Daniel Kahneman

Who Is Daniel Kahneman?

Daniel Kahneman is a professor emeritus of psychology and public affairs at Princeton University. Despite having reportedly never taken a course in economics, he is widely regarded as a pioneer of modern behavioral economics. In 2002, he was awarded the Nobel Memorial Prize in Economic Sciences for his research on prospect theory, which deals with human judgment and decision-making.

Understanding Daniel Kahneman

Daniel Kahneman was born in Tel Aviv in 1934. He spent much of his early childhood in France where he experienced the occupation by Nazi Germany in 1940. Kahneman has described those difficult times as one of the factors that influenced his interest in psychology.

Kahneman relocated to Palestine in 1948, shortly before the creation of Israel. In 1954, he began his undergraduate studies at Hebrew University, joining the psychology department of the Israeli Defense Forces. In 1958, he began graduate studies as a PhD candidate at UC Berkeley, receiving his degree in 1961. By 1966, Kahneman had become a senior lecturer at Hebrew University and was becoming a well-known scholar internationally.

During this period, Kahneman began working with fellow psychologist, Amos Tversky. Throughout the 1970s, the two went on to undertake pioneering research on human judgment and decision-making. Kahneman and Tversky’s research challenged many of the longstanding assumptions of economics.

Historically, economic theory has assumed that people are for the most part rational decision-makers who act in support of their self-interest. Kahneman’s research applied insights from psychology to economics, exposing the myriad ways in which people’s actual behaviors can depart from these assumptions. Kahneman's research suggests that investment decisions are in fact often driven by irrational considerations, despite the beliefs and best intentions of investors.

In 1978, Kahneman left Hebrew University to take a permanent position at the University of British Columbia. Around that time, he and Tversky developed the concept of Prospect Theory, for which he would later be awarded the Nobel Memorial Prize in Economic Sciences.

Amos Tversky

Kahneman’s friend and long-time collaborator, Amos Tversky, died in 1996. Had he lived longer, he almost certainly would have shared the 2002 Nobel Memorial Prize in Economic Sciences with Kahneman.

Daniel Kahneman’s Ideas

In 2011, Kahneman published Thinking, Fast and Slow, a book which summarized research that he had conducted over the previous decades. The book was widely praised and became a best-seller, selling over one million copies.

Many of the ideas summarized in this book have become popular among investors. This is because Kahneman argues that human decision-making, including investment decisions, are often deeply influenced by irrational factors such as heuristics and cognitive biases.

One such bias which is especially relevant for investing is the phenomenon of loss aversion. This states that the psychological impact of experiencing losses is roughly twice as strongly felt as that of experiencing gains. A related example is the so-called framing effect, which states that people’s assessment of probabilities differs depending on how those probabilities are presented, or “framed.”

For example, consider that you are presented with the following choice: one option is an investment with a 90% chance of resulting in a gain, while the other is an investment with a 10% chance of resulting in a loss. Kahneman’s research has shown that even if these choices refer to the exact same investment, most people will naturally gravitate toward the first option. This is because it is framed in a way that emphasizes the positive and desired outcome.