100% satisfaction guarantee Immediately available after payment Both online and in PDF No strings attached
logo-home
Previously searched by you
Previously searched by you
logo
Samenvatting Misbehaving $5.93
Add to cart
Quickly navigate to
Preview
  2.  
  3. Universiteit Antwerpen (UA)
  4.  
  5. Toegepaste Economische Wetenschappen, Sociaal Economische Wetenschappen, Handelsingenieur
  6.  
  7. Zakelijk en Economisch Engels 2

Summary

Samenvatting Misbehaving

1 review
 3 purchases
  • Course
  • Zakelijk en Economisch Engels 2
  • Institution
  • Universiteit Antwerpen (UA)
  • Book
  • Misbehaving

Dit document bevat een volledige samenvatting van Misbehaving van Richard Thaler: In plaats van de honderden pagina's die je moet lezen zijn het hier een stuk of 60. Zelf kon ik met deze samenvatting alle vragen op het examen goed beantwoorden. Ook het schriftelijke deel heb ik mbv deze samenvattin...

[Show more]

Preview 8 out of 59  pages

Document information

  • Yes
  • November 21, 2022
  • 59
  • 2020/2021
  • Summary

Subjects

  • behavioral economics
  • richard thaler
  • misbehaving
  • engels2

Connected book

book image

Book Title:

Author(s):

  • Edition:
  • ISBN:
  • Edition:

Written for

  • Universiteit Antwerpen (UA)
  • Toegepaste Economische Wetenschappen, Sociaal Economische Wetenschappen, Handelsingenieur
  • Zakelijk en Economisch Engels 2
All documents for this subject (1)

1  review

review-writer-avatar

By: lukaspleysier • 1 year ago

Seller

avatar-seller
marsepein

Reviews received

Content preview

Misbehaving

,Misbehaving........................................................................................................................................................... 1
Preface................................................................................................................................................................... 4
Striving to please Amos..................................................................................................................................... 4
Danny on my best qualities...............................................................................................................................4
I. Beginnings: 1970 – 1978.................................................................................................................................... 4
1. Supposedly Irrelevant Factors or SIFs...........................................................................................................4
2. The Endowment Effect.................................................................................................................................. 5
3. The List.......................................................................................................................................................... 6
4. Value Theory: Two kinds of theories.............................................................................................................7
5. California Dreamin’....................................................................................................................................... 8
6. The Gauntlet.................................................................................................................................................. 8
II. Mental Accounting: 1979 – 1985....................................................................................................................10
7. Bargains and Rip-Offs.................................................................................................................................. 10
8. Sunk Costs.................................................................................................................................................... 11
9. Buckets and Budgets.................................................................................................................................... 12
10. At the Poker Table...................................................................................................................................... 13
III. Self-Control: 1975 – 1988.............................................................................................................................. 14
11. Willpower? No Problem.............................................................................................................................. 15
12. The Planner and the Doer.......................................................................................................................... 17
13. Misbehaving in the Real World..................................................................................................................19
IV. Working with Danny 1984 – 1985.................................................................................................................21
14. What Seems Fair?....................................................................................................................................... 21
15. Fairness Games.......................................................................................................................................... 23
16. Mugs........................................................................................................................................................... 24
V. Engaging with the Economics Profession: 1986 – 1994.................................................................................26
17. The Debate Begins..................................................................................................................................... 26
18. Anomalies.................................................................................................................................................. 28
19. Forming a Team......................................................................................................................................... 28
20. Narrow Framing on the Upper East Side..................................................................................................29
VI. Finance: 1983 – 2003.................................................................................................................................... 33
21. The Beauty Contest.................................................................................................................................... 33
22. Does the Stock Market Overreact? ...........................................................................................................34
23. The Reaction to Overreaction....................................................................................................................36
24. The Price is Not Right................................................................................................................................37
25. The Battle of Closed-End Funds................................................................................................................38
26. Fruit Flies, Icebergs and Negative Stock Prices........................................................................................40
VII. Welcome to Chicago: 1995 – Present...........................................................................................................42
27. Law Schooling............................................................................................................................................ 42
28. The Offices................................................................................................................................................. 44
29. Football...................................................................................................................................................... 45
30. Game Shows.............................................................................................................................................. 49

2
Misbehaving

,VIII. Helping out: 2004 – Present......................................................................................................................52
31. Save more Tomorrow................................................................................................................................. 52
32. Going Public............................................................................................................................................... 55
33. Nudging in the U.K.................................................................................................................................... 56
Conclusion: What Is Next?.................................................................................................................................. 57




3
Misbehaving

,Preface
Striving to please Amos
Life offers indelible moments: One of those moments for Thaler was when Daniel called him to tell him their
friend Amos was ill with terminal cancer and had about six months to live.

Amos said that cancer is not a zero-sum game: “What is bad for the tumor is not necessarily good for me.”
He’d rather live out his last few months relatively healthy, than undergo treatments that would make him
really sick, and would only prolong his life for a couple more weeks.

From the time Thaler first met Amos, he applied an unofficial test to all of hist papers: “Would
Amos approve?”

Danny on my best qualities
”The best thing about Thaler, is that he is lazy.” Daniel meant that as a compliment: Thalers laziness meant
he only would work on questions that are intriguing and interesting enough.

I. Beginnings: 1970 – 1978
1. Supposedly Irrelevant Factors or SIFs
Thaler’s students were mad: The average score for the exam was 72 points out of a 100. As a result, he made
sure for the next exam, the total number of points available would be 137 instead of 100. This second examen
turned out to be slightly harder than the first, with an average of 70%, but this translated to an average of 96
points. The students were delighted:
 Most students got a score well into the 90s, even above 100, which generated a good reaction
 Dividing your score by 137 is not easy, so there was less emphasis on percentages
 According to economic theory, the students were misbehaving: To an economist, no one would
be happier with a 70% score than with a 72% score
 Thaler realized that human behaviour does not match the purely rational behaviour humans are
supposed to show according to economic models:
- Economic models replace homo sapiens by the homo economicus or Econs, as he calls them
- According to economic theory, humans misbehave a lot, which means economic models make
a lot of bad predictions that can have serious consequences.
- Ironically, these formal economic models give economics its reputation as the most powerful
social science in two ways:
1. Out of all of the social sciences, economics has the influence in public policy
2. Economics is considered the powerful of the social sciences in the intellectual sense, because it
has a unified ‘core’ theory: economic theory. Other social sciences do not have this.

Economic theory has two core premises:
1. Constrained optimization: Choosing the best from a limited budget
 Often too difficult, even in the supermarket, but also other choices like your career or education
 People are biased when making choices
 Too many factors are left out: Economic theory has a long list of things that are
supposedly irrelevant
 F. ex. The best gift for an Econ is cash, as it is the most ‘optimized’ option, but you’d better not
give your spouse cash for their anniversary.
2. Equilibrium: In a competitive market with no government intervention, prices, demand and supply
fluctuate in such a way that, eventually, supply will equal demand

Economists only get in trouble when they make highly specific predictions that depend on everyone being
economically rational:
 F. Ex. Predicting that farmers will use more fertilizer when prices fall is safe, because the prediction
is imprecise.
 F. Ex. Suppose scientists learn that farmers should use more or less fertilizer than has been the tradition,
and this information is publicized. When all farmers are Econs, the magic of markets will take care of the
rest. But perhaps multinational food companies will be quicker to adopt these findings, and what about
the peasant farmers in India or Africa?

4
Misbehaving

,  F. Ex. Econs will save the exact right amount for their retirement, so there will be no reason to try and
help people save by using pension plans. This way, you will miss a lot of good opportunities to make
a lot of people better off.
Conclusions:
 We need to stop making excuses and find theories that include human behavior, so we can make
more accurate predictions and policy decisions. These theories are called behavioral economics. As
of today, more and more decisions are being made in companies and governments using behavioral
economics.
 Theories based on the assumption that everyone is an Econ should not be thrown away: They remain
useful as starting points for more realistic models.
 According to Thaler, we should start by paying attention to those supposedly irrelevant factors,
or SIFs.

2. The Endowment Effect
Thomas Schelling: When a six year old girl needs an expensive operation, then the post office will be
swamped with nickels and dimes to save her. But let it be reported that without sales tax the health care
system will fail, and not many people will reach for their checkbooks.
 Health care: Statistical life – Policy decision is abstract and lacks emotional impact
 The girl: Identified life – Emotional impact
 Economic theory: Society would not pay more to save one identified life than hundreds
of statistical lives

Suppose the engineers of a new highway tell us that making it a meter wider will cost $42 million, but will
prevent 1.4 fatal accidents per year. To decide how wide to make the highway, we need a value to assign to
those statistical lives prolonged.
 Schelling’s solution: We have to ask ourselves how much the users of the highway would be willing to pay
to make each trip they take a bit safer.
 To answer this question you need a situation where people make choices that involve a trade-off
between money and risk of death. From there you can include their willingness to pay for safety.
 Richard Zeckhauser used Russian roulette as an example, using a gun with 1,000 chambers,
and four bullets. You have to pull the trigger once: How much would you be willing to pay to
remove one bullet? Although this idea formulates the problem in an elegant way, it does not help
us come up with any numbers, and it’s not practical.
 Thaler came up with a more realistic situation: Suppose you could have data of various
occupations: Dangerous ones like mining and fishing and safer ones like an accountancy.
According to economic theory, the riskier jobs would have to earn more, otherwise no one
would be willing to do them.
 Thaler came up with another experiment to estimate the value of (saving) a life:
- Willingness to pay: The chance you will get a disease by entering this room and of
which you will die next week is 1 in 1,000. There is one dose of antidote that will be sold
to the highest bidder. What is the most you would be willing to pay for this antidote?
- Willingness to accept: Researchers need volunteers who would be willing to expose
themselves to a disease of which they will die the next week, with a chance of 1 in 1,000.
No antidote will be available. What is the least amount of money you would demand to
participate in this study?
 Economic theory: Answers should be the same
 Reality: Amounts of money way lower in the first anecdote.

Richard Rosett: Has bought $10 wine bottles a long time ago, that are now worth over $100.
 Says he drinks one of these bottles occasionally, but would never buy a $100 bottle of wine
 Will also not sell these bottles for their current price
 Illogical: If he is willing to drink a $100 bottle but not sell it, the drinking must be worth more than
$100. But why wouldn’t he also be willing to buy such a bottle?
- Economic theory: Opportunity cost of drinking the bottle, is what someone is willing to pay for it.
Whether Rosett drinks his own bottle or buys one the opportunity cost of it stays the same.
- Reality: Giving up the opportunity to sell something does not hurt as much as taking the money
out of your wallet to pay for it.


5
Misbehaving

,Tom Russell: The use of credit cards:
 Pay an extra fee when paying with credit card VS Get a discount when paying with cash
 Economic theory: Should make no difference: It is the same amount of money
 Reality: People were much more pleased with the second option
- Tversky and Kahneman called this ‘framing’
- Thaler called this the endowment effect: In economic theory, the things you own are part of your
endowment. Thaler found out that, people valued things that were already part of their endowment
more highly than things that could be part of their endowment.

Dean Karlan: Suppose there is an important basketball game, and tickets are in high demand because fans
know seats will be even more expensive later in the playoffs.
 Dean received two tickets as a gift: Sold his tickets for more money: Did not understand how Ryan could
possibly think he could afford to go to the game
 Ryan also received two ticket as a gift: Went to the game with a friend: Could not understand why Dean
didn’t realize the tickets were free
= Endowment effect

3. The List
Once Thaler started paying attention, many examples of ‘misbehaving’ cropped up and he started to make a
list on the blackboard in his office. Here are a few anecdotes he came up with:
 Suppose Jeffrey has tickets to a basketball game but there is a big snowstorm and he decides not to go. If
he would’ve bought the expensive VIP tickets, he’d probably have attempted to drive to the game.
 Economic theory: Jeffrey does not ignore sunk costs like an Econ would do. The price he paid for
the tickets should not affect his choice about whether to go to the game or not.
 Stan mows his lawn every week but gets terrible hay fever. He is not willing to pay $10 to some kid to
mow his lawn, but he is also not willing to receive $20 to mow the neighbor’s lawn.
 Economic theory: Stan ignores that buying and selling prices should be the same
 Linnea is shopping for a clock radio and finds a good model for $45. Then she finds out that it’s on sale
for $35 ten minutes away. Linnea is now shopping for a new tv and finds a good model for $495. Then
she finds out that it’s on sale for $485 ten minutes away. She decides to drive for the clock radio, but
not for the tv.
 Economic theory: If Linnea spends ten minutes to save $10 on a small purchase but not on a large
one, she is not valuing time consistently
 Lee and his wife pool their money: They do not have separate assets. Lee wants to buy a sweater but
thinks it is too expensive. On Christmas, he receives it as a gift from his wife and he is delighted.
 Economic theory: Should make no difference, because it’s the same pool of money.
 Friends are over for dinner and they’re all having drinks and waiting for dinner to be ready. Thaler
brings out a bowl of cashews and they eat half the bowl. Their appetite is in danger. Thaler removes the
bowl and everyone is happy.
 Economic theory: To Econs, more choices are always preferred to fewer.
 In every case, economic theory has a highly specific prediction about some key factor – such as the
presence of the cashews – that the theory said should not influence decisions: All SIFs.

Baruch Fischhoff: Hindsight bias: After the fact, we think we always knew the outcome was likely,
if not a foregone conclusion. We often all recognize this bias in others but not in ourselves.
 Suppose a CEO convinces a manager to take on a risky project with high rewards. The CEO will almost
always think that the manager should have anticipated in advance when the project fails, and that he
always knew this project was a poor risk.

Heuristics: Humans have limited time and brainpower so to help them make judgements and choices, they
use heuristics, or rules of thumb.
 F. Ex. Availability: Suppose you are asked if Dhruv is a common name. If you are from Belgium,
you say no. But it is actually a very common name in India, which has a lot of people. So worldwide,
Dhruv is a very common name.
 Humans make predictable errors

6
Misbehaving

,Herbert Simon: People have bounded rationality: They lack the cognitive ability to solve complex
problems. Economists viewed this argument as true but unimportant, and were fine with the idea that their
models were imprecise. In their statistical models, as long as error are random, then they cancel each other
out by either being too high or too low. This was economists’ reasoning to justify the errors produced by
bounded rationality.
 Tversky and Kahneman did not find these errors random: If you asked people whether they thought
most gun deaths in the US were because of homicide or suicide, most will guess homicide, but in fact there
are almost twice as many gun deaths by suicides. That is a predictable error, and even across many
people, these errors will not average out to zero.

4. Value Theory: Two kinds of theories
Suppose these are railroad tracks, and the upper part moves up one centimeter. How much would x expand?




 Normative theory: Tell you the right way to think about some problem. Right = Logically consistent,
via economic reasoning. You calculate everything exactly using formulas. You come up with 4.5 meters
 Descriptive theory: Using intuition. People estimated x would only expand by a couple of centimeters.
 The problem with economic theory is that people think purely rational, and they will always come up
with 4.5 meters: It uses one theory to serve both normative and descriptive purposes.
 F. Ex. Economic theory says that firms will act to maximize their profits. This can for example be
done to set prices so that marginal cost = marginal revenue: Firms will keep producing until the
point where the cost of the last item made is exactly equal to the incremental revenue brought in.
 F. Ex. Gary Becker: Theory of human capital formation: People choose their education and
how much time and money to invest in acquiring these skills, by correctly forecasting how much
money they will make in their future career. In reality, there are very few high school students
whose choices are this analytical.
 Prospect theory: Breaks from the idea that human behavior can be both normative and descriptive.

Bernoulli: Diminishing sensitivity: As wealth grows, the impact of
an increase of the same amount of money on your utility/happiness falls
 This utility function implies risk aversion: If you have to choose
between $1,000 for sure or a 50% chance to win $2,000, you will
take the sure thing because you value the second thousand you
would win less than the first thousand, so you are not willing to risk
losing that first $1,000 in an attempt to get $2,000

John von Neumann and Oskar Morgenstern: Expected utility
theory: How to make decisions in risky situations: Worked with a
series of axioms of rational choice, like for example transitivity (if A > B,
and B > C, then A > C). They proved that if you want to satisfy these
axioms, then you must make decisions according to their theory. If you
have a difficult decision to make, like whether to invest in a new business, then you would aim to make the
decision in accordance with expected utility theory.
 Tversky and Kahneman: Prospect theory: An alternative to expected utility theory: A good
prediction of the actual choices real people would make. It is
impossible for Humans to estimate every little number and detail
correctly like they would do in expected utility theory.
 Tversky and Kahneman: Value function: It’s not about levels
of wealth, but changes in wealth, because Humans experience life
in terms of changes, not in terms of levels:
 F. Ex. You only notice a temperature change when it is
different from the room you were in before. When we have
adapted to our environment, we tend to ignore it.

7
Misbehaving

,  F. Ex. Suppose you get an extra $5,000 bonus. You do not calculate this change in your lifetime
wealth, which is barely noticeable. Instead, you think: “Wow, an extra $5,000!”
 Upper part: The same as the curve of diminishing sensitivity
 Lower part: Three new findings:
1. Weber-Fechner Law: An observable change (= Just noticeable Difference or JND) in a
variable, is proportional to how big that variable is:
 F. Ex. If I gain 50 grams, I don’t notice it. If I buy fresh herbs, the difference between 50
grams and 100 grams is obvious.
 F. Ex. The odds the two headlights of your car break are slim. There’s a bigger chance you
were driving a long time with just one working headlight: Going from two bulbs to one is not
always a JND, but going from one to zero is definitely noticeable.
 F. Ex. The example of Linnea and the clock radio and tv on page 5: For the tv, saving $10
would not be a JND
2. People are risk-averse for gains, and risk-seeking for losses:
 Problem 1: Assume yourself richer by $300 than you are today. You can choose between:
- A sure gain of $100 (72%)
- A 50% chance to gain $200 and a 50% chance to lose $0 (28%)
 Risk-averse for gains: Diminishing sensitivity
 Problem 2: Assume yourself richer by $500 than you are today. You can choose between:
- A sure loss of $100 (36%)
- A 50% chance to lose $200 and a 50% chance to lose $0 (64%)
 Risk-seeking for losses: Diminishing sensitivity: The pain of losing the 2 nd $100 is
less than the pain of losing the 1st $100
3. Loss aversion: We feel losses more than we feel gains of the same amount: The loss function is
steeper than the gain function
 F. Ex. Suppose you win and you lose $10
- Economic theory: Utility should go up and down by the same amount
- Reality: Utility goes down more when losing the $10
= Also the endowment effect: We’d rather keep what we have: We value things that are
part of our endowment higher than things that could be part of our endowment
 Back to the example of the wine bottle on page 5: Rosett would never buy a bottle worth the
same market price as one in his cellar: If I take away Rosett’s bottle of wine, he will feel it as
a greater loss than to the gain he would feel if he would acquire a bottle at the same price his
bottle is worth

5. California Dreamin’
To explain prospect theory, Daniel and Amos asked hypothetical questions. Economists disapproved
this method: There is a difference between what people do, and what people say they would do.
 Daniel and Amos defended their approach by saying that if their subjects were reasonably accurate in
predicting the choices they would make, and their choices were inconsistent with expected utility theory,
then that should at least indicate a presumption of doubt about whether expected utility theory is an
accurate description of behavior.




6. The Gauntlet
When trying to prove economic theory is not an accurate prediction of human behaviour, an economist said
to Thaler that, if that is true, economics and all its theories would be useless. Because of this, Thaler decided
to make a list of reasons why economists could safely ignore behaviors such as those on the List. He called
this list of reasons the ‘Gauntlet’. In this section, the most important reasons are listed:
1. The ‘as if’ reason: Even if people are not capable of solving complex problems, they at least behave
‘as if’ they can.
 To understand this reason, you have to look a bit into the history of economics: After WWII, there
was a trend of making economics more mathematically formal. One of those theories was the

8
Misbehaving

The benefits of buying summaries with Stuvia:

Guaranteed quality through customer reviews

Guaranteed quality through customer reviews

Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.

Quick and easy check-out

Quick and easy check-out

You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.

Focus on what matters

Focus on what matters

Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!

Frequently asked questions

What do I get when I buy this document?

You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.

Satisfaction guarantee: how does it work?

Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.

Who am I buying these notes from?

Stuvia is a marketplace, so you are not buying this document from us, but from seller marsepein. Stuvia facilitates payment to the seller.

Will I be stuck with a subscription?

No, you only buy these notes for $5.93. You're not tied to anything after your purchase.

Can Stuvia be trusted?

4.6 stars on Google & Trustpilot (+1000 reviews)

69052 documents were sold in the last 30 days

Founded in 2010, the go-to place to buy study notes for 15 years now

Start selling
$5.93  3x  sold
  • (1)
Add to cart
Added