December 22, 2011 Vol. 4, Issue 10

 

Daniel Kahneman reflects on a lifetime of learning about how we actually make decisions.

Kahneman, a psychologist who received the Nobel Prize in economics in 2002, helped pioneer the idea that we rely on heuristics, a type of mental shortcuts, to make decisions great and small. These shortcuts lead to biases and errors in judgment that hinder our ability to make good decisions. In Thinking, Fast and Slow, he takes us on an intellectual tour of the concepts that have fascinated him for decades.

The work of Kahneman and the late Amos Tversky, his thought partner, helped debunk the rational choice model that dominated the social sciences for most of the second half of the twentieth century. By demonstrating that we make decisions based on factors such as what we saw or heard most recently (the availability heuristic), Kahneman and Tversky showed the limitations of viewing individuals as machine-like rational actors who achieve optimal performance by maximizing benefits and minimizing costs.

For example, consider an effect that Kahneman calls “the illusion of skill.” Kahneman and economist Richard Thaler looked at the year-to-year performance of 25 top investment advisers over an eight-year period in a single firm. Significant differences in skill among individual advisers would be visible through consistently high annual rankings within the group; this would correct for the possibility of a lucky year here or there. When Kahneman and Thaler crunched the numbers, they found almost zero correlation in year-to-year rankings. “The results resembled what you would expect from a dice-rolling contest, not a game of skill,” writes Kahneman.

For engineers and scientists, Kahneman’s discovery of his own biases serves as a useful reminder of the difficulty of maintaining an objective perspective about one’s own work:

“In spite of years of teaching and using statistics, we had not developed an intuitive sense of the reliability of statistical results observed in small samples. Our subjective judgments were biased: we were far too willing to believe research findings based on inadequate evidence and prone to collect too few observations in our own research.”

Kahneman writes that his aim is to promote watercooler conversations that “improve the ability to identify and understand errors of judgment and choice, in others and eventually in ourselves, by providing a richer and more precise language to discuss them.” Given the extent to which his ideas have shaped behavioral economics and contemporary social psychology, it’s fair to say that he achieved his aim before writing this book.

Read more about Thinking, Fast and Slow.

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