Friedman, Kahneman & the tyranny of Logic
There is a joke among economists that a bunch of scientists from various disciplines is stranded on a deserted island. They have plenty of canned food but no can opener, and so the debate on how to open the cans using various scientific methods proposed by the chemist, the physicist and so on but none of them works out. The economist comes up with the obvious solution to assume we have a can opener. And voilá, problem solved. Everyone happy.
We are taught in society that being human is to be a utility-maximizing me, myself and I with the intent of getting the most out of everything for ourselves: Homo Economicus. We live in societies built on the assumption of rational decision-making where everyone are perfectly informed of all things they need to know in order to make rational, informed choices.
This is the theory developed by the neoclassical at the Chicago School of Economics where people like Milton Friedman, George Stigler and a whole bunch of other economists were awarded the Nobel Prize. Ever since attending business school I have had problems with this worldview. I remember struggling with the feeling that something was wrong while being taught that this was the foundation of public institutions and trade politics.
Once a year in December, Stockholm features a celebration of knowledge in a global science-fest called the Nobel Prize. There are Prizes for medicine, physics, literature, chemistry (the peace prize is delivered in Oslo). And then there is economics: the most challenged category in the Nobel tradition. Critics from areas of natural science wonder in what way economics is a science alongside basic research areas, dealing with the foundation of life.
Economics is to most people closely related to social science and politics and those are not Nobel Prize categories. The study of economics is the study of scarcity, of ownership and trade. It also includes decision-making and human behavior and in this respect, it actually relates to evolutionary sciences. The Nobel Foundation and the Riksbanken (incidentally the oldest federal bank in the world) awarded Milton Friedman the Prize in Economics 1976. He has since been associated with the economic shock treatment used as an excuse by Pinochet in Chile to torture and kills people in the name of economic order.
But none of that was of course known when Friedman was appointed the Prize, and to be fair the Prize in economics has also been awarded pioneers like Richard Thaler and Daniel Kahneman. Their field of study is not so much about theoretic assumptions but more about life science: they study behavior. By mapping how people make choices in real life, we now have a much more balanced theory of the economic mind. And contrary to the neo-classics, it is intuitively appealing.
Kahneman writes about system A, the automatic system or the intuitive mind and system B that represents logic and awareness thinking. The carrying idea is that we are aware of the choices we make using system B, but not of what is going on in system A. This is in line with consumer research showing that almost all choices are made subconsciously, sparked by emotions. Kahneman’s idea of two systems, one operated by the prefrontal cortex and the other by virtually all other parts of our body makes a lot of sense since we are first and foremost designed to survive before we may analyze and invent.
It is not about what system is “right” or more appropriate to use, we just need to be aware that we are not aware of most choices we make in everyday life. We are constantly using system A and sometimes system B, but while we may notice our thoughts and calculations going on behind our forehead, we are not aware of what is going on with the autopilot of System A, fueled by feelings, associations.
So what then, is intuition? How does it work? Is it the same as instinct, gut feeling, sensing? And how do we know how to use this system A to our benefit when in fact most of the time we are not even aware it is governing us at all?
The theory of Daniel Kahneman is that intuition is nothing but experience. There is no magic, no sixth sense that knows what we obviously can’t know. It explains why firefighters know when to leave a building before it collapses. It explains why Roger Federer seems to know exactly what angle and speed the ball will have when approaching so he may move in position even before the opponent touches it. And it explains phenomena like the 10.000-hour rule.
Scientists like Kahneman and Nassim Nicholas Taleb also shows us why we may trust system A to predict the future for us, based on real life experience. System B on the other hand does a lousy job at predicting stock markets and natural disasters. That’s why the monkey throwing darts is better at predicting stock prices than any over-confident expert.
So how do we know when to make conscious and rational choices and when to leave things to the autopilot? After all, we would not have come far producing medical drugs and moon rockets using only intuitive thinking. But without it, neither penicillin nor poetry would have done society any good. Or as Albert Einsten may or may not have put it:
The Intuitive mind is a sacred gift and the Rational mind its faithul servant. We have created a society that honors the servant and has forgotten the gift.
System B is wasteful of energy, contrary to the Intuitive mind. Thats why kids as well as adults get tired from sitting still, using only their brains and a pen, or a laptop. Intellectual work is tiring. Hunting, cooking and having day to day conversations are easy tasks in comparison to algebra, history or writing blog posts on Medium.
Most professional coaches teach us to use our intuition more. Why do we need that? Because in today’s society we have forgotten how to trust our instincts. We are constantly numbing our inner voice with outside impressions: music, traffic, announcements, reading, coding, browsing. And when the inner voice finally reaches through all that noise, we do not trust it because there is no way we can explan by logic reasoning why we are sensing something, and what it means.
Think of the times when your intuition tried to tell you to back out of something but you went ahead anyway and it turned out bad. Or when you met someone that triggered the alarm clock inside and you could not justify the reason for your dislike so you decided to trust them, only to be fooled. Intuition does a great job at protecting us and guiding us in life, we just need to listen and to trust our inner voice. Especially when there is no logic to it.
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