Richard H Thaler - Misbehaving- The Making of Behavioral Economics (epub)

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The Endowment Effect
I began to have deviant thoughts about economic theory while I was a graduate
student in the economics department at the University of Rochester, located in
upstate New York. Although I had misgivings about some of the material
presented in my classes, I was never quite sure whether the problem was in the
theory or in my flawed understanding of the subject matter. I was hardly a star
student. In that New York Times Magazine article by Roger Lowenstein that I
mentioned in the preface, my thesis advisor, Sherwin Rosen, gave the following
as an assessment of my career as a graduate student: “We did not expect much of
him.”
My thesis was on a provocative-sounding topic, “The Value of a Life,” but the
approach was completely standard. Conceptually, the proper way to think about
this question was captured by economist Thomas Schelling in his wonderful
essay “The Life You Save May Be Your Own.” Many times over the years my
interests would intersect with Schelling’s, an early supporter and contributor to
what we now call behavioral economics. Here is a famous passage from his
essay:
Let a six-year-old girl with brown hair need thousands of dollars for an operation that will prolong
her life until Christmas, and the post office will be swamped with nickels and dimes to save her.
But let it be reported that without sales tax the hospital facilities of Massachusetts will deteriorate
and cause a barely perceptible increase in preventable deaths—not many will drop a tear or reach
for their checkbooks.
Schelling writes the way he speaks: with a wry smile and an impish twinkle in
his eye. He wants to make you a bit uncomfortable.* Here, the story of the sick
girl is a vivid way of capturing the major contribution of the article. The
hospitals stand in for the concept Schelling calls a “statistical life,” as opposed to
the girl, who represents an “identified life.” We occasionally run into examples