Misbehaving: The Making of Behavioral Economics

In many companies, creating a large gain will lead to modest rewards, while creating an equal-sized loss will get you fired.

“choice architecture” to describe what we were trying to do. In curious ways, simply having that phrase to organize our thoughts helped us create a checklist of principles for good choice architecture, with many of the ideas borrowed from the human design literature. Designing good public policies has a lot in common with designing any consumer pro

principal–agent problems. In the economics literature, such failures are usually described in a way that implicitly puts the “blame” on the agent for taking decisions that fail to maximize the firm, and acting in their own self-interest instead. They are said to make poor decisions because they are maximizing their own welfare rather than that of t

Any firm should establish the highest price it intends to charge as the “regular” price, with any deviations from that price called “sales” or “discounts.” Removing a discount is not nearly as objectionable as adding a surcharge.

In order to get managers to be willing to take risks, it is necessary to create an environment in which those managers will be rewarded for decisions that were value-maximizing ex ante, that is, with information available at the time they were made, even if they turn out to lose money ex post.

Our model is really based on a metaphor. We propose that at any point in time an individual consists of two selves. There is a forward-looking “planner” who has good intentions and cares about the future, and a devil-may-care “doer” who lives for the present.

People think about life in terms of changes, not levels. They can be changes from the status quo or changes from what was expected, but whatever form they take, it is changes that make us happy or miserable. That was a big idea.

the beta–delta model works. Suppose that for any time period far enough away to be considered “later,” a person does not discount time at all, meaning that the discount rate is zero. But anything considered “now” is privileged and tempting, and anything considered “later” is worth only half as much.

Adam Smith famously visited a pin factory to see how manufacturing worked.

A slow hunch is not one of those “aha” insights when everything becomes clear. Instead, it is more of a vague impression that there is something interesting going on, and an intuition that there could be something important lurking not far away. The problem with a slow hunch is you have no way to know whether it will lead to a dead end. I felt like