Winning the Nobel prize in economics and then not mentioning “economics” during your Nobel lecture is unusual. Yet in 2002 Daniel Kahneman, a social psychologist, did just that.

Kahneman, who died last week, revolutionised economics without being an economist himself. Collaborating with Amos Tversky, he advanced “behavioural economics” by unveiling humans’ vulnerability to systematic biases — particularly our misjudging probabilities and being swayed by how decisions are framed. His landmark book, Thinking, Fast and Slow, popularised these ideas, contrasting humans’ rapid, instinctual, emotive thinking (“System 1”) with our slower, deliberate, analytical mode of reasoning (“System 2”).

Kahneman also studied people’s conceptions of fairness around firms’ pricing decisions, research that helps explain contentious debates today. In one 1986 survey, he and his co-authors presented interviewees with a scenario: “A hardware store had been selling snow shovels for $15. The morning after a large snowstorm, the store raises the price to $20.” Fair or unfair?

A massive 82 per cent of those surveyed deemed this price hike unfair, despite surging demand for snow shovels. Later questions showed this instinctive reaction wasn’t limited to weather emergencies. Faced with a hypothetical shortage of Red Delicious apples, a large majority also opposed a grocer raising prices upon receiving a single shipment to sell.

Digging deeper using other well-crafted questions, Kahneman and Co uncovered an important insight: on average, the public think businesses are entitled to set prices to receive a reference, or normal, profit margin. We deem it unfair to raise prices above normal levels if that results in enhanced profits. In simpler terms: we consider it OK for businesses to raise prices to protect profits after wholesale or production costs spike suddenly, but not when surging demand drives product shortages.

This widely held fairness axiom flies in the face of standard economics. Economists think excess demand will naturally drive up prices to eliminate shortages. More money chasing a product enables current sellers to charge more, but it’s this price hike that facilitates companies to ramp up production, pay overtime, or invest in new capacity to meet the higher demand and “clear the market”. Prevent the price from rising, say, through price controls, and you get shortages or rationing.

Public hostility to this market reasoning can be seen in various controversies. After Covid-19 hit, many railed against sellers jacking up facemask prices, despite surging demand. Amazon marketplace data showed new facemask suppliers had much higher prices than established sellers, hinting at a reputational leash imposed by customers of incumbent businesses. Many wanted price controls or fines to prevent sellers from “profiteering”; economists warned that this would prolong shortages.

Since then, we’ve seen panics over dynamic pricing — where algorithms adjust prices to match fluctuating demand. Harry Styles’s fans went crazy in 2022 when Ticketmaster’s concert ticket prices surged with exploding demand. There’s been a backlash as pubs trial dynamic pricing too (although Kahneman’s work implies that firms can get around our hostility by labelling higher prices as “normal” and lower prices as discounts, as in “happy hour”).

More strikingly, Kahneman’s insights also explain the allure of the “greedflation” myth. While consumers don’t mind price hikes by businesses to recoup higher energy costs, many blame corporations when excess money creation produces inflation. That’s because too much money in circulation drives up total spending, creating excess demand in certain sectors, raising prices and short-term profits for some firms, at least until wages and input costs catch up.

Ignoring these macroeconomic forces, we tend to judge each firm’s decision on price in isolation, forgetting that companies are disciplined in what they can charge by competition and consumers’ ability to pay. When we see higher prices alongside higher short-term profits, the heuristic Kahneman identifies makes us think “greed”. The result is we mistake a symptom of monetary inflation for its cause, demanding price controls or excess profit taxes, so letting central bankers off the hook for their errors.