In 2016, Empiricus made an effort to bring to Brazil Daniel Kahneman, the 2002 Nobel Prize in Economics and author of Fast and Slowwho died today at the age of 90.
Kahneman was not just any Nobel laureate. There are truly intelligent people, with solid academic, cultural and social contributions. There are geniuses. And there is the ineffable, the only possible way to try to describe those that overflow any taxonomy and break out of recurring paradigms.
One of the great intellectuals of our time, Kahneman revolutionized economic science, returning it to its essence. Young science is also a social science, although all efforts from the 1960s onwards in Chicago, most notably from John Muth, were aimed at moving it away from the obvious and trying to bring it closer to the natural sciences.
The economist started to study a guy that we didn’t find on the street, named homo economicus. It accesses all relevant information, systematizes and processes everything. We have a machine for calculating probabilities and associated scenarios, capable of maximizing our utility function (whatever that means) even in contexts of imminent danger.
By seeking to move away from social sciences and formalize itself with an approach to exact sciences, Economics earned the nickname “the envy of Physics”. With all that perfect rationality, science gained in formalization and modeling capacity. It’s a shame that we forgot one small detail: reality. To make human decisions and the complexity of social interactions fit into our spreadsheets and Eviews models, we invite the real world to lie down on Procrustes’ Bed. We cut its legs to make it fit our model.
Kahneman was not exactly a pioneer in challenging the prescriptions of rational expectations and perfect rationality as a whole. Herbert Simon had already proposed the notion of limited rationality, in which human beings would not be machines with infinite capacity, but would encounter important restrictions in their evaluations and calculations.
But together with his great partner Amos Tversky, Kahneman went beyond Simon, with the formulation of “Prospect Theory”.
Human beings are not just partially rational, as if they have 90% good vision. They suffer from structural cognitive biases, which end up, through the adoption of a series of heuristics, rules of thumb and shortcuts, often pushing us in directions contrary to the conclusions suggested by strict rationality. We are prone to systematic errors in judgment.
Kahneman promoted formidable advances in the field of psychology by reporting the classic biases of loss aversion, anchoring, mean reversion, availability bias, confirmation bias, halo effect, among many others. He identified not only how we incur cognitive failures when faced with particular situations, such as, for example, the way we make decisions when faced with risk, but he also explored a whole way of understanding the general functioning of the brain.
Its formulation was appropriated by Economics in the infamous Behavioral Finance. We leave the Platonic study of homo economicus to study man, the one who really makes decisions, invests, negotiates, gets excited, gets frustrated, profits, loses, creates brilliant things, destroys others.
That’s where his well-deserved Nobel Prize in Economics came from. But the guy was so special that he inspired another Nobel Prize, Richard Thaler, due to his contributions to Behavioral Economics, whose origins, of course, go back to the studies of Kahneman & Tversky.
Contributions, however, are not limited there. Studies on happiness speak very well to Amartya Sen’s approach to measuring the level of success of a society, going beyond measuring GDP per capita.
In this sense, Kahneman offered solid conclusions based on empirical data about the relationship between happiness and money. These things are linked, obviously, but only to a certain extent. According to his measurements, a loss of one real causes us a psychic impact two and a half times greater than the effect of a profit of one real. The loss hurts too much.
His works are so fruitful that they also permeate political science, military strategies and literature.
The concept of WYSIATI (What You See Is All That Is) can be useful for understanding political and social polarization, for example. What you read in zap uncle’s groups becomes the only thing that exists and, therefore, you quickly jump to the conclusion that the opponent is an enemy that needs to be eliminated, without us being able to hear the other side.
During his time in the Israeli army, Kahneman changed the behavior of some generals who raged at pilots who made marginal errors in landing. The top brass thought that the next correct landing was due to the previous scolding and threats. Kahneman showed that the pilots were just returning to the mean. The public verbal lynchings and the climate of fear were unnecessary.
In literature, he achieved one of the most unlikely feats even for thinkers of the highest level: writing a difficult and very popular book. The masterpiece “Two ways of thinking: fast and slow”, a synthesis of his main works, achieved the unprecedented feat of bringing together Wall Street (or Faria Lima) and psychology.
In addition to valuable practical and theoretical teachings, the book contains wonderful aphorisms, such as:
“The easiest way to increase happiness is to control the use of your time. Could you find more time to do the things you enjoy?”
“The illusion that we understand the past fuels overconfidence that we have the ability to predict the future.”
“A person who is not at peace with their losses is likely to make bets that they would not accept under other circumstances.”
“The premise of this book is that it is easier to recognize other people’s mistakes than your own.”
“Money will not buy you happiness, but the lack of it will certainly bring you misery.”
When I had lunch with Khaneman in 2016, at one point he asked me why we were interested in him. And he said something like, “I don’t think I have much to contribute to you. I don’t really agree with most financial consultants and analysts. I distrust most of them.”
We replied that we agreed with the distrust. We all laughed and a spontaneous bond was formed there. For Kahneman, it must have lasted just a few seconds. For everyone else present, it is intensely alive to this day.
This is perhaps his main lesson: intellectual humility, self-distrust. Kahneman was human, all too human.
Felipe Miranda is the founder of Empiricus.
MORE KAHNEMAN IN BRAZIL JOURNAL
Felipe Miranda
