Behavioral Economics For Dummies E-Book

Morris Altman

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 605

Veröffentlichungsjahr: 2012

Beschreibung

A guide to the study of how and why you really make financial decisions While classical economics is based on the notion that people act with rational self-interest, many key money decisions--like splurging on an expensive watch--can seem far from rational. The field of behavioral economics sheds light on the many subtle and not-so-subtle factors that contribute to our financial and purchasing choices. And in Behavioral Economics For Dummies, readers will learn how social and psychological factors, such as instinctual behavior patterns, social pressure, and mental framing, can dramatically affect our day-to-day decision-making and financial choices. Based on psychology and rooted in real-world examples, Behavioral Economics For Dummies offers the sort of insights designed to help investors avoid impulsive mistakes, companies understand the mechanisms behind individual choices, and governments and nonprofits make public decisions. * A friendly introduction to the study of how and why people really make financial decisions * The author is a professor of behavioral and institutional economics at Victoria University An essential component to improving your financial decision-making (and even to understanding current events), Behavioral Economics For Dummies is important for just about anyone who has a bank account and is interested in why--and when--they spend money.

Leseprobe

Behavioral Economics For Dummies®

Table of Contents

Visit www.dummies.com/cheatsheet/behavioraleconomics to view this books’ cheat sheet.

Introduction

About This Book

Conventions Used in This Book

What You’re Not to Read

Foolish Assumptions

How This Book Is Organized

Part I: Introducing Behavioral Economics: The Science of Making Real-World Choices

Part II: Understanding Choice

Part III: Growing the Economic Pie: The Economic Importance of Ethics, Well-Being, and Culture

Part IV: When Bubbles and Busts and Inefficiencies Are Possible: Some Behavioral Insights into the Strange World of Economic Reality

Part V: The Part of Tens

Icons Used in This Book

Where to Go from Here

Part I: Introducing Behavioral Economics: The Science of Making Real-World Choices

Chapter 1: Decoding Behavioral Economics

Making Wise Assumptions

Why reality matters

Why incentives matter — even in behavioral economics

Making Sense of Choice

Maximizing versus satisficing

The effect of emotions

The avoidance of loss

How options are framed

Paternalism versus free choice

The role of social context in decision making

Relative positioning

Growing the Economic Pie

Deciphering Bubbles and Busts

Inefficient markets and investment behavior

Emotions, intuition, animal spirits, and business cycles

Understanding Happiness: Money Isn’t Everything

Chapter 2: Getting Real about Assumptions

Defining an Economic Model

Explaining economic phenomena

Making simplifying assumptions

Discovering the irrelevance of facts

Understanding the role of math in model building

Considering cause and effect

Watching out for spurious correlations

Contemplating Conventional Economic Assumptions and Real-World Alternatives

Conventional assumption #1: People’s preferences are stable and consistent

Conventional assumption #2: People are solitary decision makers

Conventional assumption #3: How people form preferences doesn’t matter

Conventional assumption #4: People have the same preferences

Conventional assumption #5: People are all maximizers

Conventional assumption #6: People have perfect knowledge

Conventional assumption #7: People have unbounded computational capabilities

Conventional assumption #8: People have willpower

Conventional assumption #9: People are capable of acting upon their preferences

Understanding Rational Economic Behavior

You can do no wrong: Errors and biases in decision making

Selfishness and the smart society

Getting to Know the Behavioral Economics Actor

Chapter 3: Neuroeconomics: Exploring the Brain for Economic Analysis

Where Neuroeconomics Fits in the Behavioral Economics Perspective

The Brain and Economics

The evolution of the human brain

The division of labor in the human brain

The Emotional Brain

Descartes’ error: The somatic marker hypothesis

Phineas Gage and the social and emotional side of rational decision making

How Emotions Affect Decision Making

Fear and decision making

Happiness and decision making

The Limits of the Human Brain and Homo Economicus

The brain is not a calculating machine

The brain is a scarce resource

What Brain Sciences Confirm for the Behavioral Economist

People prefer the present to the future

People’s aversion to loss affects their decision making

What people feel isn’t always what they experience

People care about keeping up with — and beating — the Joneses

People’s brains evolve over their lifetimes

People value fairness

People like to trust and be trusted

Chapter 4: Why Incentives and Markets Matter, but Money Isn’t Everything

The Role of Economic Incentives for Economic Behavior

Why money is all that matters in conventional economics

Opportunity costs for Homo economicus

Decision Making and Opportunity Costs

Using up your mind: Bounded rationality

Considering costs other than money: Psychological costs

Reducing opportunity costs in the real world: Satisficing behavior

Weighing the opportunity cost of altruism

Supply and Demand and Behavioral Economics

Introducing the bandwagon effect

Investigating the snob effect

Interjecting morals and ethics

Introducing sociology to supply and demand

Economic Psychology: How Thoughts and Feelings Impact Decisions

Loss aversion: How framing, ownership, and control affect economic behavior

How the fear of uncertainty influences decisions

The warm glow: Why people sacrifice money for fairness or justice

Forfeiting money for status

Part II: Understanding Choice

Chapter 5: Exploring the Limits to Free Choice

Free Choice in Economic Decision Making

What conventional economics says

What behavioral economics says

Revealed Preferences: When Choices Reveal Your Inner Self

The narrative about preferences

False preferences versus true preferences

The limits of revealed preferences and free choice

The Illusion of Free Choice

Advertising and preference distortions

Self-control and free choice

Defaults as a determinant of choice

Herding, the bandwagon effect, and free choice: Are followers irrational?

Constraining Choice versus Freedom of Choice

Information

Education

Consumer rights

Chapter 6: Quick and Simple Heuristics and Real-World Decision Making

A Bird’s-Eye View of Smart Decision Making in Conventional Economics

Decision-making norms in conventional economics: The human calculating machine

The optimizing decision-making machine in conventional economics

Core conventional benchmarks for rational choice: To dream an impossible dream

The limits of conventional rationality

Rethinking Bounded Rationality and the Limits of the Mind

Bounded rationality and satisficing: Rationality within reason

The two blades of the decision-making scissors: Ecological rationality

Prospect Theory: Describing Average Decision-Making Behavior

Introducing prospect theory: Real-world decision making under uncertainty

Thinking about prospect theory and conventional norms

Exploring emotions as a hot bed of irrationality

The fundamentals of prospect theory: Understanding the value function

Unveiling Some Implications of Loss Aversion

Loss aversion and the certainty effect

Risk seeking in losses

The endowment effect: Explaining attachment to possessions

Uncovering Errors and Biases in Decision Making

Overconfidence

Herd behavior

Confirmation bias

Anchoring

Generalizing

Less Is Best in Decision-Making: Fast and Frugal Heuristics

Exploring the superiority of heuristics

Understanding human rationality: New benchmarks built on human capabilities

Chapter 7: How the Framing of Choices Affects Decision Making

The Framing Effect

Framing and the economic schools of thought

The effect of framing on preferences and choices

Appreciating the objective unimportance of frames: The errors and biases approach

Understanding frames as heuristics

Framing in Pictures: The Possibility of Cognitive Illusions

Framing the Mona Lisa

Distorting the line illusion

Framing faces

Framing automobiles: Surface beauty versus substance

The letter illusion

We’re All Framed: Framing and Decision Making

Framing and loss aversion: The classic Asian disease experiment

When money isn’t everything

Saving a penny to lose a bundle: Framing prices through relative positioning

Frames as Defaults: How Anchors Sway the Course of Decision Making

Changing default options and choices

Revisiting choice architecture

Framing is important, but so are income and prices

The Inescapable Frame and Rational Decision Making

Understanding frames as an information-generating machine

Repairing frames and rational decision making

Introducing product labels into the framing arsenal

Market Failure and the Framing Effect

Chapter 8: How Norms, Peers, History, and Culture Influence Choice

Making Decisions in a Bubble, the Conventional Economics Way

Making decisions as if other people don’t matter

Making decisions as if history doesn’t matter

Making decisions as if society doesn’t matter

Introducing Social Norms to Decision Making

Looking at some norms

Identifying how trust impacts economic development

Seeing how discriminating norms can lead to a slow economy

Studying the role of education in the formation of norms and the shaping of preferences

The carrot and the stick: Exploring the enforcement of social norms

Peer Pressure: Seeing How Peers Affect Decision Making

How History and Culture Affect Choice

Rooting choice in history

Culture club: How culture affects the formation of preferences and choices

Chapter 9: Why Gender, Children, and Age Matter for Economic Analysis

How Gender Affects Choice

Not tonight, honey: Conventional choice theory

Household bargaining power and women’s rights

Understanding household choices when women have a voice

Exploring population growth when women’s preferences count

Understanding why women go on welfare even if they want to work

Identifying why women are more risk averse than men

Exploring women’s altruistic preferences

Examining labor market discrimination

The Role of Children in Economic Decision Making

News Flash! Preferences Change with Age

Part III: Growing the Economic Pie: The Economic Importance of Ethics, Well-Being, and Culture

Chapter 10: Why Smart People Pay Taxes, Recycle, and Even Break the Law

Why Most People Pay Taxes: The Big Stick versus the Warm Glows

How the big stick induces tax payments

The niceness effect

Social norms and taxes

A sense of fairness and tax compliance

Different Perspectives on Reducing Pollution

Exploring the economics of pollution control

Thinking about the green corporation

Understanding the links between green consumption and green production

Studying social norms and the greening of the world

Understanding the mix of economic and non-economic variables in determining green production

Crime and Punishment

The calculating criminal

Addiction and criminal behavior

The role of identity and social networks in determining criminal behavior

Why most people don’t commit crimes even when crime pays

Chapter 11: Labor Supply in the Real World

An Introduction to Labor Supply

Decoding the reality of labor supply

Mapping out changes to labor supply

Uncovering what people do when they aren’t working

Labor Supply When People Prefer Leisure: The Conventional Economics Perspective

The income-leisure trade-off: Bribing people to work

Why economics predicts that more income reduces labor supply: Work as an inferior good

How to increase the labor supply when people dislike work: Using the big stick

How Economic Necessity, Norms, and Love of Work Determine Labor Supply

How target income affects labor supply

Why increasing income doesn’t reduce labor supply

Labor supply when market employment is a superior good

Social welfare programs and labor supply

Norms, anchors, default retirement age, and labor supply

Chapter 12: The Black Box of the Firm: Human Relationships and Productivity

Survival of the Fittest, the Firm, and Contemporary Economic Theory

Doing the best we can: From slave to free labor to the big boss

Determining industrial relations through market forces

Maximizing profits and minimizing costs in the calculating firm

Understanding why the behavioral firm wins out

When People Don’t Behave According to Conventional Economics: X-Inefficiency

Types of x-inefficiency

When product markets aren’t competitive enough

Increasing inefficiency, managerial slack, and the art of lobbying

Preferences, managerial slack, and x-inefficiency

How low wages produce x-inefficiency and high wages contribute to x-efficiency

Efficiency wages: Connecting wages, effort, and productivity

Exploring fairness and gift exchange inside the firm

Understanding the relationship between conventional, x-efficiency, and efficiency wage theories

Chapter 13: The Good Economy: How Ethical Behavior Can Grow the Economy

Ethical Behavior: An Introduction

The Conventional Perspective on Ethical Behavior and the Economy

The Good Company

The Compatibility between Ethics and Profits

Examining x-efficiency and the socially responsible firm

How ethical consumers sustain and grow ethical production

Chapter 14: Why Institutions Matter

What Behavioral Economics Has to Say about Institutions

The decision-making context

The theory of the firm

The New Institutional Economics

Institutions and Wealth Creation

Governance

Culture

Part IV: Then Bubbles and Busts and Inefficiencies Are Possible: Some Behavioral Insights into the Strange World of Economic Reality

Chapter 15: Deciphering Behavioral Finance

What Behavioral Finance Is

The Efficient Asset Market Models and Their Limits

The efficient market hypothesis

The random walk hypothesis

Irrational Exuberance: Smells Like Animal Spirit

Bubbles and Busts: A Preface to Inefficient Markets

The Dutch tulip bulb bubble

Contemporary bubbles: Evidence of inefficient markets

The causes of financial bubbles

Chapter 16: Looking into Recessions and Depressions

Introducing Psychology in Business Cycle Narratives

Grasping the meaning of macroeconomics, recessions, and depressions

Understanding animal spirits

Deconstructing business cycles: The tango between psychology and “real” factors

Economic Psychology and Government Policy

How Fairness, Reciprocity, and Punishment Influence Wages, Effort, and the Business Cycle

How efficiency wages cause sticky wages and involuntary unemployment

Why businesspeople don’t like to cut wages over the business cycle

Insights on money illusion: Tricking workers into cutting their wages

Why high wages don’t necessarily cause higher unemployment

How unemployment undermines confidence and destroys productivity

Chapter 17: The Art and Science of Happiness: Can You Be Happy without More Money?

Happiness and Conventional Economics

How happiness is measured

The art of being happy

Why conventional economics assumes that money makes you happy

Diminishing returns for income and wealth

What increasing per-capita income ignores

Happiness and Behavioral Economics

What makes us happy: The individual versus the expert

Why money alone can’t make you happy (at least if you’re well off)

The new empirics of the happiness debate

What money can’t buy (at least not easily)

How Government Policy Affects Happiness

Part V: The Part of Tens

Chapter 18: Ten (Or So) Key Public Policy Implications of Behavioral Economics

Consumer Rights and Protection and the Framing of Information

Product Labeling and Consumer Choice

Financial Markets and Information Deceit

Saving for the Future

Organ Donations

Weakness of Will and Self-Control

Labor Market Regulation and Economic Efficiency

Big Brother and Behavioral Economics: Does Government Know Best?

Crime, Punishment, and Identity

Population Growth and the Empowerment of Women

Tax Compliance: The Carrot Is as Important as the Stick

Trust and Economic Efficiency in an Imperfect World

Chapter 19: Ten (Or So) Experiments in Behavioral Economics

The Ultimatum Game: Fairness and Punishment

The Dictator Game: Being Fair Because It’s the Right Thing to Do

Fair Wage Experiments: Adventures into Labor Market Dynamics

Public Goods Games: Sacrificing for the Public Good

The Dark Side of Humanity: It Isn’t All about Lovingkindness

The Endowment Effect: How Ownership Affects Behavior

Market Games: Markets Work Even When They’re “Irrational”

Bubble Experiments: How Smart People Produce Economic Bubbles

Experiments on Bounded Rationality

Chapter 20: Ten Decision-Making Lessons from Behavioral Economics

Be Wary of Overconfidence

You Can’t Believe Everything You Read

Avoid Situations That Require More Self-Control Than You Can Muster

Don’t Blindly Follow the Herd

You Can’t Trust Everyone

Invest Simply

Pay Attention to Sample Size

Read the Fine Print

Being Nice Pays

Educate Yourself

Cheat Sheet

Behavioral Economics For Dummies®

by Morris Altman, PhD

Behavioral Economics For Dummies®

Published by John Wiley & Sons Canada, Ltd. 6045 Freemont Blvd. Mississauga, ON L5R 4J3 www.wiley.com

Copyright © 2012 by John Wiley & Sons Canada, Ltd.

Published by John Wiley & Sons Canada, Ltd.

All rights reserved. No part of this book, including interior design, cover design, and icons, may be reproduced or transmitted in any form, by any means (electronic, photocopying, recording, or otherwise) without the prior written permission of the Publisher. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd., 6045 Freemont Blvd., Mississauga, ON L5R 4J3, or online athttp://www.wiley.com/go/permissions. For authorization to photocopy items for corporate, personal, or educational use, please contact in writing The Canadian Copyright Licensing Agency (Access Copyright). For more information, visit www.accesscopyright.ca or call toll free, 1-800-893-5777.

Trademarks: Wiley, the Wiley logo, For Dummies, the Dummies Man logo, A Reference for the Rest of Us!, The Dummies Way, Dummies Daily, The Fun and Easy Way, Dummies.com, Making Everything Easier, and related trade dress are trademarks or registered trademarks of John Wiley & Sons, Inc., and/or its affiliates in the United States and other countries, and may not be used without written permission. All other trademarks are the property of their respective owners. John Wiley & Sons, Inc., is not associated with any product or vendor mentioned in this book.

Limit of Liability/Disclaimer of Warranty: The publisher and the author make no representations or warranties with respect to the accuracy or completeness of the contents of this work and specifically disclaim all warranties, including without limitation warranties of fitness for a particular purpose. No warranty may be created or extended by sales or promotional materials. The advice and strategies contained herein may not be suitable for every situation. This work is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. If professional assistance is required, the services of a competent professional person should be sought. Neither the publisher nor the author shall be liable for damages arising herefrom. The fact that an organization or Website is referred to in this work as a citation and/or a potential source of further information does not mean that the author or the publisher endorses the information the organization or Website may provide or recommendations it may make. Further, readers should be aware that Internet Websites listed in this work may have changed or disappeared between when this work was written and when it is read.

For general information on John Wiley & Sons Canada, Ltd., including all books published by John Wiley & Sons, Inc., please call our warehouse, Tel [phone]. For reseller information, including discounts and premium sales, please call our sales department, Tel [phone]. For press review copies, author interviews, or other publicity information, please contact our marketing department, Tel [phone], Fax [phone].

For technical support, please visit www.wiley.com/techsupport.

Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com.

Library and Archives Canada Cataloguing in Publication Data

Altman, Morris

Behavioral economics for dummies / Morris Altman.

Includes index.

Issued also in electronic formats.

ISBN 978-1-118-08503-5

1. Economics—Psychological aspects. 2. Finance, Personal—Decision making. I. Title.

HB74.P8A58 2012 330.01’9 C2011-907846-5

ISBN 978-1-118-08969-9 (ebk); 978-1-118-08970-5 (ebk); 978-1-118-08971-2 (ebk)

Printed in the United States

1 2 3 4 5 RRD 15 14 13 12 11

About the Author

A former visiting scholar at Cornell, Duke, Hebrew, and Stanford universities, Morris Altman is currently professor of behavioral and institutional economics and head of the School of Economics and Finance at Victoria University of Wellington. He is also professor of economics at the University of Saskatchewan, where he was head of the Department of Economics from 1994 to 2009. Recently, Morris was elected Visiting Fellow at St. Edmund’s College, Cambridge University, and was a Visiting Scholar at Stirling University in Scotland and an Erskine Fellow at the University of Canterbury, Christchurch, New Zealand.

Morris was elected and served as president of the Society for the Advancement of Behavioral Economics (SABE) from 2003 to 2006. In 2009, he was elected president of the Association for Social Economics. He is editor of the Journal of Socio-Economics (Elsevier Science) and former Associate Editor of the Journal of Economic Psychology, where he remains on the editorial board.

Morris has published over 80 refereed papers on behavioral economics, economic history, methodology, and empirical macroeconomics and four books in economic theory and public policy and has made over 150 international presentations on these subjects. He is currently completing three books on related subjects and is researching endogenous technical change, the linkages between economic justice (human rights), power, and economic growth and development, as well as the importance of altruism, ethics, and reciprocity in economic theory.

Morris is also leading major projects in experimental economics. One examines the role of prices, incomes, and social variables in determining consumer demand. Another investigates the conditions under which improved working conditions affect effort inputs and how this might impact unit costs and profitability.

He currently lives in Wellington, New Zealand, with his wife, Louise, and their daughter, Hannah.

Dedication

To my wife, Louise Lamontagne, and our daughter, Hannah Altman, for their love, inspiration, and patience.

Author’s Acknowledgments

I am very grateful to Robert Hickey of John Wiley & Sons, who got me involved in this exciting project. He carefully helped me work through a detailed template for this book, which has become its backbone. I would also like to thank Elizabeth Kuball, my project editor, for keeping me on my toes throughout my tight schedule and making very helpful suggestions that have contributed to improving the rhetoric, style, and content of this book. I’m sure that without Elizabeth’s interventions, there would be no book. I’d like to thank my technical editor Nathan Berg of the University of Texas at Dallas for his many helpful comments and suggestions. Louise Lamontagne, my colleague and collaborator of over 30 years, read through the manuscript, making critical comments and suggestions that added much to this book’s value. Hannah Altman played a critical role, always encouraging me to tackle this difficult but exciting project and adding a few hot tips of her own.

Teaching behavioral economics over the past decade has contributed immensely to the quality of this book. It gave me the opportunity to read deeply into the literature. Difficult and sometimes seemingly simple questions from my students forced me to think through concepts in behavioral economics in much more nuanced fashion than I might otherwise have done. Also, many of students’ research papers in behavioral and experimental economics helped enrich my understanding of the field.

I’ve been thinking about and researching behavioral economics since the early 1980s, when I was working through, deconstructing, and reconstructing x-efficiency theory in my doctoral work in economic history. I’ll always be appreciative to the late Harvey Leibenstein of Harvard University, the pioneer in this line of theoretical reasoning, for his mentoring and encouragement even though I was clearly heading for a road that he was not a great fan of. I also owe thanks to Professor Harold (H. R. C.) Wright, my McGill University teacher and mentor, who gave me the freedom to think and develop my own thoughts. Also of foundational importance from my McGill days are Paul Davenport, Chris Green, Jack Weldon, and Athanasios (Tom) Asimakopulos. It was Tom who enticed me out of political philosophy into economics where, he insisted, you really can make a difference. I must also thank John Tomer, a close colleague and friend on the behavioral economics bandwagon for 20 years, whose pioneering research pushed me into thinking about behavioral economics from different and interesting perspectives.

Publisher’s Acknowledgments

We’re proud of this book; please send us your comments at http://dummies.custhelp.com. For other comments, please contact our Customer Care Department within the U.S. at 877-762-2974, outside the U.S. at 317-572-3993, or fax [phone].

Some of the people who helped bring this book to market include the following:

Acquisitions and Editorial

Project Editor: Elizabeth Kuball

Acquiring Editor: Robert Hickey

Copy Editor: Elizabeth Kuball

Technical Editor: Nathan Berg, PhD

Project Coordinator, Canada: Pauline Ricablanca

Editorial Assistant: Katie Wolsley

Cover Photos: © iStock / Marcello Bortolino

Cartoons: Rich Tennant (www.the5thwave.com)

Composition Services

Senior Project Coordinator, U.S.: Kristie Rees

Layout and Graphics: Jennifer Mayberry, Corrie Socolovitch, Laura Westhuis

Proofreaders: Debbye Butler, Dwight Ramsey

Indexer: Estalita Slivoskey

John Wiley & Sons Canada, Ltd.

Deborah Barton, Vice President and Director of Operations

Jennifer Smith, Publisher, Professional and Trade Division

Alison Maclean, Managing Editor, Professional & Trade Division

Publishing and Editorial for Consumer Dummies

Kathleen Nebenhaus, Vice President and Executive Publisher

Kristin Ferguson-Wagstaffe, Product Development Director

Ensley Eikenburg, Associate Publisher, Travel

Kelly Regan, Editorial Director, Travel

Publishing for Technology Dummies

Andy Cummings, Vice President and Publisher

Composition Services

Debbie Stailey, Director of Composition Services

Introduction

Behavioral economics is all about making our economic models (the tools we use to understand and explain economic behavior) more rigorous and realistic, by building them on solid empirical foundations. It brings into the analytical mix psychological, sociological, neurological, and institutional factors. It adds breadth and depth to economic analysis. Although behavioral economics has grown in prominence over the past two decades, many conventional economists still smirk when it’s mentioned. They see behavioral economics as a bunch of mumbo-jumbo, pop psychology — but nothing could be farther from the truth.

Unlike conventional economics, behavioral economics is devoted to understanding economic phenomena based on actual human behaviors. Behavioral economics doesn’t assume that people must or even should behave in a way that’s deemed rational by conventional economics. The fact is, more often than not, people behave in ways that aren’t consistent with the conventional wisdom.

From the perspective of behavioral economics, people aren’t expected to know everything, to calculate everything in any great detail, or to be narrowly selfish. They expected, however, to be influenced by the world around them — especially by friends, family, past decisions, culture, and religion. People also are expected to be influenced by how the brain is structured: People’s decisions are affected by their limited abilities to acquire and process information and, therefore, by the need to develop decision-making shortcuts (known as ). Behavioral economics recognizes that people are not all the same. They have different tastes, wants, desires, and bargaining power, all of which can have important implications for the choices they make. It is in this unconventional world that people make decisions — and this is the world that behavioral economics is interested in understanding.