By Arav Talati. Edited by Arjun Chandrasekar.
The field of behavioral economics is now a widely explored area as it combines two fields: psychology and economics. Richard Thaler is widely regarded as the most significant contributor to the field, but other figures like psychologist Daniel Kahneman (who went on to receive a Nobel Prize in 2002) and cognitive psychologist Amos Tversky, were crucial to what we understand about behavioral economics today. These three figures are considered the “fathers of behavioral economics.”
Kahneman and Tversky
Kahneman and Tversky wrote several papers that undermined the ideas about human nature held by mainstream economics at the time. In 1979, Tversky and Kahneman developed the Prospect Theory, which in simple terms stated that our willingness to take risks is influenced by the context in which we are given the choices. According to the Nobel Prize Committee, before developing the Prospect Theory, Kahneman and Tversky started their research investigating contradictions and irregularities in human behavior and decision-making. Their experiments clearly showed that when someone is offered the same choice in two different ways, they can give contrasting answers. The Prospect Theory was the first step in our understanding of behavioral economics.
Richard Thaler is considered the premier father of behavioral economics because he built off the work of these other two figures and expanded on the research already done by Tversky and Kahneman. Thaler’s exploration of behavioral economics was inspired by the work that Kahneman and Tversky did. Thaler was the 2017 recipient of the Nobel Memorial Prize in Economics for “incorporating psychologically realistic assumptions into analyses of economic decision-making.” The Nobel Prize Committee particularly praised Thaler for “his exploration of the consequences of limited rationality, social preferences, and lack of self-control, and showed how these human traits affect economic decisions.” However, in Thaler’s own words, “the greatest thing I did was show that even economic agents are human.”
Thaler explored how economic decision-making by individuals and institutions is influenced by natural human cognitive limitations and biases, among other factors. His findings refuted the assumption that individuals always act rationally and selfishly, something that most economists had accepted, as it served well when making predictive models. According to the Britannica Encyclopedia, Thaler even explored the poor self-control people have regarding saving for retirement or reaching future financial goals. He explained that experiences in the present or near-future are perceived as more significant than those in the distant future. In simpler terms, many tend to focus on the present financial situation without planning for their future.
These three monumental figures were truly incredible and contributed remarkable work to the field of economics. It is because of them that people are starting to understand how behavioral economics works. People are learning that it is possible to avoid common mistakes that stem from behavioral economics. We owe these fathers of behavioral economics a huge thank you.