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Daniel Kahneman on Companies That Make Excellent Decisions

Dr. Daniel Kahneman, winner of the 2002 Nobel Memorial Prize in Economics, joins us to discuss his book, Thinking, Fast and Slow. 

In this video segment, Daniel discusses his thoughts on different approaches to decision-making in the financial industry, including some venture capital firms that he thinks get it really right. The full version of the interview can be watched hereA full transcript follows the video.

Audience member: First off, is there a title for Nobel Prize winners? "His Nobleness?" OK, just wanted to make sure I wasn't stepping on any toes.

Have you run across any organizations or institutions that you think demonstrate good statistical thinking? Maybe you could talk a little bit about how you think that they do?

Daniel Kahneman: I think there is a lot of very good thinking that goes on in the financial world, and that most of it is proprietary, so you don't get to see it.

I have seen really very good, what I thought was excellent thinking, in a couple of venture capital firms where there is acute awareness of their biases and there is acute awareness of how incentives affect biases and how you can engineer the process of decision-making so as to optimize results.

That takes a very dispassionate look at the way we do, a dispassionate look at the errors that we're most prone to, and what can we do to avoid those errors?

It takes extremely confident leadership to do that, because the moment you implement a thing like that, there is a standard that allows decisions to be evaluated, and that's the big risk.

Morgan Housel: You've talked before, too, about George Soros. One of the keys to his success is that he's so well aware of what he's bad at, and his errors.

Kahneman: There are many keys to George Soros' success. That one, by the way ... that one I didn't know. It's not from me.

He claims to have a theory. He's very interesting that way. The famous story about him is that he claims to have a theory that -- and there may be something to it, but other people don't understand what it is -- but his son says that basically he has a skill, and that actually when he feels sick, that's when he sells, so that he actually listens to his gut.

That's not the way he talks. I sort of believe it. Having met him, I believe he has that skill, because he is dealing at a level ... he's not dealing at the level of markets. He's dealing at a level where I think there is structure that he may understand better than most other people.

Housel: Do any other investors that you can think of have a smart decision-making process that stick out to you?

Kahneman: Well, everybody mentions Warren Buffett, who obviously is a sage, but Warren Buffett, he doesn't buy stocks. He buys companies, and he buys companies he knows a lot about. Then he has a big advantage that whenever he buys something, prices rise. That's something that other people could wish for but don't have.

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