Can it be that cheating and taking too much risk are related?

We learned that people cheat more when the object of cheating is even one step removed from money. Could it be that when financial tools are more complex it encourages people to take too much risk? It is hard to tell, but I suspect this might be the case.

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…)

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…)

A few years ago I got a new Audi A3. The car was great and I loved driving it, but about three months later, while I was driving down the Mass turnpike (trucks on my right and left), the transmission stopped responding and the car lost speed, fast. It was very dangerous to maneuver to the right shoulder, but eventually I made it.

Over the next month or so I had multiple “chats” with the Audi customer service representatives, as well as with the Audi repair shop where my car had become a permanent fixture (I think they were trying a new experiment on how to best annoy their customers and they were getting better and better at this with every passing day). About 5 weeks after the transmission died, I drove my rental car back to Boston, and took my Audi back to Princeton. But this was not the end of it for me. (more…)

Last week the second largest bank in France, Societe Generale, announced that it had uncovered a 4.9 billion euro ($7.14 billion) of fraudulent trades, allegedly committed by a 31-year-old trader named Jerome Kerviel.

Before we decide which parties are to blame, let me tell you about some experiments we recently conducted on cheating with MIT and Harvard students. (more…)