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Nobel Laureate Daniel Kahneman speaking to Kellogg students

Nobel Prize Laureate rationalizes our irrational behavior, economically speaking

Naturally shifting into automatic thinking gets us places, says Daniel Kahneman, Nancy L. Schwartz Memorial Lecture speaker

By Deborah Leigh Wood

6/1/2004 - If people always acted rationally, the field of behavioral economics probably wouldn’t exist. And Daniel Kahneman might not have been named the 2002 Nobel Prize Laureate for integrating “insights from psychological research into economic science.”

Kahneman, the Eugene Higgins Professor of Psychology and professor of public affairs in the Woodrow Wilson School of Public and International Affairs at Princeton University, engagingly presented his theories on “Psychology and Behavioral Economics” at this year’s Nancy L. Schwartz Memorial Lecture on May 19.

Acting irrationally, it’s nice to know, isn’t the same thing as acting stupidly, Kahneman told a rapt capacity crowd in the Kellogg School’s Owen L. Coon Forum.

As creatures who favor automatic thinking — intuitive, fast, effortless and emotional — over “rational” thinking — reason-based, slow, effortful and rule-governed — we’re “adequately successful,” Kahneman said.

Sending the ship was “a risky investment from the view of psychology,” Kahneman said, because Bernoulli didn’t consider what would happen if the ship got lost. But most of us are not merely walking, talking examples of basic economic theory, and so we take gains and losses into account when making economic decisions.

“An entire theory of finance is based on this model of risky investment,” said Kahneman. “This is bizarre.”

Similarly, people will tend to buy ice cream that’s advertised as 90 percent fat-free, Kahneman said, but not when it’s advertised as having 10-percent fat. Same product, different psychology. Such phenomena are associated with Kahneman’s contention that agents, in economic terms, are not, at root, poor reasoners, but prone to acting impulsively.

This is an example of irrationality at its weakest. At its strongest, irrationality encourages people to take a chance, based on intuition and optimism, and become entrepreneurs, despite knowing the dismal survival rate of startup firms.

Leaving the audience with a few provocative points to ponder, Kahneman asked, “Does behavioral economics still need psychology?” And, perhaps more fundamentally, how can demonstrable, meaningful theories about psychology and economics be put to good use?

It could be, Kahneman mischievously suggested, that what much of this sophisticated theorizing boils down to is good old common sense.

Established in 1983, the annual series, which focuses on issues of current economic theory, honors Schwartz, who was Morrison Professor of Decision Sciences and the first woman faculty member appointed to an endowed chair at the Kellogg School.