Thinking, Fast and Slow

Kahneman relates the story of his first encounter with the theoretical economic actors employed by economists. Tversky gave him a brief paper discussing the psychological assumptions of economic theory, and Kahneman was stunned. Up to that point in the 1970s, economists universally employed the assumption that humans, as economic actors, were consistently rational and wholly selfish with unchanging preferences. This theoretical person would later come to be called an “Econ,” as opposed to the humans whom psychologists study.

Kahneman did not anticipate that this conversation would come to define his career. He allowed Tversky to advise him of the questions they would begin to tackle—those that could identify the rules governing how people actually make choices among various simple gambles and sure bets. These simple gambles provided a basic model that shares key features with the more complex choices that Tversky and Kahneman really sought to understand.

At the time, the field was dominated by expected utility theory, which Kahneman describes as “the most important theory in the social sciences” and the foundation of economists’ rational-agent model (i.e., their reliance on Econs) (270). Expected utility theory essentially predicts logical choices based on a few core axioms. Economists adopted it as a normative model of how choices should be made, then assumed that it described how economic actors (Econs) would make choices for purposes of developing theoretical models.