Daniel Kahneman has passed away: the psychologist who made economists realize that people are not rational

Daniel Kahneman, who as a psychologist received a Nobel Prize in Economics for bringing down the rational ‘homo economicus’, has died at the age of 90.

The behavioral economicsrevolution that Kahneman helped launch, teaches that people often make decisions that are completely illogical. His insights forced economists to revise models that assumed rational beings, with predictions that did not come true at all.

A well-known example is our aversion to loss. For example, a loss of 50 euros bothers us more than a gain of 50 euros gives us pleasure. It also helps explain why investors have such a hard time taking a loss on a stock that has fallen in value.

Another strange twist that Kahneman and his loyal colleague Amos Tversky discovered through an experiment is that many people are willing to drive 20 minutes to save $5 on a calculator that costs $15, but are not willing to make the same effort to save $5 on a calculator that costs $15. save dollars on a calculator that costs $125. While that shouldn’t make any difference.

Kahneman poured his insights into the global bestseller ‘Thinking, Fast and Slow’ from 2011. He explains that we use two systems in our thinking. The first is intuitive, fast and sometimes emotional. Using rudimentary rules of thumb and prejudices as instruments, which regularly mislead us. The second system works more thoughtfully and slowly. According to Kahneman, people tend to avoid brain effort, which is at the expense of system 2. But overconfidence also plays tricks on us.

It is no coincidence that his book is a hit with economists such as Paul De Grauwe (London School of Economics) and Peter Vanden Houte (ING Belgium). During an earlier survey, both put it forward as one of the books that shaped their insights. “It is a beautiful book because it encompasses a lifetime of insights and research,” Vanden Houte said in 2020. “Many books contain one idea that is endlessly exploited. Not so with Kahneman, who paints a rich picture of behavioral economics. It’s about the mistakes we make when we have to make decisions, including in the financial markets, where you have to make decisions all the time.’

Kahneman’s influence extended far beyond the financial markets. His insights are used, among others, by governments that serve citizens through… nudging want to give a subtle push towards desired behavior, such as saving for your pension or eating healthier.

The Israeli-American Kahneman, born while visiting Tel Aviv but raised in France, received his doctorate from the University of California (Berkeley). He received the Nobel Prize in Economics in 2002 for ‘integrating insights from psychological research into economic science’. He shared the prize with Vernon Smith, a pioneer in laboratory experiments for economics. Tversky had already died and therefore could not share in the prize.