January 20, 2012


Michael Lewis, my favorite stock market guru, has written a review for a new book by Noble Prize winner Daniel Kahneman. The title is “Think, Fast and Slow.”  Kahneman is a psychologist who received his recognition in economics for a theory he promulgated about how we make decisions in a period of uncertainty — a subject of great fascination to those who work in the stock market. 

The gist of his argument is that “The human mind is so wedded to stereotypes and so distracted by vivid descriptions that it will seize upon them rather than upon truly relevant facts.” (“The King of Human Error,” by Michael Lewis, “Vanity Fair12/11) Below is one of the test questions Kahneman and his colleague, Amos Tversky, used to test their theory:

          “Linda is a thirty-one year old, single, outspoken and bright. She majored in philosophy and is deeply concerned with issues of discrimination and social justice and has participated in antinuclear demonstrations. CHOOSE THE ALTERNATIVE BELOW THAT IS MOST PROBABLE:

          1. Linda is a bank teller.

          2. Linda is a bank teller and is active in the feminist movement.”            (Lewis pg. 145)

The vast majority of respondents (85%) chose No. 2 as the answer. So did I. But Lewis explains that answer is illogical because if #2 is true, then so is #1.

I’m left to scratch my head. Given what little we know about Linda, except that she has a social conscience, why is #2 illogical? The question asks about probability, not truth and, frankly, is not one of logic. Anyone who’s taken a freshman course knows that logic has little to do with truth and not much to do with probability. What have I missed?

(courtesy: photobucket.com)

I hate being confronted by a conundrum. Worse, I hate being confronted by one I can’t figure out. I did learn one thing from the quiz, however. My handicap may explain why, in today’s economy, a dog’s turd has more value than my stock portfolio.