Daniel Kahneman, the Nobel laureate who explained that artificial intelligence will defeat the retail investor

Imagine that you are the owner of an insurance company. And that it asks two of its agents, with similar training and values, to establish, separately, a premium in dollars for the same company. How much do you think your prices will diverge for the same customer? They should be relatively similar… or not?

Daniel Kahneman – Nobel Prize in Economics – and other experts carried out this exercise in multiple insurance companies. His conclusion was that, on average, the difference in the premiums of some professionals and others, who had a similar preparation and trajectory, reached a striking 55% for the same client. Before knowing this result, they asked the CEOs of the insurers what variation they expected. They answered that 10%.

A variation of 55% implies, to translate it into figures, that when an insurance agent sets a premium of $9,500, the other sets one for $14,500 (and not of the 10,500 to which that 10% calculated by the executives would have been translated).

This dispersion in the decisions, which one does not expect a priori, is due to what Kahneman calls noise. And the executives surveyed estimate that the annual cost of that noise to companies in terms of premiums (taking into account lost business from excessive premiums, and those generated by undervalued contracts) amounts to hundreds of millions of dollars. Also read: What psychological mechanisms control your investment decisions?

All this is explained by Kahneman, the father of behavioral finance, in his book Noise: a Failure in Human Judgment, co-authored with two other authors, Oliver Sibony & Cass Sunstein and published in 2021. “The data showed that the price a customer is required to pay depends, to an uncomfortable extent, on the lottery that chooses which employee will negotiate the transaction “, is stated in the book. “We use the word lottery to emphasize the role of chance in the selection of an agent“, add the authors of Noise. In the normal operation of these companies, a single professional is assigned to a case, and no one will ever know what would have happened if another colleague had taken his place, “add the authors of Noise.

Kahneman recently visited Paris, where he participated as a speaker at the annual event for clients of the French manager Amundi, held in the French capital at the beginning of June. In his brief intervention, this 88-year-old man spoke about the cognitive biases that determine the behavior of investors, but he emphasized the most dangerous: “One of the most important is overconfidence, which consists in the fact that the people thinks he is closer to the truth than, on average, he is. This overconfidence it’s massive. Furthermore, success stories reinforce the view that it is something positive; if you look at people who have been very successful, in many cases they are overconfident and optimistic. However, on average, that overconfidence is not such a good thing.”

Kahneman received the Nobel in 2002, for having integrated aspects of psychological research into economic science, especially with regard to human judgment and decision making under uncertainty. At the time he was a psychologist by profession, although, in addition to his Bachelor’s degree in Psychology, he had also completed a Master’s degree in Mathematics.

Born in Tel Aviv, Daniel Kahnmean spent his childhood in Paris, where he and his family lived through the Nazi occupation. His father was arrested in a roundup of Jews, but was finally released after six weeks, thanks to the intervention of his employer. The family stayed together for the rest of the war, and survived it.

No hope for the ‘retail’

Kahneman displayed his sense of humor and caused laughter in the audience, gathered a few meters from the Louvre Museum, with his devastating forecasts for the retail investor who wishes to make his own buying and selling decisions. “The traders Individuals are overconfident. The most common mistake of trading it’s coming back too many times [al mercado]try more than you should. This causes them to buy high, and sell at low prices. They can’t compete with artificial intelligence,” she said.

In the opinion of this expert, human judgment has nothing to do with the robo advisors. “The problem, when you have an artificial intelligence that can give you advice on what to do [a la hora de invertir], the question arises as to who should have the last word. For everyone it seems obvious that it should be the human. But, if you are looking for the system that offers the most correct result, artificial intelligence should have the last word“. What is already a reality in multiple fields (the absolute domain of machines) will soon be a reality in the world of investment, he said.


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Daniel Kahneman, the Nobel laureate who explained that artificial intelligence will defeat the retail investor