Nothing
in
his
early
life
suggested
that
Daniel
Kahneman,
who
died
last
week
at
the
age
of
90,
would
eventually
win
a
Nobel
Prize
in
economics.
To
start,
the
2002
Nobel
laureate
was
trained
in
another
subject.
His
PhD
dissertation,
in
psychology,
analysed
a ratings
scale called
the semantic
differential.
That
measure
helps
researchers,
such
as
product
marketers
and
sociologists,
to
better
assess
what
respondents
think
about
a
subject.
That
would
seem
a
long
way
from
an
economics
prize,
especially
as
Kahneman
was
an
indifferent
mathematician.
Also
working
against
his
candidacy
was
his
personality.
History
chronicles
many
trailblazers
who
believed
in
themselves
in
the
face
of
scepticism.
Kahneman
was
just
the
opposite:
wracked
by
self-doubt.
When
asked
about
Kahneman’s
book Thinking,
Fast
and
Slow his
protégé Richard
Thaler
replied “he
quit
writing
this
book
at
least
a
dozen
times.
And
I
had
to
convince
him
not
to
quit,
n+1
times.
He
genuinely
didn’t
think
anybody
would
buy
it.
It
was
a
biased
forecast –
he
prides
himself
on
being
a
pessimist.”
Mistakes
Matter
Yet
it
was
Kahneman’s
lack
of
self-belief
that
laid
the
groundwork
for
his
success.
The
very
introspection
that
made
him
so
conscious
of
his
failings
underpinned
his
key
insight:
everybody
was
wrong.
Not
always,
to
be
sure,
but
they
made
mistakes
far
more
often
than
they
liked
to
admit.
People
rushed
to
judgment
by
using
mental
shortcuts – heuristics,
per
Kahneman’s
terminology.
They
then
sat
on
those
opinions,
rarely
re-examining
them
even
when
the
evidence
strongly
suggested
that
they
should.
The
study
of
errors
became
Kahneman’s
laboratory.
His
personality
then
provided
him
with
a
second
gift.
Because
of
his
diffidence,
he
willingly
accepted
a
partner.
Those
who
are
certain
of
themselves
seek
no
assistance.
In
contrast,
Kahneman
was
happy
for
the
help.
In
1969,
he
encountered
the
ideal
associate. Amos
Tversky was
many
things
that
Kahneman
was
not:
confident,
optimistic,
and
a
keen
mathematician.
Upon
meeting,
the
duo
quickly
challenged
each
other’s
beliefs
and
almost
as
quickly
became
lifelong
accomplices.
Publication
Gold
A
series
of
groundbreaking
papers
followed:
1971:
Belief
in
the
Law
of
Small
Numbers,
which
shows
how
people
overestimate
the
knowledge
that
can
be
obtained
from
small
sample
sizes.
1972:
Subjective
Probability:
A
Judgment
of
Representativeness,
which
documents
the
related
error
of
generalising
about
a
broad
group
based
on
the
characteristics
of
a
few
members.
1973:
Availability:
A
Heuristic
for
Judging
Frequency
and
Probability,
which
establishes
how
people
frequently
arrive
at
conclusions
by
comparing
their
current
situation
to
a
previous
situation
that
is
atop
their
minds
(a
sample
size
of
one!).
1974:
Judgment
Under
Uncertainty:
Heuristics
and
Biases,
a
landmark
paper
that
builds
upon
the
previous
works,
while
adding
the
process
of
“anchoring
and
adjustment.”
When
people do change
their
views,
their
new
outlooks
are
usually
related
to
their
previous
beliefs.
They
are
haunted
by
the
past.
A
New
Field
Those
articles
were
published
in
psychology
reviews.
However,
economists
soon
found
Kahneman
and
Tversky’s
work
because
it
strongly
appealed
to
those
(such
as
Thaler)
who
doubted
that
investors
invariably were of
sound
mind,
as
their
discipline
insisted.
In
turn,
Kahneman
and
Tversky
obliged
by
beginning
to
consider
economic
issues.
In
1979,
they
published
their
first
paper
about
money: Prospect
Theory:
An
Analysis
of
Decision
Under
Risk.
It
was
also
their
first
paper
to
appear
in
an
economics
journal.
As
with
most
lauded
scientists,
Kahneman
and
Tversky
occupied
the
right
place
at
the
right
time.
Economics
had
accomplished
a
great
deal
by
modelling
humans
as
strictly
rational
actors,
but
that
assumption
was
overdue
for
hard
scrutiny.
Along
came
Kahneman,
with
his
innate
scepticism
and
knowledge
of
how
to
conduct
interviews,
which
was
accompanied
by
Tversky’s
quantitative
rigour.
The
pair
invented
a
new
science:
behavioral
economics,
which
evaluated
how
people actually made
decisions.
(Tragically,
Tversky
died
young
and
therefore
did
not
receive
a
Nobel
Prize.
A
great
injustice,
because
if
ever
two
scientists
deserved
to
share
the
award,
that
duo
was
Kahneman
and
Tversky.
Or,
one
could
just
as
reasonably
write,
Tversky
and
Kahneman.)
Highly
Influential
Kahneman
and
Tversky’s
insights
spread
rapidly.
Behavioral
economics
introduced
such
now-common
concepts
as loss
aversion,
referring
to
the
tendency
for
investors
to
suffer
the
pain
of
losses
more
keenly
than
they
do
the
pleasure
of
equivalent
gains
(in
the
words
of
Larry
Bird:
“I
hate
to
lose
more
than
I
like
to
win”); fairness,
which
explains
why
consumers
dislike
dynamic
pricing;
and
the disposition
effect,
which
encourages
us
to
retain
losers.
Their
insights
have
extended
well
beyond
economics.
For
example,
rather
than
dispense
wobbly
“leadership
principles,”
which
I
had
both
feared
and
expected,
my
MBA
management
course
turned
out
to
be
a
seminar
on
the
work
of
Kahneman
and
Tversky.
What
a
delight!
During
this
course,
we
spent
10
weeks
making
mistake
after
mistake,
accompanied
by
lessons
on
how
we
could
minimise
(although
of
course
not
eliminate)
such
errors
in
the
future.
It
was
easily,
by
far,
the
most
valuable
class.
Entering
the
field
as
an
outsider,
while
possessing
far
more
questions
than
answers,
enabled
Kahneman
to
accomplish
much
more
than
if
he
had
been
a
self-assured
insider.
His
weaknesses
were
his
greatest
strength.
Verbatim
I
will
close
this
article
with
five
direct
quotes
from
Kahneman:
1)
My
main
work
has
concerned
judgment
and
decision
making.
But
I
never
felt
I
was
studying
the
stupidity
of
mankind
in
the
third
person.
I
always
felt
I
was
studying
my
own
mistakes.
2)
Many
people
now
say
they
knew
a
financial
crisis
was
coming,
but
they
didn’t
really.
After
a
crisis,
we
tell
ourselves
we
understand
why
it
happened
and
maintain
the
illusion
that
the
world
is
understandable.
In
fact,
we
should
accept
the
world
is
incomprehensible
much
of
the
time.
3)
Economists
have
a
mystique
among
social
scientists
because
they
know
mathematics.
They
are
quite
good
at
explaining
what
has
happened
after
it
has
happened,
but
rarely
before.
4)
Confidence
is
not
a
very
good
indicator
of
accuracy.
5)
A
reliable
way
of
making
people
believe
in
falsehoods
is
frequent
repetition
because
familiarity
is
not
easily
distinguished
from
truth.
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