{"id":6952,"date":"2024-05-19T17:44:01","date_gmt":"2024-05-19T17:44:01","guid":{"rendered":"https:\/\/emimer.com\/?p=6952"},"modified":"2024-05-19T17:44:01","modified_gmt":"2024-05-19T17:44:01","slug":"the-psychologist-who-convinced-economists-that-to-err-is-human","status":"publish","type":"post","link":"https:\/\/emimer.com\/?p=6952","title":{"rendered":"The Psychologist Who Convinced Economists that to Err Is Human"},"content":{"rendered":"<div class=\"article__abs u-mt-se\" dir=\"ltr\">\n<p>Daniel Kahneman, who passed away in March at the age of 90, received the Nobel Prize in Economics despite having never taken an economics course.\u00a0Nevertheless, his scholarship reshaped and upended the discipline\u2019s fundamental assumptions, laying the groundwork for the emergence of behavioral economics.<\/p>\n<\/div>\n<div class=\"article__body article__body--commentary  english\" dir=\"ltr\" data-page-area=\"article-body\">\n<p data-line-id=\"4bc21e30602d43c4b6c87c440bcd7e02\">CAMBRIDGE \u2013 The\u00a0recent passing\u00a0of psychologist and Nobel laureate Daniel Kahneman is an apt moment to reflect on his invaluable contribution to the field of behavioral economics. While Alexander Pope\u2019s famous assertion that \u201cto err is human\u201d dates back to 1711, it was the pioneering work of Kahneman and his late co-author and friend Amos Tversky in the 1970s and early 1980s that finally persuaded economists to recognize that people often make mistakes.<\/p>\n<p data-line-id=\"62abaef2ae404f91b8ec42934fed2aef\">When I received a fellowship at Stanford University\u2019s Center for Advanced Study in the Behavioral Sciences (CASBS) four years ago, it was this fundamental breakthrough that motivated me to choose the office \u2013 or \u201cstudy\u201d (to use CASBS terminology) \u2013 that Kahneman occupied during his year at the Center in 1977-78. It seemed like the ideal setting to explore Kahneman\u2019s three major economic contributions, which challenged economic theory\u2019s apocryphal \u201crational actor\u201d by introducing an element of psychological realism into the discipline.<button class=\"comment__caller icon-box icon-box--v \" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"ae08fd79e192441da398b2fcc217c535\">Kahneman\u2019s first major contribution was his and Tversky\u2019s groundbreaking 1974 study on\u00a0<a href=\"https:\/\/www.science.org\/doi\/10.1126\/science.185.4157.1124\" target=\"_blank\" rel=\"noopener\">judgmen<\/a>t and uncertainty, which introduced the idea that \u201cbiases\u201d and \u201cheuristics,\u201d or rules of thumb, influence our decision-making. Instead of thoroughly analyzing each decision, they found, people tend to rely on mental shortcuts. For example, we may rely on stereotypes (known as the \u201crepresentativeness heuristic\u201d), be overly influenced by recent experiences (the \u201cavailability heuristic\u201d), or use the first piece of information we receive as a reference point (the \u201canchor effect\u201d).<button class=\"comment__caller icon-box icon-box--v \" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"948e9f614336482a82c0e257be5d9713\">Second, Kahneman and Tversky\u2019s work on \u201cprospect theory,\u201d which they published in 1979, critiqued expected utility theory as a model of decision-making under risk. Drawing on the \u201ccertainty effect,\u201d Kahneman and Tversky argued that humans are psychologically more affected by losses than gains. The perceived loss from misplacing a $20 note, for example, would outweigh the perceived gain from finding a $20 note on the sidewalk, leading to \u201closs aversion.\u201d<\/p>\n<p data-line-id=\"ea9deb86ca534b5bb2c2f71dd1ad06ff\">This insight is also at the core of the \u201cframing effect.\u201d The theory, developed while Kahneman was a fellow at CASBS and Tversky was a visiting professor at Stanford, posits that the way information is presented \u2013 whether as a loss or a gain \u2013 significantly influences the decision-making process, even when what is framed as a loss or gain has the same value.<button class=\"comment__caller icon-box icon-box--v \" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"35ed9c10c5fd4e8890ccb3ce4558782e\">Lastly, there is Kahneman\u2019s popular masterpiece, the bestselling\u00a0<em>Thinking, Fast and Slow<\/em>. Published in 2011 and offering a lifetime\u2019s worth of insights, the book introduced the general public to two stylized modes of human decision-making: the \u201cquick,\u201d instinctive, emotional mode that Kahneman called System 1, and the \u201cslower,\u201d deliberative, or logical mode, which he called System 2. Humans, he showed, are prone to abandoning logic in favor of emotional impulses.<\/p>\n<p data-line-id=\"47d76f00b625491b8ed62e33be58dd19\">Kahneman received the\u00a0Nobel Prize in Economics in 2002, despite, as he jokingly remarked, having never taken a single economics course. Nevertheless, his scholarship laid the groundwork for an entirely new field of economic research \u2013 and it had all begun in Study 6.<button class=\"comment__caller icon-box icon-box--v \" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"37bf3f30cd144a0884f934c003092889\">In particular, Kahneman\u2019s work had a profound impact on University of Chicago economist Richard Thaler, who went on to become a Nobel laureate himself. As an assistant professor, Thaler managed to \u201cfinagle\u201d a visiting appointment at the National Bureau of Economic Research, whose offices were located down the hill from CASBS, enabling him to connect with Kahneman and Tversky.<button class=\"comment__caller icon-box icon-box--v \" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"b7d9db10692a40c2a12667ec20afc42b\">In 1998, Thaler co-authored a\u00a0seminal paper\u00a0with Cass Sunstein and Christine Jolls, introducing the concept of \u201cbounds\u201d on reason, willpower, and self-interest, and highlighting human limitations that rational-actor models had overlooked. By the time he received the Nobel Prize in 2017, Thaler had systematically documented \u201canomalies\u201d in human behavior that conventional economics struggled to explain and conducted highly influential research (with Sunstein) on \u201cchoice architectures,\u201d popularizing the idea that subtle design changes (\u201cnudges\u201d) can influence human behavior.<button class=\"comment__caller icon-box icon-box--v \" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"9051c2f42dc0497f9c4f41b471c93eb5\">But as I gazed at the sweeping views of Palo Alto and the San Francisco Peninsula from the office window at CASBS, the\u00a0birthplace\u00a0of behavioral economics, I could not help but wonder whether Kahneman, despite his famously gentle nature, had perhaps been too critical of human decision-making. Are all deviations from \u201cpure\u201d economic logic necessarily \u201cirrational\u201d? Is our inability to align with the idealized model of economic analysis, coupled with our inevitable \u2013 albeit predictable \u2013 irrationality, really an inherent weakness? And is our tendency to rely on emotions rather than reason a fatal flaw, and if so, could our susceptibility to instinct ultimately lead to our downfall?<button class=\"comment__caller icon-box icon-box--v \" aria-expanded=\"false\" aria-label=\"Paragraph comment\" aria-controls=\"login_register\" aria-haspopup=\"true\"><\/button><\/p>\n<p data-line-id=\"7d2294e1056140c7b15a72e5abaff369\">I wish I could ask Kahneman these questions. During my time there in 2020-21, Kahneman, affectionately known as \u201cDanny\u201d to all, was not just what CASBS called a \u201cghost\u201d of the \u201cstudy\u201d \u2013 a former occupant who had been a\u00a0major influence\u00a0on my work \u2013 but also, happily, a vibrant, living legend who had enthusiastically invited me to discuss these very issues in person. Looking back, I regret my \u201cplanning fallacy\u201d in not taking him up on his offer to deepen our conversation sooner \u2013 a sentiment shared by both my System 1 and System 2 modes. If \u201cto err is human,\u201d Danny taught me a poignant final lesson in human error.<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Daniel Kahneman, who passed away in March at the age of 90, received the Nobel Prize in Economics despite having never taken an economics course.\u00a0Nevertheless, his scholarship reshaped and upended the discipline\u2019s&#8230;<\/p>\n","protected":false},"author":1,"featured_media":6953,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[14],"tags":[40,46,48,50,57,68,76,77,78,79,80,82,86,87,88,90,95,96,98,99,103,107,109,111,112,114,121,123,137,139,146,148,153,159,174,176,181,182,184,187,196,201,202,203,209,217,221,222,229,231,232,233,239,241,244,246,249,250,251,252,256,262,263,266,268,277,279,280,283,285,288,300],"class_list":["post-6952","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-economy","tag-alleviation","tag-aramco","tag-athens","tag-athensenergydialogues","tag-baroudi","tag-carbon","tag-climate","tag-climate-change","tag-climateaction","tag-climatechange","tag-closure-of-nuclear","tag-co2","tag-cyprus","tag-decarbonising","tag-decarbonization","tag-democracy","tag-disputes","tag-doha","tag-east","tag-eastmed","tag-egypt","tag-embargo","tag-emissions","tag-energy","tag-energy-market","tag-energyindustry","tag-europe","tag-european-fuels","tag-gas","tag-gazprom","tag-greece","tag-greenenergy","tag-hydrocarbons","tag-international","tag-lebanon","tag-liquefied-natural-gas","tag-maritime","tag-maritime-boundaries","tag-maritime-disputes","tag-mediterranean","tag-natural-gas","tag-offshore","tag-oil","tag-oil-and-gas","tag-opec","tag-peace","tag-plants","tag-pollution","tag-poverty","tag-power","tag-putin","tag-qatar","tag-renewable-energy","tag-reserves","tag-rosneft","tag-roudi","tag-russia","tag-russia-in-the-european-energy-sector","tag-russian-gas","tag-russian-sanctions","tag-saudi","tag-solar","tag-solar-power","tag-straddling","tag-sustainability","tag-total","tag-trump","tag-turkey","tag-ukrain","tag-unclos","tag-usa","tag-300"],"_links":{"self":[{"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/posts\/6952","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/emimer.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=6952"}],"version-history":[{"count":1,"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/posts\/6952\/revisions"}],"predecessor-version":[{"id":6954,"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/posts\/6952\/revisions\/6954"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/media\/6953"}],"wp:attachment":[{"href":"https:\/\/emimer.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=6952"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/emimer.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=6952"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/emimer.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=6952"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}