“Intuition: Marvels and Flaws”
Daniel Kahneman, Ph.D.
2002 Nobel Laureate in Economic Sciences
Post-lecture discussion panelists: Gillian Tett, U.S. Managing Editor, The Financial Times; Nassim Taleb, NYU/Poly Distinguished Professor of Risk Engineering
Fourteenth Annual Lynford Lecture
Introductory Remarks and Panel Introduction by Jeffrey Lynford
March 7, 2011
According to Professor Kahneman, and to paraphrase the heroine in Alice's Adventures in
Wonder Land, things keep getting "curiouser and curiouser."
Should we think fast or slow in our daily lives? What biases of pessimism and optimism impact upon our daily decision-making? Is there really a man or woman who makes decisions based upon rationality and maximum utility?
Professor Kahneman's research suggests that human reason is flawed by many factors including, but not limited to, illusions of control, poor memory, planning and certainty fallacies, a tendency to overstate benefits and underestimate costs, all of which lead us to incorrectly assess risk. In real estate development and investment, my profession, we have a sardonic motto which goes like this: "Everything takes longer, costs more, and yields less, than initially forecasted!" I will ask Mary Anne Gilmartin, Executive VP of Forest City Ratner, who is with us here today, if she concurs.
Professor Kahneman is a psychologist by training, who by his own admission, has never taken a single economics course. Yet, he was awarded The Swedish Riksbank Prize in Economic Sciences in Memory of Alfred Nobel in 2002 "for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty."
Also we are happy to have with us this afternoon two guest panelists: Dr. Gillian Tett, U.S. Managing Editor of The Financial Times and NYU/Poly's own Dr. Nassim Taleb, Distinguished Professor of Risk Engineering. Each has written elegantly about recent events in the financial markets which may be the result in part of the concepts Professor Kahneman describes in his work. I will introduce them more fully later.
It has been my role at these convocations to frame our proceedings with some introductory remarks of an historical perspective. Thus, I have two historical anecdotes to share with you today, one drawn from 1841 and the other more recently uttered in 2008, which may help frame some of the questions from our interlocutors.
In 1841 the Scottish journalist Charles Mackay authored a book entitled, Extraordinary Popular Delusions and the Madness of Crowds, a history of popular folly. He chronicled three famous financial bubbles: the Tulip Mania of 1637 and the Mississippi Land and South Sea Company collapses of 1720.
Despite its journalistic style, the book gathered at that time a body of academic support as a work of considerable importance in the history of social psychology and psychopathology. Was this an early forerunner of Professor Kahneman's Thinking, Fast and Slow?
Mackay's observations were about human behavior which occurred in Europe before we were established as a nation. In the following nearly 200 years, citizens of the United States have also been complicit in many similar financial debacles; for example, the Panics of 1819, 1837, 1857, 1873, 1893, 1907, 1929, 1987 and 2008. Thus, it would appear that we have witnessed a veritable flock of Black Swans!
Fast forward to October 2008, after the forced merger of Bear Stearns into J.P. Morgan, the bankruptcy of Lehman Brothers, and the quasi-nationalization of AIG, when former Federal Reserve Board Chairman Alan Greenspan testified at a hearing held by the House Committee on Oversight and Government Reform. Commenting on the destruction caused by the subprime mortgage and credit derivatives, he admitted: "Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief."
This is reminiscent of the famous dialogue from the movie, Casablanca, uttered by Captain Renault of the French Sûreté. While receiving his illegal casino winnings and simultaneously forcibly closing down Humphrey Bogart's well-regarded establishment, he exclaims, "I am shocked, shocked to learn that gambling is going on here!"
This Congressional testimony from the former leading financial regulator in the world essentially
pronounced that the homo economicus, or rational economic human, was a dead mythical creature after all.
In conclusion, today we will have an opportunity to learn from Professor Kahneman more about
the idiosyncratic nature of human decision-making and maybe, just maybe, ways to avoid
repeating some of the mistakes which have plagued us from time immemorial.