This past week on Mar. 27, 2024, psychologist and Nobel prize winner Daniel Kahneman passed away at the age of 90. Kahneman is best known for his 2011 book Thinking, Fast & Slow, a summary of decades of his research into decision-making and the heuristics of judgement conducted alongside his late colleague Amos Tversky. He was widely loved by the startup community. It’s absolutely worth reading his fascinating biography here.
Kahneman’s research had a major impact outside of psychology. When he and Tversky began working together in the 1970s, academic fields like cognitive psychology and economics assumed that humans make decisions as rational agents. Their 1974 article in the journal Science titled “Judgement under Uncertainty: Heuristics and Biases“ presented research showing that human beings make decisions intuitively and that this heuristic intuition is imperfect. Although they wrote this article as “a progress report on our study of judgment under uncertainty” and never intended to entirely upend the “rational agent” model, the piece sparked a fierce debate in academia. Then in 1979, the two psychologists published a significant paper in Econometrica that constructed a new economic theory for describing choice under risk, “Prospect Theory”.
Their research caught the attention of an economics graduate student named Richard Thaler. After meeting and working briefly with Kahneman, Thaler published “Toward a Positive Theory of Consumer Choice” in 1980, and the field of behavioral economics was born. Thaler later published Nudge, which brought the ideas of behavioral economics into the mainstream.
Way back in undergrad, James and I took a Behavioral Economics class together. It was a timely class, as the book Nudge had just been released. I also recall during that semester that the avalanche of the Great Recession had just begun to fall, the sort of situation in which it becomes obvious how the independent, self-interested actions of many individuals can result in a collective disaster.
James was majoring in Psychology at the time and I was studying Economics. As we took the class together, James approached the material from the human-centered perspective of a psychologist while it took me some time to get used to the idea that the distinction between an irrational vs a rational decision often depends on the unique perspective and trade-offs of the individual making it.
Now many years later co-owning and managing a business, I often refer back to foundational ideas about choice, incentives, expected value, and human psychology we explored in that class. Business owners know that decision-making is anything but a theoretical endeavor––its consequences are real for us and the people we work with.
From those foundational principles and my professional experience in the years since, I now think about decision-making in terms of balancing gut instinct and empirical evidence. We have to remain vigilant against allowing heuristic judgements to override evidence, or conventional wisdom to override iterative experimentation. There’s a time for each. Working from first principles and gaining practical experience helps us to develop internal models and the ability to discern when that time is.
Ultimately, it’s these internal models that allow us to navigate the world and make wiser choices, whether we’re planting the seed of a startup or navigating a forest of a corporation. To read a little more about questioning our intuition, this 2014 essay by Paul Graham is a valuable exploration into startup decision-making. In the context of a large corporation, Kahneman contributed to this 2020 article in Harvard Business Review that presents the reasons why these companies become too risk averse and what managers can do to fix it.
– Stephanie
