A few months ago, I told you about Vernon Smith, who won last year's Nobel prize for Economics. Actually, Smith won only half of the prize. He shared the other half with a psychologist named Daniel Kahneman. Kahneman was the first psychologist to ever win a Nobel prize in Economics. Whereas Vernon Smith studied the impact individuals have on markets, Kahneman studied human judgment and decisions on an individual basis.

One of the main tenets of economic theory is that human beings are rational creatures: When faced with an opportunity to improve their well-being, human beings will always be driven to maximize their pleasure. But if acting on our New Year's resolutions is supposed to improve our well-being, why are we so bad at carrying them out?

The reason has to do with how our tendency to focus on the benefits of our actions, not the consequences of our inactions. "What's the difference?" you might ask. "Isn't the benefit of action simply the opposite side of inaction?". Not when it comes to the way our mind evaluates risk, claims Kahneman.

Time for a little bit of history. In 1738, the famous Swiss mathematician Daniel Bernoulli wrote an essay in which he introduced the economic theory of utility. Human beings, Bernoulli argued, are governed by self-interest. As such, they exhibit rational behavior which is aimed at maximizing their own pleasure. Bernoulli gave an example of a spice merchant contemplating sending a ship from Amsterdam to St. Petersburg during a time of year where rough seas meant there was a 5% chance the ship would sink on its way. How, asked Bernoulli, does the merchant evaluate this risk? Bernoulli's answer was that the merchant, like the rest of us, thought about risk in terms of wealth: How much more wealthy will he be if the ship arrives in St. Petersburg? What will the impact on his wealth be if he buys insurance? What will it be if he doesn't buy insurance?

Bernoulli's utility theory is, till this day, accepted as one of the tenets of Economics. But there's only one problem with utility theory: It's wrong.

What Daniel Kahneman showed, together with the late psychologist Amos Tversky, was that people evaluate risk not in terms of their states of wealth, but in terms of loss and gain. And when people evaluate risk in terms of loss and gain, they do so irrationally.

To see why, let's take a look at one of Kahneman's classic experiments. Let's say we toss a coin. If it's tails, you lose $10. "How much," asks Kahneman, "would you have to gain on winning in order for this gamble to be acceptable to you?". It turns out that people want more than $20 before the gamble is acceptable to them. Now imagine I framed the gamble differently. Consider a world where you have your current assets minus $10. Now consider a world where you have your current assets pluse $10. Aren't these two worlds exact opposites? And if you agree that they are, then why aren't people happy with a gamble that pays them $10 if they win and takes $10 if they lose? Why do we need to be promised so much more if we win than if we lose?

The answer is that when it comes to taking risky decisions, they don't think in terms of states of wealth, but in terms of gains and losses. And the prospect of losing carries a lot more weight than the prospect of winning. As much as people like to win, they hate to lose even more.

So what does that have to do with your New Year's resolutions? Everything.