Misbehaving: The Making of Behavioral Economics

by Richard H. Thaler

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  LIST OF FIGURES

  Unless otherwise noted, all figures created by Kevin Quealy

  Fig. 1. Railroad Track Puzzle

  Fig. 2. Utility of Wealth

  Fig. 3. The Value Function

  Fig. 4. Saul Steinberg, “View of the World from 9th Avenue” (New Yorker, March 29, 1976). Reproduced courtesy of the Saul Steinberg Foundation

  Fig. 5. Wimbledon Choices: Now or Later

  Fig. 6. Happiness, Guilt, and Energy Bars

  Fig. 7. An Experimental Market for Tokens

  Fig. 8. Four Card Problem (source: Wason, 1966)

  Fig. 9. Rates of Return, Displayed Two Ways (source: Benartzi and Thaler, 1999)

  Fig. 10. Guesses in the Financial Times Beauty Contest Game

  Fig. 11. Predicting Grade Point Averages

  Fig. 12. Are Stock Markets Too Volatile? (source: Shiller, 1981)

  Fig. 13. Long-Term Stock Market Price/Earnings Ratios (source: http://www.econ.yale.edu/~shiller/)

  Fig. 14. Long-Term U.S. Home Prices (source: http://faculty.chicagobooth .edu/john.cochrane/research/papers/discount_rates_jf.pdf)

  Fig. 15. Premia and Discounts on Selected Closed-End Mutual Funds (source: Wall Street Journal online, January 1, 2015)

  Fig. 16. The Peculiar Arithmetic of Palm and 3Com

  Fig. 17. The Market for Mugs and the Coase Theorem. (source image credit: Alex Berkowitz)

  Fig. 18. The Market Value of NFL Draft Picks (source: Massey and Thaler, 2013)

  Fig. 19. The Chart Used by NFL Teams to Value Draft Picks

  Fig. 20. Compensation of NFL Draft Picks (source: Massey and Thaler, 2013)

  Fig. 21. “Surplus Value” of NFL Draft Picks (source: Massey and Thaler, 2013)

  Fig. 22. Surplus Value Compared to Market Value of Draft Picks (source: Massey and Thaler, 2013)

  Fig. 23. Deal or No Deal Prizes

  Fig. 24. Cooperation Rates for Golden Balls Contestants (source: van den Assem et al., 2012)

  Fig. 25. Results of Save More Tomorrow (source: Thaler and Benartzi, 2004)

  ACKNOWLEDGMENTS

  A lazy man does not manage to write a book without a lot of help. Thanks go to John Brockman, who tricked me into writing this book, as only he can. My publishers, W. W. Norton and Penguin UK, were patient and highly supportive, even when I ended up writing a book that was not the one they were expecting. Brendan Curry at Norton provided a level of editorial support that is increasingly rare. He read every word of this manuscript at least twice; most authors are lucky to get such treatment even once. Alexis Kirschenbaum at Penguin helped encourage me to take the book in this direction, and has been great at seeing the big picture. Both of them have also been a lot of fun to work with. Allegra Huston applied the final spit and polish with aplomb.

  Many friends read early drafts of the book, and given their level of talent and the generosity of the time they gave me, this really should be a much better book. Caroline Daniel of the Financial Times read the entire manuscript and gave me handwritten comments that were almost legible. My writer’s dream team of Stephen Dubner, Malcolm Gladwell, and Michael Lewis also read and commented on various drafts. Michael took a chunk of the book on a hiking trip and sent me a three-word email saying “It’s not boring!” That kept me going for a while. All three gave me the kind of advice that only true masters of their craft can provide.

  Cass Sunstein was a constant source of encouragement and sound advice, though he cannot understand why I didn’t finish this book at least three years ago. Danny Kahneman offered his sage wisdom at every stage, including during the copyediting. Not surprisingly, Danny is amazed that I finished the book at all. Maya Bar-Hillel, Drew Dickson, Raife Giovinazzo, Dean Karlan, Cade Massey, Manny Roman, Rohan Silva, and Martijn van den Assem all read and gave detailed comments on an early draft that greatly improved the book. And what can I say about the amazing Jesse Shapiro, who has now read and edited every word of my last two books. If Jesse ever writes a book, buy it. It will be fantastic. Other friends who offered opinions about various sections include Nick Barberis, Shlomo Benartzi, Alain Cohn, Owen Lamont, Andrei Shleifer, and Rob Vishny. As usual, I talked for many hours with Sendhil Mullainathan about this book, and he made it smarter, as he always does. Craig Fox, one of our many summer campers, came up with the title last summer at a conference. This long list does not include all the friends who had to listen to me talking about this project for the past few years. Thanks, you guys!

  Kevin Quealy created all the figures in the book, doing so with creativity and patience. In my post-book life I look forward to watching some football with him and talking about fourth down strategy.

  The University of Chicago Booth School of Business provided financial support for this project via the Center for Decision Research and the Initiative on Global Markets. They also pay me to go to work at a place where I can look forward each day to learning something from someone smarter than me. Oh, and they also provide me with a great office. If you read this far, you deserve to know that I lucked into the seventh draft pick.

  To produce the book three people did yeoman’s work. Two Russell Sage summer camp graduates compiled and checked the references: Paolina Medina spent part of her summer getting us started on that ta
sk, which was then taken over by Seth Blumberg, who went into a work frenzy in the final stages in which he checked everything at least twice and even helped out on some of the figures. If the facts in this book are mostly right, give them the credit, and expect to start reading their great behavioral economics papers soon. Paolina, Seth, and I all reported to the great Linnea Meyer Gandhi, who managed the entire book production process as only a Chicago Booth–trained consultant can. I simply cannot imagine how I would have ever finished this thing without her. (Neither can she.) Especially in the final stages, with lots of people working on various parts of the book simultaneously, Linnea kept us (and especially me) organized. I expect Linnea to be running a company soon. If she hires you, be prepared to work hard. No one would ever call Linnea lazy.

  Finally, against all odds France Leclerc continues to put up with me when she would rather be traveling the world looking for those images that only she can capture. She makes my world more beautiful and interesting.

  INDEX

  Page numbers listed correspond to the print edition of this book. You can use your device’s search function to locate particular terms in the text.

  Page numbers in italics refer to illustrations.

  Page numbers beginning with 359 refer to endnotes.

  accounting, 109

  Achatz, Grant, 138

  acquisition utility, 59–63, 66

  after-tax financial return on savings, 309–13

  agency theory, 105–9

  Aiello, Greg, 139n

  Ainslie, George, 101–2

  Akerlof, George, 178, 181, 182, 183, 233

  and behavioral macroeconomics, 349

  alarm clock, 85–86

  Alfred P. Sloan Foundation, 177

  Alibaba, 248n

  Alinea, 138–39

  Amazon, 72, 127, 245

  American Association for the Advancement of Science, 344