How We Decide

If people were perfectly rational—if they made decisions solely by crunching the numbers—then subjects would always choose to invest, since the expected overall value on each round is higher if one invests ($1.25, or $2.50 multiplied by the 50 percent chance of getting tails on the coin toss) than if one does not ($1). In fact, if a person invests

Once this overlapping of ideas occurs, cortical cells start to form connections that have never existed before, wiring themselves into entirely new networks.

When a subject contemplated a gift certificate in the future, brain areas associated with rational planning, such as the prefrontal cortex, were more active. These cortical regions urge a person to be patient, to wait a few extra weeks for the bigger gain. However, when a subject started thinking about getting the gift certificate right away, the b

Mistakes aren't things to be discouraged. On the contrary, they should be cultivated and carefully investigated.

mental accounting,

Since the prefrontal cortex can handle only about seven things at the same time, it's constantly trying to "chunk" stuff together, to make the complexity of life a little more manageable. Instead of thinking about each M&M, we think about the scoops. Instead of counting every dollar we spend, we parcel our dollars into particular purc

rational agents, why don't all of them invest in stocks? Why are low-yield bonds so popular? In 1995, the behavioral economists Richard Thaler and Shlomo Benartzi realized that the key to solving the premium equity puzzle was loss aversion. Investors buy bonds because they hate losing money, and bonds are a safe bet. Instead of making financial dec

By the end of 2007, a whopping 93 percent of completed foreclosures involved adjustable-rate loans that had recently been adjusted.

The Happiness Hypothesis,

premium equity puzzle.