I was at a fascinating session last night, with Nobel
Laureate Daniel Kahneman in conversation with a leading thinker from the
advertising world, Rory Sutherland of Ogilvy and Mather. Kahneman was talking about his book *Thinking Fast and Slow*, a summary of his
life’s work.

I am a great admirer of Kahneman. Trained as a psychologist, along with his
co-Laureate Vernon Smith, he more or less created experimental and applied
behavioural economics. He had the
extraordinary idea (!) that instead of theorising a priori about how ‘rational’
people ought to behave, we should observe how people really do behave.

Yet despite his scientific standing, economic theory has so
far made very little use of his results.
Theoretical journals are still replete with articles full of calculus,
in which agents (economist-speak for ‘people’) are reasoning very well, and
taking the ‘optimal’ decision.

So there is a schizophrenia in the profession of
economics. Nobel prizes are awarded to
people whose work shows empirically that in general people do not
optimise. Theoretical work carries on in
the same old way, assuming that they do.

Why is this? Perhaps
Kahneman’s own work gives us an insight.
He distinguishes between System 1 and System 2 thinking. System 1 is when the brain is almost on
autopilot. He illustrated this in his
talk last night. ‘If I mention the word
“vomit”, your brain reacts. If I ask
“what is 2 plus 2?”, the answer comes in your mind automatically’. System 2 thinking requires much more effort –
most people, he said, cannot multiply 24 and 17 whilst at the same time negotiating
a right turn in heavy traffic.

Actually, I guess that most economists *could* do this. Many of them
could even carry out the maths required to optimise a particular function at
the same time! In other words,
economists are so steeped in calculus, they have performed these mathematical
operations so many time, that for them, the maths of calculus has become System
1 thinking.

So when economists approach a problem it has become second
nature to write down some functions and to maximise (or minimise) them. It is as instinctive as adding 2 and 2 is for
more normal people.

But Kahneman’s empirical insights require hard System 2
thinking. You are trying to understand a
particular problem. Well, exactly how do
agents behave in this situation? What
rules are they following, how do we translate them into maths, can we solve the
resulting equations or do we need numerical solutions?

In short, it is much harder to do Kahneman-inspired theory
than it is to maximise a utility function.
In economic theory, System 1 thinking rules!

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