My Conversation with Daniel Kahneman

Here is the transcript and audio, a rollicking time was had by all.  We covered what you would expect us to have covered.  Here is one bit:

COWEN: And that people want to maximize their overall sense of how their life has gone — do you think that is ultimately Darwinian roots? Why is that the equilibrium? Happiness feels good, right?

KAHNEMAN: Yeah, happiness feels good in the moment. But it’s in the moment. What you’re left with are your memories. And that’s a very striking thing — that memories stay with you, and the reality of life is gone in an instant. So memory has a disproportionate weight because it’s with us. It stays with us. It’s the only thing we get to keep.

COWEN: If you think of your own life, have you maximized happiness or the overall sense of how your life has gone?

KAHNEMAN: Neither.

[laughter]

COWEN: Neither. Citations?

KAHNEMAN: No.

And on his new project:

KAHNEMAN: I’ll tell you where the experiment from which my current fascination with noise arose. I was working with an insurance company, and we did a very standard experiment. They constructed cases, very routine, standard cases. Expensive cases — we’re not talking of insuring cars. We’re talking of insuring financial firms for risk of fraud.

So you have people who are specialists in this. This is what they do. Cases were constructed completely realistically, the kind of thing that people encounter every day. You have 50 people reading a case and putting a dollar value on it.

I could ask you, and I asked the executives in the firm, and it’s a number that just about everybody agrees. Suppose you take two people at random, two underwriters at random. You average the premium they set, you take the difference between them, and you divide the difference by the average.

By what percentage do people differ? Well, would you expect people to differ? And there is a common answer that you find, when I just talk to people and ask them, or the executives had the same answer. It’s somewhere around 10 percent. That’s what people expect to see in a well-run firm.

Now, what we found was 50 percent, 5–0, which, by the way, means that those underwriters were absolutely wasting their time, in the sense of assessing risk. So that’s noise, and you find variability across individuals, which is not supposed to exist.

I enjoyed this particular exchange:

COWEN: Do you think of low intelligence as yet a third independent source of error? Or is that somehow subsumed in bias and noise?

KAHNEMAN: You mean plain stupidity?

[laughter]

COWEN: In some cases.

And this:

COWEN: A society such as Argentina that relies so heavily on psychoanalysis — as a psychologist, do you see that as bias? Is it a placebo? Is there a placebo effect in psychoanalysis?

KAHNEMAN: You seem to attribute . . . You seem to think that I think of bias all the time.

[laughter]

COWEN: I can’t imagine why. That’s my bias.

KAHNEMAN: It’s like thinking of sex all the time. I really don’t think of bias that much.

Finally:

COWEN: Some questions about psychologists outside of what you’ve worked on, but maybe related — Freud. What do you think of Freud’s body of work? And has it influenced you at all?

Definitely recommended, and you will find cameo appearances by Michael Nielsen and Daniel Gross.

Comments

"But if you want to apply it, then clearly there is a lot of psychoanalysis in Argentina, and there’s no indication that it makes them more sane."

Maybe if Americana stopped to bleed Argentina dry, its people would not be crazy.

Makimizing ones “overall sense of how their life has gone” - said otherwise, “human flourishing” - has Aristotlean roots. It is his concept of eudaimonia, which he makes a fascinating Socratic argument for, beyond what I have time to type out while standing on this subway platform :)

Underwriters wasting their time - I completely disagree. There are a lot of different things that can affect the risk and the amounts. I personally would feel a lot more comfortable with 50% variation among my underwriters than 10%. If it was 10% I would guess they are all using some silly heuristic which could be way off. If the variation is 50% I would feel confident that I am actually getting different points of view and that I wouldn't be losing money if I priced according to the highest risk assessment among the underwriters.

Agreed, and I think this is a problem with a lot of Kahneman's conclusions. He is right that the executives don't understand some of the details of the business they are in, but you can absolutely run a successful business where your underwriters assign policy values with errors as much as +/-50%. This works as long as the people buying the policy can't do any better (or your competitors) and thus can't game your system, you avoid systematically underpricing policies, which should not be too hard in the long run, and you write enough policies that you can absorb the variability.

Yeah, I definitely was a bit confused by his example. The fact that 50% variation sounds high doesn't really mean anything unless you explain what the noise was. Maybe the problem is too difficult (like predicting the weather?) Maybe people were not qualified? Maybe personal discretion on determining an outcome was too high (i.e., it was a subjective call), etc. I am not saying that noise is not a problem, I just think he should explain exactly how that manifests itself in this example.

No, that means that there is no empirical way to calculate risk. Actuarial math is well established, but requires accurate numbers as to costs of a claim and likelihood of failure.

If the estimates diverge then it is essentially a crap shoot.

50% variation in risk might not be noise if
potential liability costs varies way more than 50%
depending on where the county/state the legal judgment
is rendered.
that's why the lawyers are always wanting to get a particular venue/judge

That's a pretty good point about the power of memories.

Tyler and all the other Hillary-voters here don't bother to look around at their lives with a POTUS Trump and see that nothing much has actually changed for the worse, and then several things are actually better. There are simply driven mad by the memory of how they felt on 11/8/16, the loss of status, the huge personal rejection of everything they are, and the realization that they have been never been so wrong about anything, ever.

That memory will never go away, even if Trump cures all cancers this afternoon. The only way to limit the damage of that memory is for the Bad Orange Man to be out of power. Hence their never-ending obsession about him, and their willingness to believe anything the WaPo and CNN decide to invent on any given day.

PS And if you don't find this hilarious, you have a heart of stone.

Bringing up Trump out of nowhere, so that you can complain that other people are obsessed with him? Classic.

Boom. +45

No, Transnational Pants is astutely drawing our attention to the salient fact about sundry progressives atm, namely that they are traumatized by the memory of one relatively minor electoral event (minor in that Trump is not the Hitler they were sure he would be).

The filters are strong in this one.

Another Hillary Derangement Syndrome post from Transnational Pants Machine. I think you are more obsessed with Hillary and the Progressives than they are with Trump.

Freud. Last night I watched old black and white clips of Woody Allen (1960s). Every performance he would devote much of his routine to Freud and his own Freudian analysis. It occurred to me that nobody talks about Freud any more, except for Cowen. Why is that? Allen's old routines were funny, but you have to pay attention or you will miss the punch line. Very Freudian.

From the perspective of someone far removed from that time period, it is striking how far psychoanalytic concepts once penetrated into the culture. 1960s novels, both from an author's and character's point of view, are dripping with it. I'd go as far as to call it one of the major differences between work then and comparable work today.

I wonder what Robin Hanson has to say about "It’s like thinking of sex all the time. I really don’t think of bias that much".

Thanks -- one of the better interviews

Hmm. Facing the question myself, before I scrolled down to the answer, I predicted 50% variation between the underwriters. What actually surprises me that executives predicted 10%.

I just paid $3.50 for a plain black coffee. No loss aversion for a routine transaction.

He shoots, he scores: Tyler with the big interview podcast win this week!

Excellent, enjoyed mucho. One general criticism - the use of italics seems to be post hoc additions and in many cases didn't reflect what I heard (I read the transcript as I listened.) (If TC didn't do this, then I'm wrong, but it seems like he wanted to make points retrospectively.) Two nuts&bolts points: the word "adventure" is used in the transcript in error. I'm pretty sure Danny said "adjustment".(the new CEO has a big adjustment...to paraphrase). And the second is a spot where italics are clearly called for. Close to the end DK says "the one guiding principle" and "the" ought (imho) be italicized.

Thankls, that helps me (I'm only reading the transcript).

Fixed, thanks.

I love how he had no fear of pushing back on either Tyler or audience members. He had no fear of saying "I have nothing to add to this conversation" - commendable!

That's a sign of real logos.

"The wise man has no fear of saying anything, or of saying nothing, nor to anyone, nor to no one, but for fear of speaking falsehood." - Xeno

"So that’s noise..."

With so much noise, even in estimates from "specialists [doing the] kind of thing [they] encounter every day", how could we expect a central committee of experts to do more unfamiliar things, like value externalities from carbon emissions or even predict global temperatures far into the future? Kahneman's example shows that querying a handful of select experts, even ones that themselves participate in insurance markets, isn't enough to replicate the information aggregation function of those markets.

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