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Maps of Bounded Rationality: Psychology for Behavioral Economics Maps of Bounded Rationality: Psychology for Behavioral Economics by Daniel Kahneman The American Economic Review, 93(5), pp. 1449-1475, December 2003 Permission to make digital or hard copies of part or all of American Economic Association publications for personal or classroom use is granted without fee provided that copies are not distributed for profit or direct commercial advantage and that copies show this notice on the first page or initial screen of a display along with the full citation, including the name of the author. Copyrights for components of this work owned by others than AEA must be honored. Abstracting with credit is permitted. The author has the right to republish, post on servers, redistribute to lists and use any component of his or her work in other works. For others to do so requires prior specific permission from the author, who should be contacted first for permission to copy, translate, or republish, and subsequent permission of the AEA. Permission requests to the AEA should already include permission of the author. While the AEA does hold copyright, our policy is that the author's agreement be secured before contacting us. Permissions may be requested from the American Economic Association, 2014 Broadway, Suite 305, Nashville, TN 37203, or by e-mailing to [email protected]. Maps ofBounded Rationality: Psychologyfor Behavioral Economics † By DANIEL KAHNEMAN* Thework cited by the Nobel committee was hopeshave been realized to someextent, giving donejointly with Amos Tversky(1937– 1996) riseto anactive program of researchby behav- duringa longand unusually close collaboration. ioraleconomists (Thaler, 2000; Colin Camerer Together,we exploredthe psychology of intu- etal., forthcoming; for otherexamples, see itivebeliefs and choices and examined their Kahnemanand Tversky, 2000). boundedrationality. Herbert A. Simon(1955, Mywork with Tversky comprised three sep- 1979)had proposed much earlier that decision arateprograms of research, some aspects of makersshould be viewedas boundedly rational, whichwere carriedout with other collaborators. andhad offered a modelin which utility maxi- The rst exploredthe heuristics that people use mizationwas replacedby satis cing. Our re- andthe biases to which they are prone in vari- searchattempted to obtain a mapof bounded oustasks of judgmentunder uncertainty, includ- rationality,by exploring the systematic biases ingpredictions and evaluations of evidence thatseparate the beliefs that people have and the (Kahnemanand Tversky, 1973; Tversky and choicesthey make from theoptimal beliefs and Kahneman,1974; Kahneman et al., 1982). The choicesassumed in rational-agent models. The secondwas concernedwith prospect theory, a rational-agentmodel was ourstarting point and modelof choice under risk (Kahneman and themain source of our null hypotheses, but Tversky,1979; Tversky and Kahneman, 1992) Tverskyand I viewedour research primarily as andwith loss aversion in riskless choice (Kah- acontributionto psychology, with a possible nemanet al., 1990, 1991; Tversky and Kahne- contributionto economics as a secondaryben- man,1991). The third line of researchdealt with et. We were drawninto the interdisciplinary framingeffects and with their implications for conversationby economists who hoped that rational-agentmodels (Tversky and Kahneman, psychologycould be ausefulsource of assump- 1981,1986). The present essay revisits these tionsfor economictheorizing, and indirectly a threelines of research in light of recent ad- sourceof hypotheses for economicresearch vancesin the psychology of intuitivejudgment (RichardH. Thaler,1980, 1991, 1992). These andchoice. Many of the ideas presented here were anticipatedinformally decades ago, but theattempt to integrate them into a coherent approachto judgment and choice is recent. † Thisarticle is arevisedversion of the lecture Daniel Economistsoften criticize psychological re- Kahneman deliveredin Stockholm, Sweden, on December searchfor itspropensity to generate lists of 8,2002, when he received theBank of Sweden Prize in EconomicSciences inMemory of AlfredNobel. The article errors andbiases, and for itsfailure to offer a iscopyright© TheNobel Foundation 2002 and is published coherentalternative to therational-agent model. here withthe permission of theNobel Foundation. Thiscomplaint is only partly justi ed: psycho- *WoodrowWilson School, Princeton University, logicaltheories of intuitive thinking cannot Princeton,NJ 08544(e-mail: [email protected]). matchthe elegance and precision of formalnor- Thisessay revisitsproblems that Amos Tverskyand I mativemodels of belief and choice, but this is studiedtogether many years ago,and continued to discuss in justanother way of sayingthat rational models aconversationthat spanned several decades. Itbuilds on an analysisof judgment heuristics that was developedin col- are psychologicallyunrealistic. Furthermore, laborationwith Shane Frederick (Kahneman andFrederick, thealternative to simple and precise models is 2002).A differentversion was publishedin AmericanPsy- notchaos. Psychology offers integrativecon- chologist inSeptember 2003. For detailed comments onthis ceptsand mid-level generalizations, which gain versionI am gratefulto Angus Deaton, David Laibson, MichaelRothschild, and Richard Thaler. The usual caveats credibilityfrom theirability to explain ostensi- apply.Geoffrey Goodwin, Amir Goren,and Kurt Schoppe blydifferent phenomena in diversedomains. In providedhelpful research assistance. thisspirit, the present essay offers aunied 1449 1450 THEAMERICAN ECONOMIC REVIEW DECEMBER2003 treatmentof intuitive judgment and choice, ationsand overt behavior also goes on. We do whichbuilds on anearlierstudy of therelation- notexpress every passing thought or act on shipbetween preferences and attitudes (Kahne- everyimpulse. But the monitoring is normally manet al., 1999) and extends a modelof lax,and allows many intuitive judgments to be judgmentheuristics recently proposed by Kah- expressed,including some that are erroneous nemanand Shane Frederick (2002). The guid- (Kahnemanand Frederick, 2002). Ellen J. ingideas are (i) thatmost judgments and most Langeret al. (1978) provided a well-known choicesare madeintuitively; (ii) that the rules exampleof what she called “ mindlessbehav- thatgovern intuition are generally similar to the ior.”In her experiment, a confederatetried to rulesof perception.Accordingly, the discussion cutin line at a copyingmachine, using various ofthe rules of intuitive judgments and choices preset“ excuses.”The conclusion was thatstate- willrely extensively on visual analogies. mentsthat had the form ofan unquali ed re- SectionI introducesa distinctionbetween questwere rejected(e.g., “ Excuseme, may I use twogeneric modes of cognitivefunction, corre- theXerox machine?” ), butalmost any statement spondingroughly to intuition and reasoning. thathad the general form ofan explanation was SectionII describesthe factors that determine accepted,including “ Excuseme, may I usethe therelative accessibility of differentjudgments Xeroxmachine because I wantto make cop- andresponses. Section III relatesprospect the- ies?”The super ciality is striking. oryto the general proposition that changes and Frederick(2003, personal communication) differencesare moreaccessible than absolute hasused simple puzzles to studycognitive self- values.Section IV explainsframing effects in monitoring,as inthefollowing example: “ Abat termsof differential salience and accessibility. anda ballcost $1.10 in total. The bat costs $1 SectionV reviewsan attribute substitution morethan the ball. How muchdoes the ball modelof heuristic judgment. Section VI de- cost?”Almost everyone reports an initial ten- scribesa particularfamily of heuristics, called dencyto answer “ 10cents” because the sum prototypeheuristics. Section VII discussesthe $1.10separates naturally into $1 and 10 cents, interactionsbetween intuitive and deliberate and10 centsis aboutthe right magnitude. Fred- thought.Section VIII concludes. erickfound that many intelligent people yield to thisimmediate impulse: 50 percent(47/ 93)of a I.The Architectureof Cognition: Two Systems groupof Princeton students and 56 percent (164/293)of studentsat theUniversity of Mich- Thepresent treatment distinguishes two igangave the wrong answer. Clearly, these re- modesof thinking and deciding, which corre- spondentsoffered their response without rst spondroughly to theeveryday concepts of rea- checkingit. The surprisingly high rate of errors soningand intuition. Reasoning is what we do inthis easy problem illustrates how lightly the whenwe computethe product of 17by258, ll outputof effortlessassociative thinking is mon- anincometax form, orconsulta map.Intuition itored:people are not accustomed to thinking isat work when we readthe sentence “ Bill hard,and are oftencontent to trusta plausible Clintonis a shyman” as mildly amusing, or judgmentthatquickly comes to mind. Re- whenwe ndourselves reluctant to eat a piece markably,Frederickhas found that errors in ofwhatwe knowto be chocolate that has been thispuzzle and in others of the same type formedin theshape of acockroach(Paul Rozin were signicant predicto rs ofhigh discount andCarol Nemeroff, 2002).Reasoning is done rates. deliberatelyand effortfully, but intuitive thoughts Inthe examples discussed so far, intuition seemto come spontaneously to mind, without was associatedwith poor performance, but in- conscioussearch or computation, and without tuitivethinking can also be powerfuland accu- effort.Casual observation
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