody can easily learn about his views and profit by them by reading his book Thinking, Fast and Slow (Penguin Books, London, 2012). That is also a great merit of this eminent scholar.
Source: Daniel Kahneman, Thinking, Fast and Slow; my blogs (use the “Search this blog” search engine for finding the themes discussed in this blog).
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