Andrew Leigh

Daniel Kahneman (1934-2024) was teaching air force flight instructors when one of them informed him that criticism worked better than praise.

Whenever they praised a successful performance, the instructor noted, the cadet pilot tended to get worse. By contrast, when instructors screamed at a pilot for a poor performance, the cadet generally improved.

Kahneman realised that the instructors were reacting to what statisticians call “regression to the mean”. Because performances are a function of both luck and skill, a lousy execution is typically followed by an improvement, while a great execution is typically followed by a deterioration.

But rather than turning the flight class into a maths lecture, Kahneman decided to illustrate the point by a simple exercise. He asked everyone to toss a coin over their shoulder towards a target. After the first attempt, people were ranked in their performance. They then tried again. As regression to the mean would predict, the best performers got worse, while the worst performers got better.

Collaborating with fellow Israeli psychologist Amos Tversky, Kahneman set about identifying systematic ways that people deviated from rationality. They developed “prospect theory”, showing that the pain of losing $1000 is bigger than the pleasure of winning $1000. The theory helps explain why someone might insure their smartphone and play the pokies – both activities that leave the average person worse off.

In their paper on the “anchoring effect”, Kahneman and Tversky asked participants to guess the share of countries in the United Nations that were in Africa.

Before making their estimate, they watched a roulette wheel spin, which was predetermined to land on 10 or 65. When the wheel landed on the smaller number, participants guessed that 25 per cent of countries were in Africa. When the wheel landed on the larger number, participants guessed that 45 per cent of countries were in Africa.

Anchoring effects are routinely used by restaurants, which have learnt that a high-priced item listed at the top of the menu pushes up the willingness of diners to spend big; and by salespeople, who understand that the first offer has a big impact on the final price.

Daniel Kahneman was born to Jewish parents in Tel Aviv in 1934 and spent his early years in France. After the Nazis invaded, his father was taken to an internment camp. Released after six weeks, he weighed just 45 kilograms. The family fled to the south of France, moving from house to house. For a time, they lived in a converted chicken coop. There, Kahneman’s father suffered a stroke and died, just weeks before D-Day.

Yet, the experience also brought surprises. Kahneman told the story of visiting the home of a friend at a time when Jews were required to wear the Star of David and obey a curfew. Kahneman was out beyond the curfew, so turned his jumper inside out so the star could not be seen. Walking along the street, he saw a German SS soldier approaching, and was frightened he would be discovered. The soldier beckoned Kahneman over, hugged him and gave the boy some money. Kahneman went home, certain that “people were endlessly complicated and interesting”.

Through a career spanning Hebrew University, the University of British Columbia, the University of California Berkeley, and Princeton University, Kahneman’s research influenced not only psychology, but also the social sciences as a whole.

His collaboration with Amos Tversky, beautifully encapsulated in Michael Lewis’ book The Undoing Project, saw them spend countless hours talking. Both understood the value of being able to pursue creative ideas. As Tversky once observed: “The secret to doing good research is always to be a little underemployed. You waste years by not being able to waste hours.“

Many other collaborators were to follow. One, Cass Sunstein, described Kahneman as a “joyful co-author”, recounting that he once exclaimed, “Cass, you think by writing. I think by talking!“.

In 2002, Daniel Kahneman won the Nobel Prize in Economics, making him one of the few psychologists to be honoured with the award (there is no specific Nobel Prize in psychology). Tversky, who had died six years earlier, did not share the prize, since Nobel Prizes are not awarded posthumously. Kahneman had become a central figure in behavioural economics, a field that draws on psychology to explain everything from under-saving to over-eating.

Some Nobel laureates rest on their laurels, but not Kahneman. In 2011, he wrote Thinking, Fast and Slow, one of the most influential social science books of the past generation. Fast thinking, it argued, accounted for 98 per cent of our thinking. It is unconscious, automatic and effortless. The other 2 per cent of our cognition is slow thinking, which is effortful, rational and self-aware.

For many actions (such as driving or playing music), fast thinking works just fine. The risk comes when people apply fast thinking in areas that require logical reasoning, such as making a medical diagnosis or choosing how to vote. The book has become a foundational text in psychology, economics, business, and public policy.

When Kahneman died last Wednesday at the age of 90, collaborators and students flooded the internet with praise for his scholarship and decency. He may have studied human imperfections, but Kahneman himself was both a first-rate mind and a first-rate temperament.

Originally published in the Australian Financial Review on Tuesday 2 April 2024.

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