In conversation with Prof Daniel Kahneman (Nobel Laureate’s lecture)

In conversation with Daniel Kahneman: Summary of the Nobel Laureate’s lecture on his book thinking, fast and slow

Daniel Kahneman is Eugene Higgins Professor of Psychology Emeritus at Princeton University and a Professor of Public Affairs Emeritus at the Woodrow Wilson School of Public and International Affairs. The recipient of the 2002 Nobel Prize in Economics for his seminal work in psychology that challenged the rational model of judgment and decision making, his ideas have had a profound and widely regarded impact on many disciplines – including economics, business, law and philosophy. Until now, he has never brought together his many years of research and thinking in one book. His book Thinking, Fast and Slow| was published late in 2011.

We (some ex-students of executive MBA London Business School, IIM Bangalore, and LBS Masters In Finance ) had the privilege of getting a place to sit and listen into Prof Kahneman’s talk on this latest book with Paul Dolan (Discussant, LSE) and from Evan Davis (Chair, BBC). Evan kicked off the talk by stating how fellow panellists in dragon’s den fall into 2 categories, the intuitive folks who react instantly and the others who would weight all the facts that before coming to a decision.

Prof Kahneman explained the two systems of thinking automatic and reflecting, System 1 and System 2, the first being effortless, and the other being calculated effortful. He explained this with a typical high school math problem (also referred to in Chip & Dan heath’s book Switch) where our intuitive responses are almost always wrong. Thaler and Sunstein’s book (Nudge) has a great description about to the extent that it categorises the type of people who follow it as Human’s and Econs (Except that people are not Econs exclusively)

The rest of summary (some extracts) is in a Q&A format

Where do we mostly operate from? We operate mostly from system 1 and for most parts its serves us well, except when our biases creep in. However when we think slower we can end up spinning wheels (paralysis through analysis). Also As nudged by Paul Dolan, most of the government policy intervention has been focussed on System 2 (rational) whereas the society is reacting through System 1, and the Nudge unit has been working on making that shift.

So which system do you rely on? According to Prof Kahneman, a back-up plan beyond System 1 and system 2 is 3rd party advice.

So who do we trust? We trust experts, but those who tell stories. The most dangerous experts are those who operate in a highly unpredictable environment (stock market picks), and where outcomes are no better than random stock picks. Anecdotal evidence is more convincing than statistical evidence, even more if the story is told by someone we trust

Inflexion point about happiness and wealth? Up to around $75,000 happiness is directly correlated with income the poorer we are the unhappier we will be — every misfortune is made worse by poverty however after this inflexion point the relationship flattens out. The thesis is that whereas one can afford things that bring pleasure, it usually happen at a cost of small things that also brought happiness.

How can we jolt System 2 into being? When we something that is out of the norm,  an upper class British male having tattoos on the back we are jolted into system 2 thinking. An advantage of a broader understanding of our biases (an other’s biases) is that we can engage in intelligent (informed) gossip rather than malicious gossip)

What biases drive us? Although there is an exhaustive list at Wikipedia (http://en.wikipedia.org/wiki/List_of_cognitive_biases), the more obvious ones are optimism, anchoring, and representativeness that drive us to get good rule of thumb solutions.

How can we improve decisions at a board level? Have quality control checks based on evidence rather than heuristics but also look at what the process was in which the decisions were made and what biases crept in during the process

Prof Kahneman also spoke about happiness in the moment and memory of happiness which merge into one another, but will leave further details to reader of his book.

 

Paul Dolan is Professor in the Department of Social Policy at the LSE. He was recently a seconded member of the Behavioural Insights Team in the Cabinet Office, and he is currently chief academic adviser on economic appraisal for the Government Economic Service. He has worked in the govt’s nudge department.

 

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- Viren Lall