In 1971, the psychologists Daniel Kahneman and Amos Tversky ran a simple experiment. They told participants that a disease was expected to kill 600 people and asked them to choose between two public health programs. Program A would save exactly 200 people. Program B had a one-in-three chance of saving all 600 and a two-in-three chance of saving none. Most people chose A, i.e., they preferred the certain outcome. Then Kahneman and Tversky rephrased the choice. Program C would result in exactly 400 deaths. Program D had a one-in-three chance that nobody would die and a two-in-three chance that all 600 would die. Statistically, the two programs are identical, but this time, most people chose D. Nothing changed except how the outcomes were described. Classical economics assumes that people are rational agents who consistently maximize their own utility. Given a choice, they weigh expected outcomes, discount the future at a consistent rate, and select whatever serves them best. This is, in…
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