Transcript: Danny Kahneman


The transcript from this week’s, MiB: Danny Kahneman on Noise, is below.

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RITHOLTZ: This week on the podcast, what can I say? Another extra special guest. Danny Kahneman, Nobel Prize winner, author of “Thinking, Fast and Slow” his new book is “Noise, A Flaw in Human Judgment” and Danny is just so knowledgeable, please call me Danny, I feel I have to call him Professor Kahneman and he insists. He’s 87 years old and incredibly sharp and insightful and just so much wisdom and knowledge.

If you like “Thinking, Fast and Slow” which is about judgment error in humans and individuals, well “Noise” is about how flaws in judgment within broader institutions come about and it’s a totally different area and it’s absolutely fascinating. I’m a big fan of behavioral finance in general plus all of Danny’s work historically.

If you are remotely interested in this, then strap yourself in, this is a another doozy. With no further ado, my conversation with Danny Kahneman.

VOICEOVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

RITHOLTZ: My extra special guest this week is Daniel Kahneman, he was awarded the 2002 Nobel Memorial Prize in Economic Sciences which he shared with Vernon Smith for his empirical findings, the work he did with Amos Tversky and what’s so fascinating about that Nobel Prize is that Danny is a psychologist, the work they did challenged the prevailing thoughts in economic theory by establishing a basis for common human errors.

His previous book “Thinking, Fast and Slow” was the bestseller of 2011 and won a variety of different awards including the National Academies Communication Award for best creative work, his latest book is just out, “Noise, a Flaw in Human Judgment” which Danny Kahneman wrote with Olivier Sibony and Cass Sunstein, Danny Kahneman, welcome back to Bloomberg.


RITHOLTZ: You always say “Call me Danny” and I always feel awkward and I feel like I should call you Professor, but let me just get that right.

KAHNEMAN: I insist. Call me Danny.

RITHOLTZ: All right, Danny. So let’s start very basically, what is noise, how does it happen and where does it come from?

KAHNEMAN: Okay, well the term noise is an accepted term in statistics, we talk about statistical noise which is an ability and that is where it comes from, we talk about noise with measurement which is unreliability in measurement or measurements that should be identical to not vary (ph).

So that is the background in the use of it. As we use it specifically, we intend – we speak about judgment noise and this is the situation in which judgments should be identical, people or the same individual judging the same object a different time to different people judging the same object if they don’t agree and are expected to agree, we speak about judgment noise. And in general, people are expected to agree when they’re trying to be accurate.

So when you have a group of people trying to make the best guess about the quantity, it could be the sentence that somebody should get for a crime, it could be the value of the company, it could be the premium that somebody should be charged or it could be a diagnosis — a medical diagnosis.

In all these cases you might have several people looking at the same information making judgment, if they don’t agree, there is noise, and noise is the topic of the book we wrote.

RITHOLTZ: So it’s fascinating how we start to see noisy decision-making come up over and over again in the same fields and you just mentioned a few, medicine, criminal justice, finance, are there certain fields that are more susceptible to problems in expert judgment than others or is it just that the results of those sort of noisy decisions are so much more significant than other fields?

KAHNEMAN: Well, we used the word judgment when there is room for reasonable disagreement. That is, you know, we don’t use the word judgment for computation and when computation is appropriate, we wouldn’t be talking of noise, we would be talking of people making mistakes.

And we talk about noise when it’s a matter of judgment and so the existence of noise by itself is not a surprise, what is a surprise is amount of noise, it is just a lot more than would be expected., and here I think the best way to explain this is to tell you the story of how I started to work on noise that where the whole thing began.

So I was consulting in an insurance company seven or eight years ago and I had the idea of running today what we would call a noise audit that is underwrites to take one example we had several underwriters saw some realistic cases, the same cases, they were constructed by executives experts in underwriting so they were completely and you might have 50 underwriters looking at the same treatment.

Now nobody would expect the numbers to be exactly the same, but I ask executives if you take a pair of underwriters at random, by how much would you expect them to this in percentages and as you take the average of the pair, you take the difference, you divide the difference by the average, what percentage looks reasonable to you?

And their answer typically was 10% and we have by the way – we have surveyed hundreds of executives since then and 10 percent seems to be what we expect a reasonable difference to be which is tolerable when two people make judgments of the quantity.

Now, the correct answer among underwriters in that company was 55% more than five times as much as expected, that is the phenomenon, so we expect disagreement where judgment is involved, we just don’t expect that much disagreement.

And this basically was the observation that started us that path of writing a book because it turns out that your find astonishing amount of disagreement when you look for it and you find it wherever judgment is involved.

So engineers who make estimates on the basis of objective beta, they don’t have a problem of judgment but to the extent they do have a problem of judgment, you would expect a lot of noise. So that is the basic finding.

And wherever precision is important, wherever it is important to get to the right number, noise is the source of error…

RITHOLTZ: So let me…

KAHNEMAN: Some people overestimating and others underestimating, they are making errors.

RITHOLTZ: So let me roll back to that insurance company which you discussed in the book and there were two particular areas wherewith there were these broad disagreements, the first was when people were trying to estimate the risk involved with some insurance and so how you price that very much determines if you’re too expensive meaning you think it’s a high risk, you’re not going to win the business and if it’s too cheap relative to the risk, well you will win the business but it won’t be profitable, the cost will be higher and then on the other end in the appraisal of hey what are the damages here figuring out how much something should be covered by insurance, what the dollar amount is, and the same situation, you can’t be too stingy or you lose customers but you can’t be too generous where you give the house away, how significant a financial issue was this for the insurance company?

KAHNEMAN: Well, you know, it’s not easy to estimate that exactly but I can tell you the question that I ask some executives. I said suppose there is a correct number, say for the underwriters, and you have somebody who overestimates underwriting cost by 15%, how much would you expect that to cost the company?

And the same question for underestimating by 15% and in fact 15% on either side is much less noise than we had discovered, but people estimated on that basis that this could be in the hundreds of millions or billions of dollars, this is a very large company.

So, underwriters have a lot of important decisions to make, claims adjusters make important decisions, which are really consequential for the company, and areas or the magnitude that we observe are costly. The main reason that they may be less costly is that if error is present in all insurance company, if all insurance companies are noisy then some of the damage to each individual company will be reduced, but that’s the best that we can say.

RITHOLTZ: Well, one would imagine the insurance company that could reduce noise would find itself at a competitive advantage.

KAHNEMAN: Absolutely.

RITHOLTZ: There was something you had written that really stood out to me. There was an assumption when you have noisy systems and everything from criminal justice to medicine to insurance, that these errors tend to cancel out, but you found out that noisy systems have errors not only do they not cancel out, they tend to add up. Explain.

KAHNEMAN: Well, if you have two separate underwriters estimating the same risk and you average their ratings, then the average will be usually more precise than the individual judgments because errors in measuring the same object do cancel out, but errors when you’re responding to different objects do not cancel out.

So, if you overprice one policy and you underprice the — another policy, that doesn’t cancel out. You’ve made two mistakes. And, you know, it’s the same thing with two — these two judges if one defendant is punished too much and another defendant is punished too little. On average, you know, punishment was right, but who cares about the average? Two mistakes were made. So, there is some confusion because people think about canceling out, but that happens when people evaluate or judge or measure the same thing there, and — and errors do cancel out.

RITHOLTZ: I recall a book a couple of years ago called “The End of Average” that looked at that exact issue and said, you know, we — we tend to look at these averages as if anyone is experiencing an average, but what you’re really saying is, hey, if it averages out to be the right answer, it means you have a lot of wrong answers.

KAHNEMAN: That’s right. Averaging out to the right answer is not a guarantee, and that this is a nice example of the phenomenon we’re discussing in the book, the — the neglect of noise. People really tend to focus on bias, which is the average error, but you can have a zero bias and a very poor performance if you have a lot of overestimates and a lot of underestimates.

RITHOLTZ: Quite interesting. So, one of the things in the book that I was so taken by had to do with the Admissions Committee for university, and they used to have all the admission officers do a blind review and get together and trying to hash out who they thought would be a good fit for the school and who wouldn’t. But it led to a problem and they started having the first person who — who reviewed the application, put their review number on the corner like they would actually put their rating on the page and then hand it off to the second person. And you described this as “the illusion of agreements in organizations.” Tell us about that.

KAHNEMAN: Well, you know, this is an experience with any teacher has had, for example. When you are looking at a test booklet, the student has written several essays. If you score a test booklet, you score the first question, then the second, then the third, then in general, you’ll find that your grades adopt very, very much.

On the other hand, if you read the same test across all students and write the score at the back of the — of the booklet so that you don’t know when you read the second question with the first question was, you will often be shocked by the discrepancy between the first and the second.

There is a mechanism by which people, if you gave a good grade the first time, you are going to be inclined to give the benefit of the doubt to the student if there is any ambiguous answer, exactly the same thing happens in deliberations and in the example that we gave. And the Admissions Committee used to operate in what we consider the correct manner, and that is everybody would individually make their judgments and then they would reveal all judgments together and average them. But they change the system so that now people spoke in sequence.

And the question was asked, why do you do this? This is not optimum. And they say, “Well, we used to do it the other way. We used to have people prepare their judgments individually, but there was so much disagreement that we stopped.”


And that’s an example where people manage to avoid finding out how much noise there really is because when the — when people are allowed to influence each other or influence themselves, in the case of the teacher reading multiple booklets, when — when judgments are not independent, they are less effective statistically. You just have less information.

Think of the example in which the first person to talk is the CEO and then everybody agrees. Then the agreement of other people is not informative. In fact, you had one person making the judgment. That’s the extreme of abolishing — of eliminating the appearance of noise without eliminating the reality of them.


RITHOLTZ: So, it sounds like groups and corporations, institutions, schools. They seem to amplify noise. Is that just the nature of bigger numbers of people working together that they’re going to create additional noise?

KAHNEMAN: No, not necessarily. What happens in a group if they made their judgments individually is not that noise is amplified, the true noise is revealed. So, suppose you had underwriters, suppose you had multiple underwriters judging routinely every — every risk, then the optimal procedure would be to have them making independent judgments and only then — then revealing the two judgment and averaging them. That’s clearly the optimal procedure.


KAHNEMAN: And — and the optimal procedure reveals noise and then — but uses it by averaging. But when a single individual makes a judgment, that judgment will be noisy. And when individuals are allowed to influence each other, then it’s more like a single judgment than it is like having multiple judgments to the same object.

RITHOLTZ: So you used the phrase “naive realism.” What — what does that mean relative to noise in groups?

KAHNEMAN: Well, what naïve realism means is — is a statement, which most of us — most of the time that we think we’re right. We think we have the right view of situations. We think we understand things correctly and showed we — we see the world as the world is. That’s naive realism.

And if I see the world as it is and — and all their friends and colleagues looking at the same world, and I like and respect them, then naturally I assume that they see the world as I do because I see it right. And if I respect them, they see it right as well. So that’s naive realism, and naive realism prevents us from becoming aware of the amount of noise that there is. We just assume noise away.

We saw that but very nicely among underwriters. You know, when you interview an underwriter, what happens to them? But how does an underwriter become expert in the absence of any feedback because they don’t — they don’t get any feedback from reality about their underwriting. And what happens is that they become increasingly confident and largely because they agree with themselves.

So when you agree with yourself a lot and you think you are right, and you make judgments with increasing speed and confidence so that makes you think that you’re even greater, that’s naive realism allowing massive noise to occur with everybody convinced that they are doing the right thing but, in fact, they may not be doing the right thing because if they were looking at the same problem, that would be different.

RITHOLTZ: Quite fascinating, so we become familiar with a particular area. That familiarity leads us to think that we’re developing an expertise. We tend to make more snap judgments. And without any sort of feedback loop, how can we possibly know that we’re right. And yet, that absence of feedback seems to strengthen people’s self-confidence. Do I have that right?

KAHNEMAN: That’s right. And think of a number of situations in which exactly there’s hope (ph) — there’s a judge who doesn’t have feedback as to whether a judgment was correct or not. They’ll judge. Sometimes there is feedback, but it’s asymmetric, so a bail judge may get feedback on somebody who was released and committed the crime. But a bail judge will never know if somebody was incarcerated, would have committed the crime. So, feedback is a massive problem and many professionals at the minimum feedback, and yet they become confident and they feel they’re experts. But in those cases, there is a high risk of noise.

RITHOLTZ: And a lot of that feedback seems to be only at the extreme. A — a bridge collapses there, a plane crashes, somebody dies. There’s someone out on bail commits a crime. What about all of the — for lack of a better word — near misses where there is a bad judgment. Something happens, it’s not quite as terrible as a — as an airplane crash, and it — it’s resolved before there’s damage, but it’s pretty clear the basic judgment was wrong. How does that affect a person’s future judgment?

KAHNEMAN: Well, in situations with their own near misses, there is an opportunity to learn. And in well-run — you know, well-run airlines and — and air traffic systems keep track very closely of near misses because those are their opportunities to learn without — without tragedies,

But in many situations, you get no feedback at all. And the idea of having senses in bridges that gives you a sensitive measurement of how much stress there is, that is fairly recent. They used to be very poor feedback of — on whether a bridge would collapse or not, and in many situations that professionals make judgment on, there’s no feedback at all.

RITHOLTZ: Quite interesting. So, let’s talk about this book, which was a collaboration. What was it like working with those two gentlemen versus “Thinking, Fast and Slow,” which I kind of get the sense was you sitting down and putting a lot of your previous work into a context for public consumption.

KAHNEMAN: Well, writing fast and slow was mostly a very lonely experience and writing with collaborators was really a pleasure. So, it was — it was a relief to be able to count on people to find mistakes to correct them. And — and a lot of the text was actually written by Olivier and by Cass. I had a lot to do with outlining and with critiquing and with rejecting drafts, but I was steered much of the things that I’m most afraid of in writing. So, it was a very good collaboration.

RITHOLTZ: That’s good.

KAHNEMAN: And, by the way, we benefited a lot from — from COVID because that forced us into quite an efficient way of collaborating. We used to visit. Olivier would come to New York from Paris, and I would visit Paris for a few days every month, and we had a very good time, but it wasn’t productive. Zooming one or two hours a day turned out to be a much better way of writing the book, and — and and this is what happened.

RITHOLTZ: It sounds like it was just a good excuse to get together in — in New York and Paris and have a little bit of fun.

KAHNEMAN: Well, I mean, you know, we didn’t think of it as a good excuse, but it turned out that we’d waste a lot of time in a fair amount of money.

RITHOLTZ: So, you — you mentioned you reviewed a lot of manuscript from Olivier and Cass and rejected stuff. You and Amos, very famously, would agonize over every sentence in all of your publications. You seem to have spent a lot of time writing meticulously and very thoughtfully. How has that evolved overtime? Is this a little easier to sort of be the orchestrator and the editor as opposed to, you know, just agonizingly putting down every single word?

KAHNEMAN: No, it isn’t. I mean, my — this is part of sort of my intellectual personality or character that I think most clearly when I find flaws in existing text, and I am not good at anticipating the flaws. So, I see a flaw and I correct it, and then there is new text, and then I discover a new flaw. And — and I tend to work that way, which is infuriating for my collaborators …


… and — and wish for a lot of time and effort, but that’s the way I am. On the other hand, I do tend to be very critical in most of the flaws that I find do exist, so it — it tends to lead to a good project in a very inefficient way.

RITHOLTZ: So, despite that perfectionism, you know, we all evolve overtime. As you were preparing “Noise,” did you find any of your previous writings or research that you either disagree with or see from a different perspective or light when you’re putting this book together?

KAHNEMAN: No, not really. I mean, in the book we actually relied on ideas from “Thinking, Fast and Slow,” but the book is really fundamentally different. “Thinking, Fast and Slow” was a book about individuals and about how — and it was a book about the average or a typical individual, and how the average or typical mind works.

No, this is about the individual differences, it’s about the way that the different people think differently. And so, this is a really different cut about thinking. It’s a different way of looking at thinking. So, we did use some of the material, but there — “Noise” is not the revision of “Thinking, Fast and Slow,” it is about a truly different topic that we didn’t even touch in “Thinking, Fast and Slow.”

RITHOLTZ: And clearly, it goes in a very different direction and it looks at some systems and some organizations that I don’t believe you touched on in “Thinking, Fast and Slow.”

KAHNEMAN: That’s right.

RITHOLTZ: It’s kind of interesting because we’ve already talked about medicine, and criminal justice, and finance. There was one section I was fascinated by where you discussed hiring and promotions and how — I don’t want to use the word “random,” but how much noise is in that system and how unreliable many organizations’ hiring processes are. Tell us a little bit about that.

KAHNEMAN: Well, it turns out that people like hiring, interviewing people and — and, for me, general image of the individual that they are thinking of hiring. And it turns out this is not a good way of doing it. A much better way of doing it is what is called a structured interview or a structured process where you accumulate information systematically about different characteristics of the person.

That is less pleasant. It’s — it’s less enjoyable, but much better. And better yet is having several — several people do the hiring, each of them forming an independent impression and then they discuss — then they average and then they discuss the average. And this is the procedure, for example, (inaudible). And it’s about state of the ark (ph), but many places are way short of state of the ark (ph).

I should add that state of the ark (ph) hiring doesn’t mean that you’re guaranteed a perfect fit. There is so much — there is so much luck in the world, there is so much uncertainty that the person that you hire may be very good, that they run into difficulties with — with the boss doesn’t like her or something like that. And by chance alone, you can get a lot of variety.

Chance, by the way, is not noise. Chance is something that happens in the real-world. Noise is differences among judgments.

So, hiring is, by and large, really very poorly done. And it’s very poorly done because it doesn’t control noise.

RITHOLTZ: Quite fascinating. So, the book goes over how noise affects judgment and how it introduces a variety of errors into our institutional decision-making process. What can we do to improve that process?

KAHNEMAN: Well, in the book, we — we introduce a concept that we call “decision hygiene”. And, you know, the word is not particularly appealing, but it’s intended to bring to mind the image of washing your hands.

And there is a contrast between debiasing (ph) and decision hygiene. Debiasing is like medication or like vaccination, it’s specific to a particular disease. When you wash your hands, you don’t know what germs you’re killing. And if you’re successful, you’ll never know.

So, decision hygiene is oriented to improving decision-making and avoiding errors, specifically, avoiding noise, but incidentally also avoiding bias without knowing precisely what biases you’re trying to control. And we have a variety of procedures that we think of as decision hygiene.

RITHOLTZ: Give us a few examples. What — what are some of the procedures if …

KAHNEMAN: Well, I will give you an example that has to do with decision-making. So, suppose you are making a decision and the first step everyone will tell you is you have to consider your options and have the best possible set of options.

But now you come to evaluate options, how do you do that? And here actually, our advice, we have a slogan. We say options are like candidates. You should think of options in the same way that the organizations are in — are advised to operate when they hire candidates. And we were talking about that earlier. Structure the thinking, break up the — each options, look at the various aspects of it, make — assess these aspects in a fact-based way, which is the equivalent of interviewing somebody about this aspects or character or — or experience. And then create a profile of old information you have about that option, and only then invoke intuition.

So, there’s a key principle of decision hygiene. It is not to avoid intuition all together, but to delay it because intuition is way more effective if it is preceded by a period in which it will accumulate information systematically. So that’s an example. I have many others, but …


… (inaudible).

RITHOLTZ: And there were quite a few in the book. There were some things that really surprised me about that decision-making process, how people’s moods affect their decisions. Even the weather affects decision-making. We are essentially different people at different times.

KAHNEMAN: Oh, yes. That is — there are different sources of noise that we — we talk about, so there are three of them actually and that one of them is what we call within person noise, and that is that the individual is in indeed making different judgments depending on circumstances that they’re irrelevant. So, it’s true there is evidence that mood really affects the way that people think. People tend to be more creative when they’re in a good mood, but they tend to be also more gullible and they are more critical when they’re in a bad mood. So, mood affects the way we think and it also affects — we’re more prone to see good things when we’re in a good mood.

Mood is important. There is evidence that judges who pass sentences on criminals are more severe on hot days, and they are more severe if their football team lost the game last Sunday. So, there are a lot of irrelevant events or circumstances that influence our — our judgment. This is one of the three major sources of judgement.

Let’s get to the other two. What are the other two sources of …

KAHNEMAN: Well, one other, which is easy to think about — that’s very easy to think about it in terms of judges, some judges are more severe than others. So, their sentences, on average, are more severe than the sentences of other judges. That’s one aspect.

And the same is true by the web underwriters. Some underwriters write large premiums on average and other underwriters write small premiums, on average, so there are differences for that client.

But it turns out that the biggest source of noise — and that came as a surprise to us. The biggest source of noise are that people really don’t see the world in the same way. So, the different judges have different things in crimes and some things in criminals. So, they — somebody maybe particularly severe about repeat offenders. Somebody else might be extremely lenient, say, about white-collar crime, but really upset by violence.

And it turns out that there is — we call that a pattern noise that is each judge — each individual has a pattern of judgments, which are — this is different from the pattern of judgments of other people, and that is the major source of noise. And people were consistent in that way.

So, for example, suppose you’re a judge and somebody remind you of your daughter, whether that makes you more lenient or more severe, probably more lenient. Now on another day, that same person would also remind you of your daughter. So, this is not noisy within the individual, this is a characteristic of the individual, but no other judge shares it. And it turns out that this highly case-specific at distances and attitudes that are difficult to pin down, they are noise. Judges have personalities and judgments differ as much as personalities do.

RITHOLTZ: And then what is the third source of noise that you identified …


RITHOLTZ: … in the book?

KAHNEMAN: That — those are — the three are differences in average level for a judge is severity; differences in taste, what we call pattern noise; and within subject — within person variability. We call that occasion noise because, on different occasions, you make different judgments. And it’s the sum of these three sources of noise that — that creates — that’s the noise that we observe.


KAHNEMAN: So, in a system, all three operates on any particular judgment.

RITHOLTZ: So, I’m going to ask the question I was thinking about a little differently based on what you just said. What fields seem to manage reducing noise better than others? And are there any fields that are so especially susceptible to noise?

KAHNEMAN: That’s a very good question to which I do not have a very good answer because, you know, in our work we — we found noise wherever we look for it. It mean our summary conclusion is wherever there is judgment, there is noise and more of it than you think. You know, this has — this has been our conclusion. So, we haven’t found places that control noise very efficiently.

The only way, by the way, to get rid of the noise — and that’s really quite important — is average judgments. Think multiple judgments of a case and average them. And this mechanically eliminates noise. If you have enough judgments, the average may be biased because averaging does nothing to reduce bias, but it eliminates noise. So that’s a sure fire away of eliminating noise of averaging multiple cases.

RITHOLTZ: Very interesting. Let me throw a curve ball at you. If you were designing a system to introduce noise, to short circuit human judgment, what would you create to make judgment less effective, noisier?

KAHNEMAN: I don’t think it would do things very differently from the way that they adapt in many institutions now. I would — I would let people make individual judgments without feedback. That’s — that’s all that’s needed. Make their individual decisions without feedback, which is a situation that’s very common, and that will create a lot of noise eventually.

And noise is reduced by a feedback. Sometimes it’s the feedback or other people, so case conferences can be arranged to some extent control noise. But, you know, you — you don’t have to try very hard to create a lot of noise. I think the existing organizations do very little to control noise.

RITHOLTZ: So, let’s talk a little bit about ways to control noise. And you describe a difference between rules and standards. Tell us about that.

KAHNEMAN: Well, standard is a way of — when you say, for example, that you — obscenity is something that you recognize, so there is a standard to avoid obscenity, but you do not define it. That’s a standard.

A rule is more precise than that, and it tells you specifically what you have to do. And rules, if followed, they are like computations. A computation is a — is a rule. And rules tend to eliminate noise. Standards sometimes reduce noise, but standards would not eliminate noise because they are vague.

RITHOLTZ: So — so the seven words you can’t say on television is a rule, but pornography, I know it when I see it is a standard. Is — is that the different?

KAHNEMAN: Precisely, precisely.

RITHOLTZ: Quite interesting. So — so given all of the work you’ve done over the years, all of your research, you seem to have continually identified flaws in cognition, flaws in — in human judgment. Has this affected the way you view other people? Do you — do you turn around and say, wow, these — the species is a terrible decision-making apparatus or is it something less comprehensive than that?

KAHNEMAN: No. I’ve — I’ve — actually for all my career, I’ve — I’ve been interested in intuition and intuitive thinking. And I’ve been interested and that’s a lecture I used to give for good many years — intuitions, marvels novels and flaws because intuitions is marvelous — intuition is marvelous, but it’s also flawed.

And it’s true that I have found it more interesting to study the flaws of intuition than its marvels. And there is a — a lot to do to correct the flaws of intuition. But to say that this is turning to a pessimist (ph) whether they dislike people because their minds are flawed, I think the minds are pretty marvelous, but they are certainly far from perfect.

RITHOLTZ: Right. So — so you’re focusing on the small bits that we get wrong, but overall, we manage to navigate through life pretty effectively.

KAHNEMAN: Well, we certainly manage to navigate through life. And, you know, it — it would be absurd to focus on the flaws of human beings when you see what they are capable of. On the other hand, if you want to do things better, then you’d better focus on the flaws rather than what is going well.

RITHOLTZ: You know, one of the things you said when we spoke last about “Thinking, Fast and Slow,” I asked you about your own investing process. And you said despite knowing everything that you know about human decision-making, you still catch yourself making the same sort of mistakes that everybody makes. Is that still the case? Do you still feel that way?

KAHNEMAN: Oh, yes. I mean, you know, I’ve been at it for more than 50 years. And I’m really not better than I was.

In general, my thinking has been that it was true when I wrote “Thinking, Fast and Slow”, which was focused on the individuals, that the — the hope of improving thinking is in organizations because organizations thinks slowly and they have procedures. And it’s by imposing procedures by adopting procedures that you can improve things. And in the case of “Noise,” we have a procedure that we recommend to get started, and that’s measured noise.

If you are in an organization where you have multiple people making the same judgment and no very good feedback, conduct what we call a noise audit. Give them the same problem and look at their solution. We predict that you’ll find more noise than — than you think you will. That’s — that’s our prediction. And that’s — that’s a recommendation to organizations. It’s not something that you can recommend to an individual.

RITHOLTZ: Quite interesting. I have to ask you before we get to our favorite questions, what’s the next project? What’s the next book look like? What is tickling your curiosity these days?

KAHNEMAN: Well, I’m — actually I’m back to a topic that I was working on 20 years ago. I — almost by accident, I’m back studying wellbeing. And I’m involved in several research projects. None of them is as big or ambitious as “Noise” was and “Thinking, Fast and Slow,” but all of them are quite interesting, so I’m not bold.

RITHOLTZ: I can’t picture you bored because you always seem to have a lot of different things going on. Let me ask my favorite questions that I ask all of our guests. And let’s start with what are you doing to stay entertained during this pandemic lockdown? In addition to working on the book, what are you streaming? What are you watching on Netflix, if anything?

KAHNEMAN: Oh, I’ve been watching several series — several very good series. Let’s see, the last ones — there is a political series on Netflix, the Baron Noir, which is a French political thriller that is very good. There is a Danish political series, Borgen, that is very good.

I am now watching Babylon Berlin about Berlin in the 1920’s, which is excellent. And so, I do my watching mainly while I exercise, and I exercise a fair amount, but so I’ve — I’ve seen a lot of series since — well, from — for the last two years.

RITHOLTZ: Baron Noir was the French one. What was the Danish one?



KAHNEMAN: Borgen is great. Actually, the Danish one, Borgen is a thriller. It’s a Scandinavian thriller. There is a Danish one about the — a woman prime minister, and it’s not Borgen, and I am now blocking its name, but it will be easy to find. And I really recommend it. It is superb.

RITHOLTZ: All right. I will — I will check that out. So, let’s talk about your early mentors. Who helped to shape your career? And I guess, we have to include collaborators in that as well?

KAHNEMAN: Well, I mean, there’s been one major influence on my career, and it was Amos Tversky. The collaboration with him completely changed my life and — and it changed the way I do things, but — and it gave me a — yeah, it changed my life. And it was the best period of my life, too, professionally.


RITHOLTZ: The thing I recall from Michael Lewis’ “Undoing Project” is that people said you guys would lock yourself into an office or a classroom, and all they would hear all day long is peels of laughter coming from within. Is that true? Is that an exaggeration or did you guys …

KAHNEMAN: No, that’s really not an exaggeration. Amos and I work very closely together for about 12 years. And we spend many hours a day together. And he was funny. He had an excellent sense of humor, and he loved laughing. And in his presence, I also became funny, so we were amusing each other. And the field that we studied was — was one that was conducive to laughter because we were looking for mistakes in our own thinking.

And to trap ourselves or to see that you are tinted to make a stupid error, that is quite funny. And that’s the game that we engaged in in studying judgment and studying decision-making was looking for errors in our own thinking, and that was very amusing.

RITHOLTZ: I can imagine. So, let’s talk about books. What are some of your all-time favorites? And — and what are you reading right now?

KAHNEMAN: Well, I would say my all-time favorites of recent years was “Sapiens.” I think it’s many people’s favorite book by Yuval Noah Harari. I read it twice, which is something that I rarely do.

And right now, well, I’m reading the new edition of “Nudge,” which is coming out, I think, in August and it’s called “Nudge: The Final Edition” by Dick Thaler and Cass Sunstein — the same Cass Sunstein. And — and it’s quite different from the original “Nudge,” which appeared I think in 2008. And it’s what — but it — it — it had the same characteristic that “Nudge” had. That’s why that it’s funny.

RITHOLTZ: Right. Dick said it’s about two-thirds new, and I think that’s August 4th that comes out.

KAHNEMAN: Yeah, that’s right. So that’s …


KAHNEMAN: … I happen to be reading that right now.

RITHOLTZ: August third, I’m looking at a message from him. He’s — he is a very amusing person to begin with. And if — if you’re telling me the book is funny, then I am really looking forward to — to reading that.

KAHNEMAN: Oh, the book is — you know, he just — he can’t help himself. He is funny all the time. He is my best friend, my best living friend.

RITHOLTZ: Let me ask you this question. If a recent college graduate asked you for some advice if he was interested in a career in either psychology or behavioral finance, what sort of advice might you give him or …

KAHNEMAN: Well, you know, I — I tend to refrain from advice because I don’t believe I have a crystal ball into the future. I can tell you what I would have been doing if I was starting today. The fields that are very exciting from my perspective are neuroscience, including neuroeconomics, which is the — the — the neuroscience of decision-making and artificial intelligence.

I mean, in those two areas, right now, there are extraordinary developments, very exciting. And so, when you see that — and they are attracting massive talent, both areas, so you know that for the next decade or so there will be (inaudible). A lot is going to happen. And what happens after that, I have no idea.

RITHOLTZ: And — and our final question, what do you know about the world of psychology, behavioral finance, economics today that you wish you knew 50 or so years ago when you were first getting started?

KAHNEMAN: Oh, well, so much has been learned. You know, if I — I can’t say that I wish I had known earlier what — what has been so much fun to find out over the years, both in my work and in the work of others. So, I can’t think of a thing that would’ve made me act differently. But all I can say you — to you is oh, yes, things have really changed since I’ve been in that field.

RITHOLTZ: Quite fascinating. Thank you, Danny, for being so generous with your time. We have been speaking with Danny Kahneman whose new book “Noise: A Flaw in Human Judgment” was co-authored with Olivier Sibony and Cass Sunstein.

If you enjoy this conversation, check out any of our previous 400 such interviews. You can find those at iTunes, Spotify, Google,, wherever you get your podcast each week.

We love your comments, feedback, and suggestions. Write to us at You can sign up for my daily reads at Check out my weekly column on Follow me on Twitter @ritholtz.

I would be remiss if I did not thank the crack staff that helps put together these conversations each week. Tim Harrow (ph) is my Audio Engineer. Atika Valbrun is my Project Manager. Michael Boyle is my Producer. Michael Batnick is my Head of Research.

I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.




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