Daniel Kahneman

Standard finance theory assumes investors are rational. Daniel Kahneman is the psychologist who showed, with real evidence, that they usually are not. He also helped build a better model of how people actually decide.

The workbook credits him, together with Richard Thaler, for bringing behavioural finance into the mainstream. With Amos Tversky, Kahneman also co-wrote Prospect Theory (1979). This is the workbook's main model for how people weigh gains and losses when the outcome is uncertain.

Two distinct contributions, both named directly in the workbook:

1. Nobel laureate status (2002). The workbook lists Daniel Kahneman (2002) and Richard Thaler (2017) together as the Nobel laureates credited with bringing behavioural finance to the forefront.
2. Prospect Theory (1979), with Amos Tversky. This describes how people choose between risky alternatives, in two phases: an early framing phase, where heuristics are used for a preliminary read of the choices on offer, and a later phase where the framed prospects are evaluated and chosen. It explains how gains and losses are weighed and how uncertain outcomes are assessed — the theoretical basis for loss aversion, the finding that losses are felt more powerfully than equivalent gains.

The workbook's broader point in citing Kahneman is structural: standard finance assumes investors are rational, risk-averse, self-interested utility maximisers who update beliefs rationally as new information arrives. Kahneman's body of work is the primary evidence that real investor behaviour departs from every one of those assumptions.

Illustrative application of Prospect Theory's framing idea.

Two advisers present the same mutual fund to a client in different ways. Adviser A says: "this fund has a 70% chance of beating its benchmark over five years." Adviser B says: "this fund has a 30% chance of underperforming its benchmark over five years." These are mathematically identical statements — 70% and 30% are complements of each other — but Kahneman and Tversky's framing research predicts clients will react to them differently: the "30% chance of underperforming" framing tends to feel more threatening than the "70% chance of beating" framing, even though nothing about the fund has changed.

This is exactly the kind of gap between the rational, information-only view of standard finance and the psychologically real behaviour that Kahneman's work — cited by name in the workbook — set out to explain.

Chapter 16 (Basics of Behavioural Finance), section 16.1, names Kahneman and Thaler as the Nobel laureates behind the field, and section 16.2.2 credits Kahneman and Tversky with Prospect Theory (1979). Expect a recall question naming Kahneman's Nobel year, his co-author on Prospect Theory, or the two phases of choice under that theory.

• Kahneman's Nobel was 2002; Thaler's was 2017 — the workbook cites both years, and they are frequently swapped in distractor options.
• Prospect Theory is co-authored with Amos Tversky (1979), not Thaler — a common mix-up, since Thaler is the other name attached to behavioural finance in this chapter.
• The two phases of Prospect Theory are framing, then evaluation/choice — not "gain" and "loss" as separate phases.
• Kahneman is a psychologist, and behavioural finance is described as sitting within behavioural economics more broadly — the workbook is explicit about this lineage.