My Evening with the Godfather of Behavioral Economics – Daniel Kahneman

Okay, so it wasn’t really just the two of us – there were a few hundred others involved. Still it was a very memorable evening that I think is worth sharing.

The day started innocently enough. I was heading out to Yale for a guest lecture in the MBA Marketing Research class taught by Jiwoong Shin as I have done for several spring semesters now. I like this trip a lot as it allows me to catch up with many of my friends in the Yale Marketing Department. One of those is Shane Frederick and I had emailed him to see if he was around. He replied asking if I was attending Kahneman’s lecture. I had no idea that Daniel Kahneman, Nobel Prize winner and godfather of behavioral economics was giving a lecture there. The day was already getting better! I quickly changed my Amtrak ticket to a later time and told Shane I would come by his office so we could walk over.

My guest lecture went off very well with the students asking plenty of interesting questions. Then I had lunch with Zoe Chance who is doing some very interesting work with leading companies, applying ideas from behavioral economics. After a couple more meetings, I went to see Shane and we walked over early knowing there would be a big crowd. And we were glad we did, as the auditorium was overflowing by the time the lecture started.

Daniel Kahneman (Danny to his friends) was introduced by another notable person from Yale, Professor Robert Shiller (yes, he of the Case-Shiller Index you may have heard about during the housing crisis). Shiller talked about the widespread impact of Kahneman’s work , especially after the publication of his best seller Thinking, Fast & Slow. Trying to find Kahneman’s connections to Yale, Shiller pointed out that two of his coauthors (Shane Frederick and Nathan Novemsky, both in the marketing department) were at Yale.

And then it was time for Kahneman to speak. His humility, thoughtfulness and eloquence came through pretty much from the first few words. He started by saying that he doesn’t do university speeches anymore since he is not actively doing any research (he is retired), but could not say no to Bob Shiller. Most of his recent speeches have been about his book, and there had been so many that as a consequence he seems to have forgotten everything else he ever did (laughter!). And that, he said, makes sense because as he points out in the book, we like things that are familiar (more laughter!).

The main topic of his book, he explained, was the departure from perfect rationality that people exhibited (he was loath to call it irrationality). Classical economics assumed that people were perfectly rational and built models on that basis. When he was first exposed to this idea (more than 40 years ago) he found it rather absurd. Even his economist friends agreed that they had to deal with spouses and teen-aged children who seemed anything but rational. So why assume such a thing in studying human nature, he wondered. As a psychologist he was not constrained by the conventions of the economics profession. So he and his great collaborator Amos Tversky (who unfortunately died a few years before the Nobel prize was awarded) embarked on research that showed through many clever experiments where and how the rational model fell apart (i.e. the heuristics and biases that seem to dominate human behavior rather than cold cost-benefit calculations).

He willingly accepted the common criticism he faces – economists have theories, while psychologists have lists. There doesn’t yet seem to be an overarching psychological model of human behavior, only an (ever expanding) catalog of situations where humans don’t follow the strict rational model. In fact, when later asked about the future of behavioral economics he expressed the hope that one day the term “behavioral” would fall away and that economics would naturally (and without controversy or comment) imbibe those ideas as part of its fundamental models.

He explained the difficulty he had in writing a book that summarizes 40 years of research and acknowledged that he deliberately used an artificial mechanism to make the explanation easier. Those who have read the book know that the title refers to the two systems (one and two) that control our behavior. In reality there is no such thing, he said, but creating two agents who behave in certain ways helps the reader grasp the material better (thus demonstrating the power of storytelling). He did admit that it was rather strange for a psychologist to ascribe behavior to little people running around in someone’s head! But the idea of System One (fast) and System Two (slow) does help cohere many strands of behavior that people exhibit at various times.

So, what are these systems? System Two is deliberate and effortful. Its effect can be measured physiologically (such as with dilated pupils) and the effort is taxing. Engaging in two System Two activities at the same time is impossible (the myth of multitasking). On the other hand System One is fast, intuitive and is often what is called skill. Things we can do automatically without needing to think, and those activities that don’t actually tire us. For example, driving on an open road and talking is controlled by System One, while making a left turn into traffic is controlled (or should be) by System Two. He likens the two systems to a group of reporters and a single editor. The reporters provide a constant, quick stream of news and the editor usually approves most of them instantaneously, sometimes correcting, and very occasionally censoring. When we have the urge to tell someone how stupid they are, but decide not to, that is System Two exercising control over System One (laughter!).

He talked about how this somewhat contrived view of the world is very useful in understanding how people behave. Several clever and useful studies (with many coauthors) have helped elucidate many of the themes touched by the book. One of his favorites is the bat-ball puzzle that Shane Frederick developed. He actually apologized to Shane from the stage for not explaining the context properly, drawing plenty of laughter from Shane and his students (who had turned up in good number). Kahneman also talked about how not everyone was enamored with his view of the world. In fact he said, much to the audience’s amusement, that in spite of all the research and writing a whole book on the topic, he himself was still unable to overcome the biases in his everyday life.

His personality came through very nicely during the question/answer session. He repeatedly refused to speculate on the future, or comment on areas that he felt fell outside his domain. So many “I don’t know” responses coming from such an accomplished researcher was very refreshing. But he also subtly showed how he was applying his own research in answering questions. One student mentioned how a friend was anxiety ridden after reading the book, constantly second guessing himself. Rather than apologize or provide a pseudo-prescription, Kahneman said that most of the people who had read the book did not exhibit that kind of behavior, and suggested that perhaps the friend had a prior disposition to self-doubt. It seemed to me that he was telling the rest of us what he had said in the book –people too easily draw conclusions from single, vivid instances rather than looking at the behavior of the population.

When he was asked about the future of behavioral economics, the field that he is said to have founded (along with his good friend Dick Thaler from the University of Chicago), he said that he could definitely see it thriving in the near future. Why? It is currently popular and many smart students are pursuing it, so he was confident that they would do interesting research for the next few years. But beyond the next 10-15 years he said he had no idea what would happen to the field. From the practitioner’s perspective that I had, he made a very interesting point. He said that for all its success and popularity, behavioral economics was still about individuals and their behavior, not about markets. So when people ask about how to apply behavioral economics, the answer is not easy because the questioner is often thinking about the market as a whole not the individual.

The evening came to a halt regrettably soon. I would have liked to have met Kahneman, even if just for a couple of minutes. But having hosted him the previous evening, and knowing there was a reception later, Shane was keen on leaving the overcrowded auditorium. So I left with him, discussing books and puzzles of mutual interest. But it certainly was a once in a lifetime opportunity to see the great Daniel Kahneman in person, and I’m glad to have taken it. And to add icing on the cake, when I arrived at the Amtrak garage in Philadelphia the door was held open for me by the famous chef Jose Garces (who has a restaurant there). When I related the day’s events to my children, they were more impressed by my encounter with the Iron Chef than the Nobel Laureate. Oh well. Maybe one day their System Two will tell them otherwise.