This week Daniel Kahneman died and memories go back to the summer of 2005. Three years ago this academic had won the Nobel Prize in Economics for his work on behavioral economics. His ideas, very close and easy to understand for the general public, had immediately achieved high popularity that transcended the university world. He still did not know that a few years later he would become almost a pop icon of Economics, thanks to the best-selling book Thinking Fast, Thinking Slowly (Ed. Debate, 2012).
It was summer and it was hot. The professor went to Barcelona to an event at the Pompeu Fabra University (UPF). When he attended La Vanguardia, the first thing he did was take off his jacket and sit down. Before the interview began, Professor Kahneman became defensive, in what in hindsight today seems like an act of great humility. “I’m not an economist. I’m just a psychologist,” he said, as the temperature became stifling.
And, in fact, Kanheman boasted of never having attended an Economics class in his academic training. However, his studies on the so-called Behavioral Economics, the economics of behavior, had a lot of influence on research into how investors and consumers act. His theory is that human decisions generally deviate from what traditional theories predict. And that’s because, as he discovered, human judgment takes shortcuts that systematically deviate from the basic principles of probabilities.
For example, he explained during the meeting he had with this newspaper that if a fund manager beats the stock market two years in a row, we believe that this is, without a doubt, because he is better than everyone else. Something that, however, may be totally wrong. He also theorized about the asymmetry of decision making: human beings would rather not lose $100 than win $100. “We do not necessarily act to achieve maximum profit,” he repeated. “When we invest we don’t do it just because we want to be richer, but because we also look for satisfaction, pleasure… We want it all at once.”
His theses provided a lot of information about why entrepreneurs face risks. “The individual doesn’t really want to take them on. When he does it, it’s because he doesn’t really know that he’s taking them on. And when he realizes it, it’s always too late.”
Regarding people’s consumption patterns, it showed how much environmental pressure influences when it comes to spending. “Consumers don’t care at all if the price of a butane cylinder goes up or if gasoline becomes more expensive. What affects us are the changes in our local community. For example, if we see around us that unemployment is increasing “We may then reduce our expenses.”
It is surprising to see how much his thoughts remain highly topical today. For example, he studied the relationship between terrorism and the economy, a topic that felt very close to him having been born in the Middle East, a land full of insecurity and dangers. “A terrorist attack does not have repercussions capable of modifying economic decisions. In general, man tends to exaggerate the risks of terrorism. Think of my country, Israel. No matter how many attacks we suffer, the number of victims does not exceed those killed by road. And we continue to receive tourists.”
Daniel Kahneman was born in Tel Aviv on March 5, 1934 and spent his childhood in Paris under Nazi occupation. He also worked in the psychology department of the Israel Defense Forces. He developed a large part of his academic career in the United States and entered the Royal Academy of Economic and Financial Sciences (Racef) in 2012, presented by the then president of “La Caixa”, Isidre Fainé. He won the Nobel Prize in Economics in 2002 “for having integrated aspects of psychological research into economic science, especially with regard to human judgment and decision-making under uncertainty.”
He said his living will in a La Contra interview with Lluis Amiguet that same year. “After 60 we are happier. Don’t get so excited about the good, but you see what is bad with more distance and thus achieve a more rewarding emotional balance.” With Kahneman’s death, homo economicus has lost his father.
