Nobel laureate and best-selling author Daniel Kahneman presented the 2013 Arthur M. Okun Public Policy lecture, titled “A Psychological Perspective on Rationality,” at Yale on Feb. 20.
In this lecture Kahneman, a pioneering expert on the psychology of economic decision-making, explains why even smart people are hard-wired to make dumb decisions.
To understand how rational beings make irrational choices, a theory he lays forth in his best-selling book “Thinking, Fast and Slow,” Kahneman looks at decision making generally as directed by two thought processes, which he calls system 1 and system 2. System 1, the fast, intuitive process, is emotional and prone to making false connections, he says, noting that it forces us to ignore evidence that contradicts our preconceived ideas. “We believe in things because we trust other people who believe them,” he says.
System 2, on the other hand, is rational, deliberate and, though slow, capable of correcting the mistakes of its faster counterpart, according to Kahneman.
Kahneman illustrates his lecture with simple tests that show how easy it is to reach false conclusions — which, without the overriding mediation of logic, he notes, might cause one to act irrationally. This theory, when applied to economic decisions, explains how investors might undermine their own financial interests, he says of the work that earned him the 2002 Nobel Prize in economics.