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…)

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…)

Dear Irrational,

I am a finance professor at one of the top business schools in the U.S., and I am starting to doubt the assumptions of irrationality based on what I see in my students.

Here is the story: Every year when I teach the basic finance class to either the MBAs or the executive MBAs we get to the point where we talk at length about the benefit of diversification, including how to think about risk and return. (more…)

The WSJ recently reviewed a book called “Billion Dollar Lessons”

Here is one of the stories from the book (and the review): (more…)

Dear Irrational,

I have a simple question: What issue do you think matters most to voters in this election?

A citizen
——–
(more…)

On Sept 14th 2008 the front page on the New York Times described some of the outcomes of Hurricane Ike as it traveled across Texas. In the previous 24 hours, Hurricane Ike distorted much of Galveston with a wall of water, flooding numerous coastal towns and leaving extensive damage across Houston. From the report it was clear that a few people died as a consequence of Hurricane Ike but it was not yet clear how many people died. It was clear however, that thousands and thousands are now homeless, that over three million people were left without electricity, and that the devastation has been incredible. (more…)

Megan made a list of songs that reflect the theme of each chapter.

Here it is: (more…)

In the aftermath of Spygate, reading the deluge of blog postings—especially those by bloggers outside of New England—may have led one to the conclusion that Bill Belichik was a calculated cheat who took planned risks and in the process tarnished the sacred reputation of a national treasure. This is, of course, not the first time that someone in a position of power has engaged in regrettable behavior, and it is also not the first time that the public and the media has rushed to label such behavior as the act of an unethical individual—a “bad apple.” We suggest that this rush to label such behaviors as the actions of one unethical individual often obscures rather than informs our understanding of such behavior, and more importantly it provides no lessons to help us understand and think about how to prevent such behaviors in the future. (more…)

A recent study conducted by Zillow finds what they call a “Not My House! Sentiment,” where despite the evidence that 77% of U.S. homes actually declined in value in the past year, 62% of homeowners believe their own home’s value has increased or stayed the same.

How can this be? (more…)