by Pranab Bardhan
All of the articles in this series can be found here.
As with game theory, I also attended some courses in Berkeley in another relatively new subject for me, Psychology and Economics (later called Behavioral Economics). In particular I liked the course jointly taught by George Akerlof and Daniel Kahneman (then at Berkeley Psychology Department, later at Princeton). I remember during that time I was once talking to George when my friend and colleague the econometrician Tom Rothenberg came over and asked me to describe in one sentence what I had learned so far from the Akerlof-Kahneman course. I said, somewhat flippantly: “Kahneman is telling us that people are dumber than we economists think, and George is telling us that people are nicer than we economists think”. George liked this description so much that in the next class he started the lecture with my remark. On the dumbness of people I later read somewhere that Kahneman’s earlier fellow-Israeli co-author Amos Tversky once said when asked what he was working on, “My colleagues, they study artificial intelligence; me, I study natural stupidity.”
Of course, by dumbness or stupidity in this context economists really mean departures from rationality, and knowing that people are often irrational, behavioral economics is really about the systematic departures from rationality which gives the subject its analytical coherence, that there is method in the madness as Polonius says in Hamlet. And in the departures from self-centered individual rationality social norms and fellow-feeling (like empathy and sympathy and social solidarity) often play an important role. In Berkeley I had a friendly colleague for many years, Matthew Rabin (now at Harvard), from whose talks and writings I have learnt a great deal on fairness in social preferences in a modified game-theory framework, apart from common human errors in probabilistic reasoning and human frailties like individual self-control problems. These are big changes in traditional ways of thinking in Economics. Read more »