Danny Kahneman’s Decision Making

A lovely article by Michael Lewis about Daniel (“Danny”) Kahneman, my former Berkeley colleague, emphasizes his indecision whether to write a popular book about his work. Should I or shouldn’t I? He doesn’t like what he’s written so far. Finally he decides to pay some experts for their opinion:

He called a young psychologist he knew well and asked him to find four experts in the field of judgment and decision-making, and offer them $2,000 each to read his book and tell him if he should quit writing it. “I wanted to know, basically, whether it would destroy my reputation,” he says. He wanted his reviewers to remain anonymous, so they might trash his book without fear of retribution. The endlessly self-questioning author was now paying people to write nasty reviews of his work. The reviews came in, but they were glowing.

Uh, why would anonymous experts trash his book? They gain in two ways from having it published: 1. It draws attention to their field, making them more important. 2. They can use it as a textbook. I love that Michael Bailey wrote The Man Who Would Be Queen (pdf). It allows me to assign my students a book I admire.

I think Danny has raised two great questions here:

1. How can we set up a situation so that others will tell us the truth (= what they actually think)?
2. How can we tell if we’ve succeeded — if they’ve told the truth?

The answers aren’t obvious, at least to me. The best answer I can give to Question 1 (what situation?) is write a blog. I take positive and negative comments to be what their authors actually think. Variations on Question 1 are common. Robin Hanson’s blog is about how bias distorts what we say and do. Hot or Not provides truthful answers to how attractive you are. CureTogether tries to get truthful answers about health care. The best answer I can give to Question 2 (how to assess) is do a test. Wear something ugly. Do your friends say you look great in it? Why do I think the comments on my blog are truthful? Well, my recent post about E-Cat was poorly-informed (unintentionally). The comments quickly and overwhelmingly said so. That supports my belief. In contrast to Question 1, Question 2 is rare.

The last time I talked to Danny was in the 90s. I was thinking of writing a book based on my introductory psychology lectures. I wrote a sample chapter based on my possessiveness lecture. The center of that lecture was the endowment effect (we value what we possess much more than the same thing when we do not possess it). Danny had written about it and loss aversion is part of prospect theory. By then Danny was at Princeton. I spoke to him on the phone. Does the endowment effect affect your everyday life? Does it affect what you do? I asked. He thought about it. No, he said. Or at least he couldn’t think of examples. In contrast, Richard Thaler chatted happily about the everyday implications.

One everyday sign of the endowment effect is a car in front of a big garage. The car isn’t in the garage because the garage is full of “junk”. Another is garage sales (also called yard sales). Such sales are held when the clutter becomes unbearable. They illustrate the everyday relevance of the effect. My point isn’t that Danny was unobservant, it’s the difference between his answer and Thaler’s. There is definitely room for two answers to my question. Humans are traders. We specialize and trade. This is central to economic life. Early papers about the endowment effect (I haven’t looked at recent papers) didn’t notice the problem/puzzle. How can we both (a) hold on to stuff tightly (= the endowment effect, loss aversion) and (b) trade easily? John List noticed.

My friend Michel Cabanac, whose research was behind the Shangri-La Diet, has criticized Danny. In a book (p. 140), Michel wrote:

At a lecture in Jerusalem on January 19, 2001, he [Danny] was kind enough to inform the audience that the recent reorientation of his research toward what he calls “experienced utility,” which he acknowledged to be a synonym of pleasure, had been inspired by my 1993 lecture at Princeton University and by previous readings of my publications on pleasure.

In an email he elaborated:

However the “lecture” [at Princeton] was a only an invited seminar in his laboratory with an audience limited to him and his team. If I remember well, he reimbursed my travel and housing expenses. Yet, the Jerusalem mentioning of my contributions was only verbal [i.e., spoken], as I failed and still fail to find reference to Cabanac in his publications.

Michel’s whole research career has centered on the idea that pleasure guides our actions, including “cognitive” ones. Faced with an arithmetic problem (2 + 7 = ?), for example, some answers will seem more pleasant than others. (2 + 7 = 9 is more pleasant than 2 + 7 = 10, not just more familiar.) He has especially stressed that changes in pleasure — the same events become more or less pleasant — help us self-regulate. We stop eating when food becomes unpleasant, for example. The food stays the same, we change. No one has understood the role of pleasure — which is at the center of all human decision making — better than Michel.

When I get a copy of Danny’s new book, Thinking Fast and Slow, I will be curious to see what he says about the endowment effect, loss aversion, and Michel Cabanac.

More Via scrbd, I have found that Danny’s new book does reference Michel — see p. 488. And, in a chapter about the endowment effect, I found this: “Knetsch, Thaler, and I set out to design an experiment that would highlight the contrast between goods that are held for use and for exchange.” He goes on to discuss List’s research. I am unable to find anything like the phrase “the contrast between goods that are held for use and for exchange” in the paper that the three of them wrote about the effect. Jack Knetsch began to study the effect because different ways of trying to establish the value of the environment (e.g., clean water) produced enormously different answers. The endowment-effect chapter is weak on everyday examples — nothing about garage sales — but does include an unsourced quote: “She didn’t care which of the two offices she would get, but a day after the announcement was made, she was no longer willing to trade. Endowment effect!”

Thanks to Dave Lull, who suggested online searching.