Why visual illusions are dangerous — at least code orange!

See reality

When do we consider and not consider hygiene?

For a long time it was difficult to make the argument that people might behave irrationally from time to time.  Sure we could demonstrate different irrationalities with experiments, but people would always tell me “clearly when it comes to important decisions like the stock market people will be perfectly rational!”

I didn’t think so, but it is hard to experiment with the stock market.

Sadly, the recent events have shown that the market is not as rational as we might hope, and making the case for irrationality is now rather trivial.  It is an expensive lesson, but when David Brooks from the NYT makes the case for behavioral economics, I think we have arrived. 

Maybe the most irrational tendency of them all is our belief that we are rational!

I just hope this would have been a cheaper lesson.
Sadly yours

Dan

Food might give us a good example of why we need to think more carefully about rationality now that we create products and markets….

Jake is about to chip onto the green at his local golf course when a long funeral procession passes by. He stops in mid swing, doffs his cap, closes his eyes and bows in prayer. His playing companion is deeply impressed. “That’s the most thoughtful and touching thing I’ve ever seen,” he says. Jake replies, “Yeah, well, we were married 35 years.”

Who do you think will find this joke more funny liberals or conservatives? (more…)

It is true that from a behavioral economics perspective we are fallible, easily confused, not that smart, and often irrational. We are more like Homer Simpson than Superman. So from this perspective it is rather depressing. But at the same time there is also a silver lining. There are free lunches! (more…)

 But in the process makes the point of how little we really understand the market
 

I always found the appeal to the market gods a bit odd. Why would the market fix mistakes instead of aggravating them?  When the Chicago economists sometimes (reluctantly) admit that people make mistakes, they claim that people make different types of mistakes that will eventually cancel each other out in the market. Behavioral economics argues that, instead, people will often make the same mistake, and the individual mistakes can aggregate in the market.  Let’s take the subprime mortgage crisis, which I think is a great example (but a very sad reality) of the market working to make the aggregation of mistakes worse.  It is not as if some people made one kind of mistake and others made another kind.  It was the fact that so many people made the same mistakes, and the market for these mistakes is what got us to where we are now.

How would a behavioral economist look at the sub-prime mortgage crisis in any way that is different from a rational economist?

Here is my perspective on the sub-prime mortgage crisis: When the housing market was hot, all the bankers that gave out loans assumed that their customers didn’t want their house to go into foreclosure, and that they would act accordingly. (more…)