Daniel Kahneman: Keeping Score May Be More Dangerous Than You Think

Dr. Daniel Kahneman, winner of the 2002 Nobel Prize in economics joins us to discuss his book, Thinking, Fast and Slow.

In this video segment, Daniel answers a question from the audience and relates an experiment where a financial executive tracked every decision he made for a year, as well as the road not taken. The full version of the interview can be watched here. A full transcript follows the video.

Audience member: Dr. Kahneman, thank you so much for visiting us at The Motley Fool. We are really pleased. We've all learned a lot from you, and we've learned even more in this hour.

When you mentioned, "The more you live, the less you feel that you know," it reminds me of a great quote from, I think it was Archbishop William Temple, who once said, "The greater the island of knowledge, the longer the coastline of mystery." I think that's a wonderful way of thinking about the progression that we all go through over the course of our lives.

I wanted to ask you simply, I see something in the financial world, because that's our world, that looks broken to me and it's probably also broken in other areas of the world, and it's that there is no scorekeeping mechanism.

If people can make predictions and no one's actually holding them accountable or scoring them, then if you think of systems thinking, it's just fundamentally broken and we can't progress. But as soon as you do start to score -- I often liken it to baseball, where everything is scored -- I wish that more for our financial world, for our political world, and others.

Do you see good score systems in the world that we should all learn from, and/or do you have any thoughts about scorekeeping? Thank you.

Daniel Kahneman: I think there is really too little scorekeeping. It's sort of astonishing when you think of those CFOs coming in year after year, and making predictions that make no sense, and they come back next year with the same level of confidence. There is no improvement. There is some absence of scorekeeping there.

On the other hand, there are really many people I think that -- most of us -- have a lot to lose from accurate scorekeeping. That's because of what I said earlier, of our ability for self-delusion, which is really a major asset in our lives. That we can lose.

I have given that advice, to keep score and when you make a decision, document the options that you considered but didn't choose. I was giving that advice a lot, and there was one place -- I didn't know it immediately -- somebody took my advice.

It was in a financial firm. I won't mention what it was. For a year, he kept track of every decision he made and the options he considered and rejected. There was a fair amount of material collected by the end of the year.

Then they told me about it, and we analyzed it. That guy was making well in excess of a million a year, and the conclusion, which I didn't share with anybody, they didn't need him. They could have saved a million dollars. He was adding nothing.

That's the kind of thing that people expose themselves to when they keep score. It's a dangerous activity.