Tim Harford has a very nice column called “Dear Economist” in which he responds to questions people email him about economics and daily life (and he writes very clever and interesting answers).  

Recently, I started getting lots of email from people with personal questions about kids, illness, jobs and romance — and I would like to propose that if anyone wants their questions about irrationality answered in a public forum (anonymously of course), send them to me (using the link on the right bar), and once a week I will pick a question and do my best to reflect on it on this blog.

Irrationally yours

Dan

The US government is clearly under some pressure to take action in an attempt to stabilize the economy, and as a consequence, recently announced a $150 billion (more or less) stimulus packages that is supposed to rejuvenate the economy and stabilize the market (H.R. 5140 — the Economic Stimulus Act of 2008).

Will the current plan achieve the government’s goals? (more…)

The reactions I get directly from people and indirectly from bloggers to Predictably Irrational are really wonderful, and I am delighted that the book is creating so much interest and discussion. Of course some people have different points of disagreements and other points of view, but this is part of the learning process (and thanks to the discussions and feedback, I am learning a lot). The range of interest in Predictably Irrational is particularly exciting for me. For example this weekend Predictably Irrational was one of the New York Times Sunday Review of Books Editors’ Choice AND it was selected for a discussion in the Sunday service of the Greater Nashville Unitarian Universalist Congregation. What more can I ask for?

Irrationally yours,

Dan

Zubin Jelveh just posted a very interesting blog post relating to Alan Greenspan’s recent piece in the Financial Times.Zubin ends the post by saying:”Just last month, Steve Levitt and John List of the University of Chicago wrote that as neat as the findings of behavioral economics have been over the past two-and-a-half decades, their practical usefulness has remained marginal:

Perhaps the greatest challenge facing behavioral economics is demonstrating its applicability in the real world. In nearly every instance, the strongest empirical evidence in favor of behavioral anomalies emerges from the lab. Yet, there are many reasons to suspect that these laboratory findings might fail to generalize to real markets.

I’d like to add the financial collapse of 2007-08 as Exhibit A.” I am not sure if this is Exhibit A (I think we had a few before), but I do think that it deserves some serious attention and some serious consideration of how to prevent this from happening again. Irrationally yours, Dan

If (as is often the case) talking about sex makes people more interested in having it, does that mean that the current talk about a recession could actually be creating one? Well, maybe.

Or so one general finding of behavioral economics would have us believe. With all this chatter about a recession, consumers might, for example, hold off on buying that new dishwasher because of the “bad economy,” or pass up the more expensive restaurant because “we’re in a recession.” Without any discussion about recession, we’re unlikely to change our pattern of behavior. But talking about it can be a force that affects our decisions and alters our consumption habits.What makes me think that we’re such creatures of habit? Consider the experience of eating a Godiva truffle: The chocolate is melting in your mouth, the aroma penetrates your nose, there is a small nut inside. . . . Now think about this familiar experience and try to determine how much it’s worth to you. A quarter? $0.50? $0.75? $1.25? $2.50? While the experience of eating a truffle is very familiar, figuring out what we would be willing to pay for it proves difficult. So what do we do when we make purchasing decisions? (more…)

Why do we buy a Toyota Prius but do not take as much care to make our homes more efficient?Don’t misunderstand me, I have nothing but admiration for the Toyota Prius. But let’s look at the numbers. Switching from a standard midsize car to the Prius can reduce CO2 emissions from 7.5 tons to 4.4 tons per year (a 3.1 savings).But consider this: A standard four-bedroom house occupied by four people in Massachusetts can produce 53 tons of CO2 a year. What if we took steps to make the home’s heating and cooling system more efficient, installed efficient lighting, used ENERGY STAR appliances, and took steps to reduce energy used for hot water? If we made all these changes, the same house could produce 30 tons of CO2 a year (savings of 23 tons).So why do we buy and proudly drive the Prius but do not spend nearly as much on making our home more efficient? (more…)

From time to time people ask me about the relationship between Predictably Irrational and Freakonomics.

To start with, Freakonomics has a single-word title, and one that is the authors’ own creation — which clearly shows that Levitt and Dubner are more imaginative and creative.

Titles aside, the fundamental difference is that whereas Freakonomics shows how the world works according to the principles of rationality, particularly in places where we don’t expect it (real-estate brokers, Sumo wrestlers, teachers, etc.). Predictably Irrational is about our irrationalities — the places where people think they behave rationally but, in fact, don’t. From this perspective, you might want to consider Predictably Irrational to be a stepbrother of Freakonomics — examining how the world works (in places where we expect rationality), according to the principles of irrationality. (more…)

The nights in the burn department were always difficult, and many of the patients would regularly ask (beg) for more painkillers to help them fall sleep. One afternoon I overheard the doctors tell the nurses not to give a certain patient any more morphine. A few hours later, when the same patient started begging for painkillers I saw the nurse go to her room with an injection and a few seconds later the patient quietly went to sleep. When the nurse stopped by my room, I asked her about it and with a smile she told me that she had given the patient IV fluid.This was the first time I experienced (secondhand) the power of placebo. I am not sure if they ever treated me with the same method, but it is certainly possible.Years later I became even more impressed with placebos when I learned that a placebo for pain has a very clear physiology. When we expect to get pain relief, our brain secretes a substance that is very much like morphine and this substance makes the pain go away. This means that even if the injection contains no painkiller we can still get pain relief courtesy of our own brain.Yesterday we published a study in The Journal of the American Medical Association about placebos. In this study we showed that when people get more expensive painkillers (placebos in our case) they expect a lot and get a lot of pain relief, but when the price of these pills is discounted, the expectations are lowered and so is their efficacy. As it turns out, with painkillers, we sometimes get what we pay for.For a story in the NYT see this link

The NYT just reported a paper by a few of my friends about soccer. The basic analysis is that during penalty kicks, goalies should stay in the middle more often than they currently do. The question, of course, is why do they so often jump to one side or the other, when it might be better to stay in the middle.

There might be many reasons for this but one thing that I am curious about is whether one reason is that not doing anything just seems wrong to the goalies. Imagine for example a highly paid stock broker that is trading on a day where there is not much news — would that broker feel the need to trade a lot just to justify his salary to himself and maybe to others? Wold he feel guilty just sitting and doing nothing (even when this is the right thing to do) and as a consequence over-trade?

I am not sure if the “idle hands” intuition is correct, but it does sound like an idea that deserves an experiment. Maybe an experiment where we pay some subjects a small amount of money for trading and others get much more money, and we see if the amount that they get changes their need to trade — even when there is no real reason to trade . . . Anyone want to predict the results?

In one of our projects, Kristina Shampanier, Nina Mazar, and I examined whether our reaction to Free! is just a rational reaction to a low price (a very low price) or if it is an irrational overreaction to Free! We carried out a set of experiments in which we measured not only what people chose but also what they gave up in the process. By doing so we were able to show that Free! can tempt us so much that we are willing to forgo a really good deal for a mediocre one simply because it is Free! For now let’s skip the experiments and consider the following thought-experiment:

Consider how long you would be willing to stand in line for a free Ben & Jerry’s ice cream cone. Let’s assume that your answer is 20 minutes and that the cost of a Ben & Jerry’s ice cream cone is $1.45. Now answer this: would you be willing to stand in line for 20 minutes for $1.45 in cash? No way.

This is exactly what the experiments showed; when something is Free! we get excited and as a consequence we are willing to give up better deals — not to mention our time, money, etc.

For the original paper see this link.

For a story about this in the New Yorker see this link.