Nobel Achievements: The Human Element in Economics
The New York Times
Editorial
"... we do a better job of weighing risks against a narrow reference
point than against the total economic outlook."
October 12, 2002
I f you ask the man or woman on the street, he or she will tell you that economics
is more likely to be the study of the behavior of money
than the study of the behavior of people. And yet the Nobel in economic
science this year has been awarded to two American economists,
Daniel Kahneman and Vernon L. Smith, whose work describes
the gap between predictions of human behavior according to economic theory
and the way humans really act. It turns out, in effect, that money would
behave logically, just the way theory predicts, if humans weren't the
ones responsible for handling it.
Mr. Kahneman and his longtime collaborator, Amos Tversky, who died
in 1996, set out to understand the dynamics of the psychology of
choice, the kind of choice consumers make, for instance, when deciding
whether to pay cash for a new television set or use a credit card when
the cash price is lower. As the credit card industry knows full well,
a lot depends on whether you describe the difference in price as a cash
discount or a credit-card surcharge. That explains why you never see the
phrase "credit card surcharge" when shopping.
Our economic decisions turn out to depend enormously on how our choices
are framed, in part because, as Mr. Kahneman writes, "our
perceptual apparatus is attuned to the evaluation of changes
or differences rather than to the evaluation of absolute magnitudes." In other
words, we do a better job of weighing risks against a narrow reference
point than against the total economic outlook.
As an example he cites this problem, which hinges not on a decision
about how much you want to live but on how the decision affects the
value of your money. If you're playing Russian roulette, would you pay
as much to reduce the number of bullets in the gun from four to three
as you would to reduce them from one to zero? Most people would not. But in fact,
a bettor can afford to pay more to reduce the number of
bullets from four to three because the value of the money placed on
that bet is reduced by the probability that he will not live to enjoy it. Even
though there are analogous issues in the stock market, most of us don't
do a good job of thinking this way because it makes our heads hurt.
That's why there will always be work for economists.
nytimes.com
Copyright The New York Times Company |
