Misbehaving: The Making of Behavioral Economics

And, of course, we face many much harder problems than a trip to the store, such as choosing a career, mortgage, or spouse.

The fact that a loss hurts more than an equivalent gain gives pleasure is called loss aversion. It has become the single most powerful tool in the behavioral economist’s arsenal.

Humans have limited time and brainpower. As a result, they use simple rules of thumb—heuristics—to help them make judgments. An example would be “availability.” Suppose I ask you if Dhruv is a common name.

The Weber–Fechner Law holds that the just-noticeable difference in any variable is proportional to the magnitude of that variable. If I gain one ounce, I don’t notice it, but if I am buying fresh herbs, the difference between 2 ounces and 3 ounces is obvious.

In our intrapersonal framework, the agents are a series of short-lived doers; specifically, we assume there is a new doer each time period, say each day.

The planner, in contrast, is completely altruistic. All she¶ cares about is the utility of the series of doers.

Businesses are catching on as well, realizing that a deeper understanding of human behavior is every bit as important to running a successful business as is an understanding of financial statements and operations management. After all, Humans run companies, and their employees and customers are also Humans.

the “endowment effect” because, in economists’ lingo, the stuff you own is part of your endowment, and I had stumbled upon a finding that suggested people valued things that were already part of their endowment more highly than things that could be part of their endowment, that were available but not yet owned.

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

gain gives pleasure is called loss aversion. It has become the single most powerful tool in the behavioral economist’s arsenal.