The founders

For a long time, economics assumed a perfectly rational human being. Calculating, cold, never fooled by themselves.

A few researchers showed that this character does not exist. They are the founders of behavioural finance.

First, two Israeli psychologists, Daniel Kahneman and Amos Tversky. They worked together from the late sixties.

In nineteen seventy-nine, they published prospect theory. A paper that became one of the most cited in economics.

First idea: we do not judge wealth, but a gap. A gain or a loss, compared with a reference point.

Second idea: losses weigh more than gains. About twice as much, by their measurements.

Third idea: we distort probabilities. Tiny chances seem bigger to us than they are.

That is why the same person can buy a lottery ticket and an insurance policy. In both cases, they overrate a small probability.

In two thousand two, Kahneman received the Nobel prize in economics. Tversky had died in nineteen ninety-six, and the prize is not awarded posthumously.

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Next, an American economist, Richard Thaler. He collected the behaviours that theory said were impossible.

He is the one who described mental accounting: those drawers where we sort money, and which change our decisions.

In two thousand eight, with the legal scholar Cass Sunstein, he published Nudge. A gentle push: presenting a choice differently, without imposing anything.

Default enrolment in retirement savings is a nudge. Nobody is forced. But the right choice becomes the easiest.

Thaler received the Nobel prize in two thousand seventeen.

Finally, Robert Shiller. He looks at whole markets, and their manias.

As early as nineteen eighty-one, he showed that share prices move far more than the dividends they are supposed to reflect.

In March two thousand, he published Irrational Exuberance. The phrase came from a speech by Alan Greenspan, chairman of the Federal Reserve.

The book came out almost at the peak of the internet bubble. In the following months, the Nasdaq collapsed.

In a new edition, in two thousand five, he warned about American house prices. Two years later, the crisis began.

He received the Nobel prize in two thousand thirteen. The same year as Eugene Fama, the great defender of market efficiency.

These researchers did not prove markets are mad. They showed that the people who make them are human.

And that our mistakes are not random. They go in predictable directions.

That is good news. What is predictable can be prepared for: written rules, default options, automatic payments.

Behavioural finance does not make you perfect. It teaches you where you will go wrong. That is already a lot.