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Daniel Kahneman's long-time collaboration with fellow psychologist Amos Tversky, and their work on decision theory, took on a new dimension when economist Richard Thaler, of the University of Chicago, became interested in how their findings could be applied to finance and economics. "The founding text of behavioral economics was the first article, in 1980, in which Thaler presented a series of vignettes that challenged fundamental tenets of consumer theory," says Kahneman. In this excerpt from his Nobel biography (www.nobel.se), Kahneman recounts his introduction to Thaler and Thaler's experiment that illustrates "mental accounting":
Richard Thaler was a young economist, blessed with a sharp and irreverent mind. While still in graduate school, he had trained his ironic eye on his own discipline and had collected a set of pithy anecdotes demonstrating obvious failures of basic tenets of economic theory in the behavior of people in general-and of...