Daniel Kahneman has died: who he was and what the Nobel Prize-winning economic psychologist discovered

Daniel Kahneman. Credits: Wikimedia Commons

He passed away on March 27th at the age of 90. Daniel Kahnemanthe Israeli psychologist who received the Nobel Prize for Economics in 2002, considered one of the “fathers” ofbehavioral economics thanks to his discoveries regarding the decision making under conditions of uncertainty. Despite the training of him as psychologisthas been able to integrate psychology with economics, highlighting how human decisions often deviate from pure rationality, highlighting how these are rather influenced by systematic cognitive biases. Let's go over some of the main discoveries and insights of Kahneman, highlighting how his work has not only expanded the boundaries of the economic discipline, but also provided crucial tools for comprehend the mechanisms underlying financial, political and personal decisions.

Life and career

Born in Tel Aviv in 1934 and raised in Paris, Daniel Kahneman was a world-renowned psychologist. Graduated in psychology and mathematics at the Hebrew University of Jerusalem, Kahneman spent much of his academic career in the United States, where he moved in 1958 and taught at prestigious universities such as Princeton University.

His collaboration with Amos Tverskybegun in 1968, contributed to the birth ofbehavioral economics, challenging traditional economic theories with profound insights into the nature of human decisions. For his groundbreaking contributions, Kahneman received the Nobel Prize for Economics in 2002, an unusual recognition for a psychologist. His most influential work, Slow and fast thoughtspublished in 2011, synthesizes decades of research on intuition and rationality, making him one of the most cited and influential authors in the field of psychology and beyond.

The most important discovery: Perspective Theory

Kahneman's most significant contribution, developed together with Amos Tversky, is the Perspective Theory (Prospect Theory). This theory, which challenges the assumption of rationality of the so-called “Homo oeconomicus”suggests that people evaluate losses and gains differentlyplacing greater weight on the former than on the latter, whereas the classical theory looked at the individual as a completely rational agent in economic choices, careful evaluator of costs and benefits.

Perspective Theory introduced concepts such asloss aversion and theanchoringdemonstrating how the presentation of options can significantly influence choices, and that most of the time it is not the cost/benefit calculation that guides the choices we make. Let's dive into an example: imagine a group of people are asked to to estimate how many days did the construction of the pyramids of Egypt take to complete, but before they give their answer, half of the group are told that the construction took more than 200 years, while the other half are told that it took more than 2000 years.

Despite these initial information are vague and not directly useful to formulate an accurate answer, it turns out that the group that was prompted with the number “2000” tends to provide significantly higher estimates than the group that was prompted with the number “200”. This happens because both numbers serve as anchor points and influence the estimation process.

Profit and loss bags on a basic scale on a blackboard

Systems of thought: the slow System and the fast System

In his 2011 bestseller Slow and fast thoughtsKahneman describes two fundamental modalities through which we make choices: the System 1, quick, intuitive and emotionaland the System 2more slow, thoughtful And logical. While System 1 can lead to hasty judgments and errors, but makes us capable of sudden choices, System 2 requires greater cognitive effort, to evaluate issues from various points of view and weigh the pros and cons. Let's also give an example here to understand better.

Let's imagine we are in the supermarket in front of two fruit stands. At the first counter, we see a perfectly shiny red apple, which immediately captures our attention. Without thinking about it, we take it, guided by an instinctive feeling that tells us that it is a good choice. This is a example of System 1 in action: it is fast, based on intuition and immediate impressions. We did not consciously reflect on the choice, but let an automatic and superficial evaluation guide our decision.

After taking the apple, however, we notice a sign indicating that the apples from another stand they are of a variety biological, locally produced and freshly picked, but they are not as shiny and perfect as the first apple we chose. Now, we stop at consider which apple is really the best option. Let's think about benefits to the health of eating organic food, to the environmental impact of consuming local produce, and to the flavor a fresh apple might have compared to one that has been treated to appear aesthetically perfect. After pondered this information, we decide to put down the shiny apple and choose one of the organic apples, despite their less inviting appearance. This process of conscious reflection and evaluation is a example of System 2 in action: requires one greater cognitive effortinvolves critical reasoning and evaluating various options, allowing us to make a more informed decision.

Young Caucasian man chooses between two similar goods

THEKahneman's contribution to economics

Kahneman also explored the concept of heuristicsthat is to say mental shortcuts that people use for simplify decision making. While useful, these heuristics can lead to systematic bias and overconfidence in irrational choices. His work on these cognitive distortions has opened new avenues in understanding how people operate in situations uncertaintydemonstrating, for example, how an economic loss has a much greater impact on our psyche than a gain of the same amount.

Placing the relevance of instinctive choices at the center of the economic discipline has meaning revolutionize the way we conceive and study financial markets, money management, marketing and the world of advertising. A clear example of the impact of anchoring in economics is the determination of the prices of goods, and their location relative to other goods, more or less expensive. By setting a very high “anchor price” through a first exposure to a very expensive product, the buyer is generally inclined to spend less than the price to which he was exposed, but consistently more than what was estimated before the exposure.

The real contribution Of Daniel Kahneman it cannot be found in a single psychological or economic theory, but its main value lies precisely inhaving opened a door towards a vast field hitherto unexplored, crossing two disciplines that couldn't talk to each other. His insights continue to influence not only academics but also policy makers, economists and the general public, offering valuable tools for navigate the complexity of human decisions.

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Tversky A., Kahneman D. (1974). Judgment Under Uncertainty: Heuristics and Biases: Biases in judgments reveal some heuristics of thinking under uncertainty. Kahneman D. (2011). Slow and fast thoughts. Kahneman D., Knetsch JL, Tahler RH (1991). Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias. Furnham A., Boo HC (2011). A literature review of the anchoring effect.