Misbehaving: The Making of Behavioural Economics

by Richard H. Thaler

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.

Paying a surcharge is out-of-pocket, whereas not receiving a discount is a “mere” opportunity cost.

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

When the expert was thinking about the problem as a member of the project team, he was locked in the inside view—caught up in the optimism that comes with group endeavors—and did not bother thinking about what psychologists call “base rates,” that is, the average time for similar projects. When he put on his expert hat, thereby taking the outside view, he naturally thought of all the other projects he’d known and made a more accurate guess. If the outside view is fleshed out carefully and informed with appropriate baseline data, it will be far more reliable than the inside view.

Each manager is loss averse regarding any outcomes that will be attributed to him. In an organizational setting, the natural feeling of loss aversion can be exacerbated by the system of rewards and punishment. In many companies, creating a large gain will lead to modest rewards, while creating an equal-sized loss will get you fired. Under those terms, even a manager who starts out risk neutral, willing to take any bet that will make money on average, will become highly risk averse. Rather than solving a problem, the organizational structure is making things worse.

“Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”

Peter Principle: people keep getting promoted until they reach their level of incompetence.

When your opportunity costs are low, it pays to take risks and speak up,