In more pragmatic than psychology, but economists nevertheless

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Last updated: June 26, 2019

Inthe podcast  “The Men Who Started aThinking Revolution,” Stephen J.

Dubner speaks to Michael Lewis, author ofnovels such as Moneyball, The Big Short, and The Undoing Project. The Undoingproject centers around the story and work of Amos Tversky and Danny Kahneman.Tversky and Kahneman were both Israeli psychologists that taught psychology atHebrew University, in Jerusalem. It was very apparent to those who knew the twothat their academic partnership was rather odd. Tversky veered toward themathematical side of psychology where he relied heavily on formal models toexplain human behavior (which ultimately proved to be beneficial when applying they’rework to economics), while Kahneman was not a mathematician in any sense, butwas rather intuitive (Sunstein).

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Despite their contrasting personalities andmethods of psychology, the dynamic partners revolutionized the fields ofpsychology and economics. They both, in fact, did lots of research on howpeople process information. Prior to Tversky and Kahneman economics was basedoff the idea that people made decisions and were motivated by incentives. Thisidea is called the rationality assumption. Tversky and Kahneman created theidea of behavioral economics. They argued that prior economic methods andassumptions didn’t explain the how people actually make decisions.

Having bothseen bad outcomes in their life Tversky and Kahneman held value in the decisionspeople made when there was a possibility of a bad outcome. Their mostinfluential paper was the Prospect Theory: An Analysis of Decision Under Risk.In this they redefine how humans think and how they make decisions. In theirpaper they focused on risk and why we place more focus on negative outcomesthan we do the positive. Tversky and Kahneman discovered that people makechoices based on the description of things rather than things themselves.

Thesedescriptions are called heuristics and act as rules of thumb or shortcuts.Tversky and Kahneman explored the biases in the human mind that lead people tomake misjudgments. Some of the heuristics explored include anchoring and theavailability heuristic. Together Tversky and Kahneman eradicated and rebuiltthe models that social scientists use to make sense of human behavior. Overtime their work crossed over into economics.

Economics, while still a socialscience, is much more pragmatic than psychology, but economists neverthelessadopted their methodology. Their peculiarpartnership laid groundwork for the field of behavioral economics and creatednew approaches to the practice of sports management, healthcare, and education (Engber). Tversky andKahneman’s ideas have crossed into government as well. How things aredescribed, or heuristics, have a major effect on the decisions made within thegovernment. Parts of Tversky and Kahnemans’s work can be seen in the U.S.

government, the British Government, the Australian government, the Germangovernment, and the Scandinavian government. Kahnemann ended up winning a nobelprize for all this work. Unfortunately Tversky had passed away, so was not eligiblefor the prize as well. Economics can be defined as the study of how people makechoices, and because of Tversky and Kahneman we now have a greaterunderstanding of that. 

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