Listen to Michael Lewis discuss his latest book on Freakonomics Radio: “The Men Who Started a Thinking Revolution” (skip to 1:50) and on Charlie Rose (much better than the former discussion); plus some print reviews in the New York Times, The New Yorker, the FT and The Economist. Below is a draft encyclopedia entry on Daniel Kahneman (and Amos Tversky).
Daniel Kahneman (b. 1934) is a social psychologist who, along with experimental economist Vernon Smith, shared the Nobel prize in economics for 2002. Though the prize was conferred upon Kahneman, it was in in effect recognition of the seminal work dubbed “prospect theory” that Kahneman formulated in collaboration with the late Amos Tversky. Independently and jointly they were interested in studying the cognitive biases (and cognitive illusions) of intuitive thinking; of how minds actually operate in a social world shot through with limitations, complexity and contingency. Their research can be understood as a finer-grained and more technical explication of Simon’s “bounded rationality” pursuing three different, though not unrelated, lines of inquiry – heuristics, prospect theory and framing effects – that all came to be distilled in Kahneman (2011).
The “framing effect” connotes the idea that options are described in terms of gains (positive frame) rather than losses (negative frame) and under study, elicits systematically different choices. Prospect theory concerns the psychophysics of wealth utility: that is, the perceived tradeoffs between potential outcomes and the probability of some outcome occurring. Kahneman and Tversky reworked Bernoulli’s long established orthodoxy of wealth utility that supposedly explained loss aversion through quantifiable states of wealth. Instead, they took the view that by asking subjective questions rather than propositional (or abstract) questions regarding terms of loss and gain, they presented a richer explanation for loss aversion. They found that that though agents like winning and dislike losing, they in effect are orientated to dislike losing more.
Kahneman and Tversky (1979) initially articulated decisions under risk (as opposed to decisions under uncertainty) involving at most two non-zero outcomes. Later as cumulative prospect theory (1992) they accommodated decisions under uncertainty and risky conditions that employs cumulative, rather than separable decision weights with any number of outcomes.
Out of prospect theory grew Kahneman’s “two minds” thesis, summarized for a popular audience in his book Thinking, Fast and Slow. The title of the book connotes two fictional systemic ideal types or characters: fast thinking connotes the “on the fly” or “online” or automatic intuitive operation of the human perceptual and memory apparatus; slow thinking by contrast is “conscious,” deliberate, effortful, conceptual, analytical and propositional in character. Four things should be noted. The positing of these two systems should not lead one to any of the following inferences:
(a) that there is indeed a sharp duality and that ne’er the twain shall meet;
(b) that these two “systems” have definitive brain structure instantiations;
(c) that fast thinking is intrinsically irrational;
(d) that slow thinking is intrinsically rational.
In support of his thesis Kahneman’s presents a raft of empirically based puzzles, illusions and paradoxes illustrating our innate capacity for deluding ourselves and perhaps more importantly just about how little we know. Kahneman illustrates how heuristics or rules of thumb deployed to solve statistical problems can quite easily result in biased estimates and predictions. Respondents, when confronted with a problem to which they are unlikely to know the correct answer to, tend to allow their ruminations to be influenced by objectively irrelevant frames. Other heuristic tests showed that even if respondents receive all the information needed, it is not used correctly.
This said, it should be understood that Kahneman is not suggesting that agents are necessarily and irredeemably irrational – what he’s proposing is merely that one is alert to the supposedly infallible deliverances of intuition. Kahneman’s and Tversky’s work illustrated that neither the lay individual nor indeed even the expert in any knowledge community, are immune from systematic error. Given the vast scope of the “expertise industry” be within an academic or in a public life setting, Kahneman is viewed as highly controversial, not least in his own field of psychology where he has called for a more rigorous validation of priming effect studies.
See also: Anchoring; bounded rationality; ecological rationality; errors and biases; heuristics
Kahneman, D., & Tversky, A. 1973. On the psychology of prediction. Psychological Review, 80, 237-25l.
Kahneman, D., & Tversky, A. 1974. Judgment Under Uncertainty: Heuristics and Biases. Science, New Series, Vol. 185, No. 4157: 1124-1131.
Kahneman, D., & Tversky, A. 1979. Prospect theory: An analysis of decisions under risk. Econometrica, Vol. 47, No. 2: 263-291.
Kahneman, D., & Tversky, A. 1992. Advances in prospect theory: Cumulative representation of uncertainty. Journal of Risk and Uncertainty 5 (4): 297–323.
Kahneman, D. 2011. Thinking, Fast and Slow. Toronto: Random House.