The Making of Behavioral Economics
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Richard Thaler
Notes
You will only notice if the room is unusually hot or cold relative to the rest of the building. When we have adapted to our environment, we tend to ignore it.
People think in life in terms of changes and not levels.
Good deals…can lead us into making purchases of objects of little value…(we buy things that are good deals even if they are junk.)
Removing a discount is not nearly as objectionable as adding a surcharge.
Raising prices because costs have increased is almost always judged to be fair. (even though economics would dictate that prices should be dictated efficiently by the market regardless of cost).
Endowment Effect: People are more likely to keep what they start with than to trade it, even when the initial allocations were done at random.
In many companies, creating large gain will lead to a modest reward, 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…(this is an exaggeration of loss-aversion and a problem with agency. While a boss would prefer their managers to be making the right risk-adjusted bets, often times the individual managers are reluctant to do so because any failure would be magnified, even if the company’s portfolio of bets turns out well).
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.
Peter Principle: people keep getting promoted until they reach their level of competence.
A “nudge” is a small feature in the environment that attracts our attention and influences behavior…One way to “unfreeze” people is to remove barriers that are preventing them from changing, however subtle those barriers might be.
The Journal of Economic Perspectives