COWEN: There’s a good deal of evidence that people in businesses are overconfident, but do you think they’re more overconfident than they should be?
KAHNEMAN: Overconfidence has many virtues. In the first place, it’s nice, it’s pleasant to be overconfident, especially if you’re an optimist. Optimism is valuable, much more than overconfidence. Overconfidence is sort of a side effect.
But to exaggerate the odds of success is a very useful thing for people. It will make them more appealing to others, they will get more resources, and they will take risks. It’s not necessarily good for them. The expected utility of taking risks in the economy is probably moderately negative. But for society as a whole to have a lot of optimists taking risks — that’s what makes for economic progress, so I call that the engine of capitalism, really, that sort of optimism.
KAHNEMAN: Yeah, happiness feels good in the moment. But it’s in the moment. What you’re left with are your memories. And that’s a very striking thing — that memories stay with you, and the reality of life is gone in an instant. So memory has a disproportionate weight because it’s with us. It stays with us. It’s the only thing we get to keep.
From an episode of Conversations with Tyler with the Nobel-winning psychologist Daniel Kahneman.
The first statement seems intuitively true. I do think it’s interesting that Kahneman says the expected value of taking risks in the economy is probably moderately negative. This leads to the weird conclusion that what is best for the economy isn’t necessarily best for the individual.
The second is also interesting. When you think about it, you have a memory of an event much longer than you actually experience the event, so why not spend your time trying to maximize the quality of your memories as opposed to the actual events? Take advantage of our bias towards how intense the peak of an experience is and how it ended.