Misbehaving: The Making of Behavioral Economics

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

The core premise of economic theory is that people choose by optimizing. Of all the goods and services a family could buy, the family chooses the best one that it can afford.

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

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

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.

One example that has been used for decades is announcing a largely fictional “suggested retail price,” which actually just serves as a misleading suggested reference price. In America, some products always seem to be on sale, such as rugs and mattresses, and at some retailers, men’s suits. Goods that are marketed this way share two characteristics:

Optimization + Equilibrium = Economics.

good rule to remember is that people who are threatened with big losses and have a chance to break even will be unusually willing to take risks, even if they are normally quite risk averse.