Misconduct
The book Misbehavior is about behavioral economics. To understand the difference between behavioral economics and traditional economics, we can start with the assumptions of traditional economics. One of the basic assumptions of traditional economics is that all people are rational, and therefore the market is an efficient market, and all traditional economic models are based on the efficient market assumption. Traditional economic models are based on the efficient market assumption. This assumption has been practiced for many years and is the basis of many economic theories. Behavioral economics, on the other hand, accepts that people are not rational, and therefore there is some conflict with traditional economics from the ground up.
If we try to summarize the paradoxes of traditional economics in a nutshell, perhaps we can put it very simply: if we assume that people are rational, all choices are based on mathematical expectations, and if two options have the same expectation, then our preferences should be fixed, and we will not change our choices because of changes in expectations. But the reality is obviously not that simple.
FEATURING EFFECT
What is the "gift effect"? People often value what they already have more than what they have the opportunity to have.
In one experiment, the number of people who chose to take $100 was 72% between the options "100% will get $100" and "50% will win $200 or 50% won't win any money." the expected value of both options was $100.
In the same experiment, among "100% loss of $100" and "50% lose $200 or 50% no loss", the only person who chose a 100% loss of $100 was 36%. the expected value of both options is -$100.
Some people like to collect red wines. A bottle of red wine purchased for $10 years ago may now be worth $100. However, those who collect red wine will be willing to drink a bottle of wine with a current value of US$100 on special occasions, but they will probably not be willing to sell the bottle of wine for US$100. According to economic theory, the opportunity cost of opening the bottle of wine is $100, but $100 does not necessarily get you the bottle of wine.
Graduate students receive two free tickets to the game. Graduate students usually can't afford expensive tickets to a game, so they usually never buy their own tickets to a game, and while tickets to a game are usually very popular and can be resold for an equivalent amount of money, it's very likely that a person would choose to go to a game in this situation rather than sell the tickets.
A man with severe hay fever still mows his own lawn every week. Ask him if he wants to spend $10 to hire someone else to help him and he won't, and ask him if he'd be willing to help someone else if he was given $10 and he'd be even more reluctant to do so.
These examples are not economically sound. But they are very common loss aversion phenomena. Usually, the happiness we get from gaining $100 and the pain we feel from losing $100 are always the same as the pain we feel from losing $100.Comparative pain of lossThe
Sunk Cost Effect and Psychological Accounts
There was a man who had paid for a tennis court membership and could play tennis once a week. Two months later, his hand was injured, but he continued to play through the pain because he didn't want to waste the membership fee.
Membership fees are in fact the so-called "sunk costs" in economics, that is, money that has already been spent and cannot be recovered, according to economics should not affect our subsequent behavior, should no longer be part of the cost at the moment, and does not belong to the variables of decision-making at the moment. Note that sunk costs are different from the opportunity costs discussed earlier. In the previous example of wine or tickets, both wine and tickets can be sold to recover the original cost. Of course, we have to assume here that the membership is probably non-transferable. However, as we can see here, people often subconsciously confuse sunk costs with opportunity costs, thinking that not going to the game is a "waste" of the membership fee.
Another interesting example we can ask ourselves to see what kind of person we belong to. Let's say you bought a $20 bottle of red wine, and now the wine is worth $75. If you decide to drink one bottle, what do you think the cost of drinking the bottle will be?
- $0. It's already been paid.
- 20 for the amount paid at the beginning of the day.
- 20 dollars + interest.
- 75, the price at which it can be sold now.
- -55 for a $75 drink for only $20, earn it.
If you are an economics major, you should choose option 4, which is based on opportunity cost. If you are an accountant, you would probably choose option 2, which is based on the initial cost of ownership. However, it is interesting to note that the results of the questionnaire published in the booklet showed that the most people chose 30% option 1, followed by 25% option 5.
The authors call this phenomenon a mental account. Everyone's psychological account seems to be different, and the value of the bottle of red wine in the psychological account may be very different for each person, even if it has nothing to do with the theoretical opportunity cost and sunk cost.
Studies on the psychology of gamblers have also pointed out that previous incidents will affect their psychological accounts, and it has been very common for them to be willing to take big risks in order to recover their capital when they have lost money.
fairness
There are many irrational human behaviors that have been discovered from experiments and social observations. The human perception of fairness is one of them that has been completely ignored in traditional economics. Let's take the example of a snow shovel. When the price of a snow shovel goes up after it snows, it makes perfect sense from an economic point of view: when demand goes up and supply stays the same, the price should go up. In reality, people will see this as an act of leveraging, and a small store that does this may not be able to do business with the locals in the future.
People's perception of the fairness of an action is also strongly influenced by packaging. For example.
1. there is a shortfall in supply of popular products and there is now a two-month waiting period, so the dealer has increased the original price by $200
2. Hot items are in short supply and there is now a two-month waiting period, so distributors who originally sold them at a discounted price of $200 below the fixed price are selling them at the fixed price instead.
In both examples, the number of people who found 1 acceptable was only 291 TP3 T, but the number of people who found 2 acceptable was 581 TP3 T. This has to do with the previously mentioned talent effect, in which people generally believe that they lost in 1, while in 2 they only lost $200 of what they would have earned.
Overreaction
Psychology has found that people are willing to make extreme predictions based on weak data.
A classic experiment asks subjects to predict student grade point averages. In this experiment, the subjects were divided into two groups. One group was given deciles of their previous historical grades, and the other group was given the same deciles of their historical grades plus the student's score on a test of their sense of humor. It would seem that history grades would be correlated with future grades, and humor would be unrelated to grades, so the two groups should have made similar predictions, but in fact the second group made predictions related to the degree of their sense of humor, and the students with the worse history grades and higher senses of humor were given the better predictions.
The authors link this observation to the opposition to the efficient market hypothesis. Robert Shiller, a well-known Yale professor, published a paper in 1981 showing that, contrary to the efficient market hypothesis, stock market prices can be wrong. The paper can be read as follows.
1. First, the long-term stock value should be the present value of all expected future dividends.
2. Since we cannot predict dividends accurately, the share price is a projection based on our dividend forecast.
3. The paper analyzed the data on long-term dividend allotment and the results showed that the long-term dividend allotment for stocks was in fact very stable.
4. At the same time, however, the stock price has moved very sharply relative to the dividend forecast, suggesting that people's expectations of dividends have changed sharply from the available dividend forecasts.
Just looking at the above summary, this paper pointed out that stock prices might be irrational without explaining why, and caused a debate in the economics profession at that time. Later, however, Shiller published another paper, pointing out that stock prices may be influenced by social phenomena (factors that actually have nothing to do with actually affecting the intrinsic value of a stock). We can understand that, just as the humor scale implicitly affects the prediction of scores, other phenomena occurring in society implicitly affect stock prices when they should not be linked to stock prices.
thrust
Behavioral economics is interesting, but finding ways to apply it in economics or the financial markets seems to be quite difficult. As Shiller warns, people can't make a lot of money because they can't predict time accurately. But the "nudge" that the authors refer to in the last part of the book is toward a practical application of public policy to help people exercise self-control.
There have been many studies on self-control, such as the famous Michelle's Experiment where children were told that if they didn't eat cookies, they would get three times as many cookies at the end of the day. This experiment is famous for the fact that the children who chose not to eat the cookies in the experiment grew up to be better performers.
We know that rational behavior can help us have a higher chance of success, and we also know that human behavior is often irrational. Is there a way to help people exercise self-control to make smarter decisions?
To help people with self-control, we can summarize three factors to overcome: inertia, loss aversion, and overcoming the temptation to enjoy the moment (studies have shown that it is easier for people to maintain rationality when they are making a decision for a longer term, such as purchasing something they will not use for 10 years).
One successful experiment to help people make better decisions is the "Save More Tomorrow" program. Retirement accounts in the U.S. allow people to decide how much they want to save, and it's well known that the U.S. doesn't have a high savings rate. The Save More Tomorrow program gives people the default option of increasing the amount they save each year. Because they get a raise every year, people don't feel like they're losing out, and it's easier to rationalize something that won't happen until next year. It's a default option, so it's possible to reject it, but it's a default option that makes everything easier. This method has proven to be effective in increasing the savings rate.
However, a point of caution in implementing such policies or methods is that they are intended to guide and inform. Those who formulate them must be careful not to fall into coercion or deception as a result of the need to advocate. The author also mentions two principles at the end of the book, one of which is to make things easier in order to encourage them, and the other is not to carry out policies that are not based on evidence.
On a personal level, the concepts mentioned here coincide with many of the ways to help increase personal productivity. The best way to increase personal productivity is to set rules and make them easy to follow. By minimizing the opportunity to make short-term, in-the-moment decisions, by maintaining the "joy" of execution, and by automating as much as possible the process of making good decisions for the long term, we make it easier to maintain good plans.
Behavioral Economics
The author of Misbehavior is Richard Thaler, the godfather of behavioral economics and winner of the 2017 Nobel Prize in Economics. In fact, I didn't care too much about the author's identity when I chose this book, I always choose a book after a little flip through the book, I feel interested or helpful to read, but after reading more and more familiar, I realized that before reading this book, I have already read his other book Nudge (thrust), the two books in the intellectual content is very similar, and they both use some of the classic cases of behavioral economics as an example, but This book focuses more on the author's personal perspective on the history of the gradual development of behavioral economics, which is perhaps more accurately described as being more like the career memoirs of the godfather of behavioral economics. The book begins with how he began to notice the topic of behavioral economics and its challenge to traditional economics, through the experiments and thesis writing process of his career, and finally to the process of thrust and its gradual influence in the British and American governments. From the author's point of view, it is very clear to piece together how an anti-conformist idea has grown from a social science observation all the way to a school of academic thought.
Behavioral economics is actually closer to a combination of psychology and economics. Much of what is now called behavioral economics could have been considered deviant in its early days. Basically, behavioral economics says that because people are irrational, we may infer that economic models based on rational assumptions are bound to be biased. At that time, research was mainly based on questionnaire surveys, asking questions similar to those mentioned above to prove that people were not rational. However, there is also room for refutation in traditional economics. One argument is that although people are not rational, they collectively behave as if they are rational. It is like a pool player who does not make precise calculations on the spot, but the path of the ball seems to be precisely calculated. Another theory is that although people are not rational at the beginning, they will eventually "learn" to be rational after making mistakes in the market. Although behavioral economics has gradually become a mainstream academic discipline, like many social science issues, it is still difficult to argue who is right and who is wrong on the basis of academic evidence. For people outside of the academic community, it is always interesting to learn more about the theories and their applications.
After reading this book, I also gained a better understanding of many famous scholars whose names I have heard but whose backgrounds I don't know, which is an added bonus.
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