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I dedicate this article in memoriam of Daniel Kahneman, a champion of rationality, who recently passed away at the age of 92.
This piece reflects on his profound influence on our understanding of rationality. Kahneman’s work inspired a critical examination of the economic models that too often claim constancy, only to unravel under real-world conditions. He prompted us to reconsider our assumptions and the very notion of rationality.
Rationality and the Real World
Kahneman, his colleagues, and followers led the movement towards questioning rationality. Many of us have listened to economic arguments that start with “ceturus paribus “(all things being equal) and then proceed with all kinds of formulas that ignore that warning.
Kahneman stimulated us to challenge assumptions and what is perceived as rational thought. In particular, changing data, bias, wrong data, and wrong interpretations can greatly alter analysis. One of the best examples is the pandemic where we didn’t – and still don’t – fully understand or consider the disruptions and their impact. It’s been a stark reminder of how unpredictable variables can render our data and logic incomplete.
The Dynamics of Decision-Making
I argue considering issues like bias, probability, time, and value can greatly enhance the rationality of decisions. We often assume that the information behind probability is correct. Stock advisors’ have been wrong far too often particularly as it relates to stocks that continue to increase. Our sports teams’ probabilities are probably the most common example of overestimating the rationality of outcomes. Our perceptions can significantly affect the probabilities we use. We should consider how biases color our forecasts, often painting an unrealistically rosy picture. It’s a reminder that our self-perception can diverge significantly from how others, such as our supervisors, may assess us.
Time is also a crucial factor in our decisions. A small entrepreneur is frequently worried about short-term returns in order to make a living. Venture capitalists expect short-term losses in order to grow businesses and make huge long-term gains. Similarly, the actual value of a lottery jackpot can significantly diminish when the payout time arrives. Acknowledging the importance of timing can guide more rational decisions.
The Pursuit of Better Data
We need more focus on the nature, quantity, and quality of data. The more data, the more reliability – and the less data, the more variability. We need to assure that the variables we consider to predict success are, in fact, reliable. As we navigate through an ever-changing landscape of social, economic, and political shifts, the need for accurate and comprehensive data becomes increasingly apparent.
Confidence in the Face of Uncertainty
Confidence, too, plays a vital role in shaping our strategies. Risk is underestimated by worrying about losses more than gains, ignoring outliers, and not following intuition; the success that can follow initial setbacks.
Confidence is greatly affected by understanding the parameters of decisions. Playing cards with your friends is a zero-sum game because the total winnings equal the total losses except for expenses. Investing in the stock market is over the long-term a win-win because history shows it has increased 5-15% annually. Gambling in total is a lose-lose because the house wins a particular percentage on bets. Yet we continue to lose money on an enormous amount of gambling debts.
Failure is often a requirement for success. As Thomas Edison said, “I have not failed. I’ve just found 10,000 ways that won’t work.”
Yet we sometimes fail to recognize its value in the process of achieving success. For example, fear and uncertainty accelerate the concerns about failure. Many studies have shown that we are about twice as likely to avoid losses as pursue gains. For example, we will trade stocks with gains twice as fast as selling stocks with losses despite tax advantages for selling losses. Sports teams consistently take fewer three-point shots, steal fewer bases, and attempt fewer two-point conversions than the odds would dictate.
A key process to mitigate failure is to analyze, test, measure, evaluate and examine alternatives. Why are kids not afraid of failure yet we become more afraid as we age? Just watch kids try things after they fail. I am always impressed with kids who won’t stop riding after they learn to ride a bicycle. It’s this fearlessness in the face of failure provides a valuable lesson in resilience for all of us.
Rationality also includes compromises. We tend to prefer to avoid loses rather than pursue gains. For example, most people will choose to flip a coin to avoid losses rather than do nothing for an equal choice.
Bias and Decision-Making
Bias is a critical issue in disrupting decisions and rationality. In fact, bias is one of the greatest complications when it comes to accuracy in the scientific analysis of decisions. This includes statistical problems like sampling, measurement, and development of information. For example, demographic considerations like aging, ethnic background and geography are not fully considered.
I also believe that social bias can be more impactful than statistical bias. This includes our preconceived perceptions and assumptions. I’m always amazed that many programmed employee selection tools outperform interviews especially in jobs requiring specific skills. Such tests remove things like unconscious age, sex, and racial discrimination.
Cultural Influences on Rationality
Cultural and environmental influences on bias suggest that our backgrounds can both hinder and facilitate understanding. Shared origins can often lead to more harmonious interactions. For example, dress, demographics, weather, location, and culture all affect perceptions in the decision-making process. These can also be used to your advantage. For instance, whenever I meet someone who is also from the Southside of Chicago, agreement on differences becomes much easier.
Climate Change: A Rational Approach Needed
Climate change represents a glaring example of collective inaction in the face of overwhelming scientific consensus, emphasizing the urgent need to shift toward sustainable practices. For the 10th consecutive month, Earth in March set a new monthly record for global heat — with both air temperatures and the world’s oceans hitting an all-time high for the month, according to European Union climate agency.
Climate scientists attribute most of the record heat to human-caused climate change from carbon dioxide and methane emissions produced by gas. “The trajectory will not change until concentrations of greenhouse gases in the atmosphere stop rising, which means we must stop burning fossil fuels, stop deforestation, and grow our food more sustainably as quickly as possible. Until then, we expect to break more records.
In summary, the world is far from a place where all factors are equal or decisions purely rational. By deepening our understanding of biases, recognizing the significance of time, scrutinizing probabilities, and demanding better data, we can refine our decision-making process. There is a pressing need to embrace a more nuanced and informed approach to rationality.