Perhaps Daniel Daniel Kahneman has more influence than anyone else in changing our understanding of human money and updating our perception of financial decisions. Earlier in his career, Kahneman, an 87-year-old Israeli-American psychologist, along with his research partner Amos Tversky, rejected the hypothesis of a "rational man" and mapped countless mistakes made by humans due to predictable prejudices and behavioural tendencies.

Kahneman asked us to question past assumptions and told us the reasons for poor judgment, for which he won the 2002 Nobel Prize in economics. In his 2011 book thinking, Fast and slow, he wrote about prejudices and that our judgments always make mistakes in a predictable way.

Noise: a flaw in Human judgmentIt's Kalman and Olivier. The latest book by Olivier Sibony and Cass R. Sunstein, mainly aboutThe most common causes of decision mistakes. The variability of noise and the broad distribution of "correct" answers-the amount of noise among so-called professionals in finance, medicine and other fields-is shocking.

Kahneman had a conversation with Barron Weekly to explain the causes of the noise and how we could mitigate their effects. The edited version of our conversation is as follows.

Barron Weekly: you said that misjudgment has two main components: prejudice and noise. Let's start here.

Daniel KahnemanTo put it simply, when the judgment has a correct answer, bias is the average error, and noise is the coefficient of variation of the error. Even if you don't know the correct answer, you can still observe the noise.

Barron Weekly: why did you shift your research methods from prejudice to noise?

Daniel KahnemanMy interest stems from a consulting experiment conducted by an insurance company, which wants to determine the correct premium for the product. They created a case and submitted it to 48 underwriters. The question is, how much coefficient of variation or noise is there among underwriters? Their expectation was 10%, and the result surprised me-55%.

The company was completely unaware of the problem and had never considered the noise factor. Even if your premium is correct on average, the cost of the coefficient of variation is very high. Too high premiums will cause insurance companies to lose business, while too low premiums will not maximize profits. The insurance company loses hundreds of millions of dollars a year because of the coefficient of variation of premiums.

Barron Weekly: is noise a more useful indicator than deviation?

Daniel KahnemanNoise is easier to measure. The field of economic forecasting is full of noise. A year later, the right answer will emerge, and by then you can determine whether the information is generally overestimated or underestimated, but you don't have to wait a year to observe the noise.

Barron Weekly: why does the noise appear?

Daniel KahnemanWe divide the noise into three categories according to the source. The judge's decision is the simplest example, and some judges are more stringent in certain cases, which is the degree of noise.

Judges' decisions may also change according to different mental states, such as hearing cases in the morning or afternoon may also have an impact on the judge's decisions, which is another source of variability. We call this situation scene noise.

Perhaps the most important source of variability is pattern noise, which refers to people's different views of the world. Judges have different views on different criminals. One judge may be harsher on case An and another judge may be harsher on case B. We don't know about this, because we can't understand people's hearts.

Barron Weekly: what does this mean for investors?

Daniel KahnemanThe same is true for investors. Some people are optimists, some people are pessimists, some investors love trading, some investors do not like trading so much, this is the degree noise.

Scene noise occurs when your mood or previous investment performance has a significant impact on your judgment, and it is randomly distributed within the individual. Pattern noise means that different investors have different perceptions of what is a good investment. Some investors may be very concerned about management or bankruptcy, while other investors may think it does not matter.

Barron Weekly: investors are divided on almost everything. Do you think that's bad?

Daniel KahnemanThe economy and the market operate on the basis of people's differences of opinion, and you can't think that's a bad thing. Diversity is not noise, noise is superfluous variability, it exists in what is supposed to be the same judgment. A federal judge should have made the same decision. Similarly, in an investment company, whether it is Zhang San or Li Si to evaluate an investment, you do not want to consider the impact of noise, you should not care about who makes the assessment.

Barron Weekly: can averaging variability reduce the degree of error? Or reach a consensus?

Daniel KahnemanIt is helpful to treat noise as a measure. If you want to measure a distance accurately, you will choose to measure multiple times, and multiple independent averages will be more accurate than a single measurement. But in most cases, it is impractical to aggregate multiple independent judgments. Investment leaders can reduce most of the noise they encounter by having four different models of people evaluate independently. But this is very expensive and difficult to achieve. Therefore, in practice, aggregate independent judgment can not eliminate variability.

Barron Weekly: you seem to be saying that investors or policy makers should make decisions collectively.

Daniel KahnemanThe key lies inJudgments should be as independent of each other as measurements. When you put people in a room and ask them to make a collective judgment, you lose a lot of information. The best way to hold a meeting is to get everyone ready for their judgment and then start the discussion. If you let people start the discussion without making a judgment in advance, they will influence each other. This does not effectively reduce noise. In some cases, the discussion can also increase the noise.

Barron Weekly: given that professional judgment is also full of variability, how can ordinary people trust the judgment of professionals (such as doctors, fund managers or maintenance workers)?

Daniel Kahneman：Where there is judgment, there is noise, and there is more noise than you think. As an individual, you really can't control anything. A very rich person can afford to talk to many experts to reduce noise, but for ordinary people, a second or even a third opinion is very important when it comes to major decisions.

Barron Weekly: scientists have reached a consensus on things like climate change, but the predicted consequences are so far away. is that why people are reluctant to act?

Daniel KahnemanThis is a very big prejudice. We call it present bias. We do tend to think about immediate consequences, and we don't pay enough attention to what we can't see.

People can ignore (facts) by citing different opinions. People say, "well, scientists disagree. "in fact, the vast majority of scientists agree, but different views do exist. So if you don't recognize climate change or vaccination, you can always find people who agree with you.

Barron Weekly: you said that overconfidence is actually a lack of imagination. Can you explain it?

Daniel KahnemanWe tend to assume that there is only one explanation for things. We don't see any other point of view. Individual investors tend to be overconfident and they trade too often.

A related bias is optimism. People exaggerate the possibility that they can control the outcome. In a bubble, for example, people often exaggerate their ability to get out in time.

Barron Weekly: how can investors avoid falling into the trap of being overconfident themselves or others?

Daniel KahnemanIt is risky to equate confidence with ability. I mean, capable people are usually confident, but there are also a lot of people who don't have the ability to be confident. People are apt to trust people who are confident and make decisive decisions, and we need to pay attention to this.

As for how to control your own overconfidence, I'd like to give you a clich é advice: seek the opinions of others, and if the people you respect don't agree with you, you should seriously question yourself.

Barron Weekly: how can people make better decisions?

Daniel KahnemanMy answer is decision-making hygiene. Many of the practices used to improve judgment are about avoiding prejudice, which is like drugs or vaccines for specific diseases or biases, but hygiene similar to hand washing is different. You don't know which bacteria you kill when you wash your hands. You just want to kill the bacteria.

Decision-making health is very similar to disciplined thinking. One way to restrain your mind is to be independent--Make sure you consult independent, irrelevant people.Or if you try to understand the different characteristics of an investment, you need to evaluate them independently.

Barron Weekly: what are the other aspects of decision-making health?

Daniel Kahneman: judge as comprehensively as possible. If possible, I suggest making a relative judgment rather than an absolute judgment. People are better at judging that An is riskier than B, rather than giving an exact number to mark how risky An is and how risky B.

Use relative risk and comparative risk, rather than making an absolute judgment of the risk. Simple rules are often good. People without decision-making discipline are often full of noise in the judgment process. When you are aware of noise, you will realize the value of rules and discipline.

Barron Weekly: according to this logic, you and most behavioral economists are more likely to approve of index investment.

Daniel Kahneman: yes, exactly.The rules are simple and the discipline is strict, so it is difficult to beat such investors.。