![]() ![]() The basic idea is that people are strongly averse to giving up goods they already have, to the point of refusing to sell the goods for a price higher than what they paid for the goods to start with. The endowment effect, a term Thaler coined in 1980 and explored in a famous 1991 paper with Kahneman and Simon Fraser University economist Jack Knetsch, has similarly profound implications. You actually do know what you’ve got before it’s gone - a little too much so, in fact This is what Thaler and Sunstein call a “nudge”: a subtle, noncoercive government intervention that can have outsize impacts because of human cognitive biases. Actually requiring that recipients enroll their kids in school hurt rather than helped merely labeling the money as school money was more effective than requiring that recipients put their kids in school.Įxploiting mental accounting, then, enabled a more effective and yet less intrusive program. A study of such a program in Morocco found that when fathers were given money and told it was meant for school support, their children were far likelier to go to school and less likely to drop out. And, it turns out, that’s exactly what happens. The idea is to trigger recipients’ mental accounting process, and use it to ensure the funds are directed toward the intended purpose. In recent years, development economics researchers have experimented with “labeled” cash transfers, wherein recipients get money that can be used for anything but are told it’s meant for a specific purpose. That, in turn, has important ramifications for public policy. These sources of income get sorted into different mental budgets, and are saved or spent differently in turn. It means that people will respond to a raise at their job very differently from a lottery payout or a tax refund or a gift card given as a present. This has important implications for analyzing, say, how an increase in income is going to change someone’s behavior. They are afraid that if the vacation home account is drawn down it will not be repaid, while the bank will see to it that the car loan is paid off on schedule." It comes, he writes, from “the household's appreciation for their own self-control problems. And what's more, Thaler notes that while economically irrational, this kind of accounting serves important purposes for people. It’s a violation of that mental accounting process to pilfer the funds for a car. The answer, Thaler argues, is that people tend to make economic decisions by budgeting certain money for certain purposes. J just use some of their $15,000 in savings to buy their new car in cash? That would save a significant amount of money, as the interest they’re paying on the car loan outstrips the interest they’re getting from their savings account. To an economist, this is pretty baffling behavior. They just bought a new car for $11,000 which they financed with a three-year car loan at 15%. The money earns 10% in a money market account. J have saved $15,000 toward their dream vacation home. In his landmark 1985 paper on mental accounting, Thaler opens with four anecdotes explaining the concept. Both of these explain behaviors that are hard to make sense of through traditional economic theory, but which should be familiar to anyone who has been, like, a human walking around in the world for a while. Thaler is perhaps most famous for his work on two kinds of economic irrationality: “mental accounting” and the endowment effect. People do accounting differently than economists - and that matters Thaler and his fellow researchers helped identified durable biases that could be modeled and used to supplement a purely rational model of human behavior. Rationality was always a simplifying assumption in economic models, and even if that assumption is implausible, it’s hard to dislodge without different, usable assumptions to put in its place. ![]() The real contribution of Thaler and other behavioral economics researchers, like psychologists Amos Tversky and Daniel Kahneman (a 2002 Nobel laureate), was identifying specific kinds of irrationality that could be predicted and modeled ahead of time. The message of behavioral economics as a subfield, and Thaler’s work in particular, is sometimes summarized as “humans aren’t rational.” Economics has historically relied heavily on models of behavior where individual agents rationally pursue their goals, and so challenging that central assumption was crucially important, especially when Thaler’s most influential papers on the subject came out in the 1980s.īut “people aren’t rational” is, on its own, a pretty obvious point. ![]()
0 Comments
Leave a Reply. |