Psychology professor and behavioral economics pioneer Daniel Kahneman passed away Wednesday at the age of 90.
Kahneman’s research focused on the ways human psychology can warp rational thinking. He won a Nobel Prize in economic science in 2002 and also received the Presidential Medal of Freedom in 2013.
The Princeton University psychology professor, along with his friend Amos Tversky, who died in 1996, upended traditional economic assumptions with their work. In reporting on his death, The New York Times noted that as opposed to traditional economics—which assumes that human beings generally act in fully rational ways and that any exceptions tend to disappear as the stakes are raised—the behavioral school is based on exposing hard-wired mental biases that can warp judgment, often with counterintuitive results.
Notably, their work was the first to note that the pain of a loss outweighs the euphoria of a gain—as in why, for example, does the loss of $100 hurt about twice as much as the gaining of $100 brings pleasure?
The concept was illustrated in another way by none other than Brad Pitt, playing Oakland A’s general manager Billy Beane in Michael Lewis’ movie Moneyball, admitting he hates losing even more than he wants to win. As an example of the wide-ranging implications of his research, Kahneman’s work is cited as leading in part to a rethinking of the evaluation of baseball talent, which was the central premise of Lewis’ book on which the namesake movie is based.
A chief tenet of behavioral finance is that people are loss averse. People are highly motivated to avoid what they consider a loss. To spur people to take action regarding their retirement benefit, the idea is to frame messages in a way so individuals will clearly understand how they might “gain” by taking action or “lose” if they don’t take action.
Over the years, the work of Kahneman, Richard Thaler, Shlomo Benartzi and others has led to incredible strides in factoring human behavior into processes and procedures, helping to “nudge” people toward good decisions.
“It’s like, suppose there’s somebody who discovers that the Earth is round and then that sets off the explorers,” Thaler, the University of Chicago Booth School of Business economist who won the economics Nobel in 2017, told The Wall Street Journal regarding the influence of Kahneman and Tversky. “I’m standing on the shoulders of giants. They gave us some shoulders to stand on.”
As the WSJ noted, Kahneman’s work found a greater audience with the publication of his 2011 book, “Thinking, Fast and Slow,” which reviewed his research with Tversky and popularized the idea that people are guided by two modes of thinking: “fast” thinking, which operates quickly and automatically, and “slow” thinking, which is more deliberative.
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