Daniel Kahneman was born March 5th, 1934 and is known for his psychological research towards economic science. He grew up in Israel and when he was 20 he started studying phycology at a university in Jerusalem. Here he received his Ph.D. in 1961. Going into, and during his mid thirty’s, Kahneman was a lecturer and a professor at his Hebrew University in Jerusalem and then moved on to teach at the University of British Columbia, the University of California, and later Princeton University. In 2002 he was awarded the Nobel Peace Prize along with fellow economist Vernon Smith for combining his phycological research into economic science.
It was later on into the 1960s that Kahneman started his research which would gain him his Nobel Peace Prize. He continued this research throughout the 70s as well. The 1970s are known for the great inflation. This is when the overall price of goods went up and the value of money went down. Economic growth was poor causing unemployment rates to rise and things were not looking good. Come the 1980S and 90s the unemployment rate, as well as inflation, had gone back down and people were getting back on their feet.
Kahneman is best known for uniting the concepts of human phycological behaviour with economic science. His research mainly revolved around human judgement and decision making. He studied with Amos Tversky on how humans made decisions when the future outcome is uncertain. In their research, the covered topics like how people tend to make their decisions off of smaller amounts of data or they assume the outcome of their decision off of the examples they have around them. With their findings, they developed a concept called the “prospect theory”. This theory implies that that people don’t take in information in a logical way as we view gains and losses in two different ways. The prospect theory tells us that people take the idea of loss much differently than gain also knows as” loss aversion”. “For example, you find 50 dollars on the ground or you lose 50 dollars and then later find 100 dollars”. Surveys show that most people would prefer the first option even though the outcome is the exact same and this is what is implied in the prospect theory. Before Kahneman’s research economists already had their views on how an individual would make decisions “under uncertainty”. It was believed that people were able to properly analyze the data presented to them and then consider the possible outcomes without bias. Kahneman and Tversky revealed this to be in fact false thus bringing to life the prospect theory.
The prospect theory is still known to be the best way to describe how individuals evaluate the element of risk when decision making. When this concept was first presented it was very difficult to know exactly how to apply it in economics. It is most recently that there has been an increase in the use of the prospect theory and advancement in the understanding of how to apply it. This theory has had its greatest impact in the economic fields of finance and insurance where the idea of risk and making decisions with uncertainty is more prominent. Daniel Kahneman is now the reason that economists have a new perspective on how people will make decisions. Behavioural Economics was a previously known concept where human behaviour and judgement were looked at in regards to economics. When Kahneman combined his knowledge in phycology with economic science he essentially rewrote what was thought to be known about human behaviour and economics. With more and more research going into the application of the prospect theory Kahneman’s contribution to economics will only grow.
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