Daniel Kahneman on Instinctual Economic Decision Making

Mr Kahneman, an Israeli-American psychologist and Nobel economics laureate, has delivered a full catalogue of the biases, shortcuts and cognitive illusions to which our species regularly succumbs. In doing so he makes it plain that Homo economicus—the rational model of human behaviour beloved of economists—is as fantastical as a unicorn.

This book, his first for a non-specialist audience, is a profound one. As Copernicus removed the Earth from the centre of the universe and Darwin knocked humans off their biological perch, Mr Kahneman has shown that we are not the paragons of reason we assume ourselves to be.

“Most of the time we can trust intuition, and we do. In terms of the distinction I draw between fast thinking and slow thinking, our life is mostly run on fast thinking, which normally does very well. We cross the street safely and make many other decisions safely. However, there are situations where people would do better by slowing down. And there are cases in which people have far more confidence in their intuitions than is justified, as in the case of stock trading.”

“Well, clearly there is a state when we lose our normal grasp on reality, which is mostly defined by what other people do. Under some conditions, people and institutions come to be guided almost exclusively by the worst-case scenario. This can happen at the level of institutions, when banks become afraid of lending to other banks. Understanding these processes is very urgent. We have vague stories but we don’t have good research of the kind we have on individual risk taking.”

— The Economist