The economic and financial market turmoil has prompted me to post this. It is relevant and enlightening as it deals with the irrationality of the human mind, especially related to our economic choices. In fact, in reality, we are anything but rational beings.
The Royal Swedish Academy of Sciences decided to give the Noble Prize in Economic Sciences, in 2002 to be shared between Daniel Kahneman, Princeton University, USA and Vernon L. Smith, George Mason University, USA.
“For having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty” and having established laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms.
Traditionally, much of economic research has relied on the assumption of a “homo œconomicus” motivated by self-interest and capable of rational decision-making. Economics has also been widely considered a non-experimental science, relying on observation of real-world economies rather than controlled laboratory experiments. Nowadays, however, a growing body of research is devoted to modifying and testing basic economic assumptions; moreover, economic research relies increasingly on data collected in the lab rather than in the field. This research has its roots in two distinct, but currently converging, areas: the analysis of human judgment and decision-making by cognitive psychologists, and the empirical testing of predictions from economic theory by experimental economists.
Here is Vernon L. Smith speech:
I wish to celebrate
• The Royal Family for their grace and charm in this magnificent affirmation of the dignity of humankind.
• Daniel Kahneman for his ingenuity in the study and understanding of human decision and its associated cognitive processes demonstrating that the logic of choice and the ecology of choice can be divergent.
• The pioneering influence of Sidney Siegel, Amos Tversky, Martin Shubik, and Charles Plott on the intellectual movement that culminated in the economics award for 2002.
• Humanity’s most significant emergent creation: Markets.
• Mandeville who said: “The worst of all the multitude did something for the common good.”
• The ancient Judeo Commandments: Thou shalt not steal or covet the possessions of thy neighbor, which provide the property right foundations for markets, and warned that petty distributional jealousy must not be allowed to destroy them. Neither shalt thou commit murder, adultery or bear false witness, which provide the foundations for cohesive social exchange.
• David Hume who declared the three laws of human nature: The right of possession, its transference by consent, and the performance of promises, and taught that the rules of morality are not the conclusions of reason.
• F.A. Hayek for teaching us that an economist who is only an economist cannot be a good economist; that fruitful social science must be very largely a study of what is not; that reason properly used recognizes its own limitations; that civilization rests on the fact that we all benefit from knowledge that we do not possess (as individuals).
• Benjamin Franklin who said “Tell me and I forget, teach me and I remember, involve me and I learn.”
• And to Kahlil Gibran who reminds us that, “work is love made visible”.