DANIEL Kahneman, a Princeton University psychology professor and winner of the Nobel Prize in economics, died on March 27. He was 90. According to the Wall Street Journal, Kahneman and his friend Amos Tversky, who died in 1996, “upended traditional economic assumptions that people consistently act rationally and with their self-interest at heart. Instead, experiments [they] conducted…showed that when presented with complex situations, people often rely on rules of thumb that can lead them to behave irrationally.”
The duo’s insights “were widely adopted in many fields beyond psychology and economics, including law, marketing, government, investment management and even the planning of giant infrastructure projects. The two found that people derive patterns and probabilities based on small sets of data, not understanding the role of randomness — for instance, ascribing skill to a fund manager who beat the stock market a couple of years in a row, and not recognizing the role of luck. They also found that people tend to feel losses much more keenly than gains. This leads to the phenomenon of loss aversion.”
The Journal’s “Intelligent Investor” columnist Jason Zweig said Kahneman once told him that the “most important question to ask before making a decision is ‘What is the base rate?’ He meant you should begin every major decision by figuring out the objective odds of success, given the historical range of outcomes in similar situations. If you’re thinking of starting a new business, your gut might tell you there’s no way you can fail. According to the Bureau of Labor Statistics, however, half of new businesses die within the first five years. That base rate comes from millions of startups, each of which also expected to succeed. You, on the other hand, are a sample of one. Knowing that the base rate is 50/50 shouldn’t deter you from trying, but it should prevent you from being unrealistically optimistic.”
We’re talking about an individual who is spending and risking his own money. What about a group of politicians elected into office and are now in charge of taking and spending other people’s money? Yes, you may shudder at the possibilities.
Kahneman was also the author of the highly regarded book, “Thinking, Fast and Slow,” published in 2011. It should be read and studied by politicians — and voters.
There are two important facts about our minds, he wrote: “we can be blind to the obvious, and we are…blind to blindness.”
He also mentioned the WYSIATI — What You See is All There is — rule. “You cannot help dealing with the limited information you have as if it were all there is to know. You build the best possible story from the information available to you, and if it is a good story, you believe it. Paradoxically, it is easier to construct a coherent story when you know little, when there are fewer pieces to fit into the puzzle. Our comforting conviction that the world makes sense rests on a secure foundation: our almost unlimited ability to ignore our ignorance.” (My italics.)
Kahneman also noted “the ease with which the past is explained.” He quoted “The Black Swan” author Nassim Taleb who said that our tendency to construct and believe coherent narratives of the past makes it difficult for us to accept the limits of our forecasting ability. In other words, everything “makes sense” in hindsight. “The illusion that we understand the past fosters overconfidence in our ability to predict the future,” Kahneman said.
Citing the results of a 20-year study on the predictions of experts conducted by University of Pennsylvania psychologist Philip Tetlock, Kahneman said “those with the most knowledge are often less reliable.” Why? Because “the person who acquires more knowledge develops an enhanced illusion of her skill and becomes unrealistically overconfident.”
Again, we’re talking about individual experts or pundits here. What if they assume elected office and are in charge of running the government — and our lives?
Shudder, shudder indeed.
As for Tetlock’s study, Kahneman recounted what happened:
“Tetlock interviewed 284 people who made their living ‘commenting or offering advice on political and economic trends.’ He asked them to assess the probabilities that certain events would occur in the not too distant future, both in the areas of the world in which they specialized and in regions about which they had less knowledge…. In all Tetlock gathered more than 80,000 predictions….
“The results were devastating. The experts performed worse than they would have been if they had simply assigned equal probabilities to each of the…potential outcomes. In other words, people who spend their time, and their living, studying a particular topic produce poorer predictions than dart-throwing monkeys… Even in the region they knew best, experts were not significantly better than nonspecialists….
“Tetlock also found that experts resisted admitting that they had been wrong, and when they were compelled to admit error, they had a large collection of excuses: they had been wrong only in their timing, an unforeseeable event had intervened, or they had been wrong but for the right reasons.”
For Tetlock most experts are “hedgehogs” as they are described by Isaiah Berlin in his famous essay on Leo Tolstoy, “The Hedgehog and the Fox.”
“Hedgehogs ‘know one big thing’ and have a theory about the world; they account for particular events within a coherent framework, bristle with impatience toward those who don’t see things their way, and are confident in their forecasts. They are also especially reluctant to admit error. For hedgehogs a failed prediction is almost always ‘off only on timing’ or ‘very nearly right.’ ” They are also very opinionated and are not shy about expressing their opinions. This, Kahneman said, “is exactly what television producers love to see on programs. Two hedgehogs, on different sides of an issue, each attacking the idiotic ideas of the adversary, make for a good show.”
In contrast, foxes are complex thinkers. “They don’t believe that one big thing drives the march of history…. Instead the foxes recognize that reality emerges from the interactions of many different agents and forces, including blind luck, often producing large and unpredictable outcomes. It was the foxes who scored best in Tetlock’s study, although their performance was still very poor. But they are less likely than hedgehogs to be invited to participate in television debates.”
This is not a call to do nothing, but a plea for humility — for prudence, for deliberation, for seeking out contrary views, for nuance. It is also a reminder to government officials and other politicians that no, they don’t know everything; that they do not necessarily know better than most of us; and therefore their guiding principle is to do no (further) harm.
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