Kahneman is a psychologist who won a Nobel Prize for economics. His great achievement was to turn psychology into a quantitative science. He made our mental processes subject to precise measurement and exact calculation, by studying in detail how we deal with dollars and cents. By making psychology quantitative, he incidentally achieved a powerful new understanding of economics. A large part of his book is devoted to stories illustrating the various illusions to which supposedly rational people succumb. Each story describes an experiment, examining the behavior of students or citizens who are confronted with choices under controlled conditions. The subjects make decisions that can be precisely measured and recorded. The majority of the decisions are numerical, concerned with payments of money or calculations of probability. The stories demonstrate how far our behavior differs from the behavior of the mythical “rational actor” who obeys the rules of classical economics.
A typical example of a Kahneman experiment is the coffee mug experiment, designed to measure a form of bias that he calls the “endowment effect.” The endowment effect is our tendency to value an object more highly when we own it than when someone else owns it. Coffee mugs are intended to be useful as well as elegant, so that people who own them become personally attached to them. A simple version of the experiment has two groups of people, sellers and buyers, picked at random from a population of students. Each seller is given a mug and invited to sell it to a buyer. The buyers are given nothing and are invited to use their own money to buy a mug from a seller. The average prices offered in a typical experiment were: sellers $7.12, buyers $2.87. Because the price gap was so large, few mugs were actually sold.
The experiment convincingly demolished the central dogma of classical economics. The central dogma says that in a free market, buyers and sellers will agree on a price that both sides regard as fair. The dogma is true for professional traders trading stocks in a stock market. It is untrue for nonprofessional buyers and sellers because of the endowment effect. Trading that should be profitable to both sides does not occur, because most people do not think like traders.
Our failure to think like traders has important practical consequences, for good and for evil. The main consequence of the endowment effect is to give stability to our lives and institutions. Stability is good when a society is peaceful and prosperous. Stability is evil when a society is poor and oppressed. The endowment effect works for good in the German city of Munich. I once rented a home there for a year, a few miles from the city center. Across the street from our home was a real farm with potato fields and pigs and sheep. The local children, including ours, went out to the fields after dark, made little fires in the ground, and roasted potatoes. In a free-market economy, the farm would have been sold to a developer and converted into a housing development. The farmer and the developer would both have made a handsome profit. But in Munich, people were not thinking like traders. There was no free market in land. The city valued the farm as public open space, allowing city dwellers to walk over grass all the way to the city center, and allowing our children to roast potatoes at night. The endowment effect allowed the farm to survive.
In poor agrarian societies, such as Ireland in the nineteenth century or much of Africa today, the endowment effect works for evil because it perpetuates poverty. For the Irish landowner and the African village chief, possessions bring status and political power. They do not think like traders, because status and political power are more valuable than money. They will not trade their superior status for money, even when they are heavily in debt. The endowment effect keeps the peasants poor, and drives those of them who think like traders to emigrate.
At the end of his book, Kahneman asks the question: What practical benefit can we derive from an understanding of our irrational mental processes? We know that our judgments are heavily biased by inherited illusions, which helped us to survive in a snake-infested jungle but have nothing to do with logic. We also know that, even when we become aware of the bias and the illusions, the illusions do not disappear. What use is it to know that we are deluded, if the knowledge does not dispel the delusions?
Kahneman answers this question by saying that he hopes to change our behavior by changing our vocabulary. If the names that he invented for various common biases and illusions, “illusion of validity,” “availability bias,” “endowment effect,” and others that I have no space to describe in this review, become part of our everyday vocabulary, then he hopes to see the illusions lose their power to deceive us. If we use these names every day to criticize our friends’ mistaken judgments and to confess our own, then perhaps we will learn to overcome our illusions. Perhaps our children and grandchildren will grow up using the new vocabulary and will automatically correct their congenital biases when making judgments. If this miracle happens, then future generations will owe a big debt to Kahneman for giving them a clearer vision.
One thing that is notably absent from Kahneman’s book is the name of Sigmund Freud. In thirty-two pages of endnotes there is not a single reference to his writings. This omission is certainly no accident. Freud was a dominating figure in the field of psychology for the first half of the twentieth century, and a fallen tyrant for the second half of the century. In the article on Freud in Wikipedia, we find quotes from the Nobel Prize–winning immunologist Peter Medawar—psychoanalysis is the “most stupendous intellectual confidence trick of the twentieth century”—and from Frederick Crews:
Step by step, we are learning that Freud has been the most overrated figure in the entire history of science and medicine—one who wrought immense harm through the propagation of false etiologies, mistaken diagnoses, and fruitless lines of enquiry.
In these quotes, emotions are running high. Freud is now hated as passionately as he was once loved. Kahneman evidently shares the prevalent repudiation of Freud and of his legacy of writings.
Freud wrote two books, The Psychopathology of Everyday Life in 1901 and The Ego and the Id in 1923, which come close to preempting two of the main themes of Kahneman’s book. The psychopathology book describes the many mistakes of judgment and of action that arise from emotional bias operating below the level of consciousness. These “Freudian slips” are examples of availability bias, caused by memories associated with strong emotions. The Ego and the Id decribes two levels of the mind that are similar to the System Two and System One of Kahneman, the Ego being usually conscious and rational, the Id usually unconscious and irrational.
There are huge differences between Freud and Kahneman, as one would expect for thinkers separated by a century. The deepest difference is that Freud is literary while Kahneman is scientific. The great contribution of Kahneman was to make psychology an experimental science, with experimental results that could be repeated and verified. Freud, in my view, made psychology a branch of literature, with stories and myths that appeal to the heart rather than to the mind. The central dogma of Freudian psychology was the Oedipus complex, a story borrowed from Greek mythology and enacted in the tragedies of Sophocles. Freud claimed that he had identified from his clinical practice the emotions children feel toward their parents that he called the Oedipus complex. His critics have rejected that claim. So Freud became to his admirers a prophet of spiritual and psychological wisdom, and to his detractors a quack doctor pretending to cure imaginary diseases. Kahneman took psychology in a diametrically opposite direction, not pretending to cure ailments but only trying to dispel illusions.
It is understandable that Kahneman has no use for Freud, but it is still regrettable. The insights of Kahneman and Freud are complementary rather than contradictory. Anyone who strives for a complete understanding of human nature has much to learn from both of them. The scope of Kahneman’s psychology is necessarily limited by his method. His method is to study mental processes that can be observed and measured under rigorously controlled experimental conditions. Following this method, he revolutionized psychology. He discovered mental processes that can be described precisely and demonstrated reliably. He discarded the poetic fantasies of Freud.
But together with the poetic fantasies, he discarded much else that was valuable. Since strong emotions and obsessions cannot be experimentally controlled, Kahneman’s method did not allow him to study them. The part of the human personality that Kahneman’s method can handle is the nonviolent part, concerned with everyday decisions, artificial parlor games, and gambling for small stakes. The violent and passionate manifestations of human nature, concerned with matters of life and death and love and hate and pain and sex, cannot be experimentally controlled and are beyond Kahneman’s reach. Violence and passion are the territory of Freud. Freud can penetrate deeper than Kahneman because literature digs deeper than science into human nature and human destiny.
William James is another great psychologist whose name is not mentioned in Kahneman’s book. James was a contemporary of Freud and published his classic work, The Varieties of Religious Experience: A Study in Human Nature, in 1902. Religion is another large area of human behavior that Kahneman chooses to ignore. Like the Oedipus complex, religion does not lend itself to experimental study. Instead of doing experiments, James listens to people describing their experiences. He studies the minds of his witnesses from the inside rather than from the outside. He finds the religious temperament divided into two types that he calls once-born and twice-born, anticipating Kahneman’s division of our minds into System One and System Two. Since James turns to literature rather than to science for his evidence, the two chief witnesses that he examines are Walt Whitman for the once-born and Leo Tolstoy for the twice-born.
Freud and James were artists and not scientists. It is normal for artists who achieve great acclaim during their lifetimes to go into eclipse and become unfashionable after their deaths. Fifty or a hundred years later, they may enjoy a revival of their reputations, and they may then be admitted to the ranks of permanent greatness. Admirers of Freud and James may hope that the time may come when they will stand together with Kahneman as three great explorers of the human psyche, Freud and James as explorers of our deeper emotions, Kahneman as the explorer of our more humdrum cognitive processes. But that time has not yet come. Meanwhile, we must be grateful to Kahneman for giving us in this book a joyful understanding of the practical side of our personalities.
A ‘Thriving Collective Enterprise’ January 12, 2012