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Daniel Kahneman- Algorithms Make Better Decisions Than You

The Knowledge Project

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  • Happiness vs. Life Satisfaction
    • Happiness relates mostly to social connections and emotions experienced in real time.
    • Life satisfaction relates to success, money, and prestige and is what people often desire more. Transcript: Shane Parrish Wireless plan for 15 bucks a month at mintmobile.com/knowledge project. That’s mintmobile.com/knowledge project. Upfront payment of $45 required, equivalent to $15 a month. Limited time new customer offer for first three months only. Speeds may vary above 35 gigabytes on unlimited plan. Taxes and fees extra. See Mint Mobile for details. You have an interesting distinction between happiness and satisfaction. Can you walk us through that? Daniel Kahneman Yeah, sure. I mean, the word happiness is so ambiguous and it means so many things to many people. But one sensible interpretation of it is that it’s got to do with your emotions, with how you feel, with the emotional tone of your life, whether it’s a happy life, you know, it’s pleasant To be you. Life satisfaction is a completely different thing. I mean, life satisfaction is how you feel about your life when you think about your life. And most of the time, we don’t think about your life. You just live. But, you know, sometimes you sort of look. And that’s when you determine how satisfied you are. That’s life satisfaction. It’s not satisfaction. It’s life satisfaction. Shane Parrish Should we balance the two? Or how would you think about them? Should we be more happy when we’re younger, more satisfied when we’re older? Daniel Kahneman That thought had never occurred to me when I began to work on this. So I started out thinking that happiness in that sense of how you feel when you live, that was reality. And that life satisfaction was just stories that people tell themselves. And the important thing (Time 0:12:20)
  • Army Interviewing Innovation
    • Daniel Kahneman shared a young army psychologist story where he replaced intuition with structured trait scoring.
    • The method improved soldier selection and stayed in use for over 50 years due to its success. Transcript: Daniel Kahneman Can think of it that there are two ways of doing it. You can push them or you can ask the question, why aren’t they doing B already? Which is an unusual question, but you know, why? So then when you ask why not, why aren’t they doing B as they ought to, as they think they ought to, then you get a list of what’s Boutle Wien, that’s the psychologist who, my guru and this, My hero and many people’s hero. He spoke of restraining forces. I mean, so there are reasons why they’re not where you want them to be. So he spoke of behavior as an equilibrium. There are forces that are pushing you one way, forces that are pushing you the other way. So how loud you speak, how fast you drive. It’s easy to think of it as an equilibrium. And what we tend to do when we want to move people from A to B is we push them. We add to the driving forces. And Kurt Lewin’s insight was that this is not what you should do. You should actually work on the restraining forces and try to make them weaker. And that’s a beautiful point. And he showed, he had that image that, you know, I’ve had since I was an undergraduate. And I’m not sure actually whether it was his image or something that I drew from reading him. But it’s like you have a plank and it’s being held by two sets of springs. You know, you want it to move one direction. And so you could add another spring that would push it that way, or it could remove one of the springs that are holding it back. And the interesting thing, and that’s the striking outcome, is when it moves, if it moves because of the driving force, you’ve added to the driving force, then at equilibrium, it will Be in a higher state of tension than it was originally. That is because you’ve compressed wet spring and such pushing back harder. But if you remove a restraining force, at equilibrium, there’ll be less tension on the system. I must have been 20 years old. I thought that’s just so beautiful. Shane Parrish What do you wish that everybody knew about psychology that you don’t think that they do? If that was class one, what’s class two? Daniel Kahneman You know, class two, which is a development from class one, you know, it’s the same idea extended. Class two is that behaviors don’t necessarily reflect the personality, but behaviors have a lot to do with the situation. And so if people behave in (Time 0:19:10)
  • Behavior as Equilibrium
    • Behavior is an equilibrium of forces pushing and restraining it, not just personality.
    • Changing behavior works better by removing obstacles than by adding pressure. Transcript: Daniel Kahneman There’ll be less tension on the system. I must have been 20 years old. I thought that’s just so beautiful. Shane Parrish What do you wish that everybody knew about psychology that you don’t think that they do? If that was class one, what’s class two? Daniel Kahneman You know, class two, which is a development from class one, you know, it’s the same idea extended. Class two is that behaviors don’t necessarily reflect the personality, but behaviors have a lot to do with the situation. And so if people behave in strange ways, look at the situation they’re in and what are the pressures in the situation that make them act as well. So there is a bias that a social psychologist, well-known social psychologist, called the fundamental attribution error. And that means that when you see people acting in some way, you think that it’s because of their personality that they do it. That may not be the case. It’s quite likely that the situation is making them do it. I’d like people to know that motivation is complex and that people do good things a mixture of good and bad reasons and they do bad things for a mixture of good and bad reasons. And I think that there is a point to educating people in psychology is to make them less judgmental. Just have more empathy and more patience and being judgmental doesn’t get you anywhere. Shane Parrish When you talk about situational, one of the things that comes to mind is it’s so easy for us to give our friends advice. But if we were in that situation, we might not necessarily see it. Why is that the case? Why is it so much easier to give other people advice? Daniel Kahneman I mean, feelings get in the way of clear thinking. There is a phenomenon that we call the endowment effect, which is that when I’d ask for more money to sell you my sandwich than I’d pay to get it, I mean, that’s essentially the endowment Effect. But a story I like to tell about it is that it’s more painful to give something up than to get something. But there is an interesting result that if you have an agent making decisions on somebody’s behalf, that agent doesn’t have loss of urge. So that agent sells and buys at the same price, which is the economically rational thing to do. Where this goes into policy and governments and really important things, that governments are like agents or people who think about the good of society. And agents, they take the economic view. They take the view of what things will be like at the end. They don’t figure out that there are some people who are going to be losing because of the reform that they make. And it turns out that you can really expect losers, potential losers, to fight a lot harder than potential winners. And that’s the reason that reforms are frequently fair, and that when they succeed, they’re almost always way more expensive than anticipated. And they’re more expensive because you have to compensate the losers. And that frequently is not anticipated. So that’s an example of a story that incorporates behavior change and the difference between perspective, between being in the situation, feeling the pain of giving up the sandwich And not feeling the pain of giving up the sandwich. Shane Parrish That would have huge public policy sort of implications too, right? That we don’t tend to think about or discuss. That’s a really interesting angle there. I want to come back to sort of situational decision-making based on sort of like what we see is all there is. And we have these feelings that we can’t sort of disassociate with. How does environment play a role, like the physical environment, in sort of what we decide or does it? Daniel Kahneman I mean, you know, there are sort of obvious things that we know. If people are hot and bothered and distracted and there is a lot of noise and so on, and they’ll think as well. That we know. But even there, there are puzzles. I mean, many people think and work a lot better in cafes, you know, where there is actually ambient noise and activity around them, and it helps them concentrate better. So there isn’t a very simple story of the environment. But certainly you can make the environment tough enough so that people won’t be able to think properly. That’s feasible. Shane Parrish Are there things that we could do to, I guess, push the environment to be more conducive to clearer thinking, the physical environment in this case? Daniel Kahneman Oh, there are all sorts of, you know, odd findings, you know, the color of the room. Some colors are better than others. And you would expect that some colors are more calming than others. So you wouldn’t want to be in a red room. Shane Parrish Making decisions. Daniel Kahneman Making decisions. But, you know, those are extreme and minor effects. Shane Parrish I want to come to intuition and noise later. Is there anything else that stands out that gets in the way of clear thinking that we can sort of bring to the surface now? Daniel Kahneman Well, you know, what gets in the way of clear thinking is that we have intuitive views of almost everything. So as soon as you present a problem to me, I have, you know, I have some ready-made answer. And what gets (Time 0:43:53)
  • Use Algorithms, Then Slow Down
    • Use algorithms wherever possible because they produce better decisions than human judgment.
    • If not, slow down decision-making and systematically evaluate problem dimensions before forming intuition. Transcript: Shane Parrish That environment. And yet we’re making a lot of these decisions on judgment or experience. What are the ways that we can sort of make better decisions with that in the context? Daniel Kahneman Well, in the first place, I think, you know, you shouldn’t expect too much. Pat to low expectations. I think, yeah, you should have low expectations about improving decisions. I mean, there is, you know, one basic rule is slow down, especially if you have that immediate conviction, slow down. There are procedures, you know, There are ways of reaching better decisions, reaching better governance, and we can talk about them. Shane Parrish I would love to hear. Daniel Kahneman If you really want to improve the quality of decision-making, use algorithms. I mean, wherever you can, if you can replace judgments by rules and algorithms, they’ll do better. And there’s big social costs to trusting, allowing algorithms to make decisions, but the decisions will likely to be better. So that’s one thing. If you can’t use algorithms, then you slow yourself down. And then there are things that you can do for certain types of problems, and there are different types of problems. So one class of problems are forecasting problems. A friend, Phil Tetlock, you know, has that book on superforecasters, where he identifies with people who are good at forecasting the future, what they do that makes them good. And, you know, it tries to train people and we can improve people. So that’s one classic problem. I’m interested specifically in another kind of problem, judgment problems, where basically you’re considering options or you’re evaluating a situation and you’re trying to give It a score. There is advice, I think, on how to do it. For me, it goes back to something I did in the Israeli army when I was like 22 years old. So that’s a long time ago, like 63 years ago. I was a psychologist in the Israeli army, and I was assigned the job of setting up an interviewing system for the army. That’s ridiculous, but you know, this was the beginning of the state of Israel. So people were improvising all over the place. So I had a BA and I was, I think I were the best trained psychologist in the army. My boss was a chemist. Brilliant. But anyway, and the existing system was one where people would interview and try to form an intuitive global image of how well that recruit would do as a combat soldier, which was the Objective, the object of the interview. And because I had read a book by Paul Neal, I took a different talk. And the different talk was I identified six traits that I sort of made up, and I had them ask questions and evaluate each of these traits independently and score it and write down the score, Then go on to the next trait. And they had to do it for all six straights. That was, that’s all I asked them to do. And the interviewers who were about one year younger than I, all recruits, but very, very smart, selected for being good at it. They were furious with me. And they were furious with me because they wanted to exercise their intuition. And I still remember that one of them said, you’re turning us into robots. So I compromised with them. And I said, okay, you do it my way. And I told them, you try to be reliable, not valid. I’m in charge of validity. You be reliable, which was pretty arrogant, but that’s how I presented it. But then when you’re done, close your eyes and just put down a number. How good a soldier is that guy going to be? And when we validated the results of the interview, it was a big improvement on what had gone on before. But the other surprise was that the final intuitive judgment added, it was good, it was as good as the average of the six straights, and not the same. It added information. So actually, we ended up with a score that was half, was determined by the specific ratings, and the intuition got half the way. And that, by the way, stayed in the Israeli army for well over 50 years. I don’t know whether it’s, I think it probably, some version of it was still being forced, but around 15 years ago, I visited my old base, and the commanding officer of the research unit Was telling me how they run the interview. And then she said, and then we tell them, close your eyes. So that had stayed for 50 years. Now, the close your eyes and that whole idea is now the basis of the book that I’m writing. So actually, I have the same idea, really, that when you are making decisions, you should think of options as if they were candidates. So you should break it up into dimensions, evaluate each dimension separately, then look at the profile. And the key is, delay your intuition. Don’t try to form an intuition quickly, which is what we normally do. Focus on the separate points. And then when you have the whole profile, then you can have an intuition and it’s going to be better. Because people make form intuitions too quickly and the rapid intuitions are not potentially good. So if you delay intuition until you have more information, it’s going to be better. Shane Parrish I’m curious how we delay intuition. Daniel Kahneman You delay intuition by focusing on the separate problems. So our advice is that if you have, you know, (Time 0:53:01)
  • Delay Intuition For Better Judgment
    • Delay intuition by evaluating each aspect of a problem separately before forming an overall judgment.
    • This approach leads to more accurate decisions than forming quick overall impressions. Transcript: Daniel Kahneman Then look at the profile. And the key is, delay your intuition. Don’t try to form an intuition quickly, which is what we normally do. Focus on the separate points. And then when you have the whole profile, then you can have an intuition and it’s going to be better. Because people make form intuitions too quickly and the rapid intuitions are not potentially good. So if you delay intuition until you have more information, it’s going to be better. Shane Parrish I’m curious how we delay intuition. Daniel Kahneman You delay intuition by focusing on the separate problems. So our advice is that if you have, you know, a board of directors making decisions about an investment, we tell them you do it that way. Take the separate dimensions and really think about each dimension separately and independently. And don’t allow, you know, if you’re the chair, don’t allow people to give their final judgment. Say, we’ll wait until we cover the whole thing. I mean, if you find a deal breaker, then you stall. But if you haven’t found a deal breaker, wait to the end and look at the profile. And then your decision is almost certainly going (Time 0:58:33)
  • Evaluate Judgment Quality Critically
    • Demand explanations for judgments and analyze their logic and evidence usage.
    • Recognize common failures to improve judgment quality and resist biases like anchoring by conscious effort. Transcript: Daniel Kahneman You know, what goes wrong. And there are quite a few ways for judgment to go wrong. Shane Parrish And I think some of those ways are the cognitive biases, like overconfidence and sort of using small or extrapolating from small sample sizes. And one of the interesting things that I’ve heard you say in interviews before, so correct me if I’m off here, is that you’ve studied cognitive biases effectively your whole life and You’re no better at avoiding them than anybody else. Daniel Kahneman Yeah, certainly not much better, no. What hope do the rest of us have? Not much. I mean, I never, you know, I think, you know, the quality of people’s judgment is affected by education. But so in general, more educated people make better judgments, I think, on average. But people decide I’m going to make better judgments. I don’t think that’s very hopeful. I’m much more hopeful about organizations because organizations think more slowly and they have procedures for thinking. And so you can control the procedures. Individual judgment is really hard to fix. Not impossible. Shane Parrish One of the things that I see people do in response to cognitive biases and trying to account for them is to sort of make a list of them, almost like a checklist. And then go through that checklist and explain or rationalize why those things don’t apply in this situation. It also strikes me that the more intelligent you are, the more stories you’d be able to conjure up about why you’re avoiding this. Daniel Kahneman I really think that’s not very hopeful because there are so many biases, and the biases work in different directions anyway. So sometimes you can recognize a situation as one in which you’re likely to be wrong in a particular way. So that’s like illusions. If you recognize a particular pattern as something that gives rise to a visual illusion, then you don’t trust your eyes. You know, you do something else. And the same thing happens when you recognize this is a situation where I’m likely to make an error. So sometimes you can recognize the importance, for example, of what we’ve called an anchor. So you’re going to negotiate a price with somebody. They start very high, and that has an effect. So you know, or you should know, that the person who moves first in a negotiation has an advantage. Because the first number changes everybody’s view of what is considered plausible. So it moves things in that direction. That’s a phenomenon. People can learn that. And they can learn to resist it. So when I was teaching negotiations, I would say somebody does that to you, comes up with a number that’s absurd. I would say, lose your temper. (Time 1:04:20)