Daniel Kahneman photoDaniel Kahneman is a Eugene Higgins Professor of Psychology, Princeton University, and Professor of Public Affairs, Woodrow Wilson School of Public and International Affairs. He was the winner of the 2002 Nobel Prize in Economic Sciences for his pioneering work integrating insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty. Kahneman is the coauthor of several academic works, which include Heuristics and Biases: The Psychology of Intuitive JudgmentChoices, Values, and FramesJudgment under Uncertainty: Heuristics and Biases; and Well-Being: The Foundations of Hedonic Psychology. He is the author of Thinking, Fast and Slow.

Professor Kahneman was born in Tel Aviv but spent his childhood years in Paris, France, before returning to Palestine in 1946. He received his bachelor’s degree in psychology (with a minor in mathematics) from the Hebrew University in Jerusalem, and in 1954 he was drafted into the Israeli Defense Forces, serving principally in its psychology branch. In 1958, he came to the United States and earned his Ph.D. in Psychology from the University of California, Berkeley, in 1961.

Kahneman is a member of the American Academy of Arts and Sciences and the National Academy of Sciences. He is a fellow of the American Psychological Association, the American Psychological Society, the Society of Experimental Psychologists, and the Econometric Society. He has been the recipient of numerous awards, among them the Distinguished Scientific Contribution Award of the American Psychological Association, the Warren Medal of the Society of Experimental Psychologists, and Hilgard Award for Career Contributions to General Psychology, and the Award for Lifetime Contributions to Psychology from the American Psychological Association (2007).

Link to podcast-http://www.thoughtleaderforum.com/default.asp?P=909655&S=945705

Michael Mauboussin: Well, I hope you all enjoyed the lunch session. It’s my honor to introduce our final speaker
of the day, Danny Kahneman. Danny is the Eugene Higgins Professor of Psychology at Princeton University and a
recipient of the 2002 Nobel Prize in Economic Sciences.
In the last couple of decades there’s been a burgeoning area of work in behavioral economics or behavioral
finance, and this whole movement can be traced directly back to the seminal work done by Professor Kahneman
and his collaborator, Amos Tversky, from the 1970s.
Kahneman and Tversky laid the groundwork for what is now known as the heuristics and biases camp, which is
essentially the study of the limits of judgment and decision-making under uncertainty. This work has been
extraordinary and has earned Professor Kahneman numerous awards and honors – too many for me to list, but
obviously the most visible of those being the Nobel Prize.
As I was writing my last book, Think Twice, I had to do a great deal of research, and what struck me as I moved
from topic to topic was that I kept running into the unbelievable contributions from Professor Kahneman. He’s truly
a towering figure in the world of psychology and certainly one of my intellectual heroes.
Professor Kahneman is the co-author of several academic works, including Heuristics and Biases and Judgment
Under Uncertainty, and he has a new book that will be out shortly called Thinking Fast and Slow, and I certainly
have pre-ordered it and I highly recommend it.
Please join me in welcoming Professor Danny Kahneman.
Professor Daniel Kahneman: Thank you. Well, there is a growing agreement, I think, and it’s been very clear in
the talks today, that we don’t understand the world very well. Nassim Taleb, who’s been mentioned a lot and is one
of my heroes, is writing a book now, and what I really like is the subtitle of the book, and the subtitle is How to Live in a World That We Do Not Understand. A very good question.
We systematically underestimate the amount of uncertainty to which we’re exposed, and we are wired to
underestimate the amount of uncertainty to which we are exposed. It is actually extremely difficult to accept how
much uncertainty there is. You can do an exercise on yourself. When you think about “Harry Potter” really, you still
think it must be exceptional. When you think of Mozart, was it luck that Mozart is what Mozart is, or could it have
been Salieri?
What we really learned today, what we could have learned from Matthew Salganik’s presentation, was that there
are hundreds of books that could have been just as important as Harry Potter. There is nothing special about Harry
Potter within the class of books that are not failures. And the choice, and this is what Matthew was telling us, the
choice is random, it is unpredictable. There is no system to it, there is no logic to it, that’s just the way it happens.
Very difficult to accept.
And part of the difficulty of understanding how much luck, the role that luck plays in our lives and in the
determination of these events, is that as soon as something happens, we understand why it happened. And this is

one of the things that Nassim went into. He has learned quite a bit of psychology, actually, and that is a very
important bit of psychology, which is that we are really not as surprised as we ought to be by surprises.
And the reason we are not as surprised is that as soon as something happens that we really had not anticipated,
we understand it. We work it out. That’s a mistake we’ll never do again. Our view of the world immediately
changes, and furthermore we are systematically mistaken about what we used to think earlier.
A very simple thought experiment will convince you of that. There are two football teams, and it’s the beginning of
the season. Make them college teams. So far as you know, they’re well-matched.
Now, they play a game and one of them destroys the other. Now they’re no longer equal. Now one of them is much
stronger than the other. You will not be able to undo in your mind the thought that one of them is stronger, and
somehow that you knew it was stronger. You will forget that you thought they were even. You will forget that there
was no particular reason.
So now that is was stronger, the fact that it won by so much is no longer surprising. That’s the mechanism. So the
mechanism is that by wiping out the surprises as we go along, we create an illusion of the world that is much more
orderly than it actually is.
One of the major influences on my thinking in that domain is Phil Tetlock. And there is the question of why do those
pundits and CIA analysts do so badly? And notice that we are inclined to think that the CIA analysts do badly.
We’re inclined to think that the television stations or chains that rejected American Idol missed something. They
made a mistake. If you think that, you have not assimilated the lesson of this morning.
It’s not that the pundits do badly. It’s not that the television chains made a mistake. They didn’t make a mistake.
The world is incomprehensible. It’s not the fault of the pundits. It’s the fault of the world. It’s just too complicated to
predict. It’s too complicated, and luck plays an enormously important role.
In thinking about Phil’s research, I came up with a thought experiment that sort of, for me at least, dramatized the
amount of luck there is.
Now, think

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