Dr. Daniel Kahneman, winner of the 2002 Nobel Prize in economics, joins us to discuss his book Thinking, Fast and Slow.
In this video segment, Daniel recalls his work with Richard Thaler, an important figure in the study of behavioral economics, and how the field of economics initially reacted to the idea of considering psychological factors in what was generally considered a rational and dispassionate discipline. The full version of the interview can be seen here. A transcript follows the video.
Morgan Housel: When you first started publishing the work, what was the response from different economists? What was their pushback?
Daniel Kahneman: The first response was real contempt. They just didn't take it seriously. They didn't take psychology seriously at all.
Economists know mathematics, more mathematics than other social scientists. If you know mathematics, you have a special attitude to the rest of the world, or to people who don't understand the formulas you have, so it took quite a while, actually.
Housel: When psychology was brought into economics, was it fine-tuning around the edges, or was this taking existing theories and turning them upside down?
Kahneman: Well, it was brought as a series of challenges. The person who really created behavioral economics is Richard Thaler, who is an economist. He happened -- not "happened"; it's not an accident -- he sought us out because he was a very unusual economist who was interested in what we were doing, as a graduate student.
He is the next president of the American Economic Association, so you are talking of a development in 30 years in his career.
In the 1980s he had a column in the Journal of Economic Perspectives, which was sort of the professional journal of the Economics Association. His column was called "Anomalies," and it was just facts in the world that look strange from the point of view of economic theory.
These columns were read by everybody because he writes very well and he's very witty, and everybody was exposed to it. I think that, more than almost anything else -- well, I don't want to exaggerate -- but that had a big effect on making behavioral economics respectable.
We didn't challenge the whole edifice, except that prospect theory was really saying that people cannot be quite as rational as they have been described. Dick Thaler and I did work on fairness, which showed that people are not as selfish as they've been described.
He has done a lot of work on self-control because, although that was not mentioned, self-control is viewed as part of rationality but Dick Thaler has shown, and many others have, that people have "bounded self-control," as he describes it. They have procrastination problems.
They don't make themselves think seriously about things that matter, and they spend a lot of time dithering and thinking about things that don't matter.
The assumptions have been challenged, but economics is still pretty much the same discipline it was.
More from The Motley Fool
The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.