I recently read this book. I found it very good. However, sometimes his explanations are long winded, which is why this reference is great.
Behavioral Economics is a fascinating field. It combines Psychology with Economics and can more accurately predict human behavior because it includes the Human factor.
Here's a sentence from another related book (Nudge) I'm currently reading on the difference between Economics and Behavioral Economics.
To qualify as Econs, people are not required to make perfect forecasts (that would require omniscience), but they are required to make unbiased forecasts. That is, the forecast can be wrong, but they can't be systematically wrong in a predictable direction.
In this book they use the term Econ to mean what a typical Economist thinks of an average person.
This is an emerging field of Social Science that has seen tremendous growth. As someone whose interested in both Psychology and Economics this is exciting to see.
It seems to me that these traits have become a part of us over a long process of social evolution. So even though they may seem irrational when observed in such a sterile environment, they must be the most successful behavior for human beings to have, otherwise we would not be doing them.
Human environments have changed significantly faster than the genetics that determine our behavior. We're still predisposed to value immediate over delayed gratification, even though modern societies highly reward those who can delay it.
No; what follows is that they must have been (not be) successful behaviour (not the most successful behaviour) for human beings to have. Evolution selects for things that work, not for things that are best, not least because possible adaptations that never actually turn up don't get the chance to be selected for.
It's almost certainly true that the heuristics built into our brains work better in practice than you'd think from a here's-how-we're-irrational description. But they still cost us sometimes, and it's good to be aware of them and look out for them in cases where we need the best answers we can get rather than the best we can get in ten seconds.
Great point! Except that the study of human behavior is used to manipulate humans, such that these successful instincts are actually not optimal or do not benefit the person in many situations. That in itself is part of social evolution, which in itself is studied, which itself is part of social evolution...
For more information on this, look up Edward Bernays, "The Engineering of Consent"
From Wikipedia:
The Engineering of Consent" is an essay by Edward Bernays first published in 1947.[citation needed] He defines "engineering consent" as the art of manipulation of people; specifically, American citizen, who are described as "fundamentally irrational people... who could not be trusted." It maintained that entire populations, which were undisciplined or lacking in intellectual or definite moral principles, were vulnerable to unconscious influence so as make them want things that they do not need. This was achieved by linking those products and ideas to their unconscious desires. Ernest Dichter, who is widely considered to be the "father of motivational research," referred to this as "the secret-self of the American consumer."
Note the homepage for the book: http://www.predictablyirrational.com/
has a 'reseach' section where you can download many if not all of the original papers.
One of the things that struck me was that "People are sometimes willing to sacrifice the pleasure they get from an experience in order to project a certain image to others...People, particularly those with a high need for uniqueness, may sacrifice personal utility in order to gain reputational utility."
This is underdeveloped, but something I've been thinking about on and off:
Hypothesis - there are klunky algorithms you can use that aren't all that good, but which are very cheap to run. Humans have a lot of tradeoffs like this built into them.
I can't think of great examples though. The strong natural link between fear and desire to destroy (rather than - for example - the desire to investigate) may be one. Yes, in the sandbox of one example the desire to investigate leads to better outcomes, but perhaps across the board that doesn't work for the amount of energy that we have available.
If I was buying a suit at that cost, I would have consumed more energy considering the decision to buy than if I'd been buying a pen, and that would influence whether I had the energy to travel for a discount.
My grandmother used to step back and analyse things by starting again and working forwards from first principles. Smart lady, but she didn't have nearly enough energy spare for things like doing the washing or cleaning her house.
Some of the things are very interesting and separate to this - particularly where the decisions we make are completely opposite by the free vs non-free. Decision tree hacking.
I see this as just a logical result of combining interest and understanding of the subconscious, which was first seen roughly a century ago, with capitalism from a consumer's perspective.
I agree with the "Predictably" part of "Predictably Irrational". Of course people are irrational while they desperately maintain a proud veneer of rationality, we've known for quite awhile now. Their conclusions are pretty predictable, but I do appreciate that they've done these studies and tested it in a variety of situations.
A strong will is increasingly becoming a human being's best tool for improving their daily lives. It seems like more and more pitfalls are being deliberately engineered in society that encourage us to abandon our self-control.
A lot of them aren't really irrational, or maybe it depends on your definition. For example the endowment effect - it would be stupid to part with your only ticket unless the buyer pays a large premium.
You didn't understand. The point was that the same person would pay $X for good A, but will only sell good A for $B, where $B >> $A..
Let's pretend that if I want a widget I am willing to pay $1 (but not $2) for it. That means I would prefer to have the widget over $1, but prefer to have $2 over the widget. However, if I have a widget I'm willing to sell it for $3 (but not for $2). That implies that I am would rather have the widget than $2, which is clearly a contradiction with the previous conclusion. This is irrational. (And it violates several of the key assumptions underlying classical economics).
The endowment effect is causing very serious problems right now.
This is probably the reason why people are unwilling to sell houses at below-bubble prices, even though they would be unwilling to buy at current prices.
If someone figures out how to arbitrage this, they will be rich.
Yeah I got that. There's a number of possible resolutions, eg selling the widget might be an unnecessary hassle. The problem is we're starting with different sets of premises. As I see it, a rational person considers many factors in the decision to sell good A for $X. The amount he'd pay for it is just one factor & probably the least important one.
In the real world there are transaction costs - but for most people in the example given (college students selling event tickets) they don't come anywhere near $1000.
These seem like heuristics that people use to avoid fraud and other social problems. They're 'usually correct'. And many of them learned from the society. For example, I bet children can start with a lot of social behavior expectations at new jobs that they would learn later are 'market behavior no nos'. Or that people who hold on to their houses and waiting for market prices to rise again are betting on a strategy that can work. The baseball ticket is a quickly expiring good, while houses can last for a very long time.
I shared my unedited notes on this book a few months ago. I felt the book had a few really cool findings and a lot of fluff, so I redid it as bullet-points:
http://blog.kiwitobes.com/?p=49
Behavioral Economics is a fascinating field. It combines Psychology with Economics and can more accurately predict human behavior because it includes the Human factor.
Here's a sentence from another related book (Nudge) I'm currently reading on the difference between Economics and Behavioral Economics.
To qualify as Econs, people are not required to make perfect forecasts (that would require omniscience), but they are required to make unbiased forecasts. That is, the forecast can be wrong, but they can't be systematically wrong in a predictable direction.
In this book they use the term Econ to mean what a typical Economist thinks of an average person.
This is an emerging field of Social Science that has seen tremendous growth. As someone whose interested in both Psychology and Economics this is exciting to see.