Better than your spouse. Better than your mother. At times, even better than yourself.
Who were they?
Daniel Kahneman and Amos Tversky.
It is doubtful that many have ever heard their names.
These gentlemen changed forever the way that economists and others viewed the human mind and the way we make decisions. Until their groundbreaking studies, it was generally conceded that humans made rational and logical decisions with the brain acting like a sophisticated computer.
Kahneman and Tversky showed just how wrong that is. Their research showed in innumerable studies how the human mind errs in systematic ways leading to poor judgments, especially in uncertain situations.
The collaborative partnership of these Israeli-American psychologists is the newest work of best-selling author Michael Lewis. I just finished reading his account of how Kahneman and Tversky came to create the field of behavioral economics in "The Undoing Project."
I first became aware of the work of Kahneman and Tvesky about 15 years ago when I led the Benefits function of a Fortune 500 company. In that role, I saw first hand how poorly our minds served us at times.
For example, despite the fact that everyone would probably desire (or be required) to stop working some day, when I assumed the Benefits role with my former company, only 50% or our employees were contributing to our 401(k) plan even though there was a generous company match.
In addition, despite the fact that the average employee had less than $500 in medical claims in a year, almost no one elected our high deductible medical plan in which they could save considerable sums in fixed payroll contributions for their coverage and place those savings in a health savings account.
In looking for ways to make our plans more cost effective for my company, and more valuable to our employees, I started searching for better ways to design our benefit plans. That research led me to the work of Kahneman and Tversky.
Everyone knows they need to save for retirement, but few save enough. Why do people ignore the logical response to save so they have money when they are no longer working? Kahneman and Tversky attributed this to what they called "availability bias". We excessively weigh in our minds those memories that are most easily available to us. We need food today. We need a new TV today. We need to take a vacation next month. These emotions outweigh the real needs we are going to have 10, 20 or 30 years from now.
You can see this for yourself in answering this short question that Kaheman and Tversky used in their research about availability bias.
Consider the letter K. Is K more likely to appear as the first or third letter in a word?
The typical person answered the first letter. In fact, they guessed that K was twice as likely to be the first letter than the third letter in a word. Kangaroo. Kite. Knee. Know. All of these easily came off of the top of my mind while writing this.
However, the fact is that K is actually twice as likely to be the third letter of a word compared to the first letter. Ankle. Take. Cake. Ink. I had to look all of these up. They just aren't as available in the mind.
That is why when we redesigned our benefit plans so that we automatically enrolled everyone in the 401(k) plan as the default option and allowed employees to opt-out of the retirement contribution if they did not want to participate.
The result--92% participation compared to the prior 50%! We also later raised the contribution each year by 1% automatically unless they opted-out of the increase. Each year only 10% opted out. I wondered in my mind how far we could increase these savings increases before we saw a drop-off in participation. It honestly looked as if we could go on forever without any significant numbers opting-out. It takes effort to change and most of us limit our efforts. We don't like change.
That brings us to another bias in the human mind---the status quo bias.
We are extraordinarily loss averse. In fact, Kahneman and Tversky found that losses generally caused twice as much pain to us as an equivalent amount of gain brought us pleasure.
That is why high-deductible health plans were so difficult to introduce to our employees. A potential $500 out of pocket health care bill was more painful than the pleasure of saving $900 in premium contributions.
This is why reforms and changes are so difficult to implement. Look no further than what has happened with Obamacare. First, in the reaction when it was initially being adopted, and now when there is talk of its repeal.
That is also why the Democrats are taking their defeat to Trump so hard and their reactions are so irrational.
Kahneman explained it this way.
"Reforms always create winners and losers, and the losers will always fight harder than the winners."
We are seeing this play out every day in the news. Only the losers show up at town halls conducted by their Congressman and protest in the streets. The winners stay home content with what they won.
Another insight that Kahneman and Tversky developed was the process by which people make decisions. Decisions are often made by making judgments about similarity and about context. These decisions are often made by comparing features and classifications. Of course, since these are important in how decisions are made, they also can be manipulated to make a classification or feature seem more noticeable.
For instance consider this example from the Lewis book.
"If you wanted two people to think of themselves as more similar to each other than they otherwise might, you might put them in a context that stressed the features they shared. Two American college student in the United States might look at each other and see a total stranger; the same two college students on their junior year abroad in Togo might find that they are surprisingly similar; They're both Americans!
This is an instructive insight, especially as it relates to identity politics, most particularly by the Democrat party. They are very intent on grouping people into classifications for purposes of their political agenda---women, African-Americans, Hispanics, gays, etc.
The result of that grouping or classification is to overemphasize differences to the detriment of those similarities that we all share as Americans. It really becomes a divide and conquer strategy.
"Things are grouped together for a reason, but, once they are grouped, their grouping causes them to seem more like each other than they otherwise would. That is, the mere act of classification reinforces stereotypes. If you want to weaken some stereotype, eliminate the classification."
Isn't it interesting that Donald Trump has really focused on one message---"Make America Great Again". He has not focused on any other classification or grouping than that. Trump's issues are not black issues, white issues, women's issues, men's issues or anything else. The issues are those that are shared by all Americans. Jobs. Defense of our country. Crime on our streets. Homeland security.
Perhaps this is the reason he is seen as such a threat by the liberal Democrats. Everything Trump is doing is attempting to eliminate the classification and in so doing also weakening the existing stereotypes that fuel identity politics.
Kahneman and Tversky were psychologists who created an entirely new field of economics. In fact, Kahheman won the Nobel Prize in Economics in 2002. Tversky would have likely won his own Nobel Prize in the same field but for his untimely death in 1996.
Is a real estate business mogul doing something similar in creating an entirely new way of looking at politics?
Trump has changed many minds along the way to being elected. However, as we watch the daily news, he has many more minds that need to change to be successful.
My advice to Trump is the same as it is for you. Understand the way your mind works and those of your fellow human beings. To do that, learn more about the research of Kahneman, Tversky and others who have helped us better understand how our minds works, how we make decisions and how we can be misled.
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