Wednesday, March 03, 2004


Everyone (almost) espouses interdisciplinary work in the social sciences and a few actually do something about it. Daniel Kahneman's Nobel lecture is in the Dec., 2003, American Economic Review. The piece is a wonderful exposition of significant progress at the intersections of economics and psychology. Offshoot behavioral economics is hot right now.

It even made the NY Times Magazine on June 8, 2003. One of the article's punchlines is reprinted in Bernard Saffran's "Recommendations for Further Reading" in the Fall, 2003 Journal of Economic Perspectives, under "Discussion Starters": "Interestingly, irrational- and rational-market experts provide much the same advice for investors: buy index funds that are pegged to broad swaths of the market rather than trying to play selected sectors. Then hold. You might expect that advice from efficiency mavens, but how do the behaviorists -- who say you should be able to exploit the crazy market players -- square the conservative circle? 'While behaviorists think that it is theoretically possible to beat the market,' Richard Thaler says, 'individual investors do not have the time or training to do that on their own, and finding superior skills among active mutual fund managers is not easy, either. So a reasonable strategy to adopt is to settle for average returns and low fees offered by index funds.'"

Behavioral economics pioneer Thaler applies old-fashioned Economic Thinking when it counts.