An Interview With Dr. Daniel Kahneman by Morgan Housel, Motley Fool

Dr. Daniel Kahneman, winner of the 2002 Nobel Prize in economics, joins us to discuss his book, Thinking, Fast and Slow, and how different systems of thought can affect our judgment when making decisions.

In this interview we look at hindsight bias, unjustified optimism in the financial industry, and why you should think of your brain like a newsroom publishing a daily paper. A full transcript follows the video.

Morgan Housel: We’re very lucky today to have Dr. Daniel Kahneman with us. He is a psychologist from Princeton University. He’s the author of the book Thinking, Fast and Slow. He’s been called “one of the most influential psychologists since Sigmund Freud.” He won the Nobel Prize in Economics in 2002. Please welcome Dr. Daniel Kahneman.

Dr. Daniel Kahneman, you won the Nobel Prize in economics, but you’re not an economist; you’re a psychologist. From what I understand, that’s the first time that’s ever happened in that award for economics.

To me, that’s a confirmation that so much of what is important in economics and in investing has less to do with numbers and spreadsheets and Greek formulas as it does what’s going on in our head, and fooling ourselves.

Just to get a background of your career, from what I understand the first time that your work intersected with economics was in the early 1970s when a colleague brought to you an economics paper and the first line of the paper was, “The agent of economic theory is rational, selfish, and his tastes do not change.” For a psychologist, that’s ridiculous, so what happened next?

Daniel Kahneman: Well, nothing happened immediately but I found that very surprising, actually, because the economics building was next door. I was at Hebrew University, Jerusalem, and we had one building and the economists were next door. I learned from that one sentence something I hadn’t known before; that they sort of lived in a different intellectual world than we did.

For a psychologist it’s obvious that people are not fully rational, and that they’re not selfish, and that their tastes change. It was just a collection of statements that seemed almost absurd. I had no idea, at that stage, that a lot of my career would be dedicated to that conversation. That sort of happened almost by accident, later.

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