Misbehaving: The Making of Behavioral Economics

by Richard H. Thaler

  221 The New Contrarian Investment Strategy: Dreman (1982).

  224 My paper with Werner: De Bondt and Thaler (1985).

  Chapter 23: The Reaction to Overreaction

  225 This subtlety was first articulated by Eugene Fama: Fama (1970).

  226 capital asset pricing model (CAPM): Sharpe (1964) and Lintner (1965a, 1965b). For a textbook treatment, see Cochrane (2005). The reason that these methods don’t use the variance of price as a measure of a stock’s risk is that in a wide portfolio of stocks, these movements would be a wash on average. Instead, the idea is to measure risk based on how sensitive the stock price is to market movements (e.g., an index like the S&P 500), so that you have a measure of how much riskier (or less risky) owning this stock would make your portfolio.

  228 the small firm effect: Banz (1981).

  228 “The CAPM Is Wanted, Dead or Alive”: Fama and French (1996).

  228 Fama–French Three Factor Model: Fama and French (1993).

  228 “Contrarian Investment, Extrapolation, and Risk”: Lakonishok, Shleifer, and Vishny (1994).

  228 Fama concedes . . . risk or overreaction: See Fama’s Nobel lecture, published as Fama (2014).

  229 a new five-factor model: Fama and French (2014). A related model is Asness, Frazzini, and Pedersen (2014).

  Chapter 24: The Price Is Not Right

  230 Shiller . . . published a paper: Shiller (1981).

  232 one of those papers . . . presented at the Chicago conference: Kleidon (1986).

  232 U.S. stock market dropped 4.4%: Cutler, Poterba, and Summers (1989).

  233 “Stock Prices and Social Dynamics”: Shiller (1984).

  233 book with George Akerlof: Akerlof and Shiller (2009).

  234 Bob later borrowed that phrase: Shiller (2000).

  236 a thriving and mainstream component of financial economics research: You can find a list of all the programs from these workshops on Bob’s website: http://www.econ.yale.edu/~shiller/behfin/.

  Chapter 25: The Battle of Closed-End Funds

  240 “THERE ARE IDIOTS. Look around”: Quoted in Fox (2009), p. 199.

  240 more rigorous, thorough, and polite version of the “idiots” paper: De Long et al. (1990).

  241 “an expensive monument”: Graham ([1949] 1973), p. 242.

  242 That is exactly what we found: Lee, Shleifer, and Thaler (1991).

  242 thesis on closed-end funds: Thompson (1978).

  242 A Random Walk Down Wall Street: Malkiel (1973).

  243 “But they can’t”: Chen, Kan, and Miller (1993), p. 795.

  243 the last set of stones: The five papers are: Lee, Shleifer, and Thaler (1991), Chen, Kan, and Miller (1993a), Chopra et al. (1993a), Chen, Kan, and Miller (1993b), and Chopra et al. (1993b).

  Chapter 26: Fruit Flies, Icebergs, and Negative Stock Prices

  249 LTCM had collapsed: Lowenstein (2000).

  249 in a paper they published on this topic: Shleifer and Vishny (1997).

  250 an academic paper about the . . . episode: Lamont and Thaler (2003).

  251 “we might define an efficient market”: Black (1986), p. 553.

  252 “liar loans”: See Mian and Sufi (2014).

  Chapter 27: Law Schooling

  258 The published version of the paper: Jolls, Sunstein, and Thaler (1998).

  259 “Posner evidently writes”: Solow (2009).

  262 “The Problem of Social Cost”: Coase (1960).

  262 “This is, of course, a very unrealistic assumption”: Ibid., p. 15.

  265 More Guns, Less Crime: Lott (1998).

  268 In not a single case did the parties even attempt to negotiate: Farnsworth (1999).

  269 Oxford Handbook of Behavioral Economics and the Law: Zamir and Teichman (2014).

  269 “The battle . . . has been won”: Korobkin (2011).

  Chapter 28: The Offices

  275 If there is a number, people will use it: Hsee et al. (2009).

  Chapter 29: Football

  277 “Division of labor strongly attenuates”: Stewart (1997).

  278 football paper: Massey and Thaler (2013).

  280 The winner’s curse: For a review, see my “Anomalies” column on the subject (Thaler, 1988a).

  280 The false consensus effect: Ross, Greene, and House (1977).

  284 If a team is paying a high draft pick a lot of money: Camerer and Weber (1999).

  292 teams don’t go for it: Romer (2006).

  292 New York Times used his model: For an example of Brian Burke’s work, see http://www.advancedfootballanalytics.com/.

  292 “New York Times 4th Down Bot”: The bot’s recommendations can be found at http://nyt4thdownbot.com/. For a comparison between coaches and the NYT Bot’s performances, see Burk and Quealy (2014).

  292 The Signal and the Noise: Silver (2012).

  293 Peter Principle: Peter and Hull (1969).

  Chapter 30: Game Shows

  296 They asked me if I would like to join the team: Post et al. (2008).

  299 my paper with Eric Johnson: Thaler and Johnson (1990).

  300 an experiment to measure the difference between public and private decisions: Baltussen, van den Assem, and van Dolder (2015).

  301 more risk averse in front of the crowd: This lines up with findings that investors take more risks online than in front of others. Barber and Odean (2002) find that investors trade more and more speculatively after switching from phone-based to online trading.

  301 “other-regarding” behavior, such as the Ultimatum Game and Dictator Game: Rabin (1993); Tesler (1995); Levitt and List (2007).

  301 low-stakes experiments of the Prisoner’s Dilemma: See Sally (1995) for a meta-study of papers published over 35 years. Holfstadter (1983) and Rapoport (1988) are some representative examples.

  302 a sample of 287 pairs of players to study: Van den Assem, van Dolder, and Thaler (2012).

  305 “an effective story”: WNYC (2014).

  Section VIII: Helping Out

  307 well-established theorists: See, for example, Ellison and Fudenberg (1993), Ellison (1997), Fudenberg and Levine (2006), and Bénabou and Tirole (2003).

  Chapter 32: Save More Tomorrow

  309 standard theories of saving: Friedman (1957); Modigliani and Brumberg (1954).

  310 “As an economist, . . . empirical questions”: Bernheim (2002).

  310 a heated debate in the economics literature: Poterba, Venti, and Wise (1996) argued that IRAs did increase savings. They pointed out that those who started such plans tended to keep contributing each year, and their balances steadily rose, with no apparent offset in other forms of saving. Engen, Gale, and Scholz (1996) focused on a different question: whether an increase in the maximum contribution would increase saving. They concluded that it would not. I think both were right. IRAs did increase saving because they induced some people who were not doing any retirement saving to put something aside each year. But an increase in the maximum contribution would only affect the affluent, who were already saving more than the maximum, and would merely shift money from taxable to non-taxable accounts. My reading of the Chetty et al. (2014) paper discussed at the end of this chapter supports this view.

  310 “Psychology and Savings Policies”: Thaler (1994).

  311 The evidence suggests that when people get a windfall: Landsberger (1966); Epley, Mak, and Idson (2006); Shapiro and Slemrod (2003).

  312 When taxpayers are audited: Engstrm, Nordblom, Ohlsson, and Persson (2015).

  313 inertia could work for us instead of against us: Choi et al. (2003); Choi, Laibson, and Madrian (2004).

  315 “The Power of Suggestion”: Madrian and Shea (2001).

  316 “Suppose a firm automatically enrolls employees”: Internal Revenue Service (1998).

  319 survey conducted by Aon Hewitt: Hess and Xu (2011).

  319 recent paper published in Science: Benartzi and Thaler (2013).

  319 a national personal saving plan: U.K. Department for Work and Pensions (2014).

  320
Australia and New Zealand: Summers (2013) provides a brief and friendly description of Australian retirement saving plans. John and Levine (2009) describe the New Zealand model, among others.

  320 a team of American and Danish economists: Chetty et al. (2014).

  321 Shlomo and I wrote a paper: Benartzi and Thaler (2004).

  Chapter 33: Going Public

  323 “Asymmetric Paternalism”: Camerer et al. (2003).

  323 “A regulation is asymmetrically paternalistic”: Ibid., p. 1212.

  323 “cautious paternalism”; “optimal paternalism”: O’Donoghue and Rabin (1999, 2003).

  323 Cass and I wrote a short paper: Thaler and Sunstein (2003).

  323 “Libertarian Paternalism is Not an Oxymoron”: Sunstein and Thaler (2003).

  325 paperback rights were later sold to trade publishers: Thaler and Sunstein (2008).

  326 The Design of Everyday Things: Norman (1988).

  327 John Tierney . . . had a suggestion: Tierney (2005).

  327 paper . . . on the powerful effect of default options in this domain: Johnson and Goldstein (2004).

  328 In Alaska and Montana: Donate Life America (2014).

  328 “mandated choice”: This was first called “mandated choice” in a report on organ donation by the Institute of Medicine (Childress et al., 2006).

  328 which I continued to call “mandated choice”: Thaler (2009).

  Chapter 34: Nudging in the U.K.

  335 the classic book Influence: Cialdini (2006).

  335 a consulting firm: Cialdini’s consulting firm is called Influence at Work.

  336 the most recent experiment: Hallsworth et al. (2014).

  338 One way to unfreeze people: See Lewin (1947).

  340 something between a scientific finding and a nifty anecdote: Behavioural Insights Team (2013), p. 3.

  341 “A billion here, a billion there”: For those who are curious, this is Senator Evvert Dirkson of Illinois.

  342 it was the reminder . . . which mattered: Raifman et al. (2014).

  343 READY4K!: York and Loeb (2014).

  344 “have developed . . . behavioural sciences”: Whitehead et al. (2014).

  Conclusion: What Is Next?

  349 Akerlof and Shiller eventually abandoned the enterprise: See Akerlof (2007) for one perspective on the questions to be answered.

  352 Jon Stewart: Stewart (2012).

  353 testing ideas in poor countries using randomized control trials: Two recent books that describe what we have learned from many such experiments are Banerjee and Duflo (2011) and Karlan and Appel (2011). Mullainathan and Shafir (2013) and Haushofer and Fehr (2014) argue that for behavioral and psychological reasons, being in poverty can lead to worse decision-making, which makes it hard to escape poverty. See also World Bank (2015).

  353 repeatedly and rigorously tested: See Post et al. (2008) and van den Assem, van Dolder, and Thaler (2012) on game shows, Pope and Schweitzer (2011) on golf, Barberis and Thaler (2003) and Kliger, van den Assem, and Zwinkels (2014) for reviews of behavioral finance, and Camerer (2000) and DellaVigna (2009) for surveys of empirical applications of behavioral economics more generally.

  353 intriguing finding by Roland Fryer: Fryer (2010).

  354 The team of Fryer, John List, Steven Levitt, and Sally Sadoff: Fryer et al. (2013).

  354 a recent randomized control trial: Kraft and Rogers (2014).

  355 Field experiments are perhaps the most powerful tool we have: Gneezy and List (2013).

  356 “If you don’t write it down, it doesn’t exist”: Ginzel (2014).

  356 his recent book The Checklist Manifesto: Gawande (2010), pp. 176–77.

  356 Into Thin Air: Krakauer (1997).

  357 99% of the work is done by the choice architecture: Another example is Alexandre Mas who (sometimes collaborating with Alan Krueger) has shown that after labor disputes that go badly for workers, the quality of work declines. See Mas (2004) on the value of construction equipment after a dispute, Mas and Krueger (2004) on defects in tires after a strike, and Mas (2006) on police work after arbitration. One other example of mainstream economists doing research with a behavioral economics bent would be Edward Glaeser (2013) on speculation in real estate.

  358 improve our understanding of public policy: See Chetty’s (2015) Ely lecture delivered at the American Economic Association Meeting that I organized in January 2015. In this case you can literally see it by going to the AEA website: https://www.aeaweb.org/webcasts/2015/Ely.php.

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