- Person
- Daniel Kahneman
- Lived
- 1934–2024
- Field
- Psychology, behavioural economics
- From
- Israeli-American
The story
In the 1970s Richard Thaler, then a young economist in graduate school at Rochester, had been collecting anecdotes showing that people break the rules of standard economic theory. One was the endowment effect: the owner of a bottle of old wine might refuse to sell it for $200 yet would not pay even $100 to replace it if it broke. Another was what came to be called mental accounting, as in the couple who drove through a blizzard to a basketball game only because they had already paid for the tickets.
Sometime in 1976 a copy of the 1975 draft of Daniel Kahneman and Amos Tversky's prospect theory reached Thaler. He realised that the endowment effect, a genuine puzzle for standard economics, was easily explained by prospect theory: people judge changes relative to where they start, and giving something up feels like a loss, which looms larger than an equal gain. When he learned that the two psychologists would be at Stanford in 1977 to 1978, he arranged a visiting appointment nearby. Kahneman later called their friendship the second most important professional friendship of his life.
In 1980 Thaler published Toward a Positive Theory of Consumer Choice, which Kahneman called the founding text of behavioural economics. With support from the Russell Sage Foundation, Thaler spent 1984 to 1985 with Kahneman at the University of British Columbia, working with the economist Jack Knetsch. Their famous mug experiments showed that people who were given a mug demanded about twice as much to sell it as others would pay to buy one. Their surveys on what the public considers fair for merchants, landlords and employers were accepted by the American Economic Review without revision, and their experiments for real stakes included the dictator game.
Kahneman insisted that much of the work of building behavioural economics was done by Thaler and the young economists around him, among them Colin Camerer, George Loewenstein, Matthew Rabin and David Laibson. In 1994 he helped Thaler and Camerer organise the first summer school in the field for graduate students.
The partnership changed economics. Kahneman received the Nobel economics prize in 2002, and Thaler in 2017, cited for building a bridge between economic and psychological analysis. Thaler's book Nudge, written with Cass Sunstein, popularised ideas such as making retirement saving the default, which greatly increases participation.
Why it matters
Behavioural economics now informs pension design, tax letters and public-health campaigns, helping people make choices that serve their own interests.
About Daniel Kahneman
Child survivor of Nazi-occupied France who, with Amos Tversky, mapped the systematic errors of human judgment, founded behavioural economics and won the 2002 Nobel Prize in economics.
More about Daniel Kahneman
- Daniel Kahneman showed how framing flips our choicesKahneman and Tversky showed that two logically identical descriptions of a choice, such as lives saved versus lives lost, can lead people to opposite decisions.
- Daniel Kahneman named the illusion of validityWatching army officer candidates, Daniel Kahneman noticed that assessors stayed confident despite proof their predictions failed. He called it the illusion of validity, his first cognitive illusion.
- Daniel Kahneman built the Israeli army's recruit interviewAt 21, Daniel Kahneman designed a structured interview for all Israeli combat recruits. It roughly tripled the interviews' predictive power and stayed in use for decades.
- Daniel Kahneman found how we remember painDaniel Kahneman showed that memories of painful experiences depend mostly on their worst moment and their end, the peak-end rule, a finding that can make medical procedures easier to bear.
- Prospect theory became the most cited paper in economicsDaniel Kahneman and Amos Tversky's 1979 paper on prospect theory, showing how people really weigh gains and losses, became the most cited paper in economics.
- Daniel Kahneman showed the eye's pupil tracks mental effortWith Jackson Beatty, Daniel Kahneman discovered that people's pupils dilate steadily as they hold more digits in memory, giving scientists a window onto mental effort.
- Daniel Kahneman's eureka moment about praise and blameWhen an Israeli flight instructor insisted that shouting worked better than praise, Daniel Kahneman realised he was seeing regression to the mean, the most satisfying eureka of his career.
- Thinking, Fast and Slow brought Kahneman's ideas to millionsDaniel Kahneman's 2011 book Thinking, Fast and Slow, describing fast intuitive and slow deliberate thinking, became an international bestseller and won major book awards.
- Kahneman and Tversky mapped the mind's shortcutsIn 1974 Daniel Kahneman and Amos Tversky published Judgment under Uncertainty: Heuristics and Biases, showing how mental shortcuts lead to predictable errors.
- Daniel Kahneman championed adversarial collaborationDaniel Kahneman urged scientists who disagree to run joint experiments instead of trading hostile rebuttals, a practice he called adversarial collaboration.
Sources
- Daniel Kahneman: Biographical NobelPrize.org
- Richard Thaler Wikipedia
- Endowment effect Wikipedia
Another act of tikkun olam. This is part of tikkun olam, the Jewish idea of repairing the world, and every one of us can add to it.