Bucking trends earns Nobel prize

Two economists who challenged the dominance of rational "economic man" as the basis for studying the subject were today named as joint winners of the Nobel Prize.

Daniel Kahneman, of Princeton University, has adapted insights from psychological research into economics and established that human decision-making in practice departed from what standard economic theory predicted. Fellow American, Vernon L Smith, of George Mason University, Virginia, "established laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms", said the Royal Swedish Academy of Sciences in awarding the prize for economic sciences .

Tel Aviv-born Professor Kahneman, 68, who is a US and Israeli citizen, was said to have integrated insights into psychological research "especially concerning human judgment and decision-making under uncertainty".

Professor Smith, 75, challenged orthodox economics from another direction by pioneering "wind tunnel tests" to predict how markets would react to new conditions.

The Swedish academy said today: "Traditionally, much of economic research has relied on the assumption of a 'homo oeconomicus' motivated by self-interest and capable of rational decision-making. Economics has also been widely considered a non-experimental science, relying on observation of real-world economies rather than controlled laboratory experiments.

"Nowadays, however, a growing body of research is devoted to modifying and testing basic economic assumptions; moreover, economic research relies increasingly on data collected in the lab rather than in the field. This research has its roots in two distinct, but currently converging, areas: the analysis of human judgment and decision-making by cognitive psychologists, and the empirical testing of predictions from economic theory by experimental economists. This year's laureates are the pioneers in these two research areas."

Professor Kahneman had laid the foundation for a new field of research, said the Nobel statement.

"Kahneman's main findings concern decision-making under uncertainty, where he has demonstrated how human decisions may systematically depart from those predicted by standard economic theory. Together with Amos Tversky (deceased in 1996), he has formulated prospect theory as an alternative, that better accounts for observed behaviour. Kahneman has also discovered how human judgment may take shortcuts that systematically depart from basic principles of probability. His work has inspired a new generation of researchers in economics and finance to enrich economic theory using insights from cognitive psychology into intrinsic human motivation."

Vernon Smith laid the foundation for the field of experimental economics, according to the academy. "He has developed an array of experimental methods, setting standards for what constitutes a reliable laboratory experiment in economics. In his own experimental work, he has demonstrated the importance of alternative market institutions, eg, how the revenue expected by a seller depends on the choice of auction method."

Professor Smith also spearheaded "wind-tunnel tests", where trials of new, alternative market designs - for example when deregulating electricity markets - are carried out in the lab before being implemented in practice. "His work has been instrumental in establishing experiments as an essential tool in empirical economic analysis."