This is not as big a book as The Shock Doctrine, but it is denser, with numerous illusions exposed by careful experiments. Naomi Klein was exposing one huge illusion with vast real-world consequences. Today I am taking on some of the most important fallacies that Kahneman and his collaborators and colleagues uncovered. Next week I will apply them to our actual politics, as we change over from Friedmanomics to Bidenomics.
We can call trust in these illusions a new class of fallacies, going far beyond the study of logical fallacies and how to counter them, pioneered by Aristotle and codified into legal and scientific rules of evidence. Here, to begin with, are a summary of the basic theory, and list of the most important errors documented in Thinking, Fast and Slow.
It has long been known that consciousness is not all of mind, or the workings of our brains. We are familiar with Platonic three-part psychology, revived by Freud as id, ego, superego. This new analysis is quite different. It distinguishes
- System 1: what we might call intuitive thinking, using automatic processes in the brain, evolved for survival, such as facial recognition and understanding language, applied in cases of insufficient knowledge with great confidence. Consider, for example, the “face on Mars”, which turns out to be a trick of the light. Or any recent conspiracy theory.
- System 2: Logic, statistical reasoning, the scientific method, and other processes involving conscious thought, and significant effort. System 2 often corrects System 1, but it can be lazy and let many errors go by. Even professional statisticians make gross statistical errors when System 2 is not engaged.
One of the most consequential errors for economics is Bernoulli’s mistake in his utility theory: that the utility of wealth follows a logarithmic function. If you are mildly prosperous, your first million has huge utility, but a second million doesn’t provide anywhere near the same utility. One would have to go from $1 million to $10 million to have a similar psychological effect, or from $10 million to $100 million. This is correct as far as it goes, but it takes no account of changes in wealth. Going from $1M to $2M is a huge gain, very satisfying, but going from $4M to $2M is a disaster. These differences lead to huge changes in acceptance of risk, of the kind that we saw play out in the housing bubble and many others.
Kahneman does not get into it deeply, but this explains a lot of our politics. Democrats are attracted by Bidenomics, which promises significant but limited gains for all. Republicans are dominated by fear of losing privilege, and are thus willing to take on any level of political risk that promises the remotest chance of maintaining privilege.
We will come back to that in more detail next week.
Now, as to that list:
- Answering an easier question—Are they good people?/Have I been taught to be prejudiced against their kind? Will they do well in school/on a job?/How did they do on tests or in interviews?
- The law of small numbers—Statistics tells us how many should be in a sample to have a certain level of confidence in results. Even professional statisticians, including Kahneman himself often roundly ignore this when evaluating their own ideas.
- Telling plausible stories—Plausible to whom?
- WYSIATI/What you see is all there is—Especially for Fox viewers
- If it bleeds, it leads—TV viewers assume that the disasters they are shown are more common than others.
- Regression to the mean—Performance = talent + practice + luck; no such thing as “hot hands”
- “Experts” often know nothing useful—Dart-throwing monkeys beat investment managers
- Anchors in decision-making—Good compared to what?
Kahneman won the Swedish Bank prize in economics for his work in decision theory. This is commonly misnamed a Nobel Prize. Unlike in physics and other sciences, many of the winners of this prize turned out to be outright charlatans, especially the Great Suppositionist Milton Friedman. But Kahneman actually shows his work.