27 July 2012

Psychology and Economics

There are good reasons for keeping prospect theory out of introductory texts. The basic concepts of economics are essential intellectual tools, which are not easy to grasp even with simplified and unrealistic assumptions about the nature of economic agents who interact in markets. Raising questions about these assumptions even as they are introduced would be confusing, and perhaps demoralizing. It is reasonable to put priority on helping students acquire the basic tools of the discipline. Furthermore the failure of rationality that is built into prospect theory is often irrelevant to the predictions of economic theory, which work out with great precision in some situations and provide good approximations in many others.
-- Daniel Kahneman "Thinking, Fast and Slow"

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