Can a person become an economist or win the Nobel Prize for her/his breakthrough research in Economics without being a student of the subject? Usually, it is more than just difficult. However, Israeli-American author and psychologist Daniel Kahneman (March 5, 1934 - March 27, 2024) made it possible! He was awarded the Nobel Memorial Prize in Economics in 2002 (jointly with Vernon Lomax Smith, an American Economist and Professor of Business Economics and Law at Chapman University) "for having integrated insights from psychological research into economic science, especially concerning human judgement and decision-making under uncertainty". It would not be an exaggeration to call Kahneman the Father of Behavioural Economics, one of the most discussed branches of Economics, at the moment.
Until the 1970s, mainstream Economic Theories did not analyse economic decision-making processes with the help of Psychology. In place of of human behaviour, economists used to stress on Homo Economicus or Economic Man, the characterisation of man in certain economic theories as a rational person who pursues wealth for his self-interest. In other words, the economists used to consider man as a mindless, brainless, selfish, highly rational and robotic economic person. The economic man has little in common with the Homo Sapiens. In actuality, a person does not always make decisions based on reason. S/he makes mistakes, suffers from depression, anxiety, uncertainty, and often sacrifices her/his own interests for the sake of social good. Hence, the mainstream Economic Theories failed to understand the decision-making process of human beings and branded them as irrational decision-makers! Kahneman corrected this huge flaw of 20th Century Economic Theories with the application of Psychology. He was quite convinced that the role of Psychology in human decision-making is infinite. Therefore, economic behaviour of human beings should be analysed from the point of view of Psychology.
A strange incident sparked Kahneman's interest in the role of Psychology in the human decision-making process. In an autobiographical work, he mentioned: "It must have been late 1941 or early 1942. Jews were required to wear the 'Star of David' and to obey a 6pm curfew. I had gone to play with a Christian friend and had stayed too late. I turned my brown sweater inside out to walk the few blocks home. As I was walking down an empty street, I saw a German soldier approaching. He was wearing the black uniform that I had been told to fear more than others - the one worn by specially recruited SS soldiers." He continued: "As I came closer to him, trying to walk fast, I noticed that he was looking at me intently. Then he beckoned me over, picked me up, and hugged me. I was terrified that he would notice the star inside my sweater. He was speaking to me with great emotion, in German. When he put me down, he opened his wallet, showed me a picture of a boy, and gave me some money. I went home more certain than ever that my mother was right: people were endlessly complicated and interesting." Thus, Kahneman explained why he entered the field of Psychology.
Kahneman's works are ingrained in Behavioural Economics. He did much of those works together with his colleague and friend Amos Nathan Tversky (March 16, 1937 - June 2, 1996), an Israeli Cognitive and Mathematical Psychologist and a key figure in the discovery of Systematic Human Cognitive Bias and Handling of Risk. Their friendship began at the Hebrew University in 1969. Kahneman joined the Hebrew University as a teacher after completing his PhD in Psychology at the University of California, Berkeley. Within days of their meeting, he felt that Tversky's thought process was similar to his. They penned several important papers, first in Psychology and then in Behavioural Economics, for nearly three decades… until Tversky's untimely death in 1996. Kahneman included all of those papers in his famous book 'Thinking, Fast and Slow', published in 2011. In that publication, he admitted that the most significant event in his life was conducting joint research with Tversky.
Among numerous works of Kahneman, the most widely studied is probably the 'Two Systems Theory'. Perhaps, it is the most realistic framework for understanding the human decision-making process. As per this theory, two systems work simultaneously in the human brain: System 1 and System 2. People use either of these two systems to make their decisions. System 1 operates automatically without any special effort, as it is usually determined by emotion. On the other hand, System 2 allocates attention to effortful mental activities, and it is determined by consciousness. It can be seen that System 1 works quite fast, while System 2 works slowly. People usually make logical decisions by using System 2. Hence, there is less chance of error in such decisions. When one makes decisions by using System 1, the person uses no (or little) reason. As a result, s/he often makes wrong decisions. It is called Cognitive Bias.
In his Heuristics Theory, Kahneman analysed how people make decisions by using System 1. This theory is closely related to Behavioural Economics. According to Kahneman, Heuristic is basically mental shortcuts that one uses to make quick decisions. For example, one is in a dilemma whether to go somewhere by plane or by car. Suddenly, the person recalled the news of a plane crash that he read in the newspaper a couple of days ago. Then, s/he hastily decides to go by car, as going by plane would be a risky affair. This decision is not made based on logic. Instead, the person uses a Heuristic to make the decision. Kahneman has termed it the Availability Heuristic.
After the demise of Kahneman on March 27, 2024, Vernon L Smith recalled that Adam Smith (baptised June 5/16, 1723 - July 17, 1790), the Father of Economics, had explained his wonderful ideas about human decision-making and the relationship between people and society in his book 'The Theory of Moral Sentiments', published 265 years ago (in 1759). Kahneman's seminal research developed the ideas of Adam Smith. Vernon L Smith believes that Kahneman was not only a psychologist or sociologist, but also the ideal successor of Adam Smith.
Usually, economists do not have much respect for other branches of Sociology. Despite being an outsider in the realm of Economics, Kahneman influenced this subject for nearly half a century, and achieved unimaginable success!
It seems the world is eagerly waiting for other cognitive scientists working on the Psychology of Judgement and Decision-making, and carry forward his works in the field of Behavioural Economics and other related topics!
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