Congratulations to Dan Kahneman, eminent psychologist at Princeton University,
for being honored with the Nobel Prize in Economics for his work on judgments &
decision making.
Here's the write-up in today's Chronicle of Higher Education, and below that,
I've appended the official citation from the Nobel Committee:
Congratulations Dan, on this outstanding honor!
Todd D. Nelson, Ph.D.
Gemperle Foundation Distinguished Professor
Department of Psychology
California State University
801 W. Monte Vista Ave
Turlock, CA 95382
-----------------------
10-9-02
Nobel in Economics Goes to 2 Americans Who Brought Markets Into the Lab
By DAVID GLENN
Two Americans have been awarded this year's Nobel in economic science for
separate work that brought experimental methods to bear on economic behavior.
Daniel Kahneman, of Princeton University, and Vernon L. Smith, of George Mason
University, have pioneered new uses of empirical data to test the assumptions
of formal models employed in neoclassical economics.
Mr. Kahneman is regarded as a founder of behavioral economics. He has used the
tools of cognitive psychology to call into question neoclassical models'
presumption that people or companies always make economic decisions on a
rational basis. Mr. Smith, a leader of the field known as experimental
economics, has developed ways to subject theoretical models of economic
problems to laboratory simulations informally known as "wind tunnels" (in
homage to the labs in which new aircraft designs are tested).
The economics prize, which is formally known as the Bank of Sweden Prize in
Economic Sciences in Memory of Alfred Nobel, was not one of the five awards
created by the will of the Swedish inventor in 1895. The economics prize was
established in his honor in 1968 by the Bank of Sweden. The two economists will
share a prize of $1.08-million, and will travel to Sweden in December to
receive the award.
Mr. Kahneman, who was born in Tel Aviv in 1934, is best known for his
explorations of why people make consistent errors in reaching some decisions
under conditions of uncertainty. His best-known insights derive from "prospect
theory," which explores decision making in gambling scenarios. Contrary to the
assumptions of neoclassical economics, which hold that economic actors will
"maximize their utility" in a strictly rational way, Mr. Kahneman has found
that people are systematically more averse to losses than attracted to gains.
He has further found that decision makers carry an implicit "reference point"
for their gains and losses. If they feel they are below that reference point
("in the realm of loss"), they tend to accept much greater gambling risks, even
when such risks are irrational -- "going for broke," in order to return to
their reference point. Mr. Kahneman's 1979 article "Prospect Theory: An
Analysis of Decisions Under Risk" (written with Amos Tversky, who died in 1996)
is the most-cited article in the history of the journal Econometrica.
In one recent experiment, he and his colleagues gave mugs to half the students
in a classroom. The students were told that the mugs were theirs to keep --
but, if they wished, they could trade in the mugs for a small amount of cash,
up to $10, at the end of the class. Those students' behavior suggested that
they valued their mugs at $7.12, on average.
The other students in the class were told to look at their neighbors' mugs. At
the end of the class, they would be able either to collect a mug just like that
or a small amount of cash, up to $10. In effect, the offer was identical to
that made to the first group of students. But students in the second group
behaved as if they valued the mugs at only $3.50. If the students' decision
making were rational, according to the standard tenets of economics, there
would have been no such discrepancy.
Mr. Kahneman attributes the phenomenon to "status quo bias." The students who
were actually presented with mugs at the beginning of class found it
emotionally difficult to give them up, and hence demanded more cash for them.
Mr. Smith, who was born in Wichita, Kan., in 1927, studied economics at Harvard
University, where he was inspired by his teacher Edward H. Chamberlin's efforts
to simulate market behavior by assigning his students to act as buyers and
sellers in classroom experiments.
Mr. Smith expanded Mr. Chamberlin's methods in a 1962 article that assigned
students to simulate a double oral auction, in which both prices offered to buy
and sell are being shouted at the same time, mimicking the structure of
real-world commodity markets. His early work found that auction behavior does
in fact match the predictions generated by traditional economic theory: Prices
converge around an equilibrium, even when buyers and sellers have no
information about each other's "reservation prices."
In later empirical work, however, Mr. Smith and his colleagues discovered that
the specific rules of real-world auction markets can have effects that had
eluded formal economic theory. For example, if buyers are allowed to change
their bids only every two minutes, instead of continuously, the market will
converge toward its equilibrium much more slowly.
More recently, Mr. Smith has developed "wind tunnel" experiments that have
tested competing mechanisms for assigning airport landing slots and competing
models of deregulated energy markets.
Official Citation from the Nobel Committee:
9 October 2002
The Royal Swedish Academy of Sciences has decided that the Bank of Sweden Prize
in Economic Sciences in Memory of Alfred Nobel, 2002, will be shared between
Daniel Kahneman
Princeton University, USA
�for having integrated insights from psychological research into economic
science, especially concerning human judgment and decision-making under
uncertainty�
and
Vernon L. Smith
George Mason University, USA
�for having established laboratory experiments as a tool in empirical economic
analysis, especially in the study of alternative market mechanisms�.
Psychological and experimental economics
Traditionally, much of economic research has relied on the assumption of a
�homo �conomicus� motivated by self-interest and capable of rational
decision-making. Economics has also been widely considered a non-experimental
science, relying on observation of real-world economies rather than controlled
laboratory experiments. Nowadays, however, a growing body of research is
devoted to modifying and testing basic economic assumptions; moreover, economic
research relies increasingly on data collected in the lab rather than in the
field. This research has its roots in two distinct, but currently converging,
areas: the analysis of human judgment and decision-making by cognitive
psychologists, and the empirical testing of predictions from economic theory by
experimental economists. This year�s laureates are the pioneers in these two
research areas.
Daniel Kahneman has integrated insights from psychology into economics, thereby
laying the foundation for a new field of research. Kahneman�s main findings
concern decision-making under uncertainty, where he has demonstrated how human
decisions may systematically depart from those predicted by standard economic
theory. Together with Amos Tversky (deceased in 1996), he has formulated
prospect theory as an alternative, that better accounts for observed behavior.
Kahneman has also discovered how human judgment may take heuristic shortcuts
that systematically depart from basic principles of probability. His work has
inspired a new generation of researchers in economics and finance to enrich
economic theory using insights from cognitive psychology into intrinsic human
motivation.
Vernon Smith has laid the foundation for the field of experimental economics.
He has developed an array of experimental methods, setting standards for what
constitutes a reliable laboratory experiment in economics. In his own
experimental work, he has demonstrated the importance of alternative market
institutions, e.g., how the revenue expected by a seller depends on the choice
of auction method. Smith has also spearheaded �wind-tunnel tests�, where trials
of new, alternative market designs � e.g., when deregulating electricity
markets � are carried out in the lab before being implemented in practice. His
work has been instrumental in establishing experiments as an essential tool in
empirical economic analysis.
Todd D. Nelson, Ph.D. Associate
Professor Department of Psychology California State University-Stanislaus
Turlock, California 95382
Office: (209) 667-3442
FAX: (209) 664-7067
E-Mail: [EMAIL PROTECTED]
Web: Http://www.csustan.edu/psych/todd/index.html
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