Neo-classical (mainstream) economic theory operates under the assumption that human beings are rationally self-interested optimizers. Rational here, in its most modest form, denotes that people consistently apply an appropriate (i.e., reasonably well-suited) set of means toward the achievement of their goals. Self-interested here, in its most charitable form, denotes that individuals adopt goals according to their own interests, which are taken as given and idiosyncratic. Optimizers here denotes that, all else equal, people tend to prefer more (of something they like) to less, and at the least cost. There is a long standing debate within economics as to whether these assumptions are descriptively accurate depictions of human motivation. Some argue that descriptive accuracy does not matter; what counts is that these simplifying assumptions reduce the infinite complexity of human motivation to a manageable degree. When all the noise is cleared away, what remains is a distillation of human motivation—a model—which can be represented mathematically and yield testable predictions of the outcomes of human interactions across a range of settings.
Many of the social science scholars Danielle and I are highlighting in our “In Memoriam” series have played a pivotal role in the debates described above and have extended our collective understanding of economics and institutions in various ways. One such scholar is Amos Tversky:
Amos Tversky and Daniel Kahneman pioneered work in cognitive psychology which explored the limits of human cognition and caused social scientists to question the applicability of the rationality assumption. Using experiments, Tversky and Kahneman demonstrated that human beings lack the cognitive resources to be fully rational. Rather, humans tend to rely upon mental shortcuts, or heuristics, “which reduce the complex tasks of assessing probabilities and predicting values to simpler judgmental operations.” These heuristics allow us to approximate rational judgments and they serve us well in most contexts, but are also susceptible to many types of error which can lead to systematic biases. In their seminal co-authored paper, “Judgment Under Uncertainty: Heuristics and Biases” (1974), Tversky and Kahneman catalogue some of the most common errors individuals make. They later gathered their research into a book by the same name (1982):
The video below discusses two such errors, representativeness and availability:
These findings have greatly influenced the way social scientists now think about human cognition, as well as the extent and conditions under which the rationality assumption applies. In fact, these insights are fundamental to the subsequent development of Behavioral Economics and Behavioral Law & Economics, both very fruitful areas of contemporary research.
The Nobel Prize
Many of the scholars Danielle and I are highlighting in this series are Nobel laureates. Daniel Kahneman won the Nobel prize in Economics in 2002 for his pioneering research, but Tversky had already passed away in 1996. James Ryerson wrote the following in the Boston Globe:
JUST AS BEATLES fans couldn’t fully appreciate the 1997 knighting of Sir Paul McCartney in the absence of the late John Lennon, so the announcement of this year’s Nobel Memorial Prize in Economic Science felt incomplete. At a news conference at Princeton University on Oct. 9, the psychologist Daniel Kahneman, who won the Nobel this year along with the economist Vernon L. Smith, expressed regret that his longtime collaborator Amos Tversky wasn’t able to share the distinction with him. Tversky died in 1996, and while he did receive a citation from the prize committee, he couldn’t receive the prize itself: Nobels are not awarded posthumously.
Tversky and Kahneman are nearly always mentioned in the same breath. In the 1970s, the two Israeli-born psychologists devised a series of ingenious experiments to expose the illogical ways in which people make decisions that involve probability – everything from playing roulette to guessing what someone does for a living. But Tversky also had a successful career in his own right. At 19, before he became a worldwide expert on risk assessment, he earned Israel’s highest military decoration by saving the life of a fellow soldier who had frozen in panic after placing an explosive charge. Tversky daringly intervened and was wounded by the explosion. After receiving his doctorate at the University of Michigan, he taught at Hebrew University, later moving to Stanford University, where he worked for many years until his death.
Well, hat’s off to you, Amos Tversky!