Chapter 6: The Gauntlet
44 whether real managers actually behaved this way: See Mongin (1997) and Frischmann and Hogendorn (2015) for a review of this debate on marginal analysis.
45 “This paper raises grave doubts”: Lester (1946).
45 “He would simply rely on his sense or his ‘feel’ of the situation”: Machlup (1946).
46 billiard players: Friedman (1953), p. 21.
48 “preference reversals”: Lichtenstein and Slovic (1973).
49 Raising the stakes made things worse: Grether and Plott (1979).
51 “Suppose there were people doing silly things”: Markets can actually exacerbate welfare losses resulting from the presence of consumer biases. Firms may not have an incentive to debias consumers since under some circumstances, firm profits are increasing in the degree of naiveté: credit card late payment fees (Heidhues and Kszegi, 2010); gym memberships (DellaVigna and Malmendier, 2006); printer cartridges and hotel room shrouded fees (Gabaix and Laibson, 2006).
51 Adam Smith’s invisible hand: For a thoughtful take on how to think about the concept of the invisible hand, see Ullmann-Margalit (1997).
52 transform people into rational agents: The study of how profit-maximizing firms interact with Human consumers is the subject of the exciting field of behavioral industrial organization. For a textbook treatment see Spiegler (2011). The examples discussed in chapter 13 are also relevant.
52 failing to act in accordance with the rational agent model is not fatal: For a thorough analysis of these kinds of arguments see Russell and Thaler (1985), Haltiwanger and Waldman (1985), and Akerlof and Yellen (1985).
53 “An Economic Theory of Self-Control”: Thaler and Shefrin (1981).
Section II: Mental Accounting
55 “mental accounting”: My paper was Thaler (1980), and they suggested the term “mental accounting” in Kahneman and Tversky (1984).
Chapter 7: Bargains and Rip-Offs
62 Macy’s: Barbaro (2007).
62 surprisingly candid press release: Tuttle (2012).
63 JC Penney claimed the end price consumers paid was effectively the same: Chernev (2012).
63 Johnson was ousted and coupons returned: Clifford and Rampell (2013).
63 [Walmart’s] “savings catcher” app: https://savingscatcher.walmart.com.
Chapter 8: Sunk Costs
65 “Knee-Deep in the Big Muddy”: Staw (1976).
66 If I want to go to the gym and will feel bad about wasting my membership fee: DellaVigna and Malmendier (2006).
67 “payment depreciation”: Gourville and Soman (1998).
67 sunk costs matter . . . but may be forgotten eventually: Arkes and Blumer (1985).
68 survey . . . with one of his newsletters: Shafir and Thaler (2006). See also Thaler (1999a) for a discussion of the study.
72 “kill their darlings”: A nice piece on this phrase is Wickman (2013).
Chapter 9: Buckets and Budgets
75 most MBA students had . . . budgets: Heath and Soll (1996).
75 the most rigorous demonstration of the effects of mental budgeting to date: Hastings and Shapiro (2013).
78 House of Debt: Mian and Sufi (2014).
Chapter 10: At the Poker Table
80 a study showing that the odds on long shots: The study cited by Kahneman and Tversky (1979) is McGlothin (1956).
82 started work on a real paper: Thaler and Johnson (1990).
84 Mutual fund portfolio managers take more risks in the last quarter of the year: Chevalier and Ellison (1997).
Chapter 11: Willpower? No Problem
87 “invisible hand”: Smith ([1776] 1981, p. 456): vol. 1, book 4, ch. 2, par. 9.
87 The same can be said of much of behavioral economics: See Ashraf, Camerer, and Loewenstein (2005) for a full discussion of this point. My discussion here draws heavily on their work and also that of George Loewenstein (1992), who has long had a interest in this topic, and is not too lazy to read very long books.
88 “The pleasure which we are to enjoy ten years hence”: Smith ([1759] 1981, p. 190): part 4, ch. 2, par. 8; cited in Ashraf, Camerer, and Loewenstein (2005).
88 preference for present consumption over future consumption: “The change, again, must be less rapid the further we are from the moment, and more rapid as we come nearer to it. An event which is to happen a year hence affects us on the average about as much one day as another; but an event of importance, which is to take place three days hence, will probably affect us on each of the intervening days more acutely than the last” (Jevons [1871], 1957, ch. 2).
88 “Our telescopic faculty is defective”: Pigou (1932), cited by Loewenstein (1992), which gives a nice historical overview of ideas about time preference.
89 “This is illustrated by the story of the farmer”: Fisher (1930, p. 82): par. 9.
89 “those working men who, before prohibition”: Ibid., p. 83: par. 9.
90 annual rate of about 10%: To be precise, the exact discount rate is 11.11...%. If next year’s consumption is valued as 10% less than today’s, then the discount rate is usually defined as the value that satisfies 1/(1+)=.9, which is .11.... That is, saying that the value of consumption next year is 90% of its value today is equivalent to saying that the value of consumption today is 111.11...% of its value next year. For discount rates close to zero, the difference between these two numbers (here 10% and 11.11...%) is small.
91 present-biased: The generalized hyperbolic discounting function introduced by Loewenstein and Prelec (1992) took a kind of faulty telescope as a starting assumption, namely that the interval between two future dates seems a fraction as long as an equivalently-sized interval that starts today.
93 adding mathematical rigor to economics.: On Pareto’s important role in divorcing economics from psychology see Bruni and Sugden (2007).
94 The General Theory of Employment, Interest and Money: Keynes (1936).
95 permanent income hypothesis: Friedman (1957).
95 a discount rate of 33% per year: Friedman (1963) clarifies the analysis of this case.
95 Modigliani, writing with his student: Modigliani and Brumberg (1954).
96 Robert Barro: Barro (1974).
98 behavioral life-cycle hypothesis: Thaler and Shefrin (1988).
98 when investors in retirement plans earn high returns: Choi, Laibson, Madrian, and Metrick (2009).
Chapter 12: The Planner and the Doer
99 the only economics paper on self-control I found: Strotz (1955–56).
101 Mischel himself had done considerable research: Mischel (1968), p. 146, and Mischel (1969), p. 1014. For an update on the longitudinal research, see Mischel et al. (2011) and Mischel’s (2014) recent book for the general public.
102 a large literature studying delay of gratification: Ainslie (1975) worked out a version of hyperbolic discounting that Loewenstein and Prelec (1992) would later build on.
103 “The idea of self-control is paradoxical”: McIntosh (1969), p. 122.
103 the two-system view: The two-system model is not a Kahneman creation. Many other psychologists had written about such models. See for example Sloman (1996) and Stanovich and West (2000).
104 Hersh Shefrin . . . to join the effort: Thaler and Shefrin (1981).
105 a famous paper on the topic: Jensen and Meckling (1976).
109 Recent research in neuro-economics: See Banich (2009) for a review of some of the relevant psychology and neuroscience.
110 PhD dissertation: Laibson (1997).
110 Two other behavioral economic theorists . . . elaborated: O’Donoghue and Rabin (1999).
110 references to the key papers: An influential survey article on time preference is Frederick, Loewenstein, and O’Donoghue (2002).
111 “hot-cold empathy gaps”: Loewenstein (2005).
Chapter 13: Misbehaving in the Real World
118 decoupled the purchase decision: Prelec and Loewenstein (1998).
121 excess inventory: Another factor driving the pile-up of inv
entory was that President Nixon had imposed price controls around 1971–72. The next year, when the fixes were lifted, manufacturers raised prices more steeply than consumers were used to, to make up for the past fixes. This created highly negative transaction utility for consumers, such that fewer were willing to buy and inventory piled up.
121 One innovation was the rebate: Technically, the first rebate was offered by Ford in 1914, but once it disappeared it didn’t come back until the 1970s as Chrysler’s “Car Clearance Carnival” campaign response to the inventory pile-up (Jewett, 1996).
121 discounted auto loans: GM reluctantly offered loans after Chrysler and Ford first did so. “It is understood that GM had been resisting following Ford and Chrysler for fear of triggering an industrywide battle on incentives. In the past, many consumers who didn’t buy cars before such programs expired have simply held off on purchases until the next round of incentives” (Nag, 1985).
121 A reporter had crunched the numbers: Buss (1986).
Chapter 14: What Seems Fair?
128 experimental philosophy: Actual philosophers do this now. See Knobe and Nichols (2013), or for a shorter introduction, Knobe et al. (2012).
130 “repugnant”: Roth (2007).
131 wages and salaries appear to be sticky: Daly, Hobijn, and Lucking (2012); Kaur (2014).
133 the cheapest place in the country to buy plywood: Lohrn (1992).
133 “FIRST CHICAGO LOSES TOUCH WITH HUMANS”: Miller (1995).
135 “tin ear”: McKay, Deogun, and Lublin (1999).
135 The Guardian was the first . . . to break the story: Halliday (2012).
135 The Daily Mail quoted one customer . . . “is totally parasitic.”: “Apple accused of exploiting Whitney Houston’s death after cost of albums soar on iTunes,” Daily Mail, February 14, 2012.
135 Whitney Houston albums sold in the U.S.: Nielsen SoundScan (2012).
137 multiples charged during a blizzard in New York City: Brown (2014).
139 “It is incredibly important for any business”: Kokonas (2014).
Chapter 15: Fairness Games
141 three German economists: Güth, Schmittberger, and Schwarze (1982). I wrote a survey article on this and other papers studying Ultimatum Games (Thaler, 1988b).
141 Dictator Game: Kahneman, Knetch, and Thaler (1986).
142 some remote tribes: The Machiguenga people in the Peruvian Amazon rarely turn down any offer of free money, and the offers they make tend to be low (Henrich, 2000). See also Henrich et al. (2002). For a popular treatment, see Watters (2013).
143 results did not differ much from lower-stakes games: Hoffman, McCabe, and Smith (1996).
143 virtually no difference in the behavior of Proposers: Cameron (1999). Slonim and Roth (1998) find similar results in Slovakia, though Andersen et al. (2011) find lower rejection rates with a different experimental design in northeast India.
145 “The purely economic man”: Sen (1977), p. 336.
145 “Economists Free Ride: Does Anyone Else?”: Marwell and Ames (1981). See also Frank, Gilovich, and Regan (1993), who argue that training in economics causes students to behave self-interestedly.
145 tested this interpretation with a brilliant twist: Andreoni (1988).
146 conditional cooperators: Fehr and Gächter (2000, 2002); Fischbacher, Gächter, and Fehr (2001); Fehr and Fischbacher, (2003); Kocher et al. (2008).
146 an article about cooperation: Dawes and Thaler (1988).
Chapter 16: Mugs
148 Laboratory Experimentation in Economics: Roth (1987).
148 a paper written by Jack Knetsch: Knetsch and Sinden (1984).
149 joined forces with him: Kahneman, Knetsch, and Thaler (1991).
154 “status quo bias”: Samuelson and Zeckhauser (1988).
Chapter 17: The Debate Begins
159 a conference at the University of Chicago: The proceedings of the conference were published, first as an issue of the Journal of Business (Hogarth and Reder, 1986), and then as a book, Rational Choice (Hogarth and Reder, 1987).
161 “Let me dismiss a point of view”: Arrow (1986), p. S385.
161 When prices change, the consumer chooses: He notes that even this theory still involves some maximization. In fact, since this time economists have developed habit-based theories that are considered to be “rational.” See Becker and Murphy (1988) and Becker (1992).
162 “We have the curious situation”: Arrow (1986), p. S391.
162 “Obviously I am accepting the insight”: Ibid., p. S397. See also Simon (1957), chs. 14–15, and Conlisk (1996).
162 “Well, some people just can’t tell a joke”: Stigler (1977), p. 441.
163 “the advantages of the division of labor are reaffirmed”: Ibid., p. 442.
163 “I will end my remarks with the following two false statements”: Thaler (1986), p. S283.
164 “Don’t laugh. We proved it rigorously!”: Modigliani and Miller (1958). See also Miller (1988).
164 behavioral finance paper: Shefrin and Statman (1984).
165 did pay dividends: Baker and Wurgler (2004) provide evidence that firms cater to investor’s desire for dividends, offering them more at times when the market puts a premium on dividend-paying firms.
166 In Lintner’s model: Lintner (1956).
166 “I assume it to be a behavioral model”: Miller (1986), p. S467.
166 “The purpose of this paper”: Ibid., p. S466.
167 “Behind each holding”: Ibid., p. S467.
168 “I tend to view”: Shiller (1986), p. S501.
Chapter 18: Anomalies
169 The Structure of Scientific Revolutions: Kuhn (1962).
174 the first two columns: Thaler (1987a, 1987b).
174 A burst of papers: Rozeff and Kinney (1976).
174 Another anomaly came from bettors at the racetrack: Thaler (1992).
Chapter 19: Forming a Team
176 game theory in the 1940s: The catalyst was arguably von Neumann and Morgenstern (1947), the first edition of which was published in 1944.
176 the field of behavioral game theory: Camerer (2003).
180 Stanley Schachter: Schachter et al. (1985a, 1985b), Hood et al. (1985).
180 generating new psychology of our own: An exception is the research associated with Sendhil Mullainathan and Eldar Shafir’s (2013) book Scarcity, one of those rare collaborations between an economist and a psychologist.
182 paper by Fehr that captured our attention: Fehr, Kirchsteiger, and Riedl (1993).
182 employment contracts could be viewed partially as a gift exchange: Akerlof (1982).
182 Rabin’s model: Rabin (1993).
20: Narrow Framing on the Upper East Side
186 bold forecasts and timid choices: Kahneman and Lovallo (1993).
186 described . . . in Thinking, Fast and Slow: Kahneman (2011), ch. 22.
189 benefits are demonstrably large: Mullainathan (2013), Baicker, Mullainathan, and Schwartzstein (2013).
191 equity premium puzzle: Mehra and Prescott (1985).
192 six years to get the paper published: Rajnish Mehra told me this.
192 none of the explanations had proven to be completely satisfactory: Mehra (2007).
194 words with one syllable: Samuelson (1979), p. 306.
194 “Risk and Uncertainty: A Fallacy of Large Numbers”: Samuelson (1963).
195 “myopic loss aversion”: Benartzi and Thaler (1995).
195 The only way you can ever take 100 attractive bets: Barberis, Huang and Santos (2001) formalize this intuition in a dynamic model.
195 experiment using recently hired non-faculty employees: Benartzi and Thaler (1999).
197 Quarterly Journal of Economics dedicated to Amos’s memory: Thaler et al. (1997).
198 A paper by . . . Maya Shaton: Shaton (2014).
198 Benartzi and I used: Benartzi and Thaler (1995).
199 the actual decision-making of cab drivers: Camerer et al. (1997).
200 The higher the wage, t
he less drivers worked: This result has been debated in the literature, with contrary findings by Farber (2005, 2008, 2014) and Andersen et al. (2014), and supportive results from Fehr and Goette (2007), Crawford and Meng (2011), Dupas and Robinson (2014), and, with the best data so far (on Singaporean cab drivers), Agarwal et al. (2014).
Chapter 21: The Beauty Contest
205 “I believe there is no other proposition in economics”: Jensen (1978), p. 95.
207 Michael Jensen’s PhD thesis: Published as Jensen (1969).
209 his thoughts on financial markets: Keynes (1936), ch. 12.
209 “the element of real knowledge . . . seriously declined”: Ibid., ch. 12, p. 153.
209 “Day-to-day fluctuations . . . market”: Ibid., p. 154.
210 “Worldly wisdom teaches . . . unconventionally”: Ibid., p. 158.
210 “Professional investment may be likened”: Ibid.
212 A Beautiful Mind: Nasar (1998).
212 commonly referred to as the “beauty contest”: Camerer (1997).
212 first studied experimentally by . . . Rosemarie Nagel: Nagel (1995).
212 zero was the Nash equilibrium: Researchers have explored various alternatives to Nash equilibrium. See, for example, Geanakoplos, Pearce, and Stachetti (1989), McKelvey and Palfrey (1995), Camerer, Ho, and Chong (2004), Eyster and Rabin (2005), Hoffmann et al. (2012), and Tirole (2014).
215 “In the long run, we are all dead”: Keynes (1923), ch. 2, p. 80.
Chapter 22: Does the Stock Market Overreact?
217 Groucho Marx theorem: This idea was formalized by Milgrom and Stokey (1982).
217 why shares would turn over at a rate of about 5% per month: Based on data from New York Stock Exchange (2014).
218 given a decile score . . . on a test of “sense of humor”: Kahneman and Tversky (1973).
219 Security Analysis . . . The Intelligent Investor: Graham and Dodd ([1934] 2008), Graham ([1949] 1973).
220 Buying the entire original thirty-stock portfolio: Graham ([1949] 1973), ch. 7, p. 164.
220 “overenthusiasm or artificial stimulants”: Graham and Dodd ([1934] 2008), p. 270.
221 “In conclusion, the behavior of security prices”: Basu (1977), p. 680.
221 “Given its longevity”: Banz (1981), p. 17.
Misbehaving: The Making of Behavioral Economics Page 39
