“The experiencing self lives its life continuously. It has moments of experience, one I after the other.”
Daniel Kahneman (1934 – March 27, 2024)
I last met with the late Daniel Kahneman, or Danny, as everyone called him, at the 2019 Bloomberg New Economy Forum in China. For years, I had wondered, “Why are smart people so often foolish with money?”
About five minutes into Danny’s presentation, I realised he had the answers — not only to that question but to nearly every mystery of financial behaviour.
Why do we sell our successful investments quickly but keep holding onto the ones that aren’t doing well? Why don’t we see that many times when things go well, it’s just luck? Why do we claim we’re okay with taking risks but panic when the market goes down? And why do we ignore the chances of losing even when we know they’re not in our favour?
Danny paced softly back and forth at the front of the hall, his blue-green eyes sparkling with amusement as he documented these behaviours and demolished conventional economic modelling.
Within four decades, he had conducted experiments, almost childlike in simplicity, to see how people really think and behave.
No, he said, money lost isn’t the same as money gained. Losses feel at least twice as painful as gains feel pleasant. He asked the conference attendees: If you’d lose $100 on a coin toss if it came up tails, how much would you have to win on heads before you’d take the bet? Most of us said $200 or more.
No, people don’t incorporate all available information. We think short streaks in a random process enable us to predict what comes next. We think jackpots happen more often than they do, making us overconfident. We think disasters are more common than they are, falling for schemes that promise to keep us safe.
Ask people if they want to take a risk with an 80 per cent chance of success, and most say yes. Ask instead if they’d incur the same risk with a 20 per cent chance of failure, and many say no.
I wasn’t just struck by his insights; I was stricken by them. I immediately bought all three of the books he had published.
For weeks, I sat in a windowless room, reading feverishly, red pen in hand, scribbling notes, underlining entire paragraphs, peppering the margins with arrows and exclamation points.
In 2011, Danny asked me to help him with a research project. I auditioned for a few months, coming up with several different proposals on how to structure the project. We finally got started in early 2012.
What eventually emerged was a model that is currently applied in the operations of Wall Street banks, the US Treasury and the US Federal Reserve.
Early on, Danny took me to lunch with his wife Anne Treisman near Princeton University. When he stepped away, I asked Anne, “Do you think Danny is crazy for wanting to do this research work with me?”
“No,” she said. “But you might be crazy for wanting to do it with him.”
In the beginning, I wrote the first drafts of chapters that never saw the light of day. Gradually, Danny took over the writing, agonising over every sentence and figure as I recalculated and edited.
Late in 2012, as we were polishing one of the equations, I woke up one night in an icy sweat, pulse racing and gasping for air.
Frantically, my wife rushed me to the emergency room. It turned out I hadn’t had a heart attack; I’d had a panic attack, the only one in my life before or since.
Danny was even more alarmed than I was.
In 2013, I moved on, joining Goldman Sachs. Neither of us would ever publicly discuss our ‘project divorce’ but it was silently understood. Danny soldiered on to complete the final third of the research without me.
“Collaborations don’t always end well,” he’d warned me on our first day of work together, “so I want to make sure you will always think of me as a mensch,” a good person.
And so I do — the most complicated mensch I’ve ever known.
Working on that research exposed me to three of Danny’s qualities I hadn’t previously encountered in their full intensity.
Only years later did I realise that I’ve internalised them as an investment banking analyst and a journalist. Or so I hope.
First, Danny saw everything through a child’s eyes or, as I call it, “beginner’s mind.” No one else I’ve ever known has so often asked: Why? Instead of assuming the status quo is valid, Danny always started by wondering whether it made any sense.
He was also relentlessly self-critical. I once showed him a letter I’d gotten from a J.P. Morgan banker telling me — correctly but rudely — that I was wrong about Danny’s works.
“Do you have any idea how lucky you are to have thousands of people who can tell you that you’re wrong?” Danny asked.
Finally, Danny could rework what we had already done as if it had never existed. Most people hate changing their minds; he liked nothing better when the evidence justified it.
“I have no sunk costs,” he would say.
One of his favourite words, while working on the research, was “miserable.” He used it to describe whatever we had just written; the process of writing it; and, above all, himself.
He knew fully well how smart he was, but he also knew how foolish he could be. Noticing that he intuitively stereotyped a bespectacled child as “the young professor,” Danny realised people extrapolate the future from almost no data at all.
After buying an expensive apartment in New York, he laughed at knowing that he would also overpay to furnish it.
Danny also insisted that studying the pitfalls and paradoxes of the human mind didn’t make him any better at problem-
solving than anybody else:
“I’m just better at recognising my mistakes after I make them.”
For all his knowledge of how foolish investors can be, Danny didn’t try to outsmart the market.
“I don’t try to be clever at all,” he told me.
Most of his money was in index funds. “The idea that I could see what no one else can is an illusion,” he said.
“All of us would be better investors,” he often said, “if we just made fewer decisions.”
Thank you for everything Danny.
The views expressed here are those of the columnist and do not necessarily represent the views of New Sarawak Tribune.
