A Nobel That Bridges Economics and Psychology

[David Morris]

http://www.nytimes.com/2002/10/10/business/10PRIZ.html

wo Americans have won this year's Nobel award in economics for trying to 
explain idiosyncrasies in people's ways of making decisions, research that 
has helped incorporate insights from psychology into the discipline of 
economics.

Daniel Kahneman, a professor of psychology and public affairs at Princeton 
University, who is also a citizen of Israel, and Vernon L. Smith, a 
professor of economics and law at George Mason University in Fairfax, Va., 
shared the prize, which is worth approximately $1.07 million before taxes. 
Their work shed light on strategies for explaining everything from stock 
market bubbles to regulating utilities and countless other economic 
activities.

In many cases, the winners tried to explain apparent paradoxes. For example, 
Professor Kahneman made the economically puzzling discovery that most of his 
subjects would make a 20-minute trip to buy a calculator for $10 instead of 
$15, but would not make the same trip to buy a jacket for $120 instead of 
$125 — saving the same $5. "It took me several years," Professor Smith said 
at a news conference yesterday, "to realize that the textbooks were wrong, 
and the people in my class were correct."

[...]

In a 1981 article, they reported results of a study in which 152 students 
were given hypothetical choices for trying to save 600 people from a 
disease. Using one strategy, exactly 200 people could be saved for certain. 
Using another, there would be a one-third chance everyone would live, and a 
two-thirds chance no one would be saved. Seventy-two percent of the 
subjects, preferring the less risky strategy, chose the first option. But 
when the researchers presented 155 other students with the same choice 
worded differently — either 400 people would die for sure or there would be 
a one-third chance that no one would die — only 22 percent chose the first 
option.

The difference, Professor Kahneman and Mr. Tversky explained, stemmed from 
the presentation of the options as sure gains or sure losses. People in 
their experiments generally shunned risk when gains, like lives saved, were 
in question — they wanted to lock in the gains with certainty. Yet people 
preferred risk when the alternative was a certain loss, even if taking the 
risk implied the chance of an even greater loss.


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