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Author
F. Heukelom
Year
2007
Title
Kahneman and Tversky and the Origin of Behavioral Economics
Number of pages
23
Publisher
Amsterdam: Faculteit Economie en Bedrijfskunde
Serie
Tinbergen Institute Discussion Paper
Volume | Edition (Serie)
TI 2007-003/1
Document type
Working paper
Faculty
Faculty of Economics and Business (FEB)
Institute
Amsterdam School of Economics Research Institute (ASE-RI)
Abstract
Kahneman and Tversky and their behavioral economics stand in a long tradition of applying
mathematics to human behavior. In the seventeenth century, attempts to describe rational
behavior in mathematical terms run into problems with the formulation of the St. Petersburg
paradox. Bernoulli’s celebrated solution to use utility instead of money marks the beginning
of expected utility theory (EUT). Bernoulli’s work is taken up by psychophysics which in turn
plays an important role in the making of modern economics. In the 1940s von Neumann and
Morgenstern throw away Bernoulli and psychophysics, and redefine utility in monetary terms.
Relying on this utility definition and on von Neumann and Morgenstern’s axiomatic
constraints of the individual’s preferences, Friedman and Savage attempt to continue
Bernoulli’s research. After this fails economics and psychology go separate ways. Economics
employs Friedman’s positive-normative distinction; psychology uses Savage’s normative descriptive distinction. Using psychophysics Kahneman and Tversky broaden the normative descriptive distinction and argue with increasing strength for a descriptive theory of rational behavior. A prominent part of contemporary behavioral economics is founded upon the export
of Tversky and Kahneman’s program to economics. Within this research, two different
branches of research can be observed. One branch continues Kahneman and Tversky’s search
for a descriptive theory of rational behavior and extends the normative-descriptive distinction
with a prescriptive part. A second branch takes Tversky and Kahneman’s work as a
falsification of positive economics. It argues that economics should take account of the
psychological critique but stick to rigorous mathematical model building and Friedman’s
positive-normative distinction.

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Permalink
http://hdl.handle.net/11245/1.287352

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