Misbehaving: The Making of Behavioral Economics

The Weber–Fechner Law holds that the just-noticeable difference in any variable is proportional to the magnitude of that variable. If I gain one ounce, I don’t notice it, but if I am buying fresh herbs, the difference between 2 ounces and 3 ounces is obvious.

FIGURE 4.

Our model is really based on a metaphor. We propose that at any point in time an individual consists of two selves. There is a forward-looking “planner” who has good intentions and cares about the future, and a devil-may-care “doer” who lives for the present.§ The key question for any model of this behavior was deciding how to characterize interact

Kahneman and Tversky focus on changes because changes are the way Humans experience life.

Sometimes the invisible handwave is combined with the incentives argument to suggest that when the stakes are high and the choices are difficult, people will go out and hire experts to help them. The problem with this argument is that it can be hard to find a true expert who does not have a conflict of interest. It is illogical to think that someon

He did so by positing that people’s happiness—or utility, as economists like to call it—increases as they get wealthier, but at a decreasing rate. This principle is called diminishing sensitivity. As wealth grows, the impact of a given increment of wealth, say $100,000, falls.

beta (β) and delta (δ). The subtleties of the model are difficult to explain without going into some detail, but references to the key papers are provided in the endnotes. The crucial advantage that the beta–delta model has over the planner and the doer is mathematical simplicity. It is the smallest possible modification of Samuelson’s basic model

This is an illustration of the big idea of this article, one that made my hands shake as I read: using these heuristics causes people to make predictable errors. Thus the title of the paper: heuristics and biases.

Adam Smith famously visited a pin factory to see how manufacturing worked.