Nearly 100 MBA students crowded in to the Cocanougher Center in March for an early breakfast and enlightenment from Nobel Prize in Economic Sciences winnerÂ Daniel Kahneman. Israeli native Kahneman began a dialogue with students about psychological impacts on rationality in the financial marketplace â€” for which research he was awarded a Nobel in 2002 â€” saying that hope typically leads to risk.
The Princeton University psychology and public affairs professor outlined his theory that optimism is a bias that makes us expect to do better than others, neglect competitors and gives the illusion of control. He says that in the financial marketplace, individual investors tend to think they’re doing better in a transaction even though most others have the same information and expertise they have.
The same goes for professionals on Wall Street, who have more skills and are taking a more informed risk in transactions but still, because of optimism, think they’re doing better than other professionals.
“People don’t know the odds,” Kahneman said. “People are taking risks but they don’t know that they’re taking them.”
Though the hope of the entrepreneurial spirit has driven the market and helped to increase general prosperity, Kahneman said investors are better off trading less â€” to avoid the risk their optimism might otherwise expose them to. “I personally don’t want my financial adviser to be an optimist,” he told students.
Born in Tel Aviv in 1934, Kahneman earned his undergraduate degree from The Hebrew University in Jerusalem in 1954 and his PhD from the University of California at Berkeley in 1961. He’s best known for his work in integrating insights from psychology into economics, which has laid the foundation for a new field of research.
During the question-and-answer session that followed his talk, Kahneman met the gaze of a first-year MBA student who posed a classic question: “Does money lead to happiness?”
Sizing up the crowd, Kahneman nodded in response to the familiar question and explained a cohort study that followed a set of college students from the 1970s into their careers 20 years later and found that those who said they wanted money typically had more of it.
But, he said, it didn’t make many of the people who aimed to be rich happier in the end because of it. “By and large wanting money leads to disappointment,” he said. “The more you wanted it, the less happy you are.”
But on a final, optimistic note for Mays students, Kahneman noted: “It’s only when you’ve made a lot of money that you’re happy with it.”