Two of the three economists awarded the Nobel Prize for 2013 are behavioral economists. Historically and, unfortunately, currently, economic theory is largely dominated by the rational model of man. In 1978, the psychologist Herbert Simon, was awarded the Nobel Prize in Economic Sciences for his research showing the human beings do not, and often cannot, evaluate all available information before making a decision. He found that people satisfice, that is, use only enough information to think they need to make a decision (see the healthymemory blog post, “More on the Dangers of Information Overload”). In 2002, the psychologist Daniel Kahneman shared the Nobel Prize in Economic Sciences for his work with Amos Tversky showing the relevance of psychological research on human judgment and decision making under uncertainty to economics. Readers of the healthymemory blog should be familiar with Kahneman’s work on the Two System View of Cognition.
Of the three economists awarded the Nobel Prize in 2013, Eugene Fama is a traditional economist who employs the rational model of human beings. He has argued for efficient markets in which all relevant information is immediately incorporated into an asset’s price. Robert Shiller‘s work has criticized the efficient market hypothesis by showing that stock prices behave in a manner not predicted by the efficient market hypothesis. Lars Peter Hansen, who is sympathetic to behavioral economics, built on Shiller’s work and developed statistical methods to test exactly what drives stock price volatility. The financial crises of several years ago were the result of irrational human behavior with respect to the value of real estate and the financial instruments underlying real estate. We humans are not rational, but rather have limited information processing capabilities and are also driven by emotions. These psychological factors are what, at bottom, drives economies. It is interesting to note that Shiller is married to a psychologist.
I am compelled to note that Daniel Kahneman has been honored with the Presidential Medal of Freedom. In addition, the White House has invited psychologists to help transform policy.1
The influence of behavioral economics is only slowly being felt, but there are questions as to why with all this automation we are working so hard (enter “why are we working so hard” into the healthymemory search block to see relevant posts on this question). Perhaps we shall eventually move from measures such as Gross National Production (GNP) as measures of economic success, to more relevant measures such as Gross National Happiness (GNH) (enter “Gross National Happiness” into the healthymemory search block to find relevant healthymemory blog posts on this topic).
1(2013). A Seat at the Table, Observer, September 2013, p.21.
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