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STOCKHOLM, Thursday (AFP) The 200-year-old view of man as a rational economic being may have always seemed too good to be true, but it took the emergence of modern psychology to prove that people are more stupid, but also less selfish, than old-style economists would have us believe.

If we are so rational, then why do we drive for many miles for a few dollars' discount on minor purchases, but won't do so to save the same amount for a more expensive item? Why do we take out costly insurance for cheap household items? Or if we are so self-interested, then why do we leave tips or return found wallets even when nobody is looking? These questions bugged this year's winners of the Nobel Prize for Economics, Daniel Kahneman and Vernon L. Smith, enough to devote their research to finding out how humans really deal with choices about money, thereby laying the foundations for two new areas of research, economic psychology and experimental economics.

Kahneman, a US-Israeli psychologist, showed in a series of studies that people are incapable of fully analyzing complex decision situations, in particular when they are faced with uncertainty, and will revert instead to back-of-envelope calculations or rules of thumb.

This explains, for example, why investors are fooled time and time again into believing that a successful fund manager for two years running will also outperform the index in future. "Such short-sightedness in interpreting data may well help clarify various phenomena in financial markets that are difficult to explain with prevailing models, such as the ostensibly unmotivated large fluctuations to which stock markets are often exposed," the Swedish Academy of Sciences said in its comment on Kahneman's work.

Because information suggesting potential losses provokes greater stress among investors than data indicating gains, evasive reactions to loss - selling - often cause markets to fall faster than they rise.

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