In 2002, Daniel Kahneman received the Nobel Prize in Economics. Nothing special, just one fact - Daniel has been studying psychology all his life. In particular, he is one of two researchers who, in the early 1970s, tried to destroy the fundamental paradigm of economics at the time: the myth of the arch-rational decision maker known as “Homo economicus.”

Unfortunately, Daniel's colleague, Amos Tversky, died in 1996 at the age of 59. If Tversky had lived, he would undoubtedly have shared the Nobel Prize with Kahneman, his longtime colleague and dear friend.

Human irrationality is the central point of all of Kahneman's work. Essentially, his entire research path can be divided into three stages, at each of which the “irrational man” reveals himself from a new side.

In the first stage, Kahneman and Tversky conducted a series of ingenious experiments that identified about twenty “cognitive biases” - unconscious reasoning errors that distort our judgments about the world. The most typical is “”: a tendency to depend on insignificant numbers. For example, in one experiment, experienced German judges showed a higher propensity to impose a long prison sentence on a shoplifter when the dice rolled high.

In the second stage, Kahneman and Tversky proved that people making decisions under conditions of uncertainty do not behave in the manner prescribed to them by economic models; they do not “maximize utility.” They later developed an alternative concept of process that was closer to actual human behavior, called prospect theory. It was for this achievement that Kahneman received the Nobel Prize.

In the third stage of his career, after Tversky’s death, Kahneman delved into “hedonic psychology”: its nature and causes. The discoveries in this area were quite extraordinary - and not only because one of the key experiments involved a deliberately delayed colonoscopy (an unpleasant medical procedure during which an endoscopist examines and evaluates the condition of the inside of the colon using a special probe).

Book "Think Slow, Decide Fast" ( Thinking, fast and slow) covers these three stages. This is a surprisingly rich work: vibrant, deep, full of intellectual surprises and valuable for self-improvement. It is entertaining and touching in many moments, especially when Kahneman talks about his collaboration with Tversky (“The pleasure we had working together made us extremely tolerant; it is much easier to strive for excellence when you are not bored for a moment.”) . His insight into the shortcomings of the human mind is so impressive that New York Times columnist David Brooks recently declared that Kahneman and Tversky's work "will be remembered hundreds of years from now" and that "it is an important anchor in man's self-understanding."

The leitmotif of the entire book is human self-confidence. All people, and especially experts, tend to exaggerate the significance of their understanding of the world - this is one of Kaleman's key postulates. Despite all the misconceptions and illusions that he and Tversky (along with other researchers) have discovered over the past few decades, the author is in no hurry to assert the absolute irrationality of human perception and behavior.

“Most of the time we are healthy, and our actions and judgments are largely appropriate to the situation,” Kahneman writes in the introduction. However, a few pages later he notes that their findings challenged the idea, common in academic circles, that "people are generally rational." Researchers have discovered “systematic errors in the thinking of normal people”: errors that do not arise from excessive exposure to emotions, but are built into established mechanisms of cognition.

Although Kahneman describes only modest policy implications (for example, treaties should be written in clearer language), others (perhaps more opinionated researchers) have gone much further. Brooks, for example, argues that the work of Kahneman and Tversky illustrates the “limits of social policy,” particularly the folly of government action to combat unemployment and rebuild the economy.

Fast or logical

Such radical data are frowned upon, even if they are not supported by the author. And disapproval breeds skepticism: what Kaleman calls System 2. In Kahneman's framework, "System 2" is our slow, deliberate, analytical, and consciously goal-directed way of reasoning about the world. System 1, on the other hand, is our fast, automatic, intuitive, and largely unconscious mode.

It is “System 1” that detects hostility in the voice and easily completes the phrase “Black and...”. And “System 2” immediately gets to work when we need to fill out a tax form or park a car in a narrow lot. Kahneman and others found a simple way to explain how a person's System 2 turns on during a task: just look into his eyes and notice how his pupils dilate.

In turn, System 1 uses associations and metaphors to implement a quick and superficial view of reality, which System 2 relies on to achieve clear beliefs and informed choices. “System 1” offers, “System 2” disposes. It turns out that “System 2” dominates? I guess, yes. But in addition to her selectivity and rationality, she is also lazy. She gets tired quickly (there is a fashionable term for this: “ego depletion”).

Too often, instead of slowing down and analyzing things, System 2 settles for the easy but inauthentic vision that System 1 feeds it.

A skeptical reader may ask how seriously we should take all this talk about the First and Second Systems. Are they really a pair of little "agents" in our heads, each with their own distinct personality? Not really, says Kahneman, but rather they are “useful fictions”—useful because they help explain the quirks of the human mind.

It's not Linda's problem.

Consider Kahneman's "best-known and most controversial" experiment that he and Tversky conducted together: the Linda problem. Participants in the experiment spoke of a fictitious young woman named Linda, a lonely, outspoken and very bright woman who, as a student, was deeply concerned about issues of discrimination and social justice. Next, the experiment participants were asked - which option is more likely? The fact that Linda is a bank teller, or the fact that she is a bank teller and an active participant in the feminist movement. The vast majority of respondents named the second option more likely. In other words, “feminist bank teller” was more likely than just “bank teller.” This, of course, is a clear violation of the laws of probability, since every feminist teller is a bank employee; adding details can only reduce the likelihood. However, even among Stanford Business graduate students undergoing intensive training in probability theory, 85% failed the Linda Problem. One student noted that she made a basic logical mistake because “I thought you were just asking for my opinion.”

What went wrong here? A simple question (how coherent is the narrative?) is replaced by a more complex one (how likely is it?). And this, according to Kahneman, is the source of many of the biases that infect our thinking. System 1 jumps to intuitive reasoning based on “heuristics”—an easy but imperfect way of answering complex questions—and System 2 approves of it without bothering with too much work if it seems logical.

Kahneman describes dozens of similar experiments demonstrating failures in rationality - “basic institutional neglect”, “cascades of availability”, “illusion of certainty”, etc.

Are we really that hopeless? Think again about the “Linda problem.” Even the great evolutionary biologist Stephen Jay Gould was concerned about this. In the experiment described above, he knew the correct answer, but wrote that “the monkey in my head keeps jumping up and down, shouting: “She can’t just be a bank teller; read the description!”

Kahneman is convinced that it was Gould's System 1 that told him the wrong answer. But perhaps something less subtle is going on. Our everyday conversation takes place against a rich backdrop of unstated expectations—what linguists call “implicature.” Such implicatures can leak into psychological experiments. Given the expectations that promote communication, it might be reasonable for subjects who chose the option “Linda is a bank clerk” to imply that she was not a feminist. If so, then their answers cannot be considered truly erroneous.

"Unkillable" optimism

In more natural conditions - when we detect fraud; when we talk about things instead of symbols; when we evaluate dry numbers and not shares, people are more likely not to make similar mistakes. At least that's what most of the subsequent research suggests. Perhaps we are not so irrational after all.

Some cognitive biases, of course, look gross even in the most natural settings. For example, what Kahneman calls “flawed planning”: the tendency to overestimate benefits and underestimate costs. So in 2002, when remodeling kitchens, Americans expected the job to cost an average of $18,658, but ended up paying $38,769.

Failure to plan is “only one manifestation of the overall optimistic bias,” which “may well be the most significant of the cognitive biases.” It turns out, in a sense, the bias towards optimism is obviously bad, because it creates false beliefs, such as the belief that everything is under your control, and not just a lucky coincidence. But without this “illusion of control,” would we be able to get out of bed every morning?

Optimists are more psychologically resilient, have a strong immune system, and live longer on average than their realistic peers. Additionally, as Kahneman notes, exaggerated optimism serves as a defense against the paralyzing effects of another bias: “loss aversion”: we tend to fear losses more than we value gains.

Remembering Happiness

Even if we could get rid of prejudices and illusions, it is by no means a fact that this would make our lives better. And here a fundamental question arises: what is the point of rationality? Our everyday reasoning abilities have evolved to cope effectively with complex and dynamic environments. Thus, they are likely to be flexible to this environment, even if they are switched off in several artificial experiments by psychologists.

Kahneman never entered into philosophical battles with the nature of rationality. He did, however, come up with a fascinating proposal for what her goal might be: happiness. What does it mean to be happy? When Kahneman first raised this question in the mid-1990s, most studies of happiness relied on surveys of people about how satisfied they were with their lives in general. But such retrospective estimates depend on memory, which is a highly unreliable variable. What if, instead, we sampled pleasant and painful experiences from time to time and added them up over time?

Kahneman calls this “experiential” well-being, as opposed to the “remembering” well-being that researchers rely on. And he found that these two measures of happiness diverged in unexpected directions. The Experiencing Self does not do the same thing as the Remembering Self. In particular, the Remembering Self does not care about duration—how long a pleasant or unpleasant experience lasts. Rather, it retrospectively evaluates the experience based on the maximum level of pain or pleasure.

In one of Kahneman's most terrifying experiments, two quirks of the Remembering Self were demonstrated: "prolonged neglect" and the "last impression rule." Two groups of patients had to undergo a painful colonoscopy. Patients in group A underwent the usual procedure. Group B patients also underwent this procedure, except for a few added minutes of discomfort during which the colonoscope was held still. Which group suffered more? Group B experienced all the pain Group A experienced and much more. But because the extended colonoscopy in Group B was less painful than the main procedure, patients in this group were less worried, and they had little objection to the repeat colonoscopy.

As with colonoscopy, so with life. It is not the “experiencing”, but the “remembering Self” that gives instructions. The Remembering Self exercises a “tyranny” over the Experiencing Self. “Strange as it may seem,” Kahneman writes, “I am both the “remembering self” and the “experiencing self,” making my life unfamiliar to me.”

Kahneman's radical conclusion is not so far-sighted. The Experiencing Self may not exist at all. For example, brain-scanning experiments by Rafael Malach and his colleagues at the Weizmann Institute in Israel have shown that when objects are absorbed into an experience, such as when watching the movie The Good, the Bad and the Ugly, parts of the brain associated with self-awareness are shut down ( inhibited) by the rest of the brain. Personality seems to simply disappear. Then who is enjoying the film? And why should such impersonal pleasures be the responsibility of the “remembering self”?

Obviously, there is still much to be discovered in hedonic psychology. But Kahneman's conceptual innovations laid the foundation for much of the empirical research outlined in his work: that headaches are hedonically worse in the poor; that women living alone earn, on average, the same as women with a partner; and that a family income of $75,000 in expensive regions and countries is enough to maximize life enjoyment.

For Daniel Kahneman, one of the most exciting moments in today's global economic crisis was Alan Greenspan, the former chairman of the US Federal Reserve, admitting to a congressional committee that he had placed too much faith in the self-correcting ability of free markets.

“He basically said that the foundations on which he had built his work were flawed, and coming from Greenspan is deeply impressive,” says Kahneman, who won the 2002 Nobel Prize in Economics for his pioneering work on incorporating individual aspects of psychological research into economic science.

But the more significant point for Kahneman was that Greenspan in his speech considered not only individuals, but also financial organizations as rational subjects. “This seemed to me to ignore not only psychology, but also economics. He seems to believe in the magical power of the market to bring about self-discipline and good results.”

Kahneman is careful to point out that, as a psychologist, he is an outsider in the field of economics. However, he helped lay the foundation for a new field of study called behavioral economics, which challenges standard rational choice economics and introduces more realistic assumptions about human judgment and decision making.

Standard economic models assume that people rationally strive to maximize their benefits and minimize their costs. And proponents of behavioral economics challenge some of the traditional tenets, showing that people often make decisions based on hunches, emotions, intuition, and rules of thumb rather than on cost-benefit analysis; that markets are infected with the disease of herd behavior and groupthink; that individual choices can often be influenced by the way proposed solutions are framed.

Overconfidence is the driving force of capitalism
The global economic crisis, rooted in the decisions of individuals and financial institutions to invest in subprime mortgages, has brought behavioral economics and the question of how people make decisions into the spotlight. “The people who took out subprime mortgages were completely misled,” Kahneman says in an interview. F& amp; D "in his home located on the picturesque hills of Berkeley overlooking San Francisco. “One of the main ideas of behavioral economics, borrowed from psychology, is the widespread prevalence of overconfidence. People do things they shouldn't do because they believe in their success." Kahneman calls this “illusory optimism.”

“Illusory optimism,” he says, is one of the driving forces of capitalism. Many people are not aware of the risks they are taking,” says Kahneman. This point was also made in Nassim Taleb's book The Black Swan, which points out that people do not sufficiently take into account the possible consequences of rare but large-scale devastating events that make our assumptions about the future incorrect.

He states: “Entrepreneurs are people who take risks and, in most cases, do not know it themselves. This happens in the case of mergers and acquisitions, but also at the level of small entrepreneurs. In the US, a third of small businesses fail within the first five years, but if you poll these people, each individually they think they have an 80 to 100 percent chance of success. They just don't know."

Two sides or more
Kahneman was born in Tel Aviv in 1934 and grew up in Paris and then Palestine as a child. He is not sure whether his vocation as a psychologist is due to his early exposure to interesting gossip or, on the contrary, his interest in gossip was evidence of an awakening vocation.

“Like many other Jews, I suppose, I grew up in a world made entirely of people and words, and most of the words were about people. Nature practically did not exist, and I never learned to recognize flowers or understand animals, he writes in his autobiography. But the people my mother liked to talk about with her friends and my father were amazingly complex. Some of them were better than others, but the best were far from perfect, and none were simply bad. Most of her stories were told with irony, and there were two sides to all of them, if not more.”

At a fairly early age, in Nazi-occupied Paris, he experienced an episode that left a lasting impression because of the many different meanings and conclusions that could be drawn about human nature. “It was probably late 1941 or early 1942. Jews were required to wear the Star of David and obey a curfew from 6 p.m. I went out to play with a Christian friend and stayed out late. I turned my brown sweater inside out to walk the few blocks home. I was walking along an empty street and saw a German soldier approaching. He was wearing a black uniform, which I was told to fear more than other colored uniforms, worn by SS special forces soldiers. I was getting closer to him, trying to walk quickly, and noticed that he was looking at me intently. He called me over, picked me up and hugged me. I was afraid that he would notice the star on my sweater. However, he spoke to me very emotionally in German. When he put me down again, he opened his wallet, showed me a photo of the boy and gave me some money. I went home more confident than ever that my mother was right: people are infinitely complex and interesting.”

In 1946, his family moved to Palestine, and at the Hebrew University of Jerusalem, Kahneman received his first degree in psychology with a minor in mathematics. In 1954, he was drafted into the Israeli army and after a year of service as a platoon commander, he was assigned to evaluate soldiers in combat units and their leadership abilities. Kahneman then developed a completely new interview system for assigning recruits to suitable positions, and this system, with only minor modifications, is used to this day.

He graduated from the University of California at Berkeley in 1961 and was a lecturer at Hebrew University from 1961 to 1978, spending his sabbaticals abroad, notably at Harvard and Cambridge. It was while working in Jerusalem that a collaboration began that would later lead to a Nobel Prize in a field Kahneman had not studied, economics.

New direction of research
Kahneman, currently professor emeritus of psychology and public affairs at Princeton University's Woodrow Wilson School, received the Nobel Prize in 2002 for work he did with fellow psychologist Amos Tversky. The collaboration between the two scientists lasted more than ten years, but Tversky died in 1996, and the prize is not awarded posthumously. “Amos and I were lucky enough together to have the goose that laid the golden eggs, a shared mind that was better than either of our individual minds,” Kahneman said of their work together.

In presenting the prize, the Nobel Committee noted that Kahneman incorporated insights from psychology into economics, thereby laying the foundation for a new direction of research. The prize was given to Kahneman jointly with Vernon Smith, who created the foundations for the separate field of experimental economics.

Kahneman's main discoveries relate to decision making in situations of uncertainty. He demonstrated how human decisions can systematically fail to conform to the predictions of standard economic theory. Together with Tversky, he formulated "prospect theory" as an alternative that better explained observed behavior. Kahneman also discovered that human judgments can be based on intuitive breakthroughs that systematically deviate from the basic principles of probability. “His work has inspired a new generation of researchers in economics and finance to enrich economic theory by drawing on insights from cognitive psychology about underlying human motivation,” the Nobel committee said in a statement.

Prospect theory helps explain experimental findings indicating that people often make different decisions in situations that are essentially identical but presented in different forms. The article by these two authors became the second most cited article published in a prestigious scientific economic journal Econometrica in the period 1979-2000 ( KahnemanandTversky , 1979). This research has influenced a variety of disciplines, including marketing, finance, and consumer choice theory.

Kahneman says that one should not look for special meaning in the name of the theory. “When we were ready to submit the work for publication, we deliberately chose a meaningless name for our theory, “prospect theory.” We assumed that if the theory ever became famous, an unusual name would be beneficial. It was probably a smart decision."

Kahneman and Tversky's joint research examined why people's response to losses is significantly stronger than their response to gains, and this led to the formulation of the concept of "loss aversion", which is one of the main areas of research in behavioral economics.

Two psychologists also found empirically that people assign less decision weight to outcomes that are only probable than to outcomes that are certain. This tendency leads to risk aversion in cases of choice with a virtually certain gain and to risk taking in cases of choice with a virtually certain loss. This can explain the behavior of a player who loses many times in a row and yet refuses to accept his obvious losses and continues to play in the hope of getting his money back.

“People are willing to make bets in hopes of regaining what they lost,” Kahneman said in a 2007 Berkeley radio interview. This made him worried that leaders of a state who had brought the country to the brink of defeat in a war were more likely to accept additional risks than to stop hostilities.

The authors also found that people exhibit inconsistent preferences when the same option is presented to them in different forms. This helps explain irrational economic behavior, such as people traveling to a distant store to take advantage of a discount on a cheap item but not doing the same to get a discount on an expensive item.

Creating a new discipline
How prospect theory found its application to economics seems almost an accident of publication. Kahneman and Tversky decided to publish an article in the journal Econometrica, not PsychologicalReview , as the former published their earlier work on decision making, which brought their research to the attention of economists.

Kahneman says his collaboration with longtime research partner and friend Richard Thaler, a professor of economics and behavioral science at the University of Chicago, contributed to the development of behavioral economics. “Although I do not deny my merit, I must say that, in my opinion, the work of integration was actually done mainly by Thaler and the group of young economists that quickly began to form around him, starting with Colin Camerer and George Lowenstein, to whom then Matthew Rabin, David Leibson, Terry Odean and Sendhil Malainathan joined.”

Kahneman says that he and Tversky proposed "quite a lot of the original ideas that later became part of the theoretical developments of some economists, and prospect theory certainly gave some legitimacy to the reliance on psychology as a source of realistic assumptions about economic agents." Thaler, who was a regular contributor to the “Anomalies” column in the magazine JournalofEconomicPerspectives in the period from 1987 to 1990 and periodically wrote in this column and subsequently, he says that it is thanks to the joint work of Kahneman and Tversky that today we have a thriving field of behavioral economics. “Their work provided the conceptual framework that made our field possible.”

The impetus created by the crisis
The buzz created by the Nobel Prize, combined with introspection by economists sobered by the global economic crisis, created a strong impetus for the spread of behavioral economics. So strong that it has begun to permeate today's White House through books such as The Nudge to Make Good Choices. Nudge ") (Thaler and Sunstein) and "Predictably Irrational" (" PredictablyIrrational ") by Duke University professor Dan Ariely.

Nudged to Better Choices explores how people make choices and how they can be nudged to make better choices for themselves across a range of issues, such as buying healthy food or deciding to put more money toward savings. “It's very clear that now is a good time for behavioral economics,” Kahneman says with a smile.

Not everyone agrees that behavioral economics is the future, viewing it as a passing and annoying fad. “Of course, today everyone is obsessed with behavioral economics. The casual reader may get the impression that the rational homoeconomicus died a sad death, and economists went forward and recognized the true irrationality of humanity. Nothing could be further from the truth,” says David Levin of Washington University in St. Louis.

“Proponents of behavioral economics are right to point out the limitations of human cognition,” says Richard Posner of the University of Chicago Law School. But if they have the same cognitive limitations as consumers, should they be involved in developing consumer protection systems?”

“Perhaps the biggest challenge facing behavioral economics is to demonstrate its applicability in the real world,” write Steven Levitt and John List in a paper published in the journal Science (2008) In almost all cases, laboratory studies reveal strong empirical evidence in favor of behavioral abnormalities. However, there are many reasons to suspect that these laboratory results may not be general enough to be valid in real-world markets."

Place in the economy
Although behavioral economics is now an established discipline taught at leading universities, “it remains a discipline built on the shortcomings of standard economic theory,” says Wolfgang Pesendorfer, professor of economics at Princeton University.

However, its full integration into economics has proven difficult, although Wallstreet and investment analysts take into account the cognitive and emotional factors that affect the decision-making process of individuals, groups and organizations. “There are too many theories of behavior, and most of them have too narrow applications,” writes Drew Fudenberg of Harvard University in his article.

In the eyes of some, even prospect theory remains flawed due to the lack of a generally accepted model for how reference points are established. “The fundamental difference between psychologists and economists is that psychologists are interested in individual behavior, while economists are interested in explaining the results of interactions between groups of people,” says David Levin in a lecture given at the European University Institute entitled “Is Behavioral Economics Doomed?”

Growing trust
However, the turmoil caused by the collapse of the subprime mortgage market and the subsequent global crisis has led to increased confidence in the need for greater consideration of human factors in regulation and economic policy. Kahneman offers a number of takeaways from the current crisis.

The need for greater protection for consumers and individual investors. “There has always been a question about the need and the extent to which people should be protected from their own choices,” he says. But I think it has become very, very difficult to say that people don’t need protection.”

Market failures have much broader implications. “Interestingly enough, it turns out that when uninformed individuals lose their money, it leads to the collapse of the global economy. Accordingly, the irrational actions of individuals have significantly broader consequences in the context of rationally malicious actors in the financial system and extremely weak regulation and supervision.”

♦ Limited forecasting capabilities. “Extremely high volatility in equity markets and the financial system highlights the level of uncertainty in the system and limited forecasting capabilities.”

Greenspan appears to agree that there are shortcomings in the models used to predict and assess risk. In an article published in FinancialTimes Last March, Greenspan compared human nature to a missing puzzle piece that makes it impossible to explain why the spreading subprime mortgage crisis was not identified earlier by risk management or econometric forecasting models.

“These models completely fail to take into account what I believe has hitherto been only a marginal factor in business cycle and financial models, the natural human response that leads to abrupt alternations of euphoria and fear, repeated from generation to generation with little or no change. there were no signs of knowledge accumulation, Greenspan writes. Asset price bubbles are swelling and bursting today, just as they have since the beginning XVIII century when modern competitive markets emerged. Of course, we tend to call such a behavioral response irrational. However, for forecasting, what should be important is not whether a human reaction is rational or irrational, but only its observability and systematicity.” “In my opinion, this is an important missing “explanatory variable” in both risk management and macroeconometric models.”

Reflections on thinking
In addition to the Nobel Prize in Economics, Kahneman has received recognition as one of the leading scientists in the field of psychology. “Kahneman, his colleagues and his students changed our understanding of how people think,” said American Psychological Association President Sharon Stephens when Kahneman was awarded the field's highest honor in 2007 “for his distinguished lifetime contribution to psychology.” Kahneman continues to closely monitor the development of behavioral economics, but has long been involved in other issues. Today, the focus of his work has shifted to the study of well-being, and he is working with Gallup to conduct a worldwide survey to quantify global issues and opinions in more than 150 countries.

Challenge to the Clergy
In the past, Kahneman has compared the economics community to a clergy that is difficult for heretics to enter. But he acknowledges how far economics has come over the past three decades in incorporating findings from psychological research and elements from other social sciences. “We published our article in the magazine Econometrica in 1979, that is, 30 years ago. In 2002 I was received with honors in Stockholm. So it's not a very strict church, given that during the early years economists largely ignored us. Yes, I was talking about the church, but this is not a church where you will be burned at the stake for heresy, otherwise we would be missing a lot of people!”

Psychologist Daniel Kahneman is one of the founders of psychological economic theory and perhaps the most famous researcher of how people make decisions and what errors based on cognitive distortions they make. For his study of human behavior under conditions of uncertainty, Daniel Kahneman received the Nobel Prize in Economics in 2002 (this is the only time a psychologist has received the Nobel Prize in Economics). What did the psychologist manage to discover? Over many years of research that Kahneman conducted with his colleague Amos Tversky, scientists found out and experimentally proved that human actions are guided not only and not so much by the mind of people, but by their stupidity and irrationality .

And, you see, it’s hard to argue with this. Today we bring to your attention 3 lectures by Daniel Kahneman, in which he will once again go through the irrational human nature, talk about cognitive distortions that prevent us from making adequate decisions, and explain why we should not always trust expert assessments.

Daniel Kahneman: “The mystery of the experience-memory dichotomy”

Using examples ranging from our attitudes toward vacations to our experiences with colonoscopies, Nobel laureate and pioneer of behavioral economics Daniel Kahneman demonstrates how differently our experiencing selves and our remembering selves perceive happiness. But why does this happen and what are the consequences of such a splitting of our “I”? Find the answers in this lecture.

Now everyone is talking about happiness. I once asked a man to count all the books with the word “happiness” in the title published in the last 5 years, and he gave up after the 40th, but of course there were even more. The rise in interest in happiness is enormous among researchers. There are many trainings on this topic. Everyone wants to make people happier. But despite such an abundance of literature, there are certain cognitive distortions that practically do not allow us to think correctly about happiness. And my talk today will mainly focus on these cognitive pitfalls. This applies both to ordinary people thinking about their happiness and to the same extent to scientists thinking about happiness, since it turns out that we are all equally confused. The first of these pitfalls is a reluctance to acknowledge how complex this concept is. It turns out that the word “happiness” is no longer such a useful word because we apply it to too many different things. I think there is one specific meaning that we should limit ourselves to, but in general it is something that we will have to forget about and develop a more comprehensive view of what well-being is. The second trap is the confusion between experience and memory: that is, between the state of happiness in life and the feeling of happiness about your life or the feeling that life suits you. These are two completely different concepts, but both of them are usually combined into one concept of happiness. And the third is the illusion of focus, and it is a sad fact that we cannot think about any circumstance that affects our well-being without distorting its significance. This is a real cognitive trap. And there is simply no way to get it all right.

© TED conferences
Translation: Audio Solutions company

Read material on the topic:

Daniel Kahneman: "The Study of Intuition" ( Explorations of the Mind Intuition)

Why does intuition sometimes work and sometimes not? For what reason do most expert forecasts not come true and can we even trust the intuition of experts? What cognitive illusions prevent you from making an adequate expert assessment? How does this relate to the specifics of our thinking? What is the difference between “intuitive” and “thinking” types of thinking? Why may intuition not work in all areas of human activity? Daniel Kahneman talked about this and much more in his video lecture Explorations of the Mind Intuition.

*Translation starts at 4:25 minutes.

© Berkeley Graduate Lectures
Translation: p2ib.ru

Daniel Kahneman: "Reflections on the Science of Well-Being"

An expanded version of Daniel Kahneman's TED talk. A public lecture given by a psychologist at the Third International Conference on Cognitive Science is also devoted to the problem of two “I” - “remembering” and “present”. But here the psychologist considers this problem in the context of well-being psychology. Daniel Kahneman talks about modern research on well-being and the results that he and his colleagues have been able to obtain recently. In particular, he explains on what factors subjective well-being depends, how our “real self” affects us, what the concept of utility is, which influences decision-making, how much the assessment of life affects experienced happiness, how attention and pleasure are interconnected, what we experience from something, and how much do we exaggerate the meaning of what we think about? And, of course, the question of what significance studies of experienced happiness have for society does not go unnoticed.

In 2002, the Nobel Prize in Economics was awarded to psychologist Daniel Kahneman. Why did this happen? Because it is psychology that can explain why traditional economic models do not work. Take Adam Smith, the founder of political economy and apologist for the market economy. The main character of his theoretical constructions is a certain "economic man", an absolute egoist, a rational person seeking exclusively to improve his own well-being. In Smith's model, these "economic men" freely exchange goods, and the market laws of supply and demand keep prices in equilibrium. What happens in reality? But here’s the thing: an absolutely liberal economic model doesn’t work even in the United States.

How does our behavior violate economic laws?

To begin with, let's take utility theory the end of the 19th century. One of its prerequisites - utility maximization - assumes that the consumer, with certain restrictions (in particular, income, prices), chooses a set of goods and services that fully satisfies existing needs. In other words, every person knows exactly what he wants, in what quantity and what of it he can buy right now. Does this seem true?

That "economic man" does not exist, and people do not always behave rationally (or, more precisely, they constantly act irrationally!), scientists even guessed before Kahneman. However, his merit is that he not only pointed out the irrationality of human behavior, but also identified a whole series of principles that this very irrationality follows. And these findings already allow us to create new, more accurate economic models.

I thought quickly, I bought it quickly

So what is Kahneman's main idea? The fact is that a person has two fundamentally different systems of thinking: "slow" And "fast". “Slow” is engaged in thinking about new and complex problems, considers connections between phenomena from a logical point of view, and makes balanced and rational conclusions. Unfortunately, it requires a lot of volume "random access memory" and cannot work constantly. Therefore, there is a “quick” system for making a decision about what bread to buy today.

"Fast" system thinking is based on stereotypes and comparisons, it operates on a well-established track and, thanks to this, does not require special expenditure of energy. The solutions it produces arise instantly and are perceived as prompts from intuition. Having a “fast” system makes our life a lot easier, but, unfortunately, it brings a number of common errors.

Librarian or farmer?

Firstly, this "intuition" does not take into account statistical data. In the article “Judgment under Uncertainty: Heuristic Methods and Errors” and in the book "Think slow, decide fast" Kahneman gives a clear example of this.

Let's say a former neighbor describes a person like this:

Steve is shy and introverted, always ready to help, but he has little interest in people or the real world. Meek and orderly, Steve seeks order and structure in everything, and is very attentive to detail.

In your opinion, who would Steve be more likely to be: a farmer or a librarian? Intuition suggests that the verbal portrait matches the stereotype of a librarian and will choose this answer. Although in reality farmers make up a much larger portion of the population (in the US) than librarians, and Steve has a much better chance of being a farmer. Kahneman calls this distortion ignoring a priori probability.

Confidence in the correctness of the forecast (Steve is a librarian) for a “fast” system depends on how well the selected result matches the input data - this is called representativeness. Moreover, it completely does not take into account the factors limiting the accuracy of the forecast. This effect in Kahneman's theory is called illusion of validity. There are other contradictions between “intuition” and statistics, but there is no point in listing them all - it is easier to direct the reader to the works of Kahneman, who, by the way, writes in an accessible and fascinating way.

Peter Heeling / skitterphoto.com (CC0 1.0)

Something about prospect theory

What else is worth noting? With the "fast" system, we rate the probability of an event highly if similar cases easily come to mind. Our assessments are “tied” to a certain point in the report, even if it is taken out of thin air. For example, in one experiment, the study groups estimated the products 1x2x3x4x5x6x7x8 and 8x7x6x5x4x3x2x1 differently, taking the first few steps of multiplication as a reference point.

And again a logical question: how can all this be correlated with economic theory? In Thinking Slow, Decide Fast, Kahneman presents his alternative to utility theory. – prospect theory. He based it on the idea of ​​another Nobel laureate, Harry Markowitz, which attributed utility to changes in wealth rather than to its size. According to this theory, the benefit of winning $500 if you had a million is equal to the difference between $1,000,500 and $1,000,000. Therefore, the “disutility” of losing that $500 is again equal to the difference between the benefits of the two amounts.

Kahneman says that, in addition to the difference, The reference point with which winnings or losses are compared also plays a role.

For financial outcomes, the reference point is usually status quo. But sometimes it's either expected Exodus, or the one that seems deserved, for example, a raise or bonus. Outcomes that are above the reference point are gains, below are losses. The size of the winnings is compared with a reference point: the difference between 900 and 1000 dollars is subjectively much smaller than between 100 and 200 dollars. At the same time, what is important is that the losses seem larger than the gains.

That the Nobel Prize in Economics (or, officially, the Swedish National Bank Prize in Economic Sciences in Memory of Alfred Nobel) will go to the American economist Richard Thaler: “for his contributions to behavioral economics.” Read about the use of knowledge and methods of modern cognitive science in economic research, as well as what behavioral economists study in our material.

The Nobel Prize in Economics was established in 1969, and since then it has been awarded primarily for either fundamental economic discoveries or research into the application of applied mathematics methods to economics. For example, in 1979, Theodore Schultz and Arthur Lewis received a prize for their work in the field of economic development (using the example of developing countries), and in 1994, the winners were the famous American mathematician John Nash and his colleagues, who carried out equilibrium analysis in the theory of non-cooperative games.

Thus, the activities of most laureate economists (and economic science in general) are aimed at building formal micro- and macroeconomic models necessary for effectively describing and predicting the financial behavior of people and large government and commercial structures. In its most general form, economics assumes that human behavior can be predicted. That is why economics is called “the most accurate social science.”

Economists, however, understand that people do not always behave rationally and distribute their income in accordance with their primary, most important needs. We may spend money on goods that we do not need, just because we like them, or we may not spend money on something expectedly profitable and useful just because we are afraid. However, such factors influencing consumer sentiment are difficult to take into account when analyzing financial behavior: analysts may predict an increase in demand for umbrellas during the rainy season (and, accordingly, an increase in supply to maximize profits), but will be confused if it turns out that in the sales ranking For some reason, umbrellas gave way to raincoats. This is why the behavioral factors influencing people's financial decisions have long been ignored - despite the fact that the term "behavioral economics" appeared in the 70s of the last century.

Everything changed when, in 2002, the Nobel Prize in Economics was awarded not to an economist, but to an American psychologist of Israeli origin, Daniel Kahneman, with the wording: “For the application of psychological techniques in economic science.” Kahneman has long been studying decision making - a cognitive process that involves choosing one behavioral strategy among several possible ones, as well as analyzing external and internal (behavioral) factors that influence this choice.

This year, the Nobel Prize traditionally went to an economist: University of Chicago professor Richard H. Thaler. His contribution to economics, however, concerns more the psychological side of things. The main thesis of his scientific works boils down to the fact that a person can be forced to buy, and his financial behavior can be predicted, given that a person is an irrational being.

One of Thaler’s most famous works, which significantly enriched behavioral economics, is devoted to the study of the so-called “endowment effect”. According to classical economic theory, owning a good or service should not affect its value. In other words, the theory assumes that a person who bought, for example, a book, will sell it, if he wants to part with it, at the same price for which he got it. Thaler (with Kahneman) showed that this is not so. In 1990, scientists conducted an experiment in which they gave people regular coffee mugs and then offered to sell them or exchange them for ballpoint pens. It turned out that a person who already owns a mug is ready to part with it for twice the “price” than what he was willing to pay for the same mug when he did not yet own it.

Having thought about the influence of what factors a person makes such a decision, scientists came to the conclusion that it is determined by his own behavior: already possessing a product, a person assigns greater value to it (and even becomes attached to it), since he has already spent energy and time and funds for its acquisition.

Another example of the “irrationality” of people’s financial behavior that Thaler describes in his works is related to the concept of “fairness” in prices. So, a bar and a supermarket may sell the same product, but at different prices. And although we are willing to pay as much for a bottle of beer as the bartender asks, we will not buy the same beer at the same price in the supermarket, because we are sure that it should cost half as much there.

Despite the fact that Thaler considers people to be irrational creatures, he has no doubt that their financial behavior can be predicted - and even benefited from it. In his book “Nudge. Architecture of choice. How to Improve Our Decisions About Health, Wealth, and Happiness,” released in 2008 (released in 2017), he formulates the theory of “nudge” (from English nudge - push with the shoulder). According to this theory, certain aspects of human behavior can be predicted - and then used to effectively sell goods and services, as well as to maximize profits.

Consequently, Thaler believes, commercial organizations try in vain to convince the buyer that purchasing their goods is beneficial for him. It would be better if they convinced him that he needed their goods.

Expert opinion

Most economic theories are based on simplified characteristics of the environment. They imply that decisions are made rationally, depending on future profitability. But it is clear that in life this is almost always not the case.

It is known that a person has several dozen prejudices that he is guided by, including in economic activity. On the one hand, a person can proceed from the rational behavior of other people and, accordingly, behave differently, or, on the contrary, expect people to behave irrationally in order to behave rationally himself. This applies to all areas: investing and trading.

This is the so-called “behavioral finance”. This area has been popular for about fifteen years, it is quite expected that one of the Nobel Prizes will be devoted to this very thing - that is, to the problem of using psychological models to predict people's economic behavior.

These works are supported by good mathematics, they have been confirmed in econometric works. As an example of the influence of prejudices and irrationality, one can cite, for example, the situation with ICO, the situation around the blockchain - this is a typical example of the use of “behavioral finance”. This is a distraction from the problems, which gives those who were first the opportunity to make money, since it is obvious that a correction in the cryptocurrency market is inevitable.

The second example: the fact that in our country in the first decade of the 2000s there was a completely abnormal situation with real estate. The same situation occurred in 1927–1930 in the USA, and this led to a crisis in the entire economy. Real estate, by all measures, cannot bring a decent investment income, but for us it brought it. Several factors were at work here: the influence of mortgages, a sharp lack of investment opportunities. That is, as a result it worked, someone made money.

Analyzing people's irrational actions allows you to avoid stepping on mistakes that you want to step on, but having a theory does not mean that you personally will achieve success. Any economic patterns are realized statistically.

Ivan Rodionov
Doctor of Economics, Professor at the Higher School of Economics

Thaler could have become a Nobel laureate 15 years ago - together with Kahneman, whose co-author he often acted as. Then, however, the Royal Swedish Academy of Sciences considered that the prestigious prize in economics should not be awarded to two psychologists at once (despite the fact that Thaler is an economist), and together with Kahneman the prize was received by Vernon Smith, one of the founders of experimental economics. Now the academy has recognized the contribution of the second "founding father" of behavioral economics to the development of economic science.

Professor Thaler “killed” Homo economicus - the fabulous stage of human evolution, having reached which, he behaves as rationally as possible - and thereby allows corporations and governments to predict their financial behavior. Instead, Thaler showed that every consumer is, first of all, a person who is guided not by abstract benefits, but by his own (sometimes spontaneous and leading to immediate reward) interests.

The Royal Swedish Academy of Sciences awards ceremony will take place in Stockholm in early December, with this year's economic sciences prize winner receiving nine million Swedish kronor (approximately $1.1 million). When asked by a journalist from The New York Times how he would spend the money, Thaler replied: “Least rationally.”

Elizaveta Ivtushok

Literature

Leonard T. C. Richard H. Thaler, Cass R. Sunstein, Nudge: Improving decisions about health, wealth, and happiness // Constitutional Political Economy. – 2008. – T. 19. – No. 4. – pp. 356-360.

Kahneman D., Knetsch J. L., Thaler R. H. Experimental tests of the endowment effect and the Coase theorem // Journal of political Economy. – 1990. – T. 98. – No. 6. – pp. 1325-1348.

Kahneman D., Knetsch J. L., Thaler R. Fairness as a constraint on profit seeking: Entitlements in the market //The American economic review. – 1986. – P. 728-741.