Behavioural Economicsheterodox economics

Thinking Fast and Slow – background reading for behavioural economics

Kahneman’s Thinking Fast and Slow is a popular introduction to the work of the psychologists Daniel Kahneman and Amos Tversky –two psychologists who delivered a groundbreaking critique of some of the premises of mainstream economic theory. While the book is of general interest, it is particularly valuable for present or future students of behavioural economics.
Kahneman sets the scene by introducing fundamental psychological insights into conscious and unconscious mental processes. These fundamental mechanisms are described in terms of two systems and their functioning is linked to concepts like priming and cognitive ease which are of concrete relevance to decision making.
A whole section of the book is dedicated to heuristics and biases. These are discussed in applications touching on choice under certainty and uncertainty and in relation to key behavioural topics like the role of base rate neglect. (This section is relevant to the discussions in Angner Chs 3 and 5, Cartwright Ch2). Overconfidence is likewise given an entire section while generally receiving a more concise treatment in behavioural economics texts (Angner Ch.5.7, Wilkinson & Klaes Ch.4.3).
The book’s penultimate section on choice covers the bulk of the material encountered in an introductory behavioural economics course. Here, Kahneman introduces prospect theory, its associated observations on risk preferences, the endowment effect and the foundations for phenomena such as honouring sunk costs. (There is little point in pinpointing chapter references here, as this material pretty much central to behavioural economics as such.)
The final section (two selves) discusses the experience of satisfaction over time. It is here that the peak end rule is covered alongisde differing valuations of a given experience depending on current or retrospective evaluation (cf.Angner Ch.9, Wilkinson & Klaes Ch.8, Cartwright Ch.4). These abstract discussions are illustrated with concrete examples. They are relevant to behavioural discussions of time inconsistent preferences and hyperbolic discounting.

What makes Kahneman’s book invaluable for students approaching behavioural economics is not only the author’s first hand experience with many of the foundational experiments, but the link it establishes between this field of economics and the underlying fundamental mechanisms in psychology.

References:
Angner, Eric (2016) “A Course in Behavioral Economics” second edition, Palgrave MacMillan, London and New York

Cartwright, Edward (2011) “Behavioral Economics” second edition, Routledge, London and New York

Kahneman, Daniel (2011) “Thinking fast and slow”, Penguin, London

Wilkinson, Nick and Klaes Matthias (2013) “An Introduction to Behavioral Economics” third edition, Palgrave MacMillan, London and New York

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