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We have spending money, general savings, earmarked savings for our children’s education or for medical emergencies.
The Econs of the rational-agent model do not resort to mental accounting:
they have a comprehensive view of outcomes and are driven by external incentives.
For Humans, mental accounts are a form of narrow framing; they keep things under control and ...
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An ironic example that Thaler related in an early article remains one of the best illustrations of how mental accounting affects behavior:
An Econ would realize that the ticket has already been paid for and cannot be returned. Its cost is “sunk” and the Econ would not care whether he had bought the ticket to the game or got it from a friend (if Econs have friends). To implement this rational behavior, System 2 would have to be aware of the counterfactual possibility:
As might be expected, finance research has documented a massive preference for selling winners rather than losers—a bias that has been given an opaque label: the disposition effect.
The disposition effect is an instance of narrow framing.
A rational agent would have a comprehensive view of the portfolio and sell the stock that is least likely to do well in the future, without considering whether it is a winner or a loser.
At least in the United States, taxes provide a strong incentive: realizing losses reduces your taxes, while selling winners exposes you to taxes.
The decision to invest additional resources in a losing account, when better investments are available, is known as the sunk-cost fallacy, a costly mistake that is observed in decisions large and small.
Driving into the blizzard because one paid for tickets is a sunk-cost error.
They do know that she does not carry the same mental accounts and is therefore better able to ignore the sunk costs of past investments in evaluating current opportunities.
The sunk-cost fallacy keeps people for too long in poor jobs, unhappy marriages, and unpromising research projects.
regret is “accompanied by feelings that one should have known better, by a sinking feeling, by thoughts about the mistake one has made and the opportunities lost, by a tendency to kick oneself and to correct one’s mistake, and by wanting to undo the event and to get a second chance.”
Intense regret is what you experience when you can most easily imagine yourself doing something other than what you did.
Regret is one of the counterfactual emotions that are triggered by the availability o...
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The key is not the difference between commission and omission but the distinction between default options and actions that deviate from the default.
The what-if? thought that occurs to any parent who deliberately makes such a trade is an image of the regret and shame he or she would feel in the event the pesticide caused harm.
Daniel Gilbert and his colleagues provocatively claim that people generally anticipate more regret than they will actually experience, because they underestimate the efficacy of the psychological defenses they will deploy—which they label the “psychological immune system.”
Their recommendation is that you should not put too much weight on regret; even if you have some, it will hurt less than you now think.
Poignancy (a close cousin of regret) is a counterfactual feeling, which is evoked because the thought “if only he had shopped at his regular store…” comes readily to mind.
The familiar System 1 mechanisms of substitution and intensity matching translate the strength of the emotional reaction to the story onto a monetary scale, creating a large difference in dollar awards.
The emotional reactions of System 1 are much more likely to determine single evaluation; the comparison that occurs in joint evaluation always involves a more careful and effortful assessment, which calls for System 2.
Like many other difficult questions, the assessment of dollar value can be solved by substitution and intensity matching.
The dollar question is difficult, but an easier question is readily available. Because you like dolphins, you will probably feel that saving them is a good cause.
The next step, which is also automatic, generates a dollar number by translating the intensity of your liking of dolph...
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In experiments, the dolphins attracted somewhat larger contributions in single evaluation than did the farmworkers.
Next, consider the two causes in joint evaluation. Which of the two, dolphins or farmworkers, deserves a larger dollar contribution?
The narrow framing of single evaluation allowed dolphins to have a higher intensity score, leading to a high rate of contributions by intensity matching.
In joint evaluation people show a solid preference for the farmworkers and a willingness to contribute substantially more to their welfare than to the protection of a likable non-human species.
As we have seen, rationality is generally served by broader and more comprehensive frames, and joint evaluation is obviously broader than single evaluation.
Salespeople quickly learn that manipulation of the context in which customers see a good can profoundly influence preferences.
was surprised to learn from Cass Sunstein that jurors who are to assess punitive damages are explicitly prohibited from considering other cases. The legal system, contrary to psychological common sense, favors single evaluation.
U.S. government agencies including the Occupational Safety and Health Administration and the Environmental Protection Agency.
He concluded that “within categories, penalties seem extremely sensible, at least in the sense that the more serious harms are punished more severely.
the largest penalties are for repeate...
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the next largest for violations that ar...
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The fine for a “serious violation” of the regulations concerning worker safety is capped at $7,000,
while a violation of the Wild Bird Conservation Act can result in a fine of up to $25,000.
As in the other examples in this chapter, you can see the absurdity only when the two cases are viewed together in a broad frame.
The next two sentences both describe the outcome: “Italy won.” “France lost.” Do those statements have the same meaning?
Their beliefs and preferences are reality-bound. In particular, the objects of their choices are states of the world, which are not affected by the words chosen to describe them.
The two sentences evoke markedly different associations.
“Italy won” evokes thoughts of the Italian team and what it did to win.
“France lost” evokes thoughts of the French team and what it did that caused it to lose, including the memorable head butt of an Ital...
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The fact that logically equivalent statements evoke different reactions makes it impossible for Humans to be as reliably rational as Econs.
Would you accept a gamble that offers a 10% chance to win $95 and a 90% chance to lose $5?
Would you pay $5 to participate in a lottery that offers a 10% chance to win $100 and a 90% chance to win nothing?
We should not be surprised: losses evokes stronger negative feelings than costs. Choices are not reality-bound because System 1 is not reality-bound.
