Misbehaving: The Making of Behavioral Economics

by Richard H. Thaler

Judge Posner remained quiet for about five minutes, but then he could no longer contain himself. Why, he asked out of the blue, were we ignoring evolution? Didn’t evolutionary biology explain many of the odd behaviors discussed in the paper, such as turning down small offers in the Ultimatum Game, or ignoring sunk costs? Couldn’t evolution explain these and all our other “cognitive quirks” (a slyly deprecating term he insisted on using)? His thought was that if humans had evolved to pay attention to sunk costs, or resist unfair offers in the Ultimatum Game, then such behavior must be good for us, in some sense, and therefore rational. Problem solved. I assured him that I was not a creationist and accepted evolution as a scientific fact. I added that there was no doubt that many of the aspects of human behavior that we were talking about had evolutionary roots. But, I argued, accepting the theory of evolution as true does not mean that it needs to feature prominently in an economic analysis. We know people are loss averse; we don’t need to know whether it has an evolutionary explanation. (Amos used to joke that there once were species that did not display the endowment effect, but they are now extinct.) Furthermore, the real point of behavioral economics is to highlight behaviors that are in conflict with the standard rational model. Unless we change the model to say that people pay attention to sunk costs, the model will make poor predictions.