Psychology's ambassador to economics

The father of behavioural economics Daniel Kahneman talks to VIKRAM KHANNA about cognitive illusions, investor irrationality and measures of well-being.

A bat and a ball together cost $1.10. The bat costs $1 more than the ball. How much does the ball cost?
Did you say 10 cents?

More than half of a Princeton University economics class gave the same answer (as did most of my friends), and it is wrong.

'If I offer you a deal: I toss a coin and if it's heads, you will win $200, but if it's tails you will lose $100. Will you take the bet?

'The majority of people say no. They don't consider it attractive. They weigh pleasure against pain, and for most people, the pain of losing $100 outweighs the pleasure of winning $200. Losses are given a weight of more than 2:1 compared with gains. This is loss aversion.

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Kahneman: Master of the imperfect mind

Daniel Kahneman won a Nobel for explaining why people habitually make the wrong moves when investing or spending their money. Who better to tell you how to do it right?
It isn't often that a psychologist helps explain personal finance, but Daniel Kahneman isn't an ordinary psychologist. In 2002 he won a Nobel Prize in economics for his research into how people confront uncertainty.

Raised in France and Israel and formerly a professor at the Hebrew University of Jerusalem, UC-Berkeley and Princeton, Kahneman has spent half a century studying how the human mind works - or fails to.

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Disclosure: thanks to David for the original reference