Kahneman’s work refreshed and expanded economic thinking
The first thing students learn in Economics is that human beings act rationally. So, when a price comes down, we buy more of the product. This was the micro part of the story.
Summed up, this created a macro picture, which tautologically led to rational decisions. The assumption of rationality was based on the tenet of self-interest made popular by Adam Smith. It was among the underlying assumptions of classical economic theorists.
Things have been turned upside down by behavioural economists, including Professor Daniel Kahneman of Princeton, who died recently. No, we are not always rational and hence do not always take the right decision. Kahneman, a student of psychology who did not formally study Economics, achieved global fame as our leading behavioural economist after his book Thinking, Fast and Slow was published, explaining his work with his late friend Amos Tversky.
Kahneman showed that a $5 discount on a product costing $15 would make us drive miles to get this benefit, while we would not do so if the $5 off came on something priced at, say, $115. That’s absence of rationality, as the $5 figure looks different based on the ‘anchor’ or vantage point we take. His book became epochal and we can see ourselves in such situations very often.
The concept of thinking ‘fast’ can be related to impulsive behaviour, like when we do things instinctively, often without any rationale. Over-eating is a good example; we know it is not good, yet indulge in it at times. Kahneman believed such impulsive behaviour is really strong and guides us more often than not.
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