Daniel Kahneman: The psychologist who won a Nobel Prize in Economics for replacing Homo economicus with flesh-and-blood humans | PNAS
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Daniel Kahneman: The psychologist who won a Nobel Prize in Economics for replacing Homo economicus with flesh-and-blood humans
Maya Bar-Hillel [email protected]Authors Info & Affiliations
June 24, 2024
121 (27) e2409646121
https://doi.org/10.1073/pnas.2409646121
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Danny, as he was known to all his friends, died on March 27, 2024, three weeks after his 90th birthday. Years earlier, he had expressed to friends his belief that 90 was a good age to leave this life. Danny was born in Tel-Aviv but spent his childhood years in wartime Paris, where he had an experience formative enough to include in his Nobel biography. Walking home after curfew hours, the mandatory yellow Star of David on his inside-out sweater, he encountered an SS soldier. To his horror, the soldier picked him up and embraced him, then showed him a photo of a small boy his age and sent him off with some money. Danny went home with the realization that “people were endlessly complicated and interesting” (1). A psychologist had been born.
Daniel Kahneman. Image Credit: Sasson Tiram (Hebrew University, Jerusalem, Israel).
When it came time to enroll in The Hebrew University, majoring in Psychology was a natural choice. After graduating, Danny served his mandatory years in the IDF (Israel Defense Forces). Having read Meehl’s recently published Clinical versus Statistical Prediction (2), he designed a structured interview for the IDF to use in selecting and allocating combat-unit recruits. Astonishingly, it was still in use decades later. In the IDF, he also discovered his “first cognitive illusion,” which he labeled the illusion of validity (1). Danny and some colleagues were charged with predicting future performance in officer training school based on controlled observations of how the candidates performed a team task. The sense of actually observing, rather than predicting, the traits of interest (e.g., leadership, loyalty) did not wane with repeated negative feedback, one group after another. They were overly confident in their nonexistent validity. This experience also foretold another cornerstone of the psychology of prediction: failure to regress it with respect to observation.
Danny got his PhD from the University of California, Berkeley. Although his early research career did not involve the study of intuitive statistics, or judgments of probability, he was already intrigued with these topics well before he teamed up with Amos Tversky in 1968, by virtue of having to grapple with them in teaching and in practice. He was accidentally discovering some of the effects he would later study with Amos: 1) The hindsight bias—Danny was visiting a psychoanalytic clinic in 1958, where he attended a case conference on the morning after a patient had committed suicide. He was struck by “the powerful retrospective sense of the inevitability of the event and the obvious fact that [it] had not been foreseen;” (1). 2) The “law of small numbers”—Danny realized that sometimes failure to replicate empirical results was due to underpowered studies, which used samples too small, because of the intuitive insensitivity to sample size (3); 3) The goldmine that teaching Introductory Statistics to Psychology students provided in terms of uncovering, and correcting, intuitive errors of statistical reasoning. He also realized early on that, no less than his future experimental participants, he was subject to the same erroneous intuitions, which were not consequences of stupidity or ignorance, but rather hallmarks of a well-functioning cognitive apparatus. Finally, he had already discovered the methodology that was to characterize his experimental work and to which he attributes much of its success: The “psychology of single questions,” which he adopted from Walter Michel’s approach to studying delay of gratification in young children. “I had no idea, of course, but I was laying the foundation for a program of research on judgment under uncertainly” (1).
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In 1974, after several years of delightful collaboration, and several groundbreaking papers on heuristics and biases in judgment under uncertainty, Kahneman and Tversky decided to reach out beyond Psychology. Science published a summary of their work (cited, as of the writing of this article, over 50,000 times) (4), which, surprisingly, “soon became a standard reference as an attack on the rational-agent model, and it spawned a large literature in cognitive science, philosophy, and psychology” (1). Soon thereafter, Kahneman and Tversky decided to move on from studying judgment to studying decision-making.
From his deep understanding of Perception, Danny brought his intuition that money is subject to the laws of psychophysics no less than judgments of the usual physical variables of weight, distance, luminance, etc. This led to the central idea of Prospect Theory, the Nobel Prize-winning theory of choice [with well over 80,000 citations today] (5), that the carriers of utility were not final states of wealth, as in Economics’ classic Utility Theory, but rather changes in wealth, with respect to some reference point.
Tversky’s background was in the study of decision-making, in which he had done his PhD thesis, and about which he had already written papers and coauthored a book (6). It was therefore widely believed that he was the host welcoming an outside visitor into his area. However, following their joint work shows that together they founded a field that was mostly new to Psychology, known today as Judgment and Decision Making (JDM). Danny brought his fresh observations and original insights into an area that had been governed by a different approach—formal and normative, which was Amos's forte. If the work has been regarded as challenging the notion of rationality prevalent in Economics and Statistics, then this benchmark came from Amos’s background, and the descriptive challenge came from Danny's introspections and observations.
While the game-changing collaboration between Tversky and Kahneman was developing in the new field they founded, Danny’s old field provided a different kind of collaborator, of no less importance, albeit on a personal level: Anne Triesman, a leading figure in that field, became his second wife.
The work that Danny and Amos did together is probably the best-known psychological work of the 20th century to be known outside of Psychology and has justifiably earned a Nobel Prize (albeit in Economics) and an in-depth portrayal in Michael Lewis’s best-selling book The Undoing Project (7). That book ends with Amos’s early death in 1996, and Danny’s Nobel Prize in 2002. In this Retrospective, I will therefore give those years less attention than is proportionately apt for their objective significance and impact and try instead to share lesser-known aspects.
Shortly after winning the Nobel, Danny was a guest of The Hebrew University, his alma mater and his first tenured academic position, where he gave a public lecture in the University’s largest hall. He spent the hour before the lecture in the company of the University’s President. Then, it was time to head out. The entire passageway between the President’s office and the lecture hall had been cordoned off to constrain the excited and curious crowd flanking its center on both sides, cheering, blowing kisses, and flashing cameras. The President’s entourage was surrounding Danny, as they slowly advanced. Throughout that entire march, Danny had his laptop open, perched on one arm, while the other was making last-minute changes to the talk. His head was bowed, his eyes on the screen, oblivious to the admiration, the pride, the affection, showered by the multitude we passed, people who had failed to secure a seat inside the auditorium. I was accustomed to Danny’s last-minute changes; I had seen it often before. Nevertheless, this was surreal. A sight for the ages.
Danny also had a closed meeting with the Economics department. The attendees sat in a circle along the seminar room’s walls, from where they conducted an informal Q&A with Danny. I remember Danny shocking them with the words: “Prospect Theory is a theory of nothing.” In response to the gasps, he explained: “It is a theory of choice between a pair of binary gambles with monetary outcomes and known probabilities.” Pause. “Now how broad is that?” Laughter.
More seriously, Danny has often said that Prospect Theory, a mathematical theory published in the hallowed Econometrica journal (5), was the entrance ticket to the attention of professional academic economists. Like a real ticket, once used to gain entry, it was disposable. Its value is entirely in the ideas it formalized: 1) reference point, a point compared with which outcomes are regarded as losses or as gains—very often the status quo; 2) loss aversion, the fact that losses of any magnitude have a greater subjective impact than same-magnitude gains; 3) the reflection effect, namely that choices between gain gambles are reversed if the outcomes’ signs are changed from positive to negative, turning them into loss gambles. In particular, risk aversion in the domain of gains is reversed to risk seeking in the domain of losses; 4) the certainty effect, namely that the difference between 90% and 100% has far more impact on choice than between, say, 30% and 40%, because 100% (certainty) has a special status. This is a special case of the more general nonlinearity of subjective probabilities.
By far the most significant effect embodied in Prospect Theory is the Framing Effect, the fact that by altering the way outcomes are framed, even without altering the outcomes themselves, choices can be altered. This is the most severe challenge to traditional models of rational choice because it challenges the most elementary, if typically implicit, assumption of rational choice: that choice is between outcomes, not between descriptions of outcomes, an assumption called invariance. Preferences, Danny and Amos claimed, are not revealed by choice; they are constructed by choice.
After Tversky’s early death, Danny continued working with other collaborators, most notably Richard Thaler, with whom collaboration had begun almost 20 y earlier. Like Tversky, he would also become a close personal friend. This collaboration contributed to a Nobel Prize for Thaler (2017) and to another new field—Behavioral Economics, the field that uses Psychology to understand and affect economic behavior. They studied phenomena like fairness (e.g., people‘s willingness to incur economic loss in order to achieve fair allocation, as in the Ultimatum Game, or to punish greed); the endowment effect (the extra value one attaches to an item merely by owning it, as in the case of “the owner of a bottle of old wine, who would refuse to sell it for $200 but would not pay as much as $100 to replace it” (1).
Danny became interested in the difference between “Decision Utility”, which is utility's standard meaning in Decision Theory, and “Experienced Utility”, which is its psychological meaning—as lived and felt. That naturally led to Danny‘s interest in hedonics, happiness, satisfaction, well-being, etc., their similarities and differences, and their relationships with each other, always with an eye to defensible measures and maximal rigor. One fascinating result in this area is the Peak-End Rule: an experience is evaluated and remembered by its most intense moment (Peak) and its final moment (End), with little weight given to the other moments and—more shockingly—to its length or duration. A paradoxical hypothesis follows: imagine an unpleasant experience, such as a colonoscopy without sedation. Imagine extending it beyond the necessary by a few extra, unnecessary, and still unpleasant moments—but less unpleasant than what would have been the final moment. By the Peak-End rule, this extension should improve the overall evaluation of the procedure. This hypothesis was actually confirmed in the wild!
In the last 15 y of his life, Danny remarkably succeeded in writing two general public books. Thinking Fast and Slow (8), and Noise (9). Both were international best-sellers, translated into many languages. In the first, Kahneman promotes the thesis that mental processes are of two kinds: System 1, fast, automatic, effortless, intuitive, associative; and System 2, slow, deliberate, calculating, logical—but lazy. This framework allowed him to organize and present much of his own work, as well as related work by others, in a coherent and structured narrative, making it at once more accessible and more comprehensive than the body of science it covers. Noise addresses the inherent inconsistency in human judgment, which is what the name means. Kahneman came to regard noise as more pernicious and pervasive than bias, and the book attempts to redress what he saw as neglect in his life work.
Kahneman did outstanding Psychology and ultimately found a way “to give Psychology away” (10). He was called “the world‘s greatest living psychologist” by Tversky, a statement with which the present author agrees. Psychology has lost a giant, but his legacy lives on.
Acknowledgments
Author contributions
M.B. wrote the paper.
Competing interests
The author declares no competing interest.
References
1
D. Kahneman, Biographical. NobelPrize.org. https://www.nobelprize.org/prizes/economic-sciences/2002/kahneman/biographical/.
2
P. E. Meehl, Clinical Versus Statistical Prediction: A Theoretical Analysis and a Review of the Evidence (University of Minneapolis Press, 1954).
3
A. Tversky, D. Kahneman, Belief in the law of small numbers. Psychol. Bull.76 , 105 (1971).
4
A. Tversky, D. Kahneman, Judgment under uncertainty: Heuristics and biases: Biases in judgments reveal some heuristics of thinking under uncertainty. Science 185 , 1124–1131 (1974).
5
D. Kahneman, A. Tversky, Prospect theory: An analysis of decision under risk. Econometrica 47 , 363 (1979).
6
C. H. Coombs, R. M. Dawes, A. Tversky, Mathematical Psychology: An Elementary Introduction (Prentice-Hall, Englewood Cliffs, NJ, 1970).
7
M. Lewis, The Undoing Project: A Friendship that Changed Our Minds (W.W. Norton & Company, 2017).
8
D. Kahneman, Thinking, Fast and Slow (Farrar, Straus and Giroux, New York, NY, 2011).
9
D. Kahneman, O. Sibony, C. Sunstein, Noise: A Flaw in Human Judgment (William Collins, London, UK, 2021).
10
G. A. Miller, Psychology as a means of promoting human welfare. Am. Psychol. 24 , 1063 (1969).
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Maya Bar-Hillel1 [email protected]
Center for The Study of Rationality, The Hebrew University of Jerusalem, Jerusalem 91904, Israel
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1
Email: [email protected].
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- M. Bar-Hillel,
Daniel Kahneman: The psychologist who won a Nobel Prize in Economics for replacing Homo economicus with flesh-and-blood humans, Proc. Natl. Acad. Sci. U.S.A. 121 (27) e2409646121, https://doi.org/10.1073/pnas.2409646121 (2024).
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