MISBEHAVING Richard H. Thaler
an certifiably lazy man - a teacher in microeconomic
CHAPTER I THE BEGINNINGS: 1970-1978
1. SUPPOSELDLY IRRELEVANT FACTORS
pag 4
"misbehaving"
Thaler gave exams which were designed to distinguish among three broad groups of
students. Only the really smart ones were capable of answering the difficult questions -
consequence the students hated his exam
the behavior of the students was inconsistent with the idealised model of behavior (the
heart of the economic theory)
they were happier to get a mean score of 96 out of 137 (70%) than 72 out of 100
he simply changed the maximum score
o why 137?
hard to calculate the percentages
avarage score is around the 90 percent
econs: theory of economics replaced the homo sapiens with the homo economicus
fictional creature
homo economicus is someone who does not misbehave
reality homo sapiens which means economic models make bad predictions
pag 5-6
economics = most powerful social science
virtual monopoly on giving policy advices
economics has a unified, core theory from which nearly everything else follows
economics = nature fysics
core theory
they have a few core permissen (=that something is true)
rational people - so we can make rational expectations
o constrained optimization: choosing the best option
o equilibrium: continuously search of balance
optimization + equilibrium (evenwicht) = economics
PROBLEMS:
1. optimization problems are somethimes hard to solve
2. beliefs on which people make their choses = not unbaised
people have feelings/preferences
3. the optimization model leaves many factors out
o example of buying food when your hungry - not relevant for your meal on Tuesday *
*best gift for an econ: money - they can buy whatever is optimal
1
,pag 7
stop making excuses
need an enriched approach which acknowledges the existence and relevance of Humans
but do not need to throw everything away
can use it as a starting point
pag 8
two research tools
randomized control trial experiments: it studies what happens when some people receive
some treatment of interest
naturally occuring experiments
pag 9
stop assuming that models give an accurate description of behavior and stop basing policy
decisions on flawed analyses
start paying attention to supposedly irrelevant factors SIF*
behavioral economics: people are not rational
reasons for adding Humans to economic consequence improve the accuracy of predictions
they name it the un-dismal (triestige) science but it is actually fun
2. THE ENDOWMENT EFFECT
pag 12-13
Shellings experiment: a girl who needs money to get an operation - the hospitals who need money
identified life: sick girl
statistical life: the hospitals - lack of emotional impact
econ won't pay more for the identified life then the statistical life
Zeckhausers experiment: russian roulette whit a gun
pag 14
thesis Thaler: "The value of a life" pre-article: The value of saving a life:
compared the salary/paychecks of jobs whith the mortality rates of each occupation
in a world of econs, the riskier jobs would have to pay more, otherwise no one would do
them
PROBLEM is that it’ not easy to put a number on a life
his cost-benifit analyse is still used by the gouvernement
2
,asked two questions
willingness to pay: woh much someone would pay to deruce the chance of dead
willingness to accept: woh much someone would pay to increace his chance of dead
example deadly disease
o A disease with antidote, how much would you pay
o B disease without antidote, how much would you demand
people will aske more in situation B
should be the same for an econ
pag 17
case Richard Rosett
example: wine from 10 dollars who now is worth 100 dollars
he would not sell his bottle for 100 dollars
he would not buy a bottle for 100 dollars
but he would drink one of his 10 dollars bottles who now is worth 100 dollar
opportunity cost = what you give up by doing it
vague <> cash: precise
pag 18 tom russell
example beginning of credit cards
discussion if retailers could charge different prices to cash between credit card and cash
credit card lobby said if a store dit charge different prices
o the regular price = higer credit card
OR
o a surcharge for the credit card users (toeslag)
for an econ these two are the same BUT credit card lobby chosed the first one,
they like the idea of a discount
framing, (depending on the persective you have, you get a discount sounds
better)
= endownment effect: the idea and belief that something becomes much more worth ones you
possess it influence on behaviour
pag 19
example tickets to a basketball game
A: sold the tickets
B: did go to the game
3. THE LIST
pag 21
sunk costs: money that has already been spent and would go lost
for an econ are more options always better
3
, hindsight bias (thesis) fiscchoff
conclusion of the thesis: we always think that we knew the outcome of something and if not
a foregone conclusion
example of project that works out badly= the CEO always thinks that the failure could be
anticipated
=illusion: we don’t see things coming, we misremember it.
pag 23-24
predictable errors
Humans have limited time and brainpower and therefore use heuristics to help them make
judgements
PROBLEM lack the cognitive ability to solve complex problems = bounded rationality*
SOLUTION in classic economic theory by putting some error ranges
o but ranges actually don’t even out the errors because the errors could be named as
predictable errors. The errors named in the theory were actually the biased ways of
handling of people and therefore can’t be evened out but leans more to one side or
another. As economic theory says that external events don’t influence the decisions
isn’t correct. These external events were seen as SIF’s, but were really highly
important in decision making. These SIF’s (external events) influence decisions
because people base it on their bias.
4. VALUE THEORY
pag 25-26
organizing principle:
1. normative theories: theories tell you the right way to think about something, logically
2. descriptive theories
PROBLEM classic economic theory use one theory for both 1 and 2
example guess the height of 2 bars
prospect theory sought to break from this traditional idea
pag 28-30
risk aversion (Bernouilli)
happiness (utility) grows but at a decreasing rate = diminishing sensitivity
example: 100 dollars to a rich or a poor guy ≠ different influence on his utility
expected utility theory (Neuman)
a series of axioms of rational choice + he derived how someone wanted to follow these
axioms
if people make a important decision they depend on the expected utility
prospect theory (Kahneman and Tversky)
alternative to the expected utility theory
people are not rational = bounded rationality*
the focus changed from levels of wealth to changes in wealth
example of the temperature
4
an certifiably lazy man - a teacher in microeconomic
CHAPTER I THE BEGINNINGS: 1970-1978
1. SUPPOSELDLY IRRELEVANT FACTORS
pag 4
"misbehaving"
Thaler gave exams which were designed to distinguish among three broad groups of
students. Only the really smart ones were capable of answering the difficult questions -
consequence the students hated his exam
the behavior of the students was inconsistent with the idealised model of behavior (the
heart of the economic theory)
they were happier to get a mean score of 96 out of 137 (70%) than 72 out of 100
he simply changed the maximum score
o why 137?
hard to calculate the percentages
avarage score is around the 90 percent
econs: theory of economics replaced the homo sapiens with the homo economicus
fictional creature
homo economicus is someone who does not misbehave
reality homo sapiens which means economic models make bad predictions
pag 5-6
economics = most powerful social science
virtual monopoly on giving policy advices
economics has a unified, core theory from which nearly everything else follows
economics = nature fysics
core theory
they have a few core permissen (=that something is true)
rational people - so we can make rational expectations
o constrained optimization: choosing the best option
o equilibrium: continuously search of balance
optimization + equilibrium (evenwicht) = economics
PROBLEMS:
1. optimization problems are somethimes hard to solve
2. beliefs on which people make their choses = not unbaised
people have feelings/preferences
3. the optimization model leaves many factors out
o example of buying food when your hungry - not relevant for your meal on Tuesday *
*best gift for an econ: money - they can buy whatever is optimal
1
,pag 7
stop making excuses
need an enriched approach which acknowledges the existence and relevance of Humans
but do not need to throw everything away
can use it as a starting point
pag 8
two research tools
randomized control trial experiments: it studies what happens when some people receive
some treatment of interest
naturally occuring experiments
pag 9
stop assuming that models give an accurate description of behavior and stop basing policy
decisions on flawed analyses
start paying attention to supposedly irrelevant factors SIF*
behavioral economics: people are not rational
reasons for adding Humans to economic consequence improve the accuracy of predictions
they name it the un-dismal (triestige) science but it is actually fun
2. THE ENDOWMENT EFFECT
pag 12-13
Shellings experiment: a girl who needs money to get an operation - the hospitals who need money
identified life: sick girl
statistical life: the hospitals - lack of emotional impact
econ won't pay more for the identified life then the statistical life
Zeckhausers experiment: russian roulette whit a gun
pag 14
thesis Thaler: "The value of a life" pre-article: The value of saving a life:
compared the salary/paychecks of jobs whith the mortality rates of each occupation
in a world of econs, the riskier jobs would have to pay more, otherwise no one would do
them
PROBLEM is that it’ not easy to put a number on a life
his cost-benifit analyse is still used by the gouvernement
2
,asked two questions
willingness to pay: woh much someone would pay to deruce the chance of dead
willingness to accept: woh much someone would pay to increace his chance of dead
example deadly disease
o A disease with antidote, how much would you pay
o B disease without antidote, how much would you demand
people will aske more in situation B
should be the same for an econ
pag 17
case Richard Rosett
example: wine from 10 dollars who now is worth 100 dollars
he would not sell his bottle for 100 dollars
he would not buy a bottle for 100 dollars
but he would drink one of his 10 dollars bottles who now is worth 100 dollar
opportunity cost = what you give up by doing it
vague <> cash: precise
pag 18 tom russell
example beginning of credit cards
discussion if retailers could charge different prices to cash between credit card and cash
credit card lobby said if a store dit charge different prices
o the regular price = higer credit card
OR
o a surcharge for the credit card users (toeslag)
for an econ these two are the same BUT credit card lobby chosed the first one,
they like the idea of a discount
framing, (depending on the persective you have, you get a discount sounds
better)
= endownment effect: the idea and belief that something becomes much more worth ones you
possess it influence on behaviour
pag 19
example tickets to a basketball game
A: sold the tickets
B: did go to the game
3. THE LIST
pag 21
sunk costs: money that has already been spent and would go lost
for an econ are more options always better
3
, hindsight bias (thesis) fiscchoff
conclusion of the thesis: we always think that we knew the outcome of something and if not
a foregone conclusion
example of project that works out badly= the CEO always thinks that the failure could be
anticipated
=illusion: we don’t see things coming, we misremember it.
pag 23-24
predictable errors
Humans have limited time and brainpower and therefore use heuristics to help them make
judgements
PROBLEM lack the cognitive ability to solve complex problems = bounded rationality*
SOLUTION in classic economic theory by putting some error ranges
o but ranges actually don’t even out the errors because the errors could be named as
predictable errors. The errors named in the theory were actually the biased ways of
handling of people and therefore can’t be evened out but leans more to one side or
another. As economic theory says that external events don’t influence the decisions
isn’t correct. These external events were seen as SIF’s, but were really highly
important in decision making. These SIF’s (external events) influence decisions
because people base it on their bias.
4. VALUE THEORY
pag 25-26
organizing principle:
1. normative theories: theories tell you the right way to think about something, logically
2. descriptive theories
PROBLEM classic economic theory use one theory for both 1 and 2
example guess the height of 2 bars
prospect theory sought to break from this traditional idea
pag 28-30
risk aversion (Bernouilli)
happiness (utility) grows but at a decreasing rate = diminishing sensitivity
example: 100 dollars to a rich or a poor guy ≠ different influence on his utility
expected utility theory (Neuman)
a series of axioms of rational choice + he derived how someone wanted to follow these
axioms
if people make a important decision they depend on the expected utility
prospect theory (Kahneman and Tversky)
alternative to the expected utility theory
people are not rational = bounded rationality*
the focus changed from levels of wealth to changes in wealth
example of the temperature
4
