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

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poor predictions. At this point Posner was completely exasperated. “You are completely unscientific!” he cried, in utter despair. I had resolved to remain calm so I just smiled at this outburst, said, “Okay then,” and moved on. There was much more contentious material still to come, and I was determined not to get into a shouting contest, especially with a federal judge! The biggest fight was about something called the Coase theorem. The Coase theorem is named for its inventor, Ronald Coase, who had been a faculty member at University of Chicago Law School for many years. The theorem can be easily stated: in the absence of transaction costs, meaning that people can easily trade with one another, resources will flow to their highest-valued use.‡ The logic is easy to explain. I will follow Coase’s lead and explain it with a simple numerical example. Suppose that Alexa and Julia are college roommates. Julia is quiet and studious, but Alexa is boisterous and likes to play loud music while she studies, which disturbs Julia. Julia complains to the dorm resident advisor, Hallie, who is empowered to settle disputes like this. Hallie can choose one of two alternatives: she can give Alexa the right to play her music as loud as she likes, or she can give Julia the right to quiet during certain hours. The Coase theorem makes a strong and surprising prediction: Hallie’s decision will have no effect on how much music Alexa will play. Rather, that will depend simply on whether Alexa likes her music more than Julia hates it. The result is surprising but the logic is simple. Suppose Alexa is willing to pay $5 per night to blast her music, and Julia is willing to pay $3 a night for silence. If Julia is awarded the right to silence, then, according to the Coase theorem, Alexa will pay Julia some amount between $3 and $5 for the right to play her music, an amount Julia will accept. Both will be happier this way than if Alexa couldn’t play her music but no money changed hands; that is, after all, why they’re both agreeing to the transaction. And if Alexa wins the right to play her music, Julia will be unwilling to pay her enough to stop, since her value of silence is less than Alexa’s joy of music. Either way, Julia will have to find somewhere else to study if she wants quiet. The reason this result is important for the law is that judges often decide who owns a certain right, and the Coase theorem says that if transaction costs are low, then what the judge decides won’t actually determine what economic activities will take place; the judge will just decide who has to pay. The article that includes this result, entitled “The Problem of Social Cost,” is one of the most cited economics articles of all time. The argument I have sketched up to this point crucially depends on the stated assumption that the costs involved in the two parties coming to an efficient economic agreement are small to nonexistent. Coase is upfront about this. He
says: “This is, of course, a very unrealistic assumption.” Although many applications of the Coase theorem ignore Coase’s warning, we wanted to show that the result was wrong, even when it could be shown that transaction costs were essentially zero. To do so, we presented the results of the mug experiments that were discussed in chapter 16, the results of which are summarized in figure 17. FIGURE 17
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To: Victor Fuchs who gave me a year
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15. Fairness Games 16. Mugs V. ENGA
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PREFACE Before we get started, here
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had written plenty of other strong
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1 Supposedly Irrelevant Factors Ear
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advice. Until very recently, other
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Humans. The good news is that we do
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now other countries around the worl
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2 The Endowment Effect I began to h
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y Schelling’s analysis, without a
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one. He also did not sell any of hi
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some modest health benefit but is e
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seen the sweater in the store and d
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efore Kahneman and Tversky came alo
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4 Value Theory After my day in the
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conceptual breakthrough offered by
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The way that von Neumann and Morgen
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The same is true in financial matte
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losses, as illustrated by the exper
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5 California Dreamin’ Sherwin Ros
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had not bothered to invent Hebrew e
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14. When I was not wandering the hi
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† There are, of course, exception
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One of the most prominent of the pu
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accordance with the rational econom
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more to give up the $ bet than the
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Jensen about his students, and Mike
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At some point I had to get this pap
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7 Bargains and Rip-Offs My friend M
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the object gained and then subtract
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always a sale going on. Most of us
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8 Sunk Costs Vince paid $1,000 to a
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you are keeping. Going to the event
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Suppose you bought a case of good B
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Strongly Strongly Mean: 2.88 Agree
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what I do “wackonomics,” a term
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on how much slack is in the budget.
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addressed by making the option of r
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10 At the Poker Table During my tim
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Kahneman and Tversky to run experim
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noticed that when a certain colleag
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ECON: In that case, you prefer to e
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he portrayed the topic as a struggl
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earlier economists such as Jevons a
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Yorker, March 29, 1976 © The Saul
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time, economists had been moving aw
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years and plans to leave no bequest
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much higher than a similar increase
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He devised a two-part plan to succe
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write a large check to someone you
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University of Rochester Graduate Sc
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less pleasurable. The only way to m
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the key papers are provided in the
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INTERLUDE
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Vermont or New Hampshire. Operation
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idea of committing to ski more ofte
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hundred dollars. A rebate seems to
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what I thought they should do. Firs
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14 What Seems Fair? Danny and Jack
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Jessie and her ever-present doll Jo
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for something falls, in this case l
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1990s. And what is it the bank thin
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My takeaway from these examples is
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price, for Saturday night at eight,
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Proposers would offer half, which w
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There is another class of games tha
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were due to some confusion on the p
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16 Mugs At some point during the Va
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a series of simple questions. Those
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subjects how much they like the goo
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The endowment effect experiments sh
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V. ENGAGING WITH THE ECONOMICS PROF
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offered to the first group are: Pol
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league crowd without seeming presum
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would no longer be irrelevant if di
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home field advantage. Shiller was t
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around the Earth. At the Chicago co
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articles were about ten to twelve p
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19 Forming a Team The “Anomalies
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invited three groups of people: dis
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Freud; Sigmund was his great-grandf
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would want to come. Fortunately, ov
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20 Narrow Framing on the Upper East
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short life expectancy, Amos and Dan
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one of the goals being to improve
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actually is. It is one of the few t
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accepting this parlay, and the chan
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Schwartz, now a professor of medica
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econometrics skills, to join us. Th
Page 183 and 184: VI. FINANCE: 1983-2003 Aside from t
Page 185 and 186: The EMH has two components, which a
Page 187 and 188: special issue of the Journal of Fin
Page 189 and 190: Make a guess before continuing. Rea
Page 191 and 192: guesses of 99 or 100; what were tho
Page 193 and 194: 22 Does the Stock Market Overreact?
Page 195 and 196: percentile), and so forth. The othe
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Page 199 and 200: etter the next game. Children of se
Page 201 and 202: 23 The Reaction to Overreaction Wit
Page 203 and 204: even more anomalous! To rescue the
Page 205 and 206: 24 The Price Is Not Right Recall th
Page 207 and 208: Shiller titled his paper “Do Stoc
Page 209 and 210: With the benefit of hindsight, it i
Page 211 and 212: I should stress that the imprecisio
Page 213 and 214: 25 The Battle of Closed-End Funds S
Page 215 and 216: from NAV. While funds typically sel
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Page 219 and 220: ________________ * The only copy of
Page 221 and 222: offering, sold about 1% to a consor
Page 223 and 224: He could pay $95 and get one share
Page 225 and 226: Owen and I wrote an academic paper
Page 227 and 228: these warning signals and realized
Page 229 and 230: each generation has got to make its
Page 231 and 232: this point I had adopted the pedago
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Page 238 and 239: Coase theorem worked in theory, whe
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Page 244 and 245: had the duty of negotiating with ne
Page 246 and 247: About a day after the draft order w
Page 248 and 249: I also put a bit of the blame on th
Page 250 and 251: MBA student, during my first year a
Page 252 and 253: who didn’t thought iPhone ownersh
Page 254 and 255: When Cade and I tracked down Mr. Mc
Page 256 and 257: the price of early picks rational,
Page 258 and 259: If this market were efficient, then
Page 260 and 261: How could the decision-makers in th
Page 262 and 263: Our relationship with the Redskins
Page 264 and 265: managerial ladder. All economists a
Page 266 and 267: 30 Game Shows With all the research
Page 268 and 269: continuing to play, the contestant
Page 270 and 271: consider the role of “path depend
Page 272 and 273: undertake more risk, when choosing
Page 274 and 275: The figure shows the percentage of
Page 276 and 277: Nick has made a nice sideline caree
Page 278 and 279: VIII. HELPING OUT: 2004-PRESENT By
Page 280 and 281: more saving. This is not much help.
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IRS to issue to issue a series of r
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one-on-one financial planning sessi
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computer programming to combine the
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ate of return on savings, and the e
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Cass relishes more than writing a b
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Econs are already doing the right t
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choice,” a term both more accurat
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I knew almost nothing about British
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University of Chicago Law School wh
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experiment used a letter with simil
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locally known as lofts. In a world
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Tempering expectations about the ma
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mandate or budget to run randomized
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For example, to my knowledge there
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financial markets were the most eff
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cannot be profitably applied to big
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theory has now been repeatedly and
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don’t know that gets you into tro
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stubbornly clinging to an imaginary
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27 the theory of human capital form
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89 “This is illustrated by the st
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146 conditional cooperators: Fehr a
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210 “Worldly wisdom teaches . . .
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Chapter 29: Football 277 “Divisio
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342 it was the reminder . . . which
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the Economics of Finance, vol. 1B,
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Cooper, Arnold C., Carolyn Y. Woo,
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Rationality.” Games and Economic
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Knobe, Joshua, Wesley Buckwalter, S
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Modigliani, Franco, and Merton Mill
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Macfie. Indianapolis: LibertyClassi
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Research. Zamir, Eyal, and Doron Te
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ACKNOWLEDGMENTS A lazy man does not
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INDEX Page numbers listed correspon
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Binmore, Ken, 50 “Binmore continu
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Daily Mail, 135 Daily Show, The, 35
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ubbles created in, 40n, 206n with d
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Goolsbee, Austan, 352 gouging, 127-
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Johnson, Eric, xv, 82, 180n, 299, 3
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of managers, 187-89, 190 myopic, 19
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National Public Radio, 32, 305 natu
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presumed consent, in organ donation
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St. Louis Rams, 290 St. Petersburg
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Stigler’s Law, 296n Stiglitz, Jos
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two-system view of mind, 103, 109 U
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ALSO BY RICHARD H. THALER Quasi-Rat
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Richard H Thaler - Misbehaving- The Making of Behavioral Economics (epub)

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