'Irritation and anger' may lead to Brexit, says influential psychologist
British voters are succumbing to impulsive gut feelings and irrational reflexes in the Brexit campaign with little regard for the enormous consequences down the road, the world's most influential psychologist has warned.
Daniel Kahneman, the Israeli Nobel laureate and father of behavioural economics, said the referendum debate is being driven by a destructive psychological process, one that could lead to a grave misjudgment and a downward spiral for British society.
"The major impression one gets observing the debate is that the reasons for exit are clearly emotional," he said.
"The arguments look odd: they look short-term and based on irritation and anger. These seem to be powerful enough that they may lead to Brexit," he said, speaking to The Telegraph at the Amundi world investment forum in Paris.
The counter-critique is that the Remain campaign is equally degrading the debate, playing on visceral reactions and ephemeral issues of the day. In a sense the two sides are egging each other on. That is the sociological fascination of it.
Professor Kahneman, who survived the Nazi occupation of France as a Jewish child in the Second World War, said the risk is that the British people will be swept along by emotion and lash out later at scapegoats if EU withdrawal proves to be a disastrous strategic error.
"They won't regret it because regret is rare. They'll find a way to explain what happened and blame somebody. That is the general pattern when things go wrong and people are afraid," he said.
The refusal to face up to the implications of what is really at stake in the referendum comes as no surprise to a man imbued with deep sense of anthropological pessimism.
“Confidence has very little to do with the information on which it is based...”
His life's work is anchored in studies showing that people are irrational. They are prone to cognitive biases and "systematic errors in thinking", made worse by chronic over-confidence in their own judgment - and the less intelligent they are, the more militantly certain they tend to be.
People do not always act in their own economic self-interest. Nor do they strive to maximize "utility' and minimize risk, contrary to the assumptions of efficient markets theory and the core premises of the economics profession. "People are myopic. Our brain circuits respond to immediate consequences," he said.
"We feel too much confidence in our beliefs but the results of psychological research are unequivocal: confidence has very little to do with the information on which it is based," he said.
This is why individual investors are so persistently incompetent and incorrigible, and why leaders often go to war on the basis of catastrophic miscalculation.
He cited a study by Berkeley economist Terrence Odean based on 10,000 discount brokerage accounts that stripped out distress sales and focused only on trades where clients bought and sold stocks in the same day.
The discovery was that the stocks they sold outperformed those they bought by 3.4pc on average over the subsequent year. "That is huge," said Prof Kahneman.
By selling their winners they can pat themselves on the back for being so clever. They can control the reward circuits of pleasure.
They cling to their bad stocks because they cannot bring themselves to crystalize the loss and acknowledge failure. This is a costly asymmetry. On balance, they should do the exact opposite.
Prof Kahneman speaks softly in English with an unplaceable accent, a melange of his years in France, Israel, and at Stanford and Princeton in the US. He recoils from his fame as a sage, insisting that he has nothing worthwhile to say about politics or economics. His lapidary views come through anyway.
"Donald Trump is psychologically fascinating. He represents a sort of ideal in that he is very rich, and people want to be rich," he said.
"He's a masculine fantasy: lots of money and lots of women. He is not afraid of anything. In the context of politicians who seem to be doing nothing, it feels compelling. He looks strong. He is a bully, and people like bullies," he said.
Prof Kahneman compares the Trump syndrome to the strange response of Americans to rape cases that he studied in the 1980s. Society has a proclivity to blame the victim - in the Trump saga: Mexicans, Muslims, and others - because people subtly conform to the idea that the rapist cannot act otherwise.
"It is a very interesting phenomenon and it has reached the point where Trump can get away with almost anything. 'The bully is immutable, it is in his nature, that is what he does', and once you convince people that it is normal for you to do that kind of thing, you can get away with things that nobody else could get away with," he said.
Corrosive economic stress seems to be the backdrop for why such a large slice of American society is willing to suspend its normal judgment. He says globalisation was badly managed in favour of winners, and has left a tens of millions of losers.
"It destroyed American manufacturing and the American middle class. There are places where real incomes have dropped 30pc over the last thirty years. There used to be a concept that if you do your job, and live your life properly, things will be fine. People don't think that any more," he said.
Prof Kahneman and his late colleague Amos Tversky have profoundly influenced a generation of psychologists. In the process they challenged the assumption of rationality in economics, which is why he won the Nobel Prize in 2002.
His book 'Thinking , Fast and Slow' became a global best-seller, compared by some to Adam Smith's Wealth of Nations or the General Theory by John Maynard Keynes for its role in shaping economic 'science' - if it can still be called a science.
He loosely contrasts the quick, intuitive, emotional reactions in the right-side of the brain with the slower, logical responses of the left-side. The latter is lazy, apt to confirm emotions too easily, and does not always pull its weight in decisions. That is where mistakes are made.
"The worst thing you can do is to keep checking your portfolio. If you have the urge to trade, take a shower instead because it will save you money.”
His experiments are deeply disturbing for anybody with a touching faith in rationality. He discovered that parole judges rack up a 65pc release rate for prisoners if the case comes up just after lunch. This collapses to almost zero by the end of the afternoon as the meal fades. The judges are of course unaware of their bias.
We are very bad at learning from mistakes because we fall into the trap of hindsight and "re-image" past events, conjuring false explications for what may have been a random shock. We have already created a false narrative about the Great Recession of 2008-2009.
"When you read the Big Short you think that those who didn't see the crash coming must have been either blind or knaves. It invites you to hindsight," he said.
"But it could not have been as simple as that. A great number of highly intelligent people didn't see it coming. The crash was not as predictable as it now appears. We have learned the wrong lesson," he said.
"Surprises are self-negating. We explain them. We deny the uncertainty we face and learn that crises are predictable, when we should learn the opposite," he said. We will be caught out again as surely as night follows day.
Most investors who think they have understood past errors and will get the timing right next time are deluding themselves. Cognitive biases are too strong. "We don't really learn anything," he said.
He advises people to invest in a tracker fund and avoid rifle shots. "People trade too much. They churn their accounts. They think they know something, but having a lot of ideas is costly. If they knew how the world worked, they wouldn't invest," he said.
The worst thing you can do is to keep checking your portfolio. If you have the urge to trade, take a shower instead because it will save you money.
An "angry" Sir John Major has launched a brutal assault on the "squalid" Brexit campaign being run by Boris Johnson and Michael Gove
Above all, do not put your wealth in managed funds or let hedge funds get hold of it. The great mystery of behavioural finance is why people ignore all the evidence and allow managers to cream off their tithe for little or no value added. "The one sure thing in the world is the fees," he said.
Not even Warren Buffett really disproves his findings, he insists. "Buffet doesn't buy the market, he buys companies, and he buys management. In a way he relies on perfectly legal insider information. And he causes markets to move in his direction. That is self-fulfilling, so he has an advantage," he said.
One thing that Prof Kahneman and Warren Buffet can agree on is that markets are imperfect and that rational expectations theory is hocus pocus.