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Random Links: Some Weekend Watching/Reading On Behavioral Economics…

April 30th, 2010 · 9 Comments
Behavioral Econ · Random Links

Behavioral economics is a pretty popular topic nowadays. (see here for an overview and some history of the subject if you are not familiar.) This is not at all surprising to me, since, well, *I* chose to study it, and who wouldn’t be fascinated by the study of human behavior as it relates to money and life choices? So I have some material that I hope will keep you entertained for the weekend.

The first is a video from NOVA on PBS entitled “Mind Over Money.” It’s subtitle says all you need to know – “Can markets be rational when humans aren’t?” The show is pretty good, and the page for the video has some interesting follow-up links about the disposition effect and the effect of emotion on decision-making. (Sidenote: What has happened to me in my old age? When I was a kid I would have kicked and screamed at the notion of watching anything that came from PBS, and now…)

(Update: Bonus points for those who can explain why the people in the dollar bill auction aren’t behaving nearly as irrationally as they seem to be.)

The second resource is an article from the McKinsey Quarterly called “A Marketer’s Guide to Behavioral Economics.” The authors seem to be explicitly stating what I’ve thought about for a while- if researchers are learning how people make decisions about what to buy and how to spend money, it’s only a matter of time until marketers figure out that they should be using this information to their advantage. I think Harvard Business School has figured this out, since a lot of the behavioral economists are in the Marketing group.

Tags: Behavioral Econ · Random Links

9 responses so far ↓

  • 1 Rafael // Apr 30, 2010 at 2:01 pm


    I just recently read the adaptive market hypothesis by Dr. Lo. It is the best reconciliation of Fear and Greed and EMH I have ever seen. As I was reading it I was wondering what you thought about it.


  • 2 Damon // Apr 30, 2010 at 2:18 pm

    As a marketer I can assure you, I want to know what triggers your decision to buy a product as well as what influences your choice of one brand over another.

    Ned’s first point fits perfectly with my own beleif on consumer spending habits. Future debt services allow greater consumption today.

    By the way, I do have a bridge in Brooklyn, just 99 easy annual payments of $1,000 followed by a balloon at the end.

  • 3 Michael // May 1, 2010 at 4:52 am

    Though I don’t fully buy into the idea myself, marketing/Beh.Econ/Exper.Econ research lends credence to the idea that highly emotionally loaded assets are unable to be priced or sold “fairly.” This is already the running theory WRT *overly-complicated* assets such as CDOs during the housing bubble, but can the emotional attachment people have to their “homes” cause rampant overvaluation?

    Further, can the fear of perhaps missing out on the gold rush (with visions of HGTV, etc. dancing in their heads) lead investors to overvalue MBSs, etc? Perhaps in an asset bubble environment the irrational behavior of buyers “should not” [normative statement (!)] “be taken advantage of” by sellers, but wouldn’t that be against the seller’s economic self-interest?

    That’s why I don’t see the haranguing over the GS deal. If you’ve already disclosed all that you are legally required to disclose, hell, if you’ve already gone above and beyond the law but the counterparty is still hungry for more, do you cut them off? In the end the only one who can CYA is you, so do your homework, always!

    Though I’m sure I got it completely wrong, I follow from Vernon Smith on this issue (–20)

  • 4 Timothy Cullen // May 2, 2010 at 4:36 pm

    It seems to me that a great many claims of irrationality tend to amount to people just having preferences that other people don’t agree with. People maximize their utility as determined by subjective preferences, not their net worth. It’s not irrational to prefer goods today to goods tomorrow.

    Further, those who make such allegations of irrationality or other imperfections like market failures often fail to see that such arguments apply also to voters and regulators who are the very same allegedly irrational people participating in the ultimate public good, informed voting and good governance. Everyone benefits from it, but everyone’s vote means virtually nothing and our government is complex beyond any individual’s understanding and only becomes more so the more power is centralized and expanded in scope the way that most regulators desire.

    The value of free markets is that they make experimentation, innovation, and error correction much easier, and those errors would be corrected far earlier if monetary mismanagement, fiscal policy, and implicit bailout guarantees weren’t fueling the bubble. Without irrational government policy the bubble would never have grown that big in the first place.

  • 5 Michael L. // May 4, 2010 at 1:37 am

    On the dollar bill auction,

    Everyone quickly bids up the dollar to 20. It then quickly becomes a loss minimization problem for the person who bid 19. If they lose, then lose, then they lose 19 dollars. However, biding 21 and getting a 20 to win only results in a loss of 1 dollar.

    This and the fact that the person may not be acting irrational but simply may not have enough information about other people’s betting to know how much to bet.

    Am i right?

  • 6 TJW // Jun 25, 2010 at 11:03 am

    In an act of mental contortion conditioned by my degree in Economics, I would argue that the difference between the 20 dollars one wins for the auction and the 28 dollars one loses in bidding equates to the utility gained from the victory. In my latter years, I’ve come to the conclusion that this is a case of circular reasoning. If by virtue of a person’s actions they are reaping utility, or exercising a risk for potential utility with a full understanding of the odds, it is permanently safe to explain any person’s actions as rational by virtue of utility. That is, utility is being defined the difference between logical and real behavior. “Well, if a person does something that seems to be a bad choice, they must have either been uninformed or reaped utility from what they did equivalent to the obvious loss they suffered.”

    Unless one is willing to inflate an enormous number of assumptions, bidding more than 20 dollars for 20 dollars is not rational behavior. It is emotional and illogical behavior. That is not to say people act irrationally all of the time, but people behave irrational at times and particularly under specific conditions.

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