Enter Amos Tversky and Daniel Kahneman, psychologists at the Hebrew University in Jerusalem. Together, in the late 1960s, they had set off to confirm their suspicion that the weird self-defeating stuff that people do isn't random and inexplicable but fundamental to human nature. More to the point, human beings were not just occasionally irrational, but systematically irrational. They had predictable biases -- for instance, they were inclined to draw radical conclusions from tiny amounts of information. Their preferences were unstable. When faced with a choice between two things, they responded not to the things themselves but to descriptions of those things. Perhaps most significantly, people responded very differently when a choice was framed as a loss than when it was framed as a gain. Tell a person that he had a 95 percent chance of surviving some medical procedure and he was far more likely to submit to it than if you told him he had a 5 percent chance of dying.
Tversky and Kahneman's work sold a generation of intellectuals, including a lot of smart young economists, on a new model of human nature. Thaler, for his part, didn't need to be sold: the Israelis had him at hello. He took their work, and championed them, and created an entire field.
Twenty years ago, after Thaler was given a tenured job at the University of Chicago, a newspaper reporter asked an older, more distinguished Chicago economist, who clearly saw little of use in behavioral economics, why he hadn't blocked Thaler's appointment. "Because each generation has got to make its own mistakes," he said. Today Thaler is the president of the American Economic Association, and a perennial candidate for the Nobel. His rise may be just another example of the power of human misjudgment. Or he might be onto something. Either way, he's been wildly disruptive.
Michael Lewis is a Bloomberg View columnist. He is a contributing editor at Vanity Fair, and his books include “Flash Boys: A Wall Street Revolt,” “Moneyball: The Art of Winning an Unfair Game” and “Liar’s Poker.”
This column was providedl by Bloomberg News.