Skip to main content Accessibility help

We use cookies to distinguish you from other users and to provide you with a better experience on our websites. Close this message to accept cookies or find out how to manage your cookie settings.

Close cookie message
×
  1. Home
  2. Search

Refine search

Refine search

Access:
Content type:
Publication date:
Apply   From and To filters
Subject: Show more
Journals Show more
Publishers: Show more
Societies Show more
Series: Show more
Collections: Show more

Actions for selected content:

Select all | Deselect all
  • View selected items
  • Export citations
  • Download PDF (zip)
  • Save to Kindle
  • Save to Dropbox
  • Save to Google Drive

Save Search

You can save your searches here and later view and run them again in "My saved searches".

Please provide a title, maximum of 40 characters.
Cancel
×

16 results

  • The Endowment Effect and Repeated Market Trials: Is the Vickrey Auction Demand Revealing?

  • Jack L. Knetsch, Fang-Fang Tang, Richard H. Thaler
  • Journal:
    Experimental Economics / Volume 4 / Issue 3 / December 2001
    Published online by Cambridge University Press:
    14 March 2025, pp. 257-269

  • The difference between people's valuations of gains and losses has been widely observed in both single trial and repeated trial experiments, as well as in survey responses and in commonplace behavior. However, the results of some Vickrey auction experiments indicate that the disparity may decrease, or even disappear, over repeated trials. This paper reports the results of two further repeated Vickrey auction experiments that test the impact of both a second price and a ninth price auction rule on valuations. Although valuations should be independent of this variation in the exchange price rule, the manipulation had a dramatic impact on subjects’ stated values of a common market good. The results suggest that the endowment effect remains robust over repeated trials, and that contrary to common understanding, the Vickrey auction may elicit differing demands dependent on the context of the valuation.

  • Nudging is being framed

  • Richard H. Thaler
  • Journal:
    Behavioral and Brain Sciences / Volume 46 / 2023
    Published online by Cambridge University Press:
    30 August 2023, e177

  • I make three points. First, the i-frame and s-frame are not helpful frameworks for thinking about behavioral public policy. Second, the authors ignore the role of politics: Policies (and the s-frame) require laws and regulations. Third, the research on retirement savings, which is all about the system, undercuts their claims.

  • “Preferences, Paternalism, and Liberty”

  • Edited by Serena Olsaretti, University of Cambridge
  • Book:
    Preferences and Well-Being
    Published online:
    07 May 2010
    Print publication:
    23 October 2006, pp 233-264

  • Summary

    Our goal in this chapter is to draw on empirical work about preference formation and welfare to propose a distinctive form of paternalism, libertarian in spirit, one that should be acceptable to those who are firmly committed to freedom of choice on grounds of either autonomy or welfare. Indeed, we urge that a kind of ‘libertarian paternalism’ provides a basis for both understanding and rethinking many social practices, including those that deal with worker welfare, consumer protection, and the family.

    In the process of defending these claims, we intend to make some objections to widely held beliefs about both freedom of choice and paternalism. Our major emphasis is on the fact that in many domains, people lack clear, stable, or well-ordered preferences. What they choose is strongly influenced by details of the context in which they make their choice, for example default rules, framing effects (that is, the wording of possible options), and starting points. These contextual influences render the very meaning of the term ‘preferences’ unclear. If social planners are asked to respect preferences, or if they are told that respect for preferences promotes well-being, they will often be unable to know what they should do.

    Consider the question whether to undergo a risky medical procedure. When people are told, ‘Of those who undergo this procedure, 90 percent are still alive after five years,’ they are far more likely to agree to the procedure than when they are told, ‘Of those who undergo this procedure, 10 percent are dead after five years’ (Redelmeier, Rozin, & Kahneman, 1993, p. 73).

  • “Preferences, Paternalism, and Liberty”

  • Cass R. Sunstein, Richard H. Thaler
  • Journal:
    Royal Institute of Philosophy Supplements / Volume 59 / December 2006
    Published online by Cambridge University Press:
    07 April 2017, pp. 233-264
    Print publication:
    December 2006

  • Our goal in this chapter is to draw on empirical work about preference formation and welfare to propose a distinctive form of paternalism, libertarian in spirit, one that should be acceptable to those who are firmly committed to freedom of choice on grounds of either autonomy or welfare. Indeed, we urge that a kind of ‘libertarian paternalism’ provides a basis for both understanding and rethinking many social practices, including those that deal with worker welfare, consumer protection, and the family.

  • 38 - Libertarian Paternalism Is Not an Oxymoron

    • By Cass R. Sunstein, Karl N. Llewellyn Distinguished Service Professor of Jurisprudence, Law School and the Department of Political Science, University of Chicago, Richard H. Thaler, Robert P. Gwinn Distinguished Service Professor of Behavioral Science and Economics, Graduate School of Business, University of Chicago
  • Edited by Sarah Lichtenstein, Paul Slovic
  • Book:
    The Construction of Preference
    Published online:
    05 June 2012
    Print publication:
    28 August 2006, pp 689-708

  • Summary

    Consider two studies of savings behavior:

    • Hoping to increase savings by workers, several employers have adopted a simple strategy. Instead of asking workers to elect to participate in a 401(k) plan, workers will be assumed to want to participate in such a plan, and hence they will be enrolled automatically unless they specifically choose otherwise. This simple change in the default rule has produced dramatic increases in enrollment (Choi, Laibson, Madrian, & Metrick, 2002; Madrian & Shea, 2001).

    • Rather than changing the default rule, some employers have provided their employees with a novel option: Allocate a portion of future wage increases to savings. Employees who choose this plan are free to opt out at any time. A large number of employees have agreed to try the plan, and only a few have opted out. The result has been significant increases in savings rates (Thaler & Benartzi, 2004).

    Libertarians embrace freedom of choice, and so they deplore paternalism. Paternalists are thought to be skeptical of unfettered freedom of choice and to deplore libertarianism. According to the conventional wisdom, libertarians cannot possibly embrace paternalism, and paternalists abhor libertarianism. The idea of libertarian paternalism seems to be a contradiction in terms.

    Generalizing from the two studies just described, we propose a form of paternalism, libertarian in spirit, that should be acceptable to those who are firmly committed to freedom of choice on grounds of either autonomy or welfare.

  • 38 - Do Analysts Overreact?

  • from PART THREE - REAL-WORLD APPLICATIONS
  • Edited by Thomas Gilovich, Cornell University, New York, Dale Griffin, Stanford University, California, Daniel Kahneman, Princeton University, New Jersey
  • Book:
    Heuristics and Biases
    Published online:
    05 June 2012
    Print publication:
    08 July 2002, pp 678-685

  • Summary

    It has long been part of the conventional wisdom on Wall Street that financial markets overreact. Both casual observation and academic research support irrational exuberance (Shiller, 2000). For instance, Shiller's survey evidence relating to the 1987 stock market crash reveals that investors were reacting to each other's behavior rather than to hard economic news.

    In prior research, we argued that mean reversion in stock prices is evidence of overreaction. In our 1985 paper, we showed that stocks that were extreme losers over an initial 3to 5-year period earned excess returns over subsequent years. In the 1987 paper, we showed that these excess returns could not easily be attributed to changes in risk, tax effects, or the small firm anomaly. Rather, we argued that the excess returns to losers might be explained by biased expectations of future earnings. We found that the earnings for losing firms had fallen precipitously while their share prices were lagging market performance, but then rebounded strongly over the next few years. Perhaps, we speculated, “the market” did not correctly anticipate this reversal in earnings. This hypothesis, of excessive pessimism about the future prospects of companies that had done poorly, was suggested by the work of Kahneman and Tversky (1973). They found that people's intuitive forecasts have a tendency to overweight salient information such as recent news, and underweight less salient data such as long-term averages.

  • 20 - Labor Supply of New York City Cab Drivers: One Day at a Time

  • from PART FIVE - APPLICATIONS
  • Edited by Daniel Kahneman, Princeton University, New Jersey, Amos Tversky, Stanford University, California
  • Book:
    Choices, Values, and Frames
    Published online:
    01 February 2019
    Print publication:
    25 September 2000, pp 356-370

  • Summary

    “It was raining hard in Frisco/I needed one more fare to make my night”

    Harry Chapin, “Taxi”

    INTRODUCTION

    Theories of labor supply predict how the number of hours people work will change when their hourly wage or income changes. The standard economic prediction is that a temporary increase in wages should cause people to work longer hours. This prediction is based on the assumption that workers substitute labor and leisure intertemporally, working more when wages are high and consuming more leisure when its price - the forgone wage - is low (e.g., Lucas and Rapping 1969). This straightforward prediction has proven difficult to verify. Studies of many types often find little evidence of intertemporal substitution (e.g., Laisney, Pohlmeier, and Staat 1996). However, the studies are ambiguous because when wages change, the changes are usually not clearly temporary (as the theory requires). The studies also test intertemporal substitution jointly along with auxiliary assumptions about persistence of wage shocks, formation of wage expectations, separability of utility in different time periods, and so forth.

    An ideal test of labor supply responses to temporary wage increases requires a setting in which wages are relatively constant within a day but uncorrelated across days, and hours vary every day. In such a situation, all dynamic optimization models predict a positive relationship between wages and hours (e.g., MaCurdy, 1981, p. 1074).

  • 15 - Toward a Positive Theory of Consumer Choice

  • from PART FIVE - APPLICATIONS
  • Edited by Daniel Kahneman, Princeton University, New Jersey, Amos Tversky, Stanford University, California
  • Book:
    Choices, Values, and Frames
    Published online:
    01 February 2019
    Print publication:
    25 September 2000, pp 269-287

  • Summary

    ABSTRACT. The economic theory of the consumer is a combination of positive and normative theories. Since it is based on a rational maximizing model it describes how consumers should choose, but it is alleged to also describe how they do choose. This paper argues that in certain well-defined situations many consumers act in a manner that is inconsistent with economic theory. In these situations economic theory will make systematic errors in predicting behavior. Kahneman and Tversky's prospect theory is proposed as the basis for an alternative descriptive theory. Topics discussed are under-weighting of opportunity costs, failure to ignore sunk costs, search behavior, choosing not to choose and regret, and precommitment and self-control.

    INTRODUCTION

    Economists rarely draw the distinction between normative models of consumer choice and descriptive or positive models. Although the theory is normatively based (it describes what rational consumers should do), economists argue that it also serves well as a descriptive theory (it predicts what consumers in fact do). This paper argues that exclusive reliance on the normative theory leads economists to make systematic, predictable errors in describing or forecasting consumer choices.

    In some situations the normative and positive theories coincide. If a consumer must add two (small) numbers together as part of a decision process, then one would hope that the normative answer would be a good predictor. So if a problem is sufficiently simple the normative theory will be acceptable. Furthermore, the sign of the substitution effect, the most important prediction in economics, has been shown to be negative even if consumers choose at random (Becker, 1962).

  • 8 - Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias

  • from PART THREE - LOSS AVERSION AND THE VALUE FUNCTION
  • Edited by Daniel Kahneman, Princeton University, New Jersey, Amos Tversky, Stanford University, California
  • Book:
    Choices, Values, and Frames
    Published online:
    01 February 2019
    Print publication:
    25 September 2000, pp 159-170

  • Summary

    Economics can be distinguished from other social sciences by the belief that most (all?) behavior can be explained by assuming that agents have stable, well-defined preferences and make rational choices consistent with those preferences in markets that (eventually) clear. An empirical result qualifies as an anomaly if it is difficult to “rationalize,” or if implausible assumptions are necessary to explain it within the paradigm. This column presents a series of such anomalies. Readers are invited to suggest topics for future columns by sending a note with some reference to (or better yet copies of) the relevant research. Comments on anomalies printed here are also welcome. The address is Richard Thaler, c/o Journal of Economic Perspectives, Johnson Graduate School of Management, Malott Hall, Cornell University, Ithaca, NY 14853.

    After this issue, the “Anomalies” column will no longer appear in every issue and instead will appear occasionally, when a pressing anomaly crosses Dick Thaler's desk. However, suggestions for new columns and comments on old ones are still welcome. Thaler would like to quash one rumor before it gets started, namely that he is cutting back because he has run out of anomalies. Au contraire, it is the dilemma of choosing which juicy anomaly to discuss that takes so much time.

  • 14 - Mental Accounting Matters

  • from PART FOUR - FRAMING AND MENTAL ACCOUNTING
  • Edited by Daniel Kahneman, Princeton University, New Jersey, Amos Tversky, Stanford University, California
  • Book:
    Choices, Values, and Frames
    Published online:
    01 February 2019
    Print publication:
    25 September 2000, pp 241-268

  • Summary

    ABSTRACT. Mental accounting is the set of cognitive operations used by individuals and households to organize, evaluate, and keep track of financial activities. Making use of research on this topic over the past decade, this paper summarizes the current state of our knowledge about how people engage in mental accounting activities. Three components of mental accounting receive the most attention. This first captures how outcomes are perceived and experienced, and how decisions are made and subsequently evaluated. The accounting system provides the inputs to be both ex ante and ex post cost-benefit analyses. A second component of mental accounting involves the assignment of activities to specific accounts. Both the sources and uses of funds are labeled in real as well as in mental accounting systems. Expenditures are grouped into categories (housing, food, etc.) and spending is sometimes constrained by implicit or explicit budgets. The third component of mental accounting concerns the frequency with which accounts are evaluated and ‘choice bracketing’. Accounts can be balanced daily, weekly, yearly, and so on, and can be defined narrowly or broadly. Each of the components of mental accounting violates the economic principle of fungibility. As a result, mental accounting influences choice, that is, it matters.

    KEYWORDS mental accounting; choice bracketing; fungibility; budgeting

  • A former colleague of mine, a professor of finance, prides himself on being a thoroughly rational man. Long ago he adopted a clever strategy to deal with life's misfortunes. At the beginning of each year he establishes a target donation to the local United Way charity.

  • […]

  • 18 - Fairness as a Constraint on Profit Seeking: Entitlements in the Market

  • from PART FIVE - APPLICATIONS
  • Edited by Daniel Kahneman, Princeton University, New Jersey, Amos Tversky, Stanford University, California
  • Book:
    Choices, Values, and Frames
    Published online:
    01 February 2019
    Print publication:
    25 September 2000, pp 317-334

  • Summary

    ABSTRACT. Community standards of fairness for the setting of prices and wages were elicited by telephone surveys. In customer or labor markets, it is acceptable for a firm to raise prices (or cut wages) when profits are threatened and to maintain prices when costs diminish. It is unfair to exploit shifts in demand by raising prices or cutting wages. Several market anomalies are explained by assuming that these standards of fairness influence the behavior of firms.

    Just as it is often useful to neglect friction in elementary mechanics, there may be good reasons to assume that firms seek their maximal profit as if they were subject only to legal and budgetary constraints. However, the patterns of sluggish or incomplete adjustment often observed in markets suggest that some additional constraints are operative. Several authors have used a notion of fairness to explain why many employers do not cut wages during periods of high unemployment (George Akerlof, 1979;Robert,Solow, 1980). Arthur Okun (1981) went further in arguing that fairness also alters the outcomes in what he called customer markets - characterized by suppliers who are perceived as making their own pricing decisions, have some monopoly power (if only because search is costly), and often have repeat business with their clientele. Like labor markets, customer markets also sometimes fail to clear:

    … firms in the sports and entertainment industries offer their customers tickets at standard prices for events that clearly generate excess demand.

  • 17 - Myopic Loss Aversion and the Equity Premium Puzzle

  • from PART FIVE - APPLICATIONS
  • Edited by Daniel Kahneman, Princeton University, New Jersey, Amos Tversky, Stanford University, California
  • Book:
    Choices, Values, and Frames
    Published online:
    01 February 2019
    Print publication:
    25 September 2000, pp 301-316

  • Summary

    ABSTRACT. The equity premium puzzle refers to the empirical fact that stocks have outperformed bonds over the last century by a surprisingly large margin. We offer a new explanation based on two behavioral concepts. First, investors are assumed to be “loss averse,” meaning that they are distinctly more sensitive to losses than to gains. Second, even long-term investors are assumed to evaluate their portfolios frequently. We dub this combination “myopic loss aversion.” Using simulations, we find that the size of the equity premium is consistent with the previously estimated parameters of prospect theory if investors evaluate their portfolios annually.

    INTRODUCTION

    There is an enormous discrepancy between the returns on stocks and fixed income securities. Since 1926 the annual real return on stocks has been about 7 percent, while the real return on treasury bills has been less than 1 percent. As demonstrated by Mehra and Prescott [1985], the combination of a high equity premium, a low risk-free rate, and smooth consumption is difficult to explain with plausible levels of investor risk aversion. Mehra and Prescott estimate that investors would have to have coefficients of relative risk aversion in excess of 30 to explain the historical equity premium, whereas previous estimates and theoretical arguments suggest that the actual figure is close to 1.0. We are left with a pair of questions: why is the equity premium so large, or why is anyone willing to hold bonds?

  • 1 - A Behavioral Approach to Law and Economics

  • Edited by Cass R. Sunstein, University of Chicago
  • Book:
    Behavioral Law and Economics
    Published online:
    05 June 2012
    Print publication:
    28 March 2000, pp 13-58

  • Summary

    Our goal in this chapter is to advance an approach to the economic analysis of law that is informed by a more accurate conception of choice, one that reflects a better understanding of human behavior and its wellsprings. We build on and attempt to generalize earlier work in law outlining behavioral findings by taking the two logical next steps: proposing a systematic framework for a behavioral approach to economic analysis of law, and using behavioral insights to develop specific models and approaches addressing topics of abiding interest in law and economics. The analysis of these specific topics is preliminary and often in the nature of a proposal for a research agenda; we touch on a wide range of issues in an effort to show the potential uses of behavioral insights.

    We suggest that an approach based on behavioral economics will help with the three functions of any proposed approach to law: positive, prescriptive, and normative. The positive task, perhaps most central to economic analysis of law and our principal emphasis here, is to explain both the effects and content of law. How will law affect human behavior? What will individuals' likely response to changes in the rules be? Why does law take the form that it does? The prescriptive task is to see how law might be used to achieve specified ends, such as deterring socially undesirable behavior. The normative task is to assess more broadly the ends of the legal system.

  • 8 - Experimental Tests of the Endowment Effect and the Coase Theorem

  • Edited by Cass R. Sunstein, University of Chicago
  • Book:
    Behavioral Law and Economics
    Published online:
    05 June 2012
    Print publication:
    28 March 2000, pp 211-231

  • Summary

    The standard assumptions of economic theory imply that when income effects are small, differences between an individual's maximum willingness to pay for a good (WTP) and minimum compensation demanded for the same entitlement (willingness to accept or WTA) should be negligible. Thus, indifference curves are drawn without reference to current endowments, any difference between equivalent and compensating variation assessments of welfare changes are in practice ignored, and there is wide acceptance of the Coase Theorem assertion that, subject to income effects, the allocation of resources will be independent of the assignment of property rights when costless trades are possible.

    The assumption that entitlements do not affect value contrasts sharply with empirical observations of significantly higher selling than buying prices. For example, Thaler found that the minimal compensation demanded for accepting a .001 risk of sudden death was higher by one or two orders of magnitude than the amount people were willing to pay to eliminate an identical existing risk. Other examples of similar reported findings are summarized in Table 8.1. The disparities observed in these examples are clearly too large to be explained plausibly by income effects.

    Several factors probably contribute to the discrepancies between the evaluations of buyers and sellers documented in Table 8.1. The perceived illegitimacy of the transaction may, for example, contribute to the extraordinary high demand for personal compensation for agreeing to the loss of a public good. Standard bargaining habits may also contribute to a discrepancy between the stated reservation prices of buyers and sellers.