Seeing is not believing

Kahneman.pngProf Daniel Kahneman is the blog’s favourite living social scientist. He won the 2002 Nobel Prize for economics for his insight that:

• Economists are wrong to assume human beings are motivated by self-interest and make rational decisions
• In fact, human judgement may take short-cuts that systematically depart from basic principles of probability
• The avoidance of loss and disadvantage is a more important driver than the hope for gain and advantage

CMAI kindly allowed the blog to repeat Kahneman’s most famous experiment on the day of his Nobel award, with an audience of 500 people. His insight was again proved correct.

Unfortunately, most policymakers ignored his work, although it could have helped them to avoid the current financial crisis. The blog only hopes they will now read his new book, ‘Thinking, Fast and Slow’. It raises important questions about how we allow perception to dominate reasoned analysis, and could be a powerful tool for promoting global economic recovery.

The chart above is one of his examples:

• It appears that the top line is shorter
• But if you measure it, they are both the same

Now you know they are the same, does your mind accept this fact?

The answer, certainly in the blog’s case, is ‘no’. It wants to believe the top line is shorter, even though it drew the lines. This is Kahneman’s point.

He argues that the mind has two ways of operating:

• One is fast and intuitive (System 1)
• The other is slow and analytical (System 2)

And as this example shows, they operate independently, so that “you cannot decide to see the lines as equal, even though you know they are. To resist the illusion, you must learn to distrust your impressions of the length of lines when fins are attached to them”.

Politicians can’t summarise Kahneman’s work in 146 characters on Twitter. Nor can it provide a sensationalist headline for the mass-media.

But his work does explain why such ‘sound-bites’ can appear effective. They allow us to use System 1 and rush to instant judgement.

It also explains why current policies, mostly based on System 1 thinking, may appear to be rational, whilst taking us steadily in the wrong direction.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

2 Responses to Seeing is not believing

  1. Neil Burns 7 January, 2012 at 8:56 pm #

    Paul: I too love Kahneman’s work and he was one of the greatest inspirations in our “Theory and Structure of Financial Markets” class taught by the great Prof. Jamshed Gandhi many years ago. However, is it not true, that without a bit of judiciously applied system 1 thinking, our ancestors may well have been eaten in their entirety many generations ago? Your last point is well taken but I also see as many examples of politicians and bureaucracies who, clearly facing system 1 problems, will dicker endlessly trying to apply system 2 solutions, because they have been taught that is how things are supposed to be done. Sometimes you really do have to just grab the controls and yank them before the plane hits the side of the mountain. The trick is knowing which approach is appropriate in which situation. Work in progress, I’d say, for me at least.

  2. Paul Hodges 9 January, 2012 at 6:26 am #

    Neil

    Your comment is spot on.

    There are most certainly times when rapid-fire System 1 thinking is essential.

    If the UK’s Finance Minister, Alastair Darling, had waited in September 2008 to commission a study into what to do about the banking crisis, the economy could have collapsed whilst it analysed all the options.

    Knowing when to pull a System 1 lever, and when to go with System 2, is a core skill for running a business or an economy
    Thanks

    Paul

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