Kahneman and Efficient Bias

This article will point to some good resources from Kahneman, but also makes a critique about a point he makes about bias.

Daniel Kahneman is a smart guy, an experimental psychologist, and a winner of the Nobel Prize in Economics. He is known for his books Thinking Fast and Slow and Judgment Under Uncertainty: Heuristics and Biases.

Some great items from Kahneman, in addition to the two books just prior, include the following:

  1. Daniel Kahneman: The riddle of experience vs. memory
  2. Prospect Theory (Yale)
  3. Prof. Daniel Kahneman: “Thinking, Fast and Slow”

Lastly, he has a great recorded talk at Google from 2011 which is embedded just below. This item is special because he does a great job with one small exception and I want to criticize that point.

Around 44:00, Kahneman ridicules substitution bias. However, this bias is perfectly rational, proper, and efficient. Ceteris paribus, we should assume similar questions have similar answers. This is the principle employed in standard probability theory. If you can’t prove the null hypothesis false then you must accept it, and the null hypothesis is that the means are equal.

In case it’s not clear, the reason that substitution bias may constitute an efficient outcome is because time has value. If the value of the time saved through the use of substitution is greater than the value of error incurred from the sacrifice of accuracy due to analysis based on substitution or analogy, then substitution is actually the superior behavior.

It makes perfect sense that certain questions are more efficiently answered under a substitution regime while others are not, and it’s actually an example of biological fine-tuning that our bodies seem to know which is which, at least usually.

The assumption of the irrationality of cognitive bias is a widespread assumption in academia and culture. It is an incorrect assumption and I have written on this topic before. The fact that this assumption is incorrect is consistent with both the theory of evolution and also the theory of intelligent design.

I would also point out that it seems that Kahneman’s experiencing self, system 1 thinker, and the economic concept of a short run actor are all correlated. A long run actor, a system 2, rational, thinker, and Kahneman’s remembering self seem to be correlated.

Consider this in connection with microeconomic choice under uncertainty. A system 2 thinker might be more likely to be risk neutral compared to a system 1 agent. Yes, I linked to Gruber. I know.

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