Misbehaving: The Making of Behavioral Economics

by Richard H. Thaler

when investors in retirement plans earn high returns, making them richer, they increase their saving rates, most likely because they extrapolate this investment success into the future.

two important tools that people use to confront self-control problems.

delay of gratification.

In a principal–agent model the principal is the boss, often the owner of a firm, and the agent is someone to whom authority is delegated. In the context of an organization, tensions arise because the agent knows some things that the principal does not, and it is too costly for the principal to monitor every action that the agent takes. The agent in these models tries to make as much money as possible while minimizing effort. In response, the firm adopts a set of rules and procedures (incentive schemes and accounting systems, for example) that are designed to minimize the costs of the conflicts of interest between the principal and the agents employed at the firm.

Why not always use rules? One reason is that externally enforced rules may not be easily available.