Are People Probabilistically Challenged?
Daniel Kahneman’s recent book, Thinking, Fast and Slow, is a must-read for any scholar or policymaker interested in behavioral economics. Behavioral economics is a young, but already well-established, discipline that pervasively affects law and legal theory. Kahneman, a 2002 Nobel Laureate, is the discipline’s founding father. His pioneering work with Amos Tversky and others challenges the core economic concept of expected utility, which serves to determine the value of people’s prospects. Under mainstream economic theory, the value of a person’s prospect equals the prospect’s utility upon materialization (U) multiplied by the probability of the prospect materializing (P). When the prospect is advantageous, its utility is a positive sum that augments the person’s well-being. When the prospect is disadvantageous, its utility is a negative sum (a disutility) that decreases the person’s well-being. Under both scenarios, the full amount of the person’s utility or disutility is discounted by the prospect’s probability of not materializing. Economic theory holds that the expected-utility formula, P • U, ought to determine a rational person’s choice among available courses of action. The action yielding the highest expected utility is the one that the person ought rationally to prefer over the alternatives.