October 31, 2011

IF YOU MEET THE HOMO ECONOMICUS ON THE ROAD...:

Is Self-Knowledge Overrated?: a review of Thinking, Fast and Slow, by Daniel Kahneman (, 10/25/11, The New Yorker)


Although we'd always seen ourselves as rational creatures--this was our Promethean gift--it turns out that human reason is rather feeble, easily overwhelmed by ancient instincts and lazy biases. The mind is a deeply flawed machine.

Nevertheless, there is a subtle optimism lurking in all of Kahneman's work: it is the hope that self-awareness is a form of salvation, that if we know about our mental mistakes, we can avoid them. One day, we will learn to equally weigh losses and gains; science can help us escape from the cycle of human error. As Kahneman and Tversky noted in the final sentence of their classic 1974 paper, "A better understanding of these heuristics and of the biases to which they lead could improve judgments and decisions in situations of uncertainty." Unfortunately, such hopes appear to be unfounded. Self-knowledge isn't a cure for irrationality; even when we know why we stumble, we still find a way to fall.

Consider the story of Harry Markowitz, a Nobel Prize-winning economist who largely invented the field of investment-portfolio theory. By relying on a set of complicated equations, Markowitz was able to calculate the optimal mix of financial assets. (Due to loss-aversion, most investors hold too many low-risk bonds, but Markowitz's work helped minimize the effect of the bias by mathematizing the decision.) Markowitz, however, was incapable of using his own research, at least when setting up his personal retirement fund. "I should have computed the historical co-variances of the asset classes and drawn an efficient frontier," Markowitz later confessed. "Instead, I visualized my grief if the stock market ... went way down and I was completely in it. My intention was to minimize my future regret. So I split my contributions 50/50 between bonds and equities."

Football coaches have performed just as badly. Although it's now clear that their biases have a meaningful impact--a coach immune to loss aversion would win one more game in three seasons out of every four--their collective decision-making hasn't improved.

This same theme applies to practically all of our thinking errors: self-knowledge is surprisingly useless. Teaching people about the hazards of multitasking doesn't lead to less texting in the car; learning about the weakness of the will doesn't increase the success of diets; knowing that most people are overconfident about the future doesn't make us more realistic. The problem isn't that we're stupid--it's that we're so damn stubborn.

Kahneman, of course, knows all this. One of the most refreshing things about "Thinking, Fast and Slow" is his deep sense of modesty: he is that rare guru who doesn't promise to change your life. In fact, Kahneman admits that his decades of groundbreaking research have failed to significantly improve his own mental performance. "My intuitive thinking is just as prone to overconfidence, extreme predictions, and the planning fallacy"--a tendency to underestimate how long it will take to complete a task--"as it was before I made a study of these issues," he writes.
Posted by Orrin Judd at October 31, 2011 7:22 AM
  
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