Before the theories of behavioral economics, economics was a generally straightforward field. Adding this new approach to consumer behavior makes us seem less like robots acting only as economics expects us to act and more like the more or less irrational beings we are. As Swiss economist, Bruno Frey put it, “The agent of economic theory is rational, selfish, and his tastes do not change.” The Homo Economicus, whom psychologist Daniel Kahneman refers to as “Econs” focuses on rationality to understand how choices are made; however, Kahneman was determined to prove rationality is not always the be-all and end-all of economics. Daniel Kahneman is one of only a couple non-economists and the first psychologist to win the Nobel prize in Economics
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Kahneman successfully integrated psychology and economics making it easier to discern the motive behind consumer behavior. One of Kahneman’s most famous theories that essentially won him the Nobel prize in economics is prospect theory and that of loss aversion. Kahneman, along with Amos Tversky developed this theory when studying how people react to gambles. To Econs the expected utility theory and rational choice guided the outcomes of the decision process regarding a gamble. Expected utility theory explains how Econs rationally make choices. Kahneman and Tversky tackled the task of explaining how humans make choices, rational behavior aside. Rationally, Econs assume that a persons makes their decision on a gamble based on the expected value. Say one has the opportunity to take a gamble where there is an 80% chance to win $100 and a 20% chance to win $10. The expected value of this gamble is $82. Kahneman adds a spin to this example. Now, say one can choose between taking the gamble or receiving $80 for sure. Since the expected value of a gamble is higher than the sure thing, rationality assumes everyone should …show more content…
Kahneman uses Bernoulli’s theory on utility to explain why this is not how most would react. He explains that people are risk-averse, a fact Kahneman agrees with. People would rather abstain from risk in favor of a guaranteed outcome. The standard utility curve is shown in figure 1. Increasing wealth from 1 million
Kahneman successfully integrated psychology and economics making it easier to discern the motive behind consumer behavior. One of Kahneman’s most famous theories that essentially won him the Nobel prize in economics is prospect theory and that of loss aversion. Kahneman, along with Amos Tversky developed this theory when studying how people react to gambles. To Econs the expected utility theory and rational choice guided the outcomes of the decision process regarding a gamble. Expected utility theory explains how Econs rationally make choices. Kahneman and Tversky tackled the task of explaining how humans make choices, rational behavior aside. Rationally, Econs assume that a persons makes their decision on a gamble based on the expected value. Say one has the opportunity to take a gamble where there is an 80% chance to win $100 and a 20% chance to win $10. The expected value of this gamble is $82. Kahneman adds a spin to this example. Now, say one can choose between taking the gamble or receiving $80 for sure. Since the expected value of a gamble is higher than the sure thing, rationality assumes everyone should …show more content…
Kahneman uses Bernoulli’s theory on utility to explain why this is not how most would react. He explains that people are risk-averse, a fact Kahneman agrees with. People would rather abstain from risk in favor of a guaranteed outcome. The standard utility curve is shown in figure 1. Increasing wealth from 1 million