• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

ECONOMICS has never been a science in the sense physics or chemistry is, and economists have always felt a sense of discomfort on this account. That is why they try to give it a veneer of science with their laws, models, equations and multi-coloured graphs. They have even managed to graft on to it the new branch of econometrics, which makes a simple proposition seem very profound by propping it up with plenty of mathematics and calculus. One has to wade through at least 40 or 50 equations with lots of sigmas and deltas before one lands on the QED.

Of late, the shadowy domain of psychology is getting mixed up with economics, and a couple of Nobel prizes have gone to those who are said to have imported psychological insights into interpreting economic decisions made by households, stock markets, business enterprises and the like. The latest to win the coveted Nobel for illuminating economics with the aid of psychology is Dr Daniel Kahneman, Professor at the Princeton University. With his amazing grasp of the obvious, he has established that people, instead of acting as rational beings to maximise their pleasure or profit, often behaved erratically and made choices and judgments which were hard to justify on rational grounds. Dr Kahneman further discovered that their first impressions were most of the time their last impressions, and they were apt to find concrete examples more to their liking than abstract or abstruse concepts. Confoundingly, some sort of a myopia drives them to suffer from "loss aversion", since in their perception losses loom larger than gains. And how did the learned doctor hit upon this monumental insight? By simply asking the students of his class: "I am going to toss a coin, and if it is tails, you lose $10. How much would you have to gain on winning in order for this gamble to be acceptable to you?" In a chorus they all said that they would not consider the gamble worthwhile unless they won more than $20.

To get further confirmation, Dr Kahneman asked some tycoons the same question, only increasing the figure of loss, if the coin landed tails, by a thousand times to a respectable $10,000. The fat cats were firm that they would not be satisfied with less than $20,000 to induce them to take the gamble.

Dr Kahneman is now hard at work developing a measure of well-being to replace the reigning concept of quality of life, by meticulously measuring the moods governing the quotidian lives of 1,000 working women in Texas. In his own words: "We know a lot about these ladies. Divorced women, compared to married women, are less satisfied with their lives... but they are actually more cheerful... The other thing is the huge importance of friends. People are really happier with friends than they are with their families or their spouse or their child." Dr Kahneman may well be one of those rare beings to get a Nobel Prize twice for what an American professor visiting him in his earlier years in Israel and reacting to his exposition called the "psychology of stupidity"!

B. S. Raghavan

Send this article to Friends by E-Mail
Comment on this article to BLFeedback@thehindu.co.in

Stories in this Section
Asean initiative

Copyright © 2002, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line