2007-9-17

Any economic change is never a kind of pure economic operation process, instead,is a kind of bidirectional movement process of "Economic ideology," which inevitably goes along with sharp collision between new and old concepts and re-orientation of value of life.
        ----Kahneman

Kahneman, the founder of"Prospect Theory"

The ultimate object that people pursue shall be happiness, rather than money. The degree of people's bitterness suffering from loss is often higher than that of people's happiness resulting from gain. As people are facing with gain, they prefer to dodge the risk, while they are facing with loss,they prefer to take risks. The key to lose or win depends on anchor point. This is what Kahneman,the psychologist and Nobel Economics Prize Laureate in 2002,tells in his "Prospect theory". He provides people with a strict theory for researching about how to maximize happiness of people, which will be new development direction of Economics.

Kahneman has dual nationality of U.S.A and Israel. He was born in Tel Aviv of Israel in 1934, and finished his study in University of California-Berkeley and was awarded Dr degree. Kahneman assumed many duties,including professor of The Hebrew University of Jerusalem, professor of The University of British Columbia and professor of University of California-Berkeley etc. In addition,he still assumed psychology and public affairs professor of Princeton University (NJ).

Kahneman,who is near 70 years old,found the uncertainty of human's decision, i.e. he found that human's decision is often widely divergent from the anticipation made on basis of standard economic theory hypothesis. In fact,prior to Kahneman's obtaining the prize,people never supposed that he would obtain prize,at least never suppose that he would obtain economic prize, for he is purely a psychologist,rather than an economist. He ever joked that he never attended class on economics in his lifetime.

According to the news communiqu of Royal Swedish Academy of Sciences(RSAS),Kahneman "integrates the profound analysis on psychology with economics, which lays foundation for a new research area of economics. "

In daily life,many issues related with economics also relate with psychology. From personal shopping consumption to risk decisions of enterprise and from property loss compensation to making of national public policy,as to any economic activities involved decision making and psychological activities from decision maker,the economic activities can all be anal sized from angle of psychology. 

There are vivid examples in daily life. People often unconsciously spend more money on poor quality of goods sometimes. Take two breads for example,they have same ingredients and same taste,which are nearly identical but one is a bit larger than the other. Strangely,people are always willing to spend more money for buying the larger bread. Everyone think he or she is rational and has self judgment ability. People always believe that their decision making is right,especially when they to themselves:Oh, I have made a wise shopping today! In fact,their decision makings are not wise sometimes,it is very difficult to say that they have made wise shopping. 

Let's take a look at the experiment on ice cream. This is a simple choice problem. It is believed that even a primary student, who can distinguish from large and small and more and less,can make a decision. Now there are two cups of ice creams, one cup is 700 ml,the ice cream is filled in a 500 ml of box, and the box is so small that a huge tip of the ice cream is bulged out,which makes the ice cream seem to be on the verge of overflowing; another cup is a bit larger and is 800 ml, yet the ice cream is filled in a 1000 ml of box, the box is so large, and it looks like that the box is not filled up. Now, our question is:Which cup of ice cream would you prefer to spend more money on?

Now,perhaps without any hesitation you will say you would certainly spend more money on
800 ml of box of ice cream, on account that it is obviously 100 ml more than that in another box!Yet the result of experiement showed that people in daily life are not so wise. As the experiment was carried out in supermarket,the result made people surprised:when bid for two boxes of ice creams respectively, people would prefer to spend more money for buying 700 ml of ice cream,rather than 800 ml of ice cream. People would think that:the former is obviously more;it can not be filled in the box and seems to be on the edge of overflowing!

This was just the research content of professor Kahneman: Human being is indeed a kind of rational animal, yet the rationality of human being is limited. For example, when people go to buy ice cream,they have no ideas for figuring out carefully the real value of a box of ice cream and then buy it on basis of evaluation,instead, they utilize other easier evaluation clues for making judgment, for example,and vision difference is a kind of judgment criteria. People feel that the box with 700 ml of ice cream is full,so they are willing to spend more money on it.

However,businessman is very familiar with this kind of vision difference in daily life. They fully utilize people's psychology and produce plenty of effects looking "nice". For example, each ice cream cone of McDonald sells for $2. The whole screwy ice cream loftily piles outside of the cone,and it seems that the ice cream is plenty. In fact, you just take two bites and it will be eaten up. In addition, as to the French fries of Ken Fried Chicken(KFC),many people prefer to buy the small bag, for it seems that the small bag is a bit full, yet when you calculate them actually,it obviously worthies buying the large bag than the small one. If you still have doubt on it,you can buy two bags and calculate them carefully. 

In fact,It is not only us ordinary people who will make such mistakes,but also the government officials who will make such kind of mistakes as well and go certain degree of deviance. There is a true story ever happened, which deepens people's understanding on the theory of Kahneman and fully verifies its correctiveness. There was a city where two fire emergencies emerged in succession within half a year, which made plenty of people suffer from the fire emergencies. In the first fire emergency, a residential building caught fire, there were 50 residents in the residential quarter, among which 90% of residents' houses were destroyed by the fires. In the second fire emergency, the situation is worse--- a large area of fire emergency happened in a residential quarter that had 900 residents,among which 10% of residents' houses were destroyed by the fires. If you were an official of Bureau of Civil Affairs, and you only know one of the fire emergencies and know nothing about the other, in your opinion, how much should the Bureau of Civil Affairs support? Objectively, loss in the latter is obviously more serious. Yet as far as the assistance results are concerned,it surprises people that government provided $8 million for the first fire emergency assistance,while the government only provided $5 million for the latter fire emergency assistance. The deviance did not result from some other factors, but only resulted from the two figures of 90% and 10%. 

As for this case,explanation of Kahneman is:people will response to external stimulus under normal conditions. 

For example,Light, sound and temperature etc. By this time, previous experience will provide people with a referenced level, which can be referred to as reference point. Hence,when the external stimuli take place, people can make a judgment on basis of their past experiences. For example,when people intent to perceive an object,they can judge that it is hot or cool on basis of their touching and the past reference point for temperature. Likewise,this kind of rule can also be applied on other areas, such as health,prestige and wealth etc. For example,there are two different persons who get different pays; one may think that it's miserable for his life, which means his failure and poor, while the other will think that it means a big sum of money for him,which means his success and wealth. The difference between them perhaps lies in the differ of their previous economic levels. They had different consumption levels,experiences and living styles in the past,once they get same pay, they will feel differently. This is the reference point in heart of each person, which will influence decision making of people, and the influence is irrational. For example,the above mentioned case that spending more money for buying less ice cream.

The theory of Kahneman deeply influences each sector of social life. Though he is a psychologist,his winning of Nobel Economics Prize is based on actual achievements!

Interestingly, after he learned that he won Nobel Economics Prize in 2002,though Kahneman continually alleged that he was a psychologist,rather than an economist. Yet, as to the news about the prize,he forgot himself, he left without taking key with him and he locked himself outside of the house. As his friends asked him about how to deal with $500,000 premium, he joked:"even though I am so old,I can use this sum of money for doing many important things."