Monthly Archives: June 2003

Daniel Kahneman and Vernon Smith, Economics Nobel Prize

ArgMax Economics Weblog: Clarifying the Nobel Prize. This is not new news, but I'm collecting some summary and background information on behavioral economics, and as good a place as any to start is Kahneman and Smith's 2002 Nobel prize. The blog here cited says:

The problem with doing a summary is that either you (the reader) are (1) an economist and likely know their work and don't need a summary, or (2) a generally intelligent person who will read the summary and think, "gee, that's obvious, I knew people don't behave the way economists assume, they won a Nobel for that?" or (3) bored to death.

That said, here's the Nobel committee's summary:

Traditionally, economic theory has relied on the assumption of a "homo œconomicus", whose behavior is governed by self-interest and who is capable of rational decision-making. Economics has also been regarded as a non-experimental science, where researchers – as in astronomy or meteorology – have had to rely exclusively on field data, that is, direct observations of the real world. During the last two decades, however, these views have undergone a transformation. Controlled laboratory experiments have emerged as a vital component of economic research and, in certain instances, experimental results have shown that basic postulates in economic theory should be modified. This process has been generated by researchers in two areas: cognitive psychologists who have studied human judgment and decision-making, and experimental economists who have tested economic models in the laboratory. This year’s prize is awarded to the innovators in these two fields: Daniel Kahneman and Vernon Smith.

Note the timeframe – I got my undergraduate degree in economics in 1988, which means that all of the advances in the field in this area happened well after any of it started to percolate into the undergraduate curriculum at Michigan. (Don't even know if any of it has made its way in yet.) So that homonculous "homo economicus" still lives in my brain, and I'm trying as best I can to drive him out.

Calculating the Irrational in Economics

Calculating the Irrational in Economics

The Boston Fed summoned the behaviorists to the Wequassett Inn in Chatham, Mass. The conference was given the quaint title 'How Humans Behave,' as if monetary policymakers had suddenly realized that, lo and behold, on the other end of all that policy are actual people. The collection of mainstream economists and central bankers would be the highest-level audience the behaviorists had ever enjoyed, the best chance yet for their new thinking to hit the bloodstream.

From the outset the mood was civil, especially considering that the behaviorists are essentially calling for an end to economics as we know it. (As one economist grumbled, 'What you have to understand is that behavioral economics is attacking the foundation of what welfare economics is built on.') So it was not surprising that some Fed elders seemed wary, as if they were at a family reunion and welcoming a distant cousin about whom they had heard only puzzling rumors. But with the economy stuck in a condition between dismal and desperate, the behaviorists' timing could not have been better."

(The New York Times)