Daniel Kahneman passed away at 90. I never met him. I did get a full dose of exposure to behavioral economics when I was earning my MBA at Chicago Booth. Initially, it made a lot of sense to me. As a floor trader, I had seen behavioral economics in action and experienced it fully inside my body.
Kahenman’s research and some other behavioralists research is very valuable. For me, it is less about true economics, and more about consumer behavior. Much of their research works in a lab, and not in the real world. But, the stuff that translates out of a lab is powerful.
In some cases, it can be damaging. Read Richard Thaler’s book “Nudge” to see what I mean. Nudges from an overarching powerful source aren’t like getting a nudge from the market. You can go from trying to help people make better decisions down a slippery slope to totalitarianism.
Here are some maxims that you might have experienced or know to be true.
Losers hurt a lot more than winners make you happy.
Are you lucky, or smart?
Things like that were dealt with on a minute-by-minute basis in the trading pits.
One thing that stood out to me in the piece Jason Zweig wrote for the Wall Street Journal on him was this:
We think disasters are more common than they are, making us suckers for schemes that purport to protect us.
Social media magnifies things that happen in the world to such a degree, that it seems the world somewhere someplace is always in panic. When there are real disasters, they seem natural.
I also think that the psychological part of being human allows us to buy into the fatalistic stories we are told about phenomena like global warming. These people spin scary stories and then back them up with “science” which has been debunked by other science.
Instead of focusing on the solution, we spin around and around.
Kahneman said to always ask the question about the base rates. Zweig writes, 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.
One of the hardest things to do is to actually look at data that makes you objective. Your confirmation bias is often strong, so your brain sifts the data and you don’t even know it. When you are confronted, you might get angry about it.
Covid and the resulting Covid policy is a perfect example of people not looking at data objectively. By all statistical measures, the vaccine didn’t work yet there are still people that are so fearful they will take what amounts to an inert placebo, or worse.
was the first journalist to sift through the data and show who was getting sick and dying and who wasn’t. Once you knew that, you could plainly see which group you were in and either be fearful and take precautions or just lead your life without fear.What happened to the people who spoke out and didn’t follow the party line?
We all know what happened to them. We all have lost friendships and relationships with family members if we didn’t toe the official line.
A lot of wealth managers and investors have embraced the whole “irrational investor” idea. They never cared for Milton Friedman and the classical theorists who based their research on rational investors. The problem is, in a market with enough liquidity and transactions, the irrational investor exists. However, as Kahneman noted, can you make a decision and take advantage of it? How do you know? What’s the base rate of the decision? Can you do it fast enough so you beat the market? We all know markets self-correct and are always right.
Kahneman has almost all his money in index funds. Somewhere, Eugene Fama is smiling.
Social media is a scourge on mankind. It derives its power of influence from manipulation ("Nudge" from Thaler and Sunstein) and encourages mob behavior, especially emotionalism--literally the opposite of Kahneman's ideas of rational behavior. Confirmation bias was one of Kahneman's bugaboos.
-->"One of the hardest things to do is to actually look at data that makes you objective. Your confirmation bias is often strong, so your brain sifts the data and you don’t even know it. When you are confronted, you might get angry about it."
Well said. One of the hardest things to do is to reserve judgment in arriving at conclusions--especially opinions about topics or incidents that are still playing out. It's a two-edge sword where premature decisions or opinions can be just as haunting as deferring a decision until more information arrives.
I think Kahneman's early work with his research partner Amos Tversky (d-1996) was probably their best work (Prospect Theory-1979). By the time Kahneman got to "Thinking, Fast and Slow" (2011), the gold mine was exhausted. I've not read his last work "Noise" (2021) co-authored with Sibony and Sunstein.
The premise of "Nudge," and "Noise," appear to minimize that man is predominately a social-emotional animal, taking the idea that man is rational to Olympian heights of perfectibility, rather than recognizing that man is fallible, error-prone. We're all familiar with 20-20 hindsight. A condition we are born with and will die with.
Can man's rational decision-making be tweaked? Probably. Should we strive to do better? Certainly. Can we? In limited ways. Kahneman contributed loads of new insights into human behavior and decision-making. RIP.
I edited a word after posting.
And we could also learn a few things from Robert Service, though he is not nearly in the same class as Kipling.
I say that on the strength of one line from The Cremation of Sam McGee: "A promise made is a debt unpaid."
This had been a moral truth for the West. It is not any longer.