Daniel Kahneman's Thinking
The book is called Thinking, Fast and Slow and for me it is one of the best five books of the year. No, he is not attempting to break new ground. It is more like a summing up of his career and of the topic of behavioral economics. But even if it is mostly familiar to you, I still recommend it. If it is less familiar to you, I recommend it even more.
Apropos my discussion of Super-achievers, I liked this paragraph on page 256:
Optimistic individuals play a disproportionate role in shaping our lives…they are the inventors, the entrepreneurs, the political and military leaders–not average people. They got to where they are by seeking challenges and taking risks. They are talented and they have been lucky, almost certainly luckier than they acknowledge. They are probably optimistic by temperament; a survey of founders of small businesses concluded that entrepreneurs are more sanguine than midlevel managers about life in general. Their experiences of success have confirmed their faith in their judgment and in their ability to control events. Their self-confidence is reinforced by the admiration of others. This reasoning leads to a hypothesis: the people who have the greatest influence on the lives of others are likely to be optimistic and overconfident, and to take more risks than they realize.
What bothers me about behavioral economists is what I might term “one-trial bias.” Most of the results (not all) are from situations in which individuals are confronted with a problem that is novel for them. Often, the psychologist-experimenter engages in deception. The mistakes that individuals make may or may not be replicated in repeated situations, in circumstances where the individual is able to learn from experience, or in situations where an organizational or institutional mechanism (such as the market) may produce results that are superior to the judgment of any single individual.
Kahneman’s insistence that success involves a great deal of luck (he makes this point several times in the book) may also be a case of “one-trial bias.” In this essay, I argue that it is important to remember that a game lasts more than one move. Two chess players, for example, may appear to be so close in terms of ability that it would seem that the outcome should be determined by luck. If you look at any one move, one player may have a 70 percent chance of making the optimal move and the other player may have a 65 percent chance. If that one move were the whole game, then the outcome would vary considerably, depending on luck. However, in a sequence of many moves, the better player’s chance of coming out ahead gets to be very high. Business is like a multi-move game, in which any one decision by an inferior player can turn out right, but it is unlikely that an inferior player will make a sequence of decisions that turns out to be better than those of a superior player.
I certainly believe that the phenomenon of overconfidence is important. I believe that hindsight bias and the fundamental attribution error are at work in leading people to over-estimate the skill of CEO’s. However, in some places in the book, Kahneman assigns numerical values to the percentage of success that is due to luck that are purely subjective. That is, they are not based on any study, but instead represent his gut feel. I worry that his gut feel may fail to take into account the context of multiple decisions, learning, and the ability of the market to sort for skill.
On p. 412, he writes,
For behavioral economists, however, freedom has a cost, which is borne by individuals who make bad choices, and by a society that feels obligated to help them. The decision of whether to protect individuals against their mistakes therefore presents a dilemma for behavioral economists.
This poses a choice between freedom, with mistakes, and state power. I think of this as a false choice. As I wrote in The Era of Expert Failure, the choice we face is not between following government experts or making our own mistakes. Instead, it is a choice between following the experts who emerge in a competitive market or obeying experts who grasp the reins of power in government. Government is not the only source, or even the best source, of restraints on our propensity to make mistakes. The market provides many such mechanisms. I would rather see behavioral economists attempting to be market entrepreneurs than see them acting as policy entrepreneurs.
Do not let my critical comments turn you away from the book. It is rich with insight. One example is the way that statistical prediction often beats clinical prediction. But there are many other examples.