Thinking Straight and Crooked – An Irishman’s Diary about Daniel Kahneman
Nobel laureate Daniel Kahneman: his running theme is that the decisions we make in everyday life are often based on false assumptions
Some years ago I worked out that the chances of my winning the lottery were similar – give or take a million to one – to the chances of me dying in a plane crash. A result of this epiphany is that I don’t buy lottery tickets any more.
Okay, that’s not completely accurate. The truth is I didn’t buy many before then, either.
And I still get the odd one now, occasionally; although not if I’m planning to fly anywhere before the draw takes place. Even so, the lottery/plane-crash equation has definitely helped reduce my expenditure on the former.
Which is entirely illogical, I know.
It’s not like a reverse-Faustian pact, whereby, in agreeing to forego the chance of unearned wealth in this life, I avoid any unpleasant experiences in the sky. On every flight, whether I want to or not, I must still buy a ticket in that other draw, and hope my numbers don’t come up.
But somehow, the rational comfort of knowing that the chances of a crash are negligible is increased by the feeling that I haven’t tempted fate in entering the Lotto. For similar reasons, I also avoid Ryanair scratch cards.
So I was delighted to read recently that even some of the smartest and most rational people on the planet think like this too. Or at least Daniel Kahneman, who won the Nobel Prize for economics in 2002, does.
In his best-selling book Thinking, Fast and Slow, Kahneman writes of visiting his native Israel on several occasions during the years just after the millennium and being “ashamed” at finding himself making decisions based on the chances of a disaster that he knew to be negligible.
In his case, the disaster was terrorist bombs on buses, of which Israel had experienced many in those years. And he wasn’t even on buses, much.
But he was sometimes parked beside them in traffic and on such occasions, despite knowing better, feared the worst.
When the lights changed, he noticed himself driving away faster than he would anywhere else. In the language of his profession, he had assigned an inordinately high “decision weight” to a “minuscule probability”.
This was how terrorism worked, he realised. But back in New York, two paragraphs later, he noted that it was also how “high-prize lotteries” worked, albeit in spreading hope rather than fear.
As Kahneman explains: “The thrilling possibility of winning the big prize is shared by the community and reinforced by conversations at work and at home. Buying a ticket is immediately rewarded by pleasant fantasies, just as avoiding a bus [in Israel] was immediately rewarded by relief from fear. In both cases, the actual probability is inconsequential; only possibility matters.”
The fear of plane crashes does also feature – fleetingly – in his book, which is a distillation of all the hard-won wisdom of Kahneman’s long life (he turned 83 this week).
But most of it concerns events in between these unlikely extremes of triumph and disaster.
His running theme is that the decisions we make in everyday life are often based on false assumptions, and that even the most rational-seeming people and systems can be skewed by undiagnosed biases, dooming them to make the same or similar mistakes over and over.
Never mind lottery tickets, his book may also have cured me of any desire to buy shares.
In a section on “the illusion of stock-picking skill”, Kahneman concludes that when markets are efficient, ie when all or most of the relevant information about companies is known to everyone, educated guesses are no more accurate than blind ones as to which prices will rise or fall.
But he also notes that many individual investors lose consistently by trading, “an achievement that a dart-throwing chimp could not match”.
When I finish Kahneman’s tome, I may have to re-read another economics classic, from an earlier era, JK Galbraith’s account of the 1929 Wall Street Crash.
In the meantime, getting back to the neuroses of flying, I’m reminded of Galbraith’s story of an incident in a bookshop shortly after that work first appeared.
Like many authors, he was already distressed by its invisibility in window displays. And while searching for it in vain at the shop in Boston airport, he was offered help by an assistant.
So, affecting vagueness about the author’s name – “maybe Galbraith” – he told her the book was called “The Great Crash”. To which she replied: “That’s certainly not a title you could sell in an airport.”