Last month, I interviewed psychologist Daniel Kahneman, who won the Nobel Prize in economics in 2002 and recently authored the book Thinking, Fast and Slow.
In this clip, Kahneman discusses why those who think they knew the financial crisis of 2008 was coming are deluding themselves. (Transcript follows.)
Dr. Kahneman: We want to live in a world that makes sense, but we're also wired to make sense of the world, and there are many reasons why we never learn that we can't predict, and one of the major reasons I think is hindsight. So whenever something happens, like the financial crisis, people feel there are many stories and people come up and said, Well I knew it all along.
Many more people come up and say this didn't have any right to say this, but the pernicious thing about believing that some people really knew the crisis was coming is that it gives you the sense that the crisis was knowable, that the world is knowable. That, I think, in many cases is just a pernicious illusion. So in fact there were some people, when you talk about the crisis, who thought the crisis was coming. Then when the crisis comes, they say I knew it, but in fact they were just thinking it and other people who knew just as much were thinking something else.
So that idea that the world is knowable feeds into the persistence of overconfidence. In addition, confidence is not a judgment; confidence is a feeling. It's an emotion by itself, and it's a feeling that's generated by the quality of the story that you're telling yourself. If the story is a coherent story, you believe in it, and it's just an emotion. It's not that you're judging the quality of my evidence to justify this conclusion. It's the feeling there is a good story, here, and that feels good.
The article Nobel Prize-Winning Psychologist Daniel Kahneman on Why You're Not As Smart As You Think originally appeared on Fool.com.
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