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By Bloomberg

The Ebola epidemic is generating "irrational attitudes," and policy makers must take that into account when formulating their response to the disease, according to Nobel Prize-winning psychologist Daniel Kahneman.

The Israeli-born Kahneman, 80, was the 2002 Nobel economics laureate for his research on how people's biases hinder rational decision-making. His best-selling book "Thinking, Fast and Slow" detailed the mind's division into two distinct thought systems: an instinctive quick-response process to deal with immediate challenges, and a more deliberate method to analyze intricate problems.

The Ebola epidemic is typical of the kind of event that leads to "exaggerated panic," Kahneman said in an interview at the National Library of Israel in Jerusalem. "People measure risk by fear," he said. "They don't measure it by probability."

While banning travel from west African states where the epidemic is highest may not be justified by the low probability of catching Ebola, it may be defensible as long as the consequences aren't too costly, he said.

"You cannot ignore the fact that people have irrational attitudes, you must reassure people, this is the responsibility of the leadership," he said.

The success of Kahneman's book, and related works he cites, such as Nassim Nicholas Taleb's "The Black Swan" and Cass Sunstein and Richard Thaler's "Nudge," has popularized research into the psychology behind decision-making, including in the realm of investment. While those writings have contributed to a clearer understanding of the consumer choices people make, irrational behavior lingers in markets, he said.

'Biggest Puzzle'

"The biggest puzzle is why do so many people still buy individual stocks," said Kahneman, who thinks individual stock pickers can't consistently beat the market. "Still, there is a trend toward mutual funds, and to taking costs and fees into account. The main thing behavioral economists have been preaching is that fees matter, and should be a criteria in decision-making."

Kahneman, a professor emeritus at Princeton University, now advises corporations on "how to reduce noise in decision- making" on behalf of the TGG Group, a consulting agency he founded with top economists and behavioral scientists.

The goal is to improve the uniformity of decision-making within companies, because "reducing the variability will improve the bottom line," he said. He said the ideas he uses today are directly influenced from lessons he learned 60 years ago as an Israeli army officer, when he was charged with designing a method for picking officer candidates.

'Endlessly Complicated'

Kahneman has said his interest in psychology stems in part from his experience as a Jewish child living under the German occupation of Paris during World War II. One night, he walked home after curfew, his sweater turned inside out to hide the yellow star European Jews were required to wear. A German soldier stopped him in the street, then embraced him and gave him money before sending him home, providing an example of how people are "endlessly complicated," he said.

Much of Kahneman's work has focused on loss aversion, the human tendency to fear losses more than value gains. It's a trait evident in the current Israeli government's failure to advance toward a peace agreement with the Palestinians, he said.

"Each side is much more sensitive to the concessions that it makes because they are losses, than the concession that it receives, because they are gains," he said. "If we put more weight on losses than on gains, that creates an enormous difficulty for both sides in reaching an agreement."

Kahneman's explanation of the diplomatic dynamic contrasts with that advanced by another Israeli Nobel economics laureate, Jerusalem-based Robert Aumann, who has cited his own work on game theory to justify a hard line in peace negotiations.

"Game theory can be interpreted in many ways," Kahneman said of Aumann. "I'm explaining as a psychologist why it's difficult to reach an agreement; I'm not taking a position."