Daniel Kahneman on Behavioral Economics

Dr. Daniel Kahneman is a professor of Psychology at Princeton University. He is one of the few psychologhists who received nobel prize for economics. He questioned the assumption of rationality behind the human decision making process. He also showed that human decisions are not rational.

He is the speaker at the Georgetown University at the graduation ceremony.



We are also seeing that the efficient market theory for stock market prediction is also being questioned recently. The new thinking is that the markets are not efficient.

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Brain Economic and Moral Choices

Image via Wikipedia

The brains is the central organ where most of our decisions are made. It has been a mysterious organ because we could not look inside the brain to observe how we actually make decisions.

There were many old models those divided the decision making mainly into two separate processes. The rational goal oriented decision making process and the irrational emotion based decision making process sometimes referred to as "Animal Spirits". All the attempts that are made to civilize humans were to suppress the irrational decision making and promote rational decision making. The modernity was based upon the ascension of the rational decision making to the highest pedestal while our instinctual urges were considered bad and relegated to the bottom of the pyramid of the needs.

This two part division provided a satisfactory explanation for our behavior in the past. It also provided guidelines for developing suitable methods to train kids to become rational functioning adults. However, the recent advances in non invasive brain scanning techniques such as FMRI allow us to probe inside the brain while it is trying to make decisions. The technique still lacks fine spatial and temporal resolution but it is getting better with time and it provides a glimpse of inside working of human brain.

The neurons inside the brain are interconnected and we do not find a clear cut distinction between two types of decision making. In fact both of them are involved in all types of decision making. This invalidates the "Rational Actor" model of humans used in Economic theory. Human are not purely rational decision making computers.

We now have new disciplines like Neuro-economics and Behavioral Finance. These disciplines have shown that our decisions differ sometimes considerably from a pure rational actor. All decision are value based decisions including the decisions involving money and morality.

Here is a fascinating video that shows some of the experiments in the field of Neuro-economics showing human decision making and a neuroscience based explanation



We can not find a moral center within the brain making moral decisions. Also, we can not find 'Homo Economus nuclei " within the brain making rational informed decisions on money matters purely out of self interest. This conclusion is fairly obvious to common people but the religious authorities and the big name economists so far are not willing to accept these findings in Neuro-economics despite the mounting evidence supporting the idea that brain is an organic unit and it acts as a single unit to perform calculations leading to making decisions.

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Gut Feelings: The Intelligence of the Unconscious

Image via WikipediaDr. Gird Gigerenzer is a German Psychologist who studies "Bounded rationality" and produces evidence about the human decision making based upon Intuition.

"Gigerenzer, a leading expert and author on heuristics, won the AAAS Prize for the best article in the behavioral sciences. He is the author of Calculated Risks: How To Know When Numbers Deceive You, the German translation of which won the Scientific Book of the Year Prize in 2002. His books on heuristics include Bounded Rationality: The Adaptive Toolbox, with Reinhard Selten, a Nobel laureate in economics - UCSD

Acccording to the speaker, human beings tend to think of intelligence as a deliberate, conscious activity guided by the laws of logic. Yet, he argues, much of our mental life is unconscious, based on processes alien to logic: gut feelings, or intuitions. Dr. Gigerenzer argues that intuition is more than impulse and caprice; it has its own rationale. This can be described by fast and frugal heuristics, which exploit evolved abilities in the human brain. Heuristics ignore information and try to focus on the few important reasons. Says Gigerenzer: "More information, more time, even more thinking, are not always better, and less can be more."

Here is his talk on Fora.TV