Misbehaving

“Finally, an idea occurred to me. On the next exam, I made the total number of points available 137 instead of 100. This exam turned out to be slightly harder than the first, with students getting only 70% of the answers right, but the average numerical score was a cheery 96 points. The students were delighted! No one’s actual grade was affected by this change, but everyone was happy.”

This quote exemplifies the core theme of Thaler’s book: The Human Factor in Economic Decision-Making. Thaler’s solution to the students’ dissatisfaction with their exam scores highlights the irrational, yet predictable, aspects of human nature. It illustrates how small changes in the presentation of information can significantly alter perception and satisfaction, a key observation that underpins the field of behavioral economics.

“Dean did not understand how his friend could possibly think he could afford to go to the game. His friend could not understand why Dean didn’t realize the tickets were free. That is the endowment effect.”

This captures the essence of the endowment effect, a key concept in behavioral economics. It highlights how ownership changes our valuation of items. Dean’s friend values the experience of attending the game more because he owns the tickets, while Dean sees the opportunity to sell them for profit. This divergence in behavior due to ownership status demonstrates the irrational yet predictable ways humans assign value to possessions. Thaler uses this real-world example to illustrate the practical implications of the endowment effect.

“The discrepancy between buying and selling prices got my mind wandering. What else do people do that is inconsistent with the economists’ model of rational choice?”

This captures a pivotal moment for Thaler, sparking his dive into behavioral economics. It highlights his observation that human decisions frequently stray from what traditional economics would predict as rational. Thaler’s inquiry into the different values people assign to things they own versus those they don’t leads to uncovering the complex and often irrational nature of human decision-making.