Economics Nobelist has Berkeley fan club
Now at Princeton, Daniel Kahneman taught here for nearly a decade, with lasting influence

By Jonathan King, Public Affairs

Daniel Kahneman (left), David Laibson of Harvard, and George Akerlof participated in the Sage Summer Institute on Behavioral Economics at Berkeley this past August. Akerlof, still on the faculty in the economics department here, and Kahneman, a former Berkeley psychology professor, were awarded the Nobel Prize in economics in successive years. Grace Katagiri photo

16 October 2002 | Berkeley economists took October off this year, after winning two consecutive Nobel Prizes in that category. But this year’s co-honoree, Professor Daniel Kahneman of Princeton, has a more than casual connection to Berkeley, having spent the years 1986 to 1994 on the psychology faculty here, continuing the research that began decades ago and led to this year’s honors.

Psychology? What’s that got to do with economics? More and more as years go by, say his former colleagues here, echoing the opinion of the Nobel judges. The contributions that psychology has made to economics are now widely recognized, as is the fundamental work by Kahneman (and his late colleague, Amos Tversky) that paved the way for the integration of the two social sciences.

That work, among its other impacts, changed forever the view of economics as a science unsupported — indeed, unsupportable — by controlled experimentation. As a psychologist focusing on the variables affecting decision-making, Kahneman identified numerous variances from standard theories about human economic behavior, thus challenging the classic view of Homo economicus as a rational assessor of costs and benefits.

Kahneman’s work “was social science at its best,” says Professor George Breslauer, dean of the divison of social sciences in the College of Letters and Science. “Fundamentally, he’s been interested in figuring out how people really think — how they go about figuring out the odds, deciding whether something is worth the risk. He and Tversky invented prospect theory, which has turned out to be one of the most influential theories of how people reason — first in psychology, then in economics and political science. It’s spread like wildfire in those fields.”

The connection with economics is affirmed by nearly everyone in both fields; the link to political science is less frequently asserted. But Breslauer, a Chancellor’s Professor in that discipline, is firm. “One of the principles of their work is that people are more inclined to take risks to defend what they already have than they are to gain something new. Or, put another way, they’ll take more risks to avert losses than they will to acquire gains. That’s obviously important to the thinking of foreign-policy decision makers.”

Practical applications
Though theoretical economics has profited most famously from Kahneman’s insights, the “dismal science’s” most practical applications now reflect them as well. Professor Terry Odean of the Haas School of Business specializes in the psychology of stock-market investors, a subject of no little relevance to the boom-and-bust era we’re living through now. Odean’s discovery that investors tend to sell off their winning investments but hang on to their losers — a form of denial he calls “regret avoidance” — owes much to the work of Kahneman and Tversky. And Odean himself owes his choice of career to Daniel Kahneman.

“Danny was a mentor to me,” says Odean, who took psychology courses from Kahneman while getting his B.A. in statistics at Berkeley. “I went over to his house to talk about grad school one afternoon, and to ask if I could study with him in the Ph.D. program. He said I should give some serious thought to going into finance instead, to apply what I’d learned in his classes about behavioral decision theory to that universe. It wasn’t a well-populated field at the time, but he told me that was an advantage – that while the behavioral approach to finance was being met with skepticism, it meant an opportunity to do research. So I got my Ph.D. in finance and have been working in that field ever since.”

Productive years at Berkeley
Even those of Kahneman’s colleagues who didn’t consider him a mentor were grateful for his guidance and counsel. Another Haas School professor, Philip Tetlock, says “he was a continual source of creative ideas and inspiration. He helped me reformulate a number of research problems and to avoid a number of dead-ends that I might have otherwise gone down.” Kahneman’s Berkeley years were “very productive,” says Tetlock, including significant early work on “hedonic psychology,” the focus of the Nobelist’s recent research into the psychological experience of well-being.

Tetlock’s wife and Haas colleague, Barbara Mellers, has a doctorate in psychology and a longstanding interest in the decision-making process. “Both Phil and I taught courses with Danny Kahneman,” she says. “We talked with him in depth, and we both really admired the way he would attack a problem. He would focus on it like a laser beam.” Kahn-eman, she says, “has an amazing ability to see paradoxes in human behavior. He would point out how something that seemed perfectly normal was actually really, truly bizarre. And he did that over and over again.”

Economics Professor Matthew Rabin, winner of the 2001 John Bates Clark medal from the American Economic Association, says that while Kahneman takes pains to identify himself as a psychologist, not an economist, he “thinks more like an economist than most psychologists do, which means that the perspective he has is more useful.” He also notes that “it’s tremendously rare for someone in one discipline to speak to another discipline so successfully.”

Rabin refers to himself straightforwardly as “an acolyte” of Kahneman’s. “I teach a graduate class in the psychology of economic theory where, for virtually every topic we explore, there’s a relevant reading by Danny and one of his primary colleagues, either Tversky or [Richard H.] Thaler. In fact, I joke to my class that my work consists of taking every word Danny ever said and turning it into math.”