Posted by John Irons at October 18, 2002 11:39 AM

I have, a few times, written about the research that won Nobel Prizes for economists. I am currently suppressing the urge to again summarize/translate the work of this year's winners, Daniel Kahneman and Vernon Smith, into a form that non-economists can understand.

I'm being tested though. I've read more than one account of why they won the prize, and I'm not really happy.

The problem with doing a summary is that either you (the reader) are (1) an economist and likely know their work and don't need a summary, or (2) a generally intelligent person who will read the summary and think, "gee, that's obvious, I knew people don't behave the way economists assume, they won a Nobel for that?" or (3) bored to death.

The problem with not doing a summary is that the only summaries will be done by people who don't know what they're talking about. (Very few people who know what they're talking about write about economic Nobel prize winners - there is a very low signal to noise ratio when it comes to economic writings.)

(Warning: gratuitous name-dropping!) I was fortunate enough to meet both winners several years back: Kahneman at a two-week graduate-level behavioral economics workshop in Berkeley, and Smith at a two-week graduate-level experimental economics workshop in Arizona. So I do feel somewhat qualified to do some summarizing.

However, the Nobel Prize committee has already done that reasonably well. Read the summary here.

If I were to write something, these would be some points I would try to make...

On the prize...

1. Econ Nobels are more often than not awarded to "fields" - experimental and behavioral economics are very much "teams" in the sense that many, many people contributed to the foundations of the field. Amos Tversky was explicitly mentioned in the press release, but there are also many other people working away in these fields which have done very significant work. Smith and Kahneman were definitely leaders though.

2. Modern economists are aware of the work of Smith and Kahneman and dozens of their coauthors. We know their results, and that people are not always rational. You can't use the prize and their research to ignore the rest of the field or economists in general.

On Rationality...

1. A paper by John Miller and Scott Page has a nice quote about how there is only one way to be rational, but many ways to be non-rational. It's not enough to say that people are not always "rational" and thus ignore economic results. A more positive approach would be to specify *how* people are not rational, find the implications, and compare to a fully rational world. This isn't easy -- just ask theorists who deal in bounded rationality, or even those who deal with limited irrationality (myopia, procrastination, loss-aversion). The math is usually harder when you don't assume rationality.

2. Smith and Kahneman's work can be seen, in part, as trying to figure out the "how people are not rational." My only argument with some of their work is that the harder part -- figuring out what specific behavioral quirks mean for the behavior of markets/economies -- is often left undone (although people are working on this, especially with the "wind-tunnel" tests cited by the Nobel committee.)

3. Their research does not "disprove" all of more traditional economics. The assumption of rational economic actors was not / is not meant to be taken exactly literally - it is a simplification of reality, an approximation to the complexities of human behavior, and has allowed us to draw powerful conclusions in a variety of areas.

4. Rationality (usually) gets us close to the right answer, sometimes that's good enough.

On the announcement...

1. Why did the committee call Kahneman's field "psychological" economics and not "behavioral economics"? Is this a shot at the current behavioral economists?

If you want more on Economic Nobel winners, there's a book by MIT press, The Lives of the Laureates, or some similar title. I'm sure amazon.com has it.

Also, The Knowledge Problem has comments and links on Vernon Smith

My older writings are here:
2001 Akerlof, Spence, Stiglitz
2000 Heckman, McFadden
1999 Mundell
1998 Sen
1997 Merton, Scholes