Misbehaving: The Making of Behavioral Economics

by Richard H. Thaler

He explained to his oncologist that cancer is not a zero-sum game. “What is bad for the tumor is not necessarily good for me.”

My laziness, he claims, means I only work on questions that are intriguing enough to overcome this default tendency of avoiding work.

My only advice for reading the book is stop reading when it is no longer fun.

we rarely allow any identified life to be extinguished solely for the lack of money. But of course thousands of “unidentified” people die every day for lack of simple things like mosquito nets, vaccines, or clean water.

Giving up the opportunity to sell something does not hurt as much as taking the money out of your wallet to pay for it. Opportunity costs are vague and abstract when compared to handing over actual cash.

“hindsight bias.” The finding is that, after the fact, we think that we always knew the outcome was likely, if not a foregone conclusion.

People think about life in terms of changes, not levels. They can be changes from the status quo or changes from what was expected, but whatever form they take, it is changes that make us happy or miserable.

The Weber–Fechner Law holds that the just-noticeable difference in any variable is proportional to the magnitude of that variable.

Roughly speaking, losses hurt about twice as much as gains make you feel good.

The fact that a loss hurts more than an equivalent gain gives pleasure is called loss aversion. It has become the single most powerful tool in the behavioral economist’s arsenal.

Because learning takes practice, we are more likely to get things right at small stakes than at large stakes. This means critics have to decide which argument they want to apply. If learning is crucial, then as the stakes go up, decision-making quality is likely to go down.

For those who are at least living comfortably, negative transaction utility can prevent our consuming special experiences that will provide a lifetime of happy memories, and the amount by which the item was overpriced will long be forgotten. Good deals, on the other hand, can lure all of us into making purchases of objects of little value.

And when the quality of a product, like a mattress, is hard to assess, the suggested retail price can do double duty. It can simultaneously suggest that quality is high (thus increasing perceived acquisition utility) and imply that there is transaction utility to be had because the product is “on sale.”

A good rule to remember is that people who are threatened with big losses and have a chance to break even will be unusually willing to take risks, even if they are normally quite risk averse. Watch out!

The famous Chicago economist George Stigler was fond of saying that there was nothing new in economics; Adam Smith had said it all. The same can be said of much of behavioral economics.

I came across a quote from social scientist Donald McIntosh that profoundly influenced my thinking: “The idea of self-control is paradoxical unless it is assumed that the psyche contains more than one energy system, and that these energy systems have some degree of independence from each other.”

a large proportion of people can be categorized as conditional cooperators, meaning that they are willing to cooperate if enough others do. People start out these games willing to give their fellow players the benefit of the doubt, but if cooperation rates are low, these conditional cooperators turn into free riders. However, cooperation can be maintained even in repeated games if players are given the opportunity to punish those who do not cooperate.

There are enough honest people out there (especially in a small town) to make it worthwhile for the farmer to put out some fresh corn or rhubarb to sell. But they also know that if the money were left in an open box where anyone could take all of it, someone eventually would. Economists need to adopt as nuanced a view of human nature as the farmers. Not everyone will free ride all the time, but some people are ready to pick your pocket if you are not careful.

Interdisciplinary meetings, especially those with high-level agendas (reduce poverty, solve climate change) tend to be disappointing, even when the attendees are luminaries, because academics don’t like to talk about research in the abstract—they want to see actual scientific results. But if scientists from one field start presenting their research findings in the manner that the colleagues in their field expect, the scientists from other disciplines are soon overwhelmed by technical details they do not understand, or bored by theoretical exercises they find pointless.

behavioral economics has turned out to be primarily a field in which economists read the work of psychologists and then go about their business of doing research independently.

The misbehavior is in failing to create an environment in which employees feel that they can take good risks and not be punished if the risks fail to pay off.

The winner’s curse. When many bidders compete for the same object, the winner of the auction is often the bidder who most overvalues the object being sold.

The false consensus effect. Put basically, people tend to think that other people share their preferences.

People are more willing to lie by omission than commission.

To get at the truth, it helps to ask specific questions.

we have no interest in telling people what to do. We want to help them achieve their own goals. Readers who manage to reach the fifth page of Nudge find that we define our objective as trying to “influence choices in a way that will make choosers better off, as judged by themselves.” The italics are in the original but perhaps we should have also used bold and a large font, given the number of times we have been accused of thinking that we know what is best for everyone.

if you want people to comply with some norm or rule, it is a good strategy to inform them (if true) that most other people comply.