Misbehaving: The Making of Behavioral Economics

by Richard H. Thaler

There is, however, a problem: the premises on which economic theory rests are flawed. First, the optimization problems that ordinary people confront are often too hard for them to solve, or even come close to solving.

The current estimate is roughly $7 million per life saved.

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.

If the credit card price is $1.03 and the cash price is $1, it should not matter whether you call the three-cent difference a discount or a surcharge. Nevertheless, the credit card industry rightly had a strong preference for the discount.

In saying that people have bounded rationality, Simon meant that they lack the cognitive ability to solve complex problems, which is obviously true.

Paying seven dollars for a beer at a resort is annoying but expected; paying that at a bodega is an outrage! This is the essence of transaction utility.

Goods that are marketed this way share two characteristics: they are bought infrequently and quality is difficult to assess.

A recent study finds that when U.S. supermarkets were confronted with the challenge of a Walmart entering their home market, all suffered, but those who used a promotional pricing strategy (e.g., frequent sales) experienced significantly greater revenues and long-term viability than an everyday low price strategy (Ellickson, Misra, and Nair, 2012).

Suppose you bought a case of good Bordeaux in the futures market for $20 a bottle. The wine now sells at auction for about $75. You have decided to drink a bottle. Which of the following best captures your feeling of the cost to you of drinking the bottle? (The percentage of people choosing each option is shown in brackets.) (a) $0. I already paid for it. [30%] (b) $20, what I paid for it. [18%] (c) $20 plus interest. [7%] (d) $75, what I could get if I sold the bottle. [20%] (e) –$55. I get to drink a bottle that is worth $75 that I only paid $20 for so I save money by drinking this bottle.