From: Grant Callaghan (firstname.lastname@example.org)
Date: Wed 11 Dec 2002 - 23:01:27 GMT
They knocked rationality from its roost
Psychologists found that logic was far from law in decision-making process
By Erica Goode
NEW YORK TIMES NEWS SERVICE 'K
December 11, 2002
Everybody said it that way.
As if the Israeli psychologists Daniel Kahneman and Amos Tversky were a
single person, and their work, which challenged long-held views of how
people formed judgments and made choices, was the product of a single mind.
Earlier this fall, Kahneman, a professor at Princeton, was awarded the Nobel
in economics science, sharing the prize with Vernon L. Smith of George Mason
University. But Kahneman said the Nobel, which is not awarded posthumously,
belongs equally to Tversky, who died of cancer in 1996 at 59.
"I feel it is a joint prize," Kahneman, 68, said. "We were twinned for more
than a decade."
In Jerusalem, where their collaboration began in 1969, the two were
inseparable, strolling on the grounds of Hebrew University or sitting at a
cafe or drinking instant coffee in their shared office at the Van Leer
Jerusalem Institute and talking, always talking. Later, when Tversky was
teaching at Stanford and Kahneman at the University of British Columbia,
they would call each other several times a day.
Every word of their papers, now classics studied by every graduate student
in psychology or economics, was debated until "a perfect consensus" was
reached. To decide who would appear as first author, they flipped a coin.
Wiry, charismatic, fizzing with intelligence, Tversky was younger by a few
years. Kahneman, as intellectually keen, was gentler, more intuitive, more
Together, the psychologists developed a new understanding of judgments and
decisions made under conditions of risk or uncertainty.
Economists had long assumed that beliefs and decisions conformed to logical
rules. They based their theories on an ideal world where people acted as
"rational agents," exploiting any opportunity to increase their pleasure or benefit.
But Kahneman and Tversky demonstrated that in some cases, people behaved
illogically, their choices and judgments impossible to reconcile with a
rational model. These departures from rationality, the psychologists showed,
followed systematic patterns.
For example, the exact same choice presented or "framed" in various ways
could elicit different decisions, a finding that traditional economic theory
could not explain.
Over more than two decades, working together or with others, Kahneman and
Tversky elaborated many situations in which psychological "myopia"
influenced people's behavior and offered formal theories to account for
They established, among other things, that losses loom larger than gains,
that first impressions shape subsequent judgments, that vivid examples carry
more weight in decision making than more abstract – but more accurate –
Anyone who read their work, illustrated, as one admirer put it, with "simple
examples of irresistible force and clarity," was drawn to their conclusions.
Even economists, unused to looking to psychology for instruction, began to
take notice, their attention attracted by two papers, one published in 1974
in Science, the other in 1979 in the economics journal Econometrica.
In a recent conversation, Kahneman, who carries both American and Israeli
citizenship, talked about what happens when psychology and economics meet.
QUESTION: Did you set out to challenge the way economists were thinking?
ANSWER: We certainly didn't have in mind to influence economics.
In the first years, economists, and philosophers too, were simply not
interested in the trivial errors that we as psychologists were studying.
I have a clear memory of a party in Jerusalem around 1971, attended by a
famous American philosopher. Someone introduced us and suggested that I had
an interesting story to tell him about our research. He listened to me for
about 30 seconds, then cut me off abruptly, saying, "I am not really
interested in the psychology of stupidity."
Our work was completely ignored until our 1974 paper, which eventually had
an impact on both economics and epistemology. Of course, we did not mind in
the least because economists were not our intended audience anyway; we were
talking to psychologists. It came as a pleasant surprise when others started
to pay attention.
Why is the rational model of human behavior so entrenched in economic
There's a very good reason for why economics developed the way it did, and
that is that in many situations, the assumption that people will exploit the
opportunities available to them is very plausible, and it simplifies the
analysis of how markets will behave.
You know, when you're thinking of two stalls next to each other selling
apples at different prices, then you're assuming that the fellow who is
selling them at too high a price is just not going to have customers.
So you get rationality at this level, and it buys a lot of predictive power
by this assumption. When you are building a formal theory, you want to
generalize that assumption, and then you end up making people completely
You and Amos Tversky are perhaps best known for prospect theory. Could you
explain what this is based on?
When I teach it, I go back to 1738. In 1738, Daniel Bernoulli wrote the big
essay that introduced utility theory. Utility really means pleasure more
than anything else.
The question that Bernoulli put to himself was "How do people make risky
decisions?" And he analyzed really quite a nice problem: a merchant thinking
of sending a ship from Amsterdam to St. Petersburg at a time of year when
there would be a 5 percent probability of the ship being lost.
Bernoulli evaluated the possible outcomes in terms of their utility. What he
said is that the merchant thinks in terms of his states of wealth: how much
he will have if the ship gets there, if the ship doesn't get there, if he
buys insurance, if he doesn't buy insurance.
And now it turns out that Bernoulli made a mistake; in some sense it was a
bewildering error to have made. For Bernoulli, the state of wealth is the
total amount you've got, and you will have the same preference whether you
start out owning a million dollars or a half million or two million. But the
mistake is that no merchant would think that way, in terms of states of
wealth. Like anybody else, he would think in terms of gains and losses.
That's really a very simple insight but it turns out to be the insight that
made the big difference. Because, if that's not the way that people think,
if people actually think in terms of gains and losses and not in terms of
states of wealth, then all the mathematical analysis that has been done
which assumed people do it that way is not true. It took us a long time to
One of the things you are studying now is well-being. Does this connect in
any way to economics?
I would like to develop a measure of well-being that economists would take
seriously, an alternative to the standard measure of quality of life.
We're attempting to measure it not by asking people but by actually trying
to measure the quality of their daily lives. For example, we are studying
one day in the lives of 1,000 working women in Texas. We have people
reconstruct the day in successive episodes as recalled a day later, and we
have a technique that recovers the emotions and the feelings. We know who
they were with and what they were doing. They also tell us how satisfied
they are with various aspects of their lives. We know a lot about these
What are you finding out?
I'll give you a striking finding. Divorced women, compared to married women,
are less satisfied with their lives, which is not surprising. But they're
actually more cheerful, when you look at the average mood they're in in the
course of the day. The other thing is the huge importance of friends. People
are really happier with friends than they are with their families or their
spouse or their child.
Help STOP SPAM with the new MSN 8 and get 2 months FREE*
This was distributed via the memetics list associated with the
Journal of Memetics - Evolutionary Models of Information Transmission
For information about the journal and the list (e.g. unsubscribing)
This archive was generated by hypermail 2.1.5 : Wed 11 Dec 2002 - 23:07:23 GMT