DANIEL
KAHNEMAN
An israeli psychologist who won the 2002
Nobel Prize in Economics «for having
integrated the results of psychological
research into economic science, especially
concerning human judgment and decision
theory in a climate of uncertainty».
We provide a summary of his theories
below, as well as his recent work on
consultancy in the financial sector.
Sources: “Le leggi del pensiero” – La Repubblica.it of 28.04.2012
“Governare le emozioni dei risparmiatori” – Il Sole 24 Ore of 12.06.2016
DANIEL KAHNEMAN AND DECISIONS IN A CLIMATE OF UNCERTAINTY
Daniel Kahneman is an israeli psychologist who won the 2002 Nobel Prize in Economics «for having integrated the results of
psychological research into economic science, especially concerning human judgment and decision theory in a climate of uncertainty».
Kahneman was the historical scientific partner of the late Amos Tversky, with whom he revolutionised knowledge about how decisions
are made under conditions of uncertainty and risk. That is, almost always.
The influence of his work was so enormous that it founded new economic, "behavioural economics," which debunks the approach
based on rational agents that is the basis of liberalism and it does much more: it intertwines psychology with economics, as well as with
sociology, medicine, neuroscience, finance and all areas involving aspects of how people make decisions.
Forty years of research and experiments have led Kahneman to identify two systems of perception and decision in our brain: System 1
and System 2.
System 1 or quick thinking is intuitive, impulsive, associative (it tends to jump to conclusions immediately), unconscious, quick,
ecological and economic (particularly in the use of energy).
System 2 or slow thinking is aware, deliberative, slow, if not actually lazy, tiring to start, thoughtful, educable and polite, with a high
consumption of energy.
We often delude ourselves that we are being guided by System 2 in making decisions after careful thought, when in fact it is the System
1 that controls our lives for most of the time.
The problem with System 1 is that it does not know its limits. It tends to make blunders in the evaluation of the statistical probability of
an event. When using System 1, we generally underestimate the risk that catastrophic "rare events" can occur, although we instead
overestimate the probability of a repetition immediately after these disasters have occurred. People are not naturally capable of
reasoning in a statistical way, neither experts or the uninitiated, even logical people or economists. But intuition leads us astray.
If System 2 remains passive we end up believing that false impressions are true, which applies as much to optical illusions as judgments
and decisions we make daily.
And we need to pay attention, because what gets us into trouble is not so much what we know but what we mistakenly think we know.
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THE IRRATIONAL HOMO ECONOMICUS
In the 1970s, Kahneman began to demolish the myth of a perfectly rational homo economicus and yet, until the crisis of 2008, the
greatest exponents of single neoliberal thought have continued to behave as if the markets were the utmost in rational balance
therefore able to correct their mistakes.
Irrational aspects played their part in the financial crisis, for instance in those who contracted mortgages knowing that they could never
repay them. Other players in the crisis instead acted while letting themselves be guided by self-interest. The illusion of rationality
influenced certain economic policies.
According to Kahneman, consultants have now become indispensable, since they are the only ones able to govern the emotions of
investors to avoid them always making the same basic errors.
«My student - said Kahneman, as a guest at the Mediolanum Bank convention in Milan - has carried out research involving thousands of
investors, analysing their purchases and sales of securities. Well, after a year from the day of purchase or sale, the securities sold achieved
better returns on average than those that had been purchased, and not by a small margin. What was the reason for this? Because it is
hard to sell losing securities, it causes us pain to lose out, but by keeping these securities it is likely that we continue worsening the losses.
While it is easier to sell the best securities, which have been a source of pleasure to us, but which we could have earned more money
from».
Even in the choice of investments it is therefore system 1 that takes over.
«More than technical experts in savings, advisor should be psychologists, they should be able to understand what kind of clients they have
and structure appropriate financing based on the psychological profiles of each client. Also, it is necessary to inform people in advance,
they need to know in advance what oscillations they could face. They need to be prepared and aware. Preparation regarding volatility acts
as a vaccine and vaccinated people do not get sick, they do not give in to nostalgia and the desire to change investment choices and risk
buying at too high prices and selling when the markets fall. But the vaccine must not involve an excess of information. An equity portfolio
should be checked once per year, not quarterly. History teaches us that savers who have forgotten about their investments are those that
have achieved the best results».
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