The automatic mind creates causal stories out of dubious raw material. When Kahneman studied the records of managers at one investment firm, over 25 years, he found there was zero link between managers earning an above-market return one year and repeating that kind of performance the next — although, of course, pay was pegged to annual returns and managers with good years were richly rewarded. Unsurprisingly, the firm’s executives refused to believe that variation in performance was random. “I’ve done very well for the firm and no one can take that away from me,” one told Kahneman. “I took it away from you this morning,” Kahneman recalls thinking.
One of Kahneman and Tversky’s most famous ideas is what they callprospect theory: our inclination to fear possible losses more than we value possible gains. Would you take a bet on a one-time coin flip that paid $200 if you won but cost you $150 if you lost? Most people wouldn’t, though it’s tilted in your favor. Pro golfers tend to make a higher proportion of their putts when they’re trying to avoid a bogey (which would result in losing a stroke) than when they have a chance for a birdie (for the possible gain of a stroke); here, too, avoiding a failure is more crucial than achieving a triumph.
Most recently, Kahneman has turned his attention to the study of human well-being, which involves our evaluations of pleasure and pain. One unsettling conclusion from this work is that our memory of events is shaped by pain-pleasure peaks and final experiences, rather than what we were really feeling at the time. In an experiment, people rated a long, painful colonoscopy as less painful than a shorter, painful one — if the pain peaks were the same and the lengthier procedure ended with a period of lesser discomfort. Here’s the ethical conundrum: Should doctors focus on limiting real-time pain or the memories of pain?
There’s a self-helpish aspect to the book, because Kahneman offers some end-runs around common errors. Faced with an opposing negotiator’s unfair opening gambit, you should make a scene, he advises, if that’s what it takes to erase the anchor your opponent has just dropped. He also recommends that you make one-time decisions involving risk and reward on the assumption you’ll face many such bets in your life. (Professional traders always take the $150/$200 bet.)
Persistent cognitive errors have profound philosophical and political implications, but Kahneman doesn’t spend much time on these. He does say that his work undercuts libertarianism: Humans make choices that go against self-interest too often for freedom to be the highest good. He’s in favor of nudges to steer people toward wiser retirement plans, or healthier lunches, while leaving the ultimate decision to those nudged. But these wider-view thoughts are left to a sketchy, 11-page concluding chapter.
So, if you read this book, will you make better decisions? I’m hopeful, but Kahneman’s the expert, he’s in his eighth decade, and despite the self-help advice, he’s skeptical about our ability to change — and skeptical about his own improvement, too. As he puts it, “I have made much more progress in recognizing the errors of others than my own.”
writes the Ideas Market blog and Week in Ideas column for the Wall Street Journal.