Daniel Kahneman, RIP

The Israeli psychologist who won the Nobel Prize for Economics in 2002 has died, aged 90. His most recent book was "Thinking, fast and slow"; I suspect that I never finished reading this book, not that it's not interesting, but because it's a long and concentrated read. 

 

Ironically, today I read the following (from "Originals" by Adam Grant, chapter 8)

Imagine that you’re an executive at a car manufacturer, and due to economic challenges, you need to close three plants and lay off six thousand employees. You can choose between two different plans: Plan A will save one of the three plants and two thousand jobs. Plan B has a one-third chance of saving all three plants and all six thousand jobs, but a two-thirds chance of saving no plants and no jobs. 

 

Most people prefer Plan A. In the original study, 80 percent chose to play it safe rather than take a chance. But suppose we gave you a different set of options: Plan A will lose two of the three plants and four thousand jobs. Plan B has a two-thirds chance of losing all three plants and all six thousand jobs, but a one-third chance of losing no plants and no jobs. 

 

Logically, these are the same options as the first set of choices. But psychologically, they don’t feel the same. In the latter option, 82 percent of people prefer Plan B. Their preferences reverse. 

 

In the first case, the options are framed as gains. We prefer Plan A because we tend to be risk averse in the domain of benefits. When we have a certain gain, we like to hold on to it and protect it. We play it safe to guarantee saving two thousand jobs instead of taking a risk that might leave us saving no jobs. After all, a bird in the hand is worth two in the bush. 

 

But in the second case, we’re presented with a guaranteed loss. Now, we’re willing to do whatever it takes to avoid that loss, even if it means risking an even bigger one. We’re going to lose thousands of jobs anyway, so we throw caution to the wind and make the big gamble, hoping that we’ll lose nothing. 

 

This line of research was conducted by psychologists Amos Tversky and Daniel Kahneman; it helped give rise to the field of behavioral economics and win Kahneman a Nobel Prize. It revealed that we can dramatically shift risk preferences just by changing a few words to emphasize losses rather than gains. This knowledge has major implications for understanding how to motivate people to take risks.  

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