The Grey Chronicles

2009.October.12

Learning from Kahneman



After reading the biography and works of Stiglitz in Steven Pressman’s second edition of his book entitled Fifty Major Economists (2006), I perused the succeeding pages and focused on Daniel Kahneman. In the Preface of Pressman’s book, similar to Robert Owen who was jettisoned from the 50 and replaced with Joseph Stiglitz, he explains:

“[Oscar] Lange did work on economic planning and socialist
economies. Over the past decade, interest in this issue has waned among both economists and policy-makers. Conversely, there has been greater interest in understanding human decision-making and in doing experiments to try to understand how people actually behave. The importance of these lines of research was recognized in 2002 when Daniel Kahneman was awarded a Nobel Prize for Economics. So it seemed logical to replace Lange with Kahneman.”

Although a a psychologist, Daniel Kahneman, “has been a leader in two areas of economics — experimental economics and behavioral economics.” (Pressman, 2006: 292).

“The work of Kahneman (and Tversky) has focused on errors in judgment, particularly around decision-making. Kahneman (2002) sees human judgments as having two different components. First, humans are able to directly perceive things; we take in information from the environment around us. However, our perceptual systems are not perfect. Optical illusions are one well-known class of perceptual error.”

“Second, we have a deliberative or evaluative system, which knows that our perceptions can be mistaken and may try to correct them. Unfortunately, we cannot and do not always do this. Kahneman has identified several types of decision-making mistakes. These occur when our perceptual system generates errors and our deliberative system fails to correct them. Moreover, Kahneman (1973) has shown that these errors are not mitigated through either education or experience. People do not seem to learn from their past mistakes; instead, they tend to make these same errors over and over again. One type of error stems from faulty memory. In large measure, our decisions today depend on what we remember about our past experiences. If our memories about what happened in the past are defective, it hinders our ability to make good choices now.” (Pressman, 2006: 294—295) [Emphasis added.]

In my post entitled: What Could Have Been, I also contemplated on writing a thesis on forecasting. I wanted to focus the research on errors in judgment, which is also present in forecasting methods and decision-making. Both topics are also a part of production and operations. When I took an elective: Materials Management, a required subject for my major, forecasting was also a major topic. Some lecturers, however, also believe that the forecasting and decision-making leaned more toward economics and has little to do with production management. Although, I argued that production theory can be traced back to economics theory, remembering Adam Smith’s most significant treatise: The Wealth of Nations, but they would not have it either. I surmised then that maybe what these lecturers understood of production management is purely the technology side of it. Thus, they suggested a research on ISO implementation and other management technologies, specifically Six Sigma or Total Productive Maintenance [TPM]. I declined pursuing these suggestions because the company I was employed then had this protective sense on their implementation methodology, aside from the fact that only a very few companies in the Philippines have deployed these technologies.

In retrospect, if Kahneman, a psychologist, could link psychology to economics, then probably somebody could attempt to link production management with economics? And one lecturer told me that how can I write something about economics when I fared miserably in both microeconomics and macroeconomics? Humbly, I only knew one Latin word from that subject anyway: ceteris paribus—all other things being equal. Maybe this word summed it all for what I find hard to grasp most aspect of economics, ceteris paribus; because in real life, all other things are NOT equal. Assumptions, assumptions, assumptions, the basis of most economic theories.

Pressman (2006: 240) offers:

“One frequent criticism made about economists is that they always make unrealistic assumptions whenever they study the economy. A favorite joke about economists concerns several professionals stranded on a deserted island with many cans of food, but no way to open them up. After all the other castaways fail to use their professional know-how to open the food cans, the economist comes to the rescue: "Let’s assume we have a can opener," he proudly suggests.”

In a controversial essay contained in his Essays in Positive Economics, Milton Friedman (1953) argues that the realism of assumptions does not matter in scientific analysis. Quoted by Pressman, Friedman further states:

“All theory involves abstraction and so all the assumptions of a theory have to be, in one sense, unrealistic. The only important thing is whether the implications of the theory are true; that is, whether the theory works and makes good predictions. If the theory is supported by the data, it does not matter whether the assumptions of the theory are completely accurate. On the other hand, if data does not support the theory, the theory has to be discarded even if it employs realistic assumptions.”

I know for a fact that I’m not a Kahneman, but I can dream, can’t I? But, thesis writing is not a dream, its painstaking research. I only read Pressman’s Fifty Major Economists this month, and it was some sort of a validation that Kahneman words: “People do not seem to learn from their past mistakes; instead, they tend to make these same errors over and over again,” is almost similar to the last sentence of my thesis: “Not learning from the past is a presage of repeating the same,” which was the topic of yet another post entitled:Repeating The Same.


Notes:

Friedman, Milton (2009). Essays in Positive Economics. Chicago: University of Chicago Press, 1953. pp. 3—143. As cited by Pressman (2006: 240) back to text.

Kahneman, David (1973) with Amos Tversky. On the Psychology of Prediction. Psychological Review, 80 (1973). pp. 237—51. back to text.

Kahneman, David (2002) with S. Frederick. Representativeness Revisited: Attribute Substitution in Intuitive Judgment. Heuristics and Biases: The Psychology of Intuitive Judgment T. Gilovich, D. Griffin, and Daniel Kahneman [eds.]. New York: Cambridge University Press, 2002. 874pp. back to text.

Pressman, Steven (2006). Fifty Major Economists. 2nd ed. London and New York: Routledge (Taylor & Francis Group), 2006. pp. 292, 294—295. back to text.

Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 LicenseDisclaimer: The posts herein do not necessarily represent any organization’s positions, strategies or opinions. Read the full version of self-imposed rules for this blog: A New Year; New Rules. Unless otherwise expressly stated, the posts are licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 License.
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