Tapu Misa: Dart-throwing monkeys beat political pundits

Psychologist Daniel Kahneman lays out how we can avoid the cognitive traps that lead us astray. Photo / Thinkstock

How good are we at making decisions? Are we as rational as we think we are?

Considering the evidence - the worsening state of global economies, looming climate change, and the extent of poverty and inequality around the world - the answer would have to be no. The consequences of our bad choices are everywhere to be seen.

Indeed, we can do better, according to the influential psychologist Daniel Kahneman, whose important new book Thinking, Fast and Slow lays out why we think the way we do, and how we can avoid the cognitive traps that lead us astray.

Kahneman is the only non-economist ever to win the Nobel Prize for Economics - for his work on judgment and decision-making. He and his friend and collaborator, the late Amos Tversky, are widely credited with creating behavioural economics.

Their groundbreaking work challenged two assumptions about human nature that social scientists once took for granted. First, that people "are generally rational, and their thinking is normally sound"; and second, that "emotions such as fear, affection, and hatred explain most of the occasions on which people depart from rationality".

As Kahneman and Tversky showed, humans are a little more complicated. We're all of us prone to a host of biases and cognitive illusions that affect the decisions we make. And not only are we unaware of them, but most of us suffer from "excessive confidence in what we believe we know".

Kahneman employs two fictional characters to explain how we think and make decisions: the automatic, emotionally driven, intuitive System 1, which leaps to conclusions without waiting for evidence, and the more deliberate, rational System 2, which does the "effortful", slow thinking.

Unfortunately, System 2 is lazy (thinking is hard work), so it often endorses rather than checks its more impulsive sibling.

Kahneman presents a vast body of research to paint a fascinating if somewhat sobering picture of the human mind. The insights he offers can be applied to almost every area of our lives.

For example, marriage: a reliable formula for predicting the longevity of a marriage is frequency of lovemaking minus frequency of quarrels. Obviously, the former should far outnumber the latter.

Money: exposure to a screensaver with floating dollar bills can make people less likely to help a stranger.

And politics. Psychologists have shown, for example, that frequent repetition is "a reliable way to make people believe in falsehoods ... because familiarity is not easily distinguished from the truth"; and that some voters (particularly if they're not well informed, and watch too much TV) are more likely to vote for candidates whose faces exude competence (a strong chin with a confident smile).

They've also coined what's known as the halo effect, the tendency to like (or dislike) everything about a person based on mere impressions and intuition. Which explains why voters are inclined to overlook John Key's "forked tongue" (because they believe he's a nice guy).

It's not that people are stupid or infinitely gullible. It's that that "all of us live much of our life guided by the impressions of System 1 - and we often do not know the source of those impressions".

A recurrent theme of Kahneman's book is how much of a part luck plays in success.

"We are prone to overestimate how much we understand about the world and to underestimate the role of chance in events," writes Kahneman. That overconfidence is fed by the "illusory certainty of hindsight". When things go wrong, we make excuses. When things go right, we take the credit.

For example, one study of the forecasts of experts who made their living "commenting or offering advice on political and economic trends" concluded that the pundits produced poorer predictions "than dart-throwing monkeys".

Studies of CEO performance showed, too, that although CEOs could make a difference, the correlation between the success of a firm and the quality of its CEO pointed to "an improvement of a mere 10 percentage points over random guessing, hardly grist for the hero worship of CEOs".

"Knowing the importance of luck, you should be particularly suspicious when highly consistent patterns emerge from the comparison of successful and less successful firms. In the presence of randomness, regular patterns can only be mirages."

As for the stock market, Kahneman cites a landmark study which showed that "for the large majority of individual investors, taking a shower and doing nothing would have been a better policy than implementing the ideas that came into their minds".

The same research showed that "men acted on their useless ideas significantly more often than women, and that as a result women achieved better investment results than men".

Errors of prediction are inevitable, writes Kahneman, because the world is unpredictable.

"You should expect little or nothing from Wall St stock pickers who hope to be more accurate than the market in predicting the future of prices.

"And you should not expect much from pundits making long-term forecasts - although they may have valuable insights into the near future. The line that separates the possibly predictable future from the unpredictable distant future is yet to be drawn."

Tapu.Misa@gmail.com