Daniel Kahneman and Vernon Smith
Citation: For having integrated insights from psychological research into economic science (Kahneman) and for having established laboratory experiments as a tool in empirical economic analysis (Smith).
The key idea
Kahneman: prospect theory — people are loss-averse, weight probabilities non-linearly, frame matters. Smith: experimental markets reach competitive equilibrium remarkably fast even with few traders.
The explanation
Kahneman and Tversky's prospect theory (1979) replaced expected utility with a value function that is concave for gains, convex for losses, and steeper for losses — capturing the systematic violations of EU documented in the Allais Paradox. Smith's experimental economics showed that double-auction markets converge to competitive equilibrium with surprisingly few traders, validating Hayek's price-as-information argument.
Why Africa should care
Prospect theory is the framework behind every behavioural finance product in African markets: M-Shwari's 'lock savings' uses loss aversion; M-Kopa's daily-payment solar uses present-bias mitigation; the Hustler Fund's framing as 'access' vs 'debt' uses framing effects. Loss aversion explains why African smallholders under-insure despite high realised losses — premium feels like a sure loss, payout an uncertain gain.
How to use it
When designing financial products for African consumers, exploit loss aversion (commitment savings), present-bias mitigation (defaults, automated transfers), and reference-dependence (framing premiums as discounts). Behavioural design routinely doubles take-up vs neoclassical product design.
Canonical works
- Daniel Kahneman and Amos Tversky (1979) "Prospect Theory: An Analysis of Decision under Risk" Econometrica
- Daniel Kahneman (2011) "Thinking, Fast and Slow" Farrar, Straus and Giroux
- Vernon L. Smith (1962) "An Experimental Study of Competitive Market Behavior" Journal of Political Economy
More from Behavioural, empirical, institutional · 2000-2009
- 2000James Heckman and Daniel McFadden
Heckman: selection bias has structure and can be corrected. McFadden: the multinomial logit and conditional logit make discrete-choice data (yes/no, which-brand) econometrically tractable.
- 2001George Akerlof, Michael Spence, and Joseph Stiglitz
Akerlof: in markets with information asymmetry, bad goods drive out good ones (the lemons problem). Spence: education can signal innate ability even if it produces nothing. Stiglitz: insurance markets unravel under asymmetric information; screening contracts emerge in equilibrium.
- 2003Robert Engle and Clive Granger
Engle: ARCH/GARCH models — volatility clusters, time-varies, can be forecast. Granger: cointegration — non-stationary series can share a stationary long-run relationship; pairs trading and error-correction modelling follow.
- 2004Finn Kydland and Edward Prescott
Time inconsistency: optimal policy announced today becomes sub-optimal tomorrow once private agents have reacted. Real Business Cycle theory: business cycles can arise purely from technology shocks under flexible prices.
- 2005Robert Aumann and Thomas Schelling
Aumann: repeated games support cooperation via the Folk Theorem; common knowledge is more subtle than it seems. Schelling: focal points solve coordination problems; tipping models explain segregation; deterrence requires credible commitment.