- Insight: Economists use "error" terms in equations as a result of the acknowledgement of bounded rationality.
- Reference: Herbert Simon: defined bounded rationality - people lack the cognitive ability to solve complex problems.
Misbehaving
by Richard H. Thaler
Published date: 2015
Category: Reference
Index Topics & Notes
- Insight: Designing good public policies has a lot in common with designing consumer products, both include choice architecture.
- Definition: People have a tendency to search for confirming, rather than disconfirming evidence.
- Insight: Confirmation becomes worse when we have assumptions that makes some disconifming evidence seem even more unlikely.
- Insight: People have a tendency to be overconfident because we do not keep a record of wrong predictions - we re-write history once we know what the present situation is.
- Insight: To fight confirmation bias we must systematically collect data, and search for evidence that could prove beliefs or assumptions to be incorrect.
- Example: Special concerts and sporting events are particularly prone to the endowment effect.
- Insight: Thaler describes the 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."
- Insight: Economic decisions are made through the lens of opportunity costs. People do not like to give up their endowment.
- Definition: The finding that after the fact we believe we always knew the outcome was likely.
- Insight: Hindsight bias is important to consider in management: a good decision at the time can lead to bad outcomes, failures cannot always be anticipated.
- Insight: People tend to recognise hindsight bias in others, but not ourselves.
- Principle: Create an environment where management are willing to take risks and are rewarded for decisions made with the information available at the time of the decision not after the fact.
- Insight: In business, sport and life everyone wants to win now.
- Insight: Mental accounting is how we think about money.
- Example: When gambling, big winners and losers tend to become more risk seeking, as their behaviour is influenced by how the game has played out.
- Definition: People keep getting promoted until they reach their level of incompetence.
- Definition: People stick to what they have unless there is a compelling reason to switch, or sometimes despite there being a good reason.
- Reference: Economists William Samuelson and Richard Zeckhauser: named status quo bias.
- Example: Eating dessert at a restaurant when full just because you pre-paid for a set menu.
- Insight: Even when we know about the principle of sunk costs, people find it difficult to ignore them.
- Insight: Money paid in advance for tickets should not influence a decision about whether or not to go.
- Principle: Ignore sunk costs (money already spent).