Misbehaving: The Making of Behavioral Economics

We think that required active choosing is most suitable when the choices are simple, such as whether to opt in or out. In more complex situations, such as choosing a portfolio from a menu of hundreds of mutual funds, forcing people to choose is a dubious strategy.

Understanding mental accounts would also improve public policy. Governments can benefit from understanding the concept of mental accounting.

If people were perfectly rational—if they made decisions solely by crunching the numbers—then subjects would always choose to invest, since the expected overall value on each round is higher if one invests ($1.25, or $2.50 multiplied by the 50 percent chance of getting tails on the coin toss) than if one does not ($1). In fact, if a person invests

Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias,” Journal of Economic Perspective 5, no. 1 (1991): 193– 206, http://users.tricity.wsu.edu/~achaudh/kahnemanetal.pdf