What determines human decisions?

One could call Daniel Kahneman the unicorn of economics. As a psychologist, he had a profound influence on people who criticized the homo economicus (the theoretical notion that our economic decisions are always perfectly rational), instead showing how people actually make decisions. His insights forever changed the field, paving the way for what’s now called behavioral economics.

If we want to understand and shape the system, Kahneman claims that we need to understand the humans who act inside it first. Long-time companion Amos Tversky and Kahneman dedicated their academic life to the psychological phenomena around judgement and decision-making, establishing a new way of thinking about human errors based on heuristics and biases.

Kahneman is listed as one of the most important economists alive today, even though he vehemently denies this to be true.

Daniel Kahneman

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (shared), 2002

At a glance

Born: 1934, Tel Aviv, Israel

Field: Psychology, Economic Psychology

Prize-winning work: Prospect theory; integration of cognitive psychology into economic analysis

First steps: As a 10-year old, he wrote his first essay on the psychology of religion

The author’s secret: Doesn’t like his best-selling book "Thinking Fast, Thinking Slow"

Attitude: Deeply pessimistic about everything

One rainy day in Manhattan

When you snag an appointment with Daniel Kahneman (which can take up to a year!), you want everything to be perfect to welcome the man in demand: flowers, seats, lunch, even the room temperature. But while waiting for Kahneman in a downpour in front of a Downtown Manhattan hotel, trying to spot his limousine, there’s a tap on the shoulder. "Hi, I’m Daniel." And well, there he is. Cloaked in a long black coat, shaking his wet umbrella: he’d walked.

Happiness is a disappointment

Taking a taxi might have been a happier solution in the unpleasant weather, but Kahneman admits that happiness is actually the biggest disappointment in his career, at least when it comes to research. "I was very much expecting to find one thing," he says, immediately casting an air of suspense, "but we found exactly the opposite." He smiles. Kahneman is referring to the Day Reconstruction Method (DRM), a process he invented and is still in use today. DRM is a way to ask people about every part of their day on a daily basis, focusing on their emotions. He expected to find a broader change in emotions than in life satisfaction, but the plan didn’t work out. "We were convinced that if we looked at the difference between teachers in good schools and in bad schools, we’d find a much bigger difference in emotions than in satisfaction. It turned out the opposite was true," he calmly reveals. "We found that it’s actually emotionally miserable to be poor, but beyond a certain level of poverty, it stops making any difference. But for life satisfaction, the more you have, the more satisfied you are with your life."

Can a single question reveal what we’re thinking?

In general, Kahneman is critical of how surveys on happiness are devised. A political question at the beginning could lead to an overall unsatisfactory result, for example.

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Single questions in psychology are of high relevance, as he shows using an example that was discussed with a little controversy. He introduces Linda. All we know about her is that she’s 41, has studied philosophy, was very active in political movements, and marched in antinuclear protests. "The question is," Kahneman offers, "How likely is she to be a bank teller? Or how likely is she to be a bank teller who’s also active in the feminist movement?" He smiles, and admits that 90 percent of the people surveyed think that she’s more likely to be a feminist bank teller, even if it’s not logical. "Because if she’s a feminist bank teller, she is a bank teller. You can give people hints and then they won’t make the mistake." It’s not just the question you ask, but the way you ask the question.

Can we rely on our intuition?

Kahneman was confronted with this question while serving in the Israeli army in 1956. He recognized that recruiters were relying on intuition too much when recruiting soldiers. So he took his first job as a psychologist and made significant updates to the system, which are still in use. "People were asked not to worry about the general impression of that person, but to ask specific, very detailed questions about several topics," he says. He explains the six traits they focused on, for example, punctuality or masculine pride. Each trait was rated separately and at the end, all interviewees had to close their eyes and write down their overall evaluation. "Intuition is okay, but you don’t want to have it too early," he says. "This is what we’re working on today. To work out instructions for people who are making decisions in businesses or in government in exactly the same way. To break up a problem into elements and to delay intuition until the end."

How should we make decisions inside a group?

He refers to studies on judgments and immediately uses a pivotal word: noises. "Judgment is much less stable and much noisier than most people think. I call noise an invisible problem," he explains, and cites a remarkable notion about intuition: It feels just the same when it’s wrong and when it’s right.

In organizations, which Kahneman calls "factories" of decisions and judgments, reducing noise is very important. "If you have different people who are going to reach a decision together, the noise reduction technique is to have every one of them write down their answer before the discussion," he says. "Because otherwise the first person who talks has too much influence."

Why do some people take more risk than others?

In organizations, there’s frequently another margin of error concerning judgment and decision-making, which Kahneman refers to as inherent predispositions.

People who rise in an organization are likely to be optimists.

He underlines that these people are usually more willing to take risks. "They’re the people who get things done. A few decisions are successful, people think you can walk on water, and they promote you further." Again we see that our intuition cannot judge what’s right or wrong.

Can our eyes reveal what we’re thinking?

To understand decision making, people need to understand their own thinking first. Kahneman’s research on what he’d later call the two systems, started with a Eureka moment in a laboratory, and strangely, with the pupil of an eye. It’s "the single best measure of mental effort," he underlines. Kahneman clarifies why it’s better than heart rate, blood pressure, or skin conductance, by relaying one of the "most elegant findings" he ever came across, as he observed a test subject’s pupil. When they were asked to remember their phone number, their pupil dilated and contracted. But by accident, he noticed that when she was simply talking to somebody sitting in the lab, nothing happened. "Having a conversation is easier than remembering your phone number. I became very interested in effort from that kind of observation. What is strenuous, what is effortless."

Thinking intuitively, thinking analytically

Kahneman later developed the two systems to describe our mental life: system one defines the effortless, intuitive part of our thinking and system two explains the kind of concentration that involves effort. "My favorite example is making a left turn into traffic," he says with excitement. "You’ll stop the conversation. When you’re putting effort into one thing, you cannot do other things at the same time. System one doesn’t have that limitation." Because in life, we learn intuitively and apply it - like how children say "doggie!" every time they see one.

Now, by making decisions we have the choice between those systems. "You could run or you could walk", Kahneman says, and leads into the general mechanism he calls the "lazy system". "Our mental life is like walking slowly. Mental life is easy, mostly. We can concentrate, but mostly we don’t like to; we avoid it." He notes that there are differences in how "lazy" people think and decide, but this is not necessarily a negative. "Intelligent people who can solve many problems effortlessly can get away with being more lazy," he adds.

How should we make important decisions?

Kahneman shares some advice on making important decisions. "You should slow down and get advice from a particular kind of person. Somebody who likes you, but doesn’t care too much about your feelings. That person is more likely to give you good advice."

The assumption of rational investors can be dangerous

Kahneman points to the fact that one has to be extremely cautious in financial decisions. He calls it risky, if not dangerous, when people who have little knowledge of the financial system need to make decisions about which stocks to buy for their retirement, for example. "That becomes silly," he quips. "The assumption that individual investors are rational. That leads to serious mistakes."

With Prospect Theory, the work for which Kahneman won the Nobel Prize, he proposed a change to the way we think about decisions when facing risk, especially in finance. Along with Amos Tversky, he found out that people aren’t first and foremost foresighted utility maximiziers, but react to changes in terms of gains and losses. "And gains and losses are short-term," Kahneman states. "They’re immediate, emotional reactions. This makes an enormous difference to the quality of decisions.” He demonstrates that when people think of the future, they think of the near future far more than the distant future. Changing the perspective from people acting to obtain long-term wealth, to people not wanting to lose tomorrow, significantly alters our understanding of behavior. "People put much more weight on losses than gains. People hate losing."

Where do populist beliefs come from?

As a psychologist, Kahneman investigates a most important question: where do our beliefs come from? Especially when reading the news, being confronted with populism, religious hatred and the dramatic consequences of political choices, his thoughts roam back to it.

Subjectively, it feels like you believe in something because you have the arguments for it," he says. "But it works the other way around. You believe in the conclusion, and then you create supporting arguments. That’s fundamental.

The essential question is: why do people believe in their conclusions? Partly because people we love and trust believe in the same conclusion. Kahneman calls it "emotionally coherent". It’s psychologically coherent, but not in the sense that it provides solid evidence. Voting, he says, is emotionally driven and one of the most powerful emotions is anger. It leads people to seek out an enemy.

Kahneman shares the story of his childhood in Paris, where he grew up as a jewish boy in World War II. "I’d gone out to play with a friend and I had my sweater with my star on it," he says. He’d turned it inside out, so no one would see it. "I saw a German soldier in a black uniform, and I knew that those were absolutely the worst. We walked towards each other and then he called me."Even decades later, the experience is clearly emoitional. "I was afraid that he would see the star inside the sweater, but he didn’t. He hugged me and showed me pictures of a little boy. And he actually gave me some money."

Both went their separate ways, but the significance remains to this day. "It showed the complexity of people. He would have killed me easily, but in that context he was just a father of a little boy."

Referring to anti-Muslim tendencies in our present society, Kahneman knows that society has no historical memory. Both populists and terrorists use powerful emotional triggers; they address people’s fear and direct their anger towards the unknown stranger. "That’s very easy to believe. And it’s very effective."

Will we learn from the history of mankind and avoid mistakes?

Can we ever get over this and avoid the mistakes of the past in future? Kahneman clarifies that he’s an eternal pessimist and not able to solve such problems by simply responding: "No." But luckily, as he says, this won’t be his job. "I am only a psychologist." He puts on his black coat again, opens his umbrella and steps out into the downpour. In this context, it’s definitely not a lazy decision.

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