endowment effect

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pages: 500 words: 145,005

Misbehaving: The Making of Behavioral Economics by Richard H. Thaler

"Robert Solow", 3Com Palm IPO, Albert Einstein, Alvin Roth, Amazon Mechanical Turk, Andrei Shleifer, Apple's 1984 Super Bowl advert, Atul Gawande, Berlin Wall, Bernie Madoff, Black-Scholes formula, business cycle, capital asset pricing model, Cass Sunstein, Checklist Manifesto, choice architecture, clean water, cognitive dissonance, conceptual framework, constrained optimization, Daniel Kahneman / Amos Tversky, delayed gratification, diversification, diversified portfolio, Edward Glaeser, endowment effect, equity premium, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, George Akerlof, hindsight bias, Home mortgage interest deduction, impulse control, index fund, information asymmetry, invisible hand, Jean Tirole, John Nash: game theory, John von Neumann, Kenneth Arrow, Kickstarter, late fees, law of one price, libertarian paternalism, Long Term Capital Management, loss aversion, market clearing, Mason jar, mental accounting, meta analysis, meta-analysis, money market fund, More Guns, Less Crime, mortgage debt, Myron Scholes, Nash equilibrium, Nate Silver, New Journalism, nudge unit, Paul Samuelson, payday loans, Ponzi scheme, presumed consent, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, random walk, randomized controlled trial, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Silicon Valley, South Sea Bubble, Stanford marshmallow experiment, statistical model, Steve Jobs, Supply of New York City Cabdrivers, technology bubble, The Chicago School, The Myth of the Rational Market, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, transaction costs, ultimatum game, Vilfredo Pareto, Walter Mischel, zero-sum game

Buyers were willing to pay about half of what sellers would demand, even with markets and learning. Again we see that losses are roughly twice as painful as gains are pleasurable, a finding that has been replicated numerous times over the years. The endowment effect experiments show that people have a tendency to stick with what they have, at least in part because of loss aversion. Once I have that mug, I think of it as mine. Giving it up would be a loss. And the endowment effect can kick in very fast. In our experiments, the subjects had “owned” that mug for a few minutes before the trading started. Danny liked to call this the “instant endowment effect.” And while loss aversion is certainly part of the explanation for our findings, there is a related phenomenon: inertia. In physics, an object in a state of rest stays that way, unless something happens.

Many years later Kahneman and Tversky would call this distinction “framing,” but marketers already had a gut instinct that framing mattered. Paying a surcharge is out-of-pocket, whereas not receiving a discount is a “mere” opportunity cost. I called this phenomenon the “endowment effect” because, in economists’ lingo, the stuff you own is part of your endowment, and I had stumbled upon a finding that suggested people valued things that were already part of their endowment more highly than things that could be part of their endowment, that were available but not yet owned. The endowment effect has a pronounced influence on behavior for those considering attending special concerts and sporting events. Often the retail price for a given ticket is well below the market price. Someone lucky enough to have grabbed a ticket, either by waiting in line or by being quickest to click on a website, now has a decision to make: go to the event or sell the ticket?

Second, they invoked a version of the invisible handwave to argue that the misbehaving observed in the Knetsch and Sinden experiment would disappear if the subjects were making choices in a market context, meaning buyers and sellers trading and prices fluctuating. Danny and I returned to Vancouver with a mission: design an experiment that would convince Plott and Smith that the endowment effect was real. Naturally, since Jack had conducted the original experiment and was part of our fairness team, we joined forces with him on the new design. The discussion with Charlie and Vernon also led us to recognize that the endowment effect, if true, will reduce the volume of trade in a market. Those who start out with some object will tend to keep it, while those who don’t have such an object won’t be that keen to buy one. We wanted to come up with a design that could exploit this prediction. The basic idea was to build on Jack’s original study and add a market.


pages: 654 words: 191,864

Thinking, Fast and Slow by Daniel Kahneman

Albert Einstein, Atul Gawande, availability heuristic, Bayesian statistics, Black Swan, Cass Sunstein, Checklist Manifesto, choice architecture, cognitive bias, complexity theory, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, delayed gratification, demand response, endowment effect, experimental economics, experimental subject, Exxon Valdez, feminist movement, framing effect, hedonic treadmill, hindsight bias, index card, information asymmetry, job satisfaction, John von Neumann, Kenneth Arrow, libertarian paternalism, loss aversion, medical residency, mental accounting, meta analysis, meta-analysis, nudge unit, pattern recognition, Paul Samuelson, pre–internet, price anchoring, quantitative trading / quantitative finance, random walk, Richard Thaler, risk tolerance, Robert Metcalfe, Ronald Reagan, Shai Danziger, Supply of New York City Cabdrivers, The Chicago School, The Wisdom of Crowds, Thomas Bayes, transaction costs, union organizing, Walter Mischel, Yom Kippur War

Quarterly Journal of Economics 118 (2003): 47–71. Jack Knetsch also: Jack L. Knetsch, “The Endowment Effect and Evidence of Nonreversible Indifference Curves,” American Economic Review 79 (1989): 1277–84. ongoing debate about the endowment effect: Charles R. Plott and Kathryn Zeiler, “The Willingness to Pay–Willingness to Accept Gap, the ‘Endowment Effect,’ Subject Misconceptions, and Experimental Procedures for Eliciting Valuations,” American Economic Review 95 (2005): 530–45. Charles Plott, a leading experimental economist, has been very skeptical of the endowment effect and has attempted to show that it is not a “fundamental aspect of human preference” but rather an outcome of inferior technique. Plott and Zeiler believe that participants who show the endowment effect are under some misconception about what their true values are, and they modified the procedures of the original experiments to eliminate the misconceptions.

However, it is well understood that reference points are labile, especially in unusual laboratory situations, and that the endowment effect can be eliminated by changing the reference point. No endowment effect is expected when owners view their goods as carriers of value for future exchanges, a widespread attitude in routine commerce and in financial markets. The experimental economist John List, who has studied trading at baseball card conventions, found that novice traders were reluctant to part with the cards they owned, but that this reluctance eventually disappeared with trading experience. More surprisingly, List found a large effect of trading experience on the endowment effect for new goods. At a convention, List displayed a notice that invited people to take part in a short survey, for which they would be compensated with a small gift: a coffee mug or a chocolate bar of equal value.

As the volunteers were about to leave, List said to each of them, “We gave you a mug [or chocolate bar], but you can trade for a chocolate bar [or mug] instead, if you wish.” In an exact replication of Jack Knetsch’s earlier experiment, List found that only 18% of the inexperienced traders were willing to exchange their gift for the other. In sharp contrast, experienced traders showed no trace of an endowment effect: 48% of them traded! At least in a market environment in which trading was the norm, they showed no reluctance to trade. Jack Knetsch also conducted experiments in which subtle manipulations made the endowment effect disappear. Participants displayed an endowment effect only if they had physical possession of the good for a while before the possibility of trading it was mentioned. Economists of the standard persuasion might be tempted to say that Knetsch had spent too much time with psychologists, because his experimental manipulation showed concern for the variables that social psychologists expect to be important.


pages: 302 words: 87,776

Dollars and Sense: How We Misthink Money and How to Spend Smarter by Dr. Dan Ariely, Jeff Kreisler

accounting loophole / creative accounting, Airbnb, Albert Einstein, bitcoin, Burning Man, collateralized debt obligation, Daniel Kahneman / Amos Tversky, delayed gratification, endowment effect, experimental economics, hedonic treadmill, IKEA effect, invisible hand, loss aversion, mental accounting, mobile money, placebo effect, price anchoring, Richard Thaler, sharing economy, Silicon Valley, Snapchat, Stanford marshmallow experiment, Steve Jobs, TaskRabbit, the payments system, Uber for X, ultimatum game, Walter Mischel, winner-take-all economy

Ownership of an item, no matter how that ownership came to be, makes us overvalue it. Why? Because of something called the ENDOWMENT EFFECT. The idea that we value what we have more simply because we own it was first demonstrated by Harvard psychologist Ellen Langer and later expanded by Dick Thaler. The basic conceit of the endowment effect is that the current owner of an item overvalues it, and because of that will want to sell it at a price higher than the future owner will be willing to pay for it.1 After all, the item’s potential buyer is not its owner and therefore is not affected by the same love-what-you-have endowment effect. Typically, in experiments testing the endowment effect, selling prices are found to be about twice as high as buying prices. The price at which the Bradleys wanted to sell their home—how they valued it—was higher than the price buyers were willing to pay.

We just hope they include either virtual weight loss or a virtual appreciation for “Dad bod,” too. IT’S IN THE WAY THAT YOU LOSE IT The endowment effect is deeply connected to LOSS AVERSION. The principle of loss aversion, first proposed by Daniel Kahneman and Amos Tversky,6 holds that we value gains and losses differently. We feel the pain of losses more strongly than we do the same magnitude of pleasure. And it’s not just a small difference—it’s about twice as much. In other words, we feel the pain of losing $10 about twice as strongly as we do the pleasure of winning $10. Or, if we tried to make the emotional impact the same, it would take winning $20 to counteract the feeling of losing $10. Loss aversion works hand in hand with the endowment effect. We don’t want to give up what we own partly because we overvalue it, and we overvalue it partly because we don’t want to give it up.

Knetsch (Simon Fraser University), and Richard H. Thaler (University of Chicago), “The Endowment Effect: Evidence of Losses Valued More than Gains,” Handbook of Experimental Economics Results (2008). 2. Michael I. Norton (Harvard Business School), Daniel Mochon (University of California, San Diego), and Dan Ariely (Duke University), “The IKEA Effect: When Labor Leads to Love,” Journal of Consumer Psychology 22, no. 3 (2012): 453-460. 3. Ziv Carmon (INSEAD) and Dan Ariely (MIT), “Focusing on the Forgone: How Value Can Appear So Different to Buyers and Sellers,” Journal of Consumer Research 27, no. 3 (2000): 360–370. 4. Daniel Kahneman (UC Berkeley), Jack L. Knetsch (Simon Fraser University), and Richard Thaler (Cornell), “Experimental Tests of the Endowment Effect and the Coarse Theorem,” Journal of Political Economy 98 (1990): 1325–1348. 5.


pages: 201 words: 21,180

Designing for the Social Web by Joshua Porter

barriers to entry, en.wikipedia.org, endowment effect, Howard Rheingold, late fees, Marc Andreessen, Mark Zuckerberg, Milgram experiment, Paul Buchheit, Ralph Waldo Emerson, recommendation engine, social software, social web, Steve Jobs, web application, zero-sum game

Using words like “my” or “your” may seem like little more than rhetoric, but there’s real psychology at play here. These sites are leveraging what’s called the Endowment Effect.10 The Endowment Effect is the tendency of people to value things more once a sense of ownership has been established. It’s not just about site names, however. In design, ownership can be conveyed best in copywriting and labeling. By using words such as “you” and “my” where appropriate, designers can imply ownership and give people the feeling that their content is something worth holding onto. Conferring ownership has several benefits: . Leverages the Endowment Effect to make content seem more valuable . Conveys a sense of responsibility for the content if others are around (people will be more likely to take care of it) .

When newcomers see this review, they learn what behavior is appreciated. They learn by observing what happens. Figure 5.20 Yelp.com places “reviews of the day” in prominent locations to show desired behavior to newcomers. They tend to have impressive numbers that show successful behavior to others. Endowment Effect The Endowment Effect is the idea that people value something more when they feel a sense of ownership. We all know what this is like. From the moment we first compare our bicycles with our friends’ bikes, there’s something special about ours simply because it is ours. The classic study of the endowment effect involves economics. To test for the presence of the effect, researchers usually test whether or not people will insist upon selling an item for more than they can buy it for. This would show that they value it more because they own it. This quickly gets murky, however, because there are many shades of “ownership.”

Technically, we own something the moment we pay money for it. But for many things, this notion of ownership is weak. Certainly, we give items meaning based on our history with them. We value a gift from a loved one much more than the exact same item received in some other way. From a less economic point of view, however, we have a very common way to describe the Endowment Effect. When we say that an item has “sentimental value,” suggesting that its value goes beyond its inherent value as an object, we are pointing to the Endowment Effect. On the web, we’re often talking not just about items we own, but items we create. This is important because items that we create (pictures, blog posts, bookmarks, comments, etc.) tend to have much more meaning than items we did not create. Everyone likes to feel ownership in and be proud of their creations. 122 DESIGNING FOR THE SOCIAL WEB Attachment to a Group Attachment to a group is one of the more straightforward reasons why people participate online.


pages: 249 words: 77,342

The Behavioral Investor by Daniel Crosby

affirmative action, Asian financial crisis, asset allocation, availability heuristic, backtesting, bank run, Black Swan, buy and hold, cognitive dissonance, colonial rule, compound rate of return, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, endowment effect, feminist movement, Flash crash, haute cuisine, hedonic treadmill, housing crisis, IKEA effect, impulse control, index fund, Isaac Newton, job automation, longitudinal study, loss aversion, market bubble, market fundamentalism, mental accounting, meta analysis, meta-analysis, Milgram experiment, moral panic, Murray Gell-Mann, Nate Silver, neurotypical, passive investing, pattern recognition, Ponzi scheme, prediction markets, random walk, Richard Feynman, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, science of happiness, Shai Danziger, short selling, South Sea Bubble, Stanford prison experiment, Stephen Hawking, Steve Jobs, stocks for the long run, Thales of Miletus, The Signal and the Noise by Nate Silver, tulip mania, Vanguard fund

In-person due diligence of management, for all its common-sense appeal, is really little more than an expensive boondoggle that gives fund managers false confidence while increasing sunk costs that obscure decision-making. Endowment effect and experience Hopeful new research out of the University of Maryland suggests that experience may lessen the impact of the endowment effect. John List observed that experienced sports memorabilia traders were much less prone to conservatism than their more callow counterparts. Whereas newbies tended to overvalue their holdings and be slow to buy and sell, more experienced traders sized up deals on an individual basis and made dispassionate decisions less prone to the endowment effect. If it is human nature to want to cling tightly to what we own, even in the face of better options, it is encouraging to think that we can be broken of this habit with sufficient experience.

Good investing is based on clear-eyed decision-making and buying and selling wholly on merit. This tendency to love the one you’re with is known as the endowment effect. Its existence has been established in hundreds of experiments but has never been as described as beautifully as in Ayn Rand’s novel, The Fountainhead. Within, Wynand describes the effect in easily relatable terms, “I am the most offensively possessive man on earth. I do something to things. Let me pick up an ashtray from a dime-store counter, pay for it and put it in my pocket – and it becomes a special kind of ashtray, unlike any on earth, because it’s mine.” Like so many of the concepts discussed in this book, the endowment effect exhibits deep evolutionary salience. It has now been observed in three different primate species and has been shown to be more intense when life-sustaining needs (e.g., food) are involved versus simple wants (e.g., toys).

The human propensity toward conservatism, driven by some of the neurological processes discussed before, appears behaviorally as the interaction of a constellation of non-rational cognitive processes including the endowment effect, mere exposure effect, home bias, regret avoidance and loss aversion. Remember from our earlier discussion that the human brain and body are always looking to operate in the most parsimonious manner possible. Relying on what has worked in the past or what has always been done is a very cognitively efficient way to do just that. It’s no wonder that as decisions become more complicated or the tradeoffs become more tiring to consider, the tendency to stay put becomes more pronounced. Richard Thaler has suggested that this tendency is rooted in the endowment effect or our proneness to value something simply because it is ours. Whether that something is a method of viewing the world, a political ideology or even a physical item, we tend to love it just because we own it.


pages: 241 words: 75,516

The Paradox of Choice: Why More Is Less by Barry Schwartz

accounting loophole / creative accounting, attribution theory, Atul Gawande, availability heuristic, Cass Sunstein, Daniel Kahneman / Amos Tversky, endowment effect, framing effect, hedonic treadmill, income per capita, job satisfaction, loss aversion, medical residency, mental accounting, Own Your Own Home, Pareto efficiency, positional goods, price anchoring, psychological pricing, RAND corporation, Richard Thaler, science of happiness, The Wealth of Nations by Adam Smith

Considering the random distribution, you would think that about half the people in the group would have gotten the object they preferred and that the other half would be happy to swap. But in fact, there are very few trades. This phenomenon is called the endowment effect. Once something is given to you, it’s yours. Once it becomes part of your endowment, even after a very few minutes, giving it up will entail a loss. And, as prospect theory tells us, because losses are more bad than gains are good, the mug or pen with which you have been “endowed” is worth more to you than it is to a potential trading partner. And “losing” (giving up) the pen will hurt worse than “gaining” (trading for) the mug will give pleasure. Thus, you won’t make the trade. The endowment effect helps explain why companies can afford to offer money-back guarantees on their products. Once people own them, the products are worth more to their owners than the mere cash value, because giving up the products would entail a loss.

Once people own them, the products are worth more to their owners than the mere cash value, because giving up the products would entail a loss. Most interestingly, people seem to be utterly unaware that the endowment effect is operating, even as it distorts their judgment. In one study, participants were given a mug to examine and asked to write down the price they would demand for selling it if they owned it. A few minutes later, they were actually given the mug, along with the opportunity to sell it. When they owned the mug, they demanded 30 percent more to sell it than they had said they would only a few minutes earlier! One study compared the way in which the endowment effect influences people to make car-buying decisions under two conditions. In one condition, they were offered the car loaded with options, and their task was to eliminate the options they didn’t want.

Moxey, “Perspective in Statements of Quantity, with Implications for Consumer Psychology,” Psychological Science, 2002, 13, 130–134. Or suppose you are Many examples of phenomena discussed in this section can be found in articles collected in D. Kahneman and A. Tversky (eds.), Choices, Values, and Frames (New York: Cambridge University Press, 2000). On the endowment effect, see D. Kahneman, J. Knetsch, and R. Thaler, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias.” On decisions to sell stock, see T. Odean, “Are Investors Reluctant to Realize Their Losses?” On sunk costs, see R. Thaler, “Mental Accounting Matters,” and R. Thaler, “Toward a Positive Theory of Consumer Choice.” On health insurance decisions, see E. Johnson, J. Hershey, J. Mezaros, and H. Kunreuther, “Framing, Probability Distortions, and Insurance Decisions.”


pages: 420 words: 130,503

Actionable Gamification: Beyond Points, Badges and Leaderboards by Yu-Kai Chou

Apple's 1984 Super Bowl advert, barriers to entry, bitcoin, Burning Man, Cass Sunstein, crowdsourcing, Daniel Kahneman / Amos Tversky, delayed gratification, don't be evil, en.wikipedia.org, endowment effect, Firefox, functional fixedness, game design, IKEA effect, Internet of things, Kickstarter, late fees, lifelogging, loss aversion, Maui Hawaii, Minecraft, pattern recognition, peer-to-peer, performance metric, QR code, recommendation engine, Richard Thaler, Silicon Valley, Skype, software as a service, Stanford prison experiment, Steve Jobs, The Wealth of Nations by Adam Smith, transaction costs

Since we now know that the value of something becomes much greater after it is in our possession, consumers often feel reluctant to return that product and get their money back afterwards. For Sale Not For Use One caveat to the Endowment Effect is, if the person owns something as a token “for exchange,” they will not feel attached to the item in a biased manner. If a merchant owns hundreds of shoes in the hopes of exchanging them for money, he obviously does not feel that sense of attachment when someone buys the product. Similarly, when consumers part ways with their money to buy these shoes, they also are not pulled back by the Endowment Effect (unless they are already in financial difficulty)8. Interestingly, when Economist John List studied trading behaviors at Baseball Card Conventions, he noticed that novice traders were heavily influenced by the Endowment Effect, inappropriately valuing their own cards much higher than what the market would bear.

It became one of the earliest precursors of popular social games where the key objective is to care for an animal, a property, or a business. It looks like this ingrained sense of Ownership & Possession, along with some added benefits of novelty (Core Drive 7: Unpredictability & Curiosity), made products like Pet Rocks, Tamagotchi, and later on Facebook games like Farmville or Pet Society4 such big successes worldwide. The Endowment Effect There is quite a bit of scientific research on how our psychology changes when we believe we own something. Much of it is summed up in what Academics call the Endowment Effect. In his book Thinking: Fast and Slow, Economics Nobel Prize Laureate Daniel Kahneman describes how a certain well-respected academic and wine lover becomes very reluctant to sell a bottle of wine from his collection for $100, but would also not pay more than $35 for a wine of similar quality. This made little economic sense because the same or similar wine should hold the same value in a person’s mind.

Tic-Tac-Draw The General’s Carrot in Education Folding into the Crowd The Elysian Stairs to Health Empowerment and Creativity in the Corporate Space Draw a Gun for Bad Endgame Design Game Techniques within Empowerment of Creativity & Feedback Core Drive 3: The Bigger Picture Chapter 8: The Fourth Core Drive - Ownership & Possession Wait, it’s mine? Hold on, I do care then! Stamps of Sanity How Stoned Can You Be The First Virtual Pet Game The Endowment Effect Identity, Consistency, and Commitments Game Techniques within Ownership & Possession Core Drive 4: The Bigger Picture Chapter 9: The Fifth Core Drive - Social Influence & Relatedness The Mentor that Stole My Life We’re all Pinocchios at Heart The Average Person is Above Average Social Influence vs. Epic Meaning within a Team Corporate Competition as an Oxymoron Game Techniques within Social Influence & Relatedness Core Drive 5: The Bigger Picture Chapter 10: The Sixth Core Drive: Scarcity & Impatience The Lure of being Exclusively Pointless The Value of Rare Pixels The Leftovers aren’t all that’s Left Over Persuasively Inconvenient Curves are better than Cups in Economics “This guy’s not expensive enough.”


pages: 397 words: 109,631

Mindware: Tools for Smart Thinking by Richard E. Nisbett

affirmative action, Albert Einstein, availability heuristic, big-box store, Cass Sunstein, choice architecture, cognitive dissonance, correlation coefficient, correlation does not imply causation, cosmological constant, Daniel Kahneman / Amos Tversky, dark matter, endowment effect, experimental subject, feminist movement, fixed income, fundamental attribution error, glass ceiling, Henri Poincaré, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, job satisfaction, Kickstarter, lake wobegon effect, libertarian paternalism, longitudinal study, loss aversion, low skilled workers, Menlo Park, meta analysis, meta-analysis, quantitative easing, Richard Thaler, Ronald Reagan, selection bias, Shai Danziger, Socratic dialogue, Steve Jobs, Steven Levy, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, William of Occam, Zipcar

Giving teachers the same amount of money at the beginning of the term and telling them they would have to pay back that amount if their students failed to meet a specified target resulted in a significant positive effect on student performance.4 It’s not possible to justify the endowment effect in cost-benefit terms. I should be willing to sell a commodity at the same or slightly higher price than I paid for it. Even economists are susceptible to a range of biases, including the endowment effect bias, which prevent them from being fully rational in cost-benefit terms. The endowment effect concept, in fact, first occurred to the economist Richard Thaler when he thought about the behavior of an economist colleague who was a wine enthusiast. The man never paid more than thirty-five dollars for a bottle of wine but was sometimes unwilling to sell a bottle bought at that price even for amounts as large as one hundred dollars.5 Having such a large spread between buying price and selling price can’t be defended in terms of the normative rules of cost-benefit theory.

On average, owners are willing to sell only when the price is double what the average nonowner is willing to pay.2 Loss aversion lies behind this endowment effect. People don’t want to give up things they own, even for more than they originally considered a fair price. Imagine you bought a ticket to a football game for two hundred dollars but would have been willing to pay five hundred dollars. Then a couple of weeks later you discover on the Internet that there are lots of desperate people willing to pay up to two thousand dollars for a ticket. Do you sell? Maybe not. There can be a huge spread between what something was worth to buy and what it’s worth to sell—for no better reason than that we would have to give the thing up.3 The performing arts presenters at my university make good use of the endowment effect in their promotional campaigns. Sending people a twenty-dollar voucher they can use for ticket purchase nets 70 percent more ticket sales than mailing them a letter with a promo code for a twenty-dollar discount.

We fail to make a friend because we made hasty judgments based on insufficient evidence. We hire people who are not the most capable because we trusted firsthand information too much and more extensive and superior information from other sources too little. We lose money because we don’t realize the applicability of statistical concepts such as standard deviation and regression and the relevance of psychological concepts such as the endowment effect, which causes us to want to keep things for no better reason than that we have them, and economic concepts such as sunk costs, which cause us to send good money after bad. We eat foods and take medicines and consume vitamins and other supplements that aren’t good for us because we’re not sufficiently skilled in evaluating alleged scientific findings about health practices. Society tolerates government and business practices that make our lives worse because they were developed without following effective evaluation procedures and remain untested long after they were introduced—sometimes for decades and at costs in the billions of dollars.


pages: 415 words: 125,089

Against the Gods: The Remarkable Story of Risk by Peter L. Bernstein

"Robert Solow", Albert Einstein, Alvin Roth, Andrew Wiles, Antoine Gombaud: Chevalier de Méré, Bayesian statistics, Big bang: deregulation of the City of London, Bretton Woods, business cycle, buttonwood tree, buy and hold, capital asset pricing model, cognitive dissonance, computerized trading, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Lloyd's coffeehouse, endowment effect, experimental economics, fear of failure, Fellow of the Royal Society, Fermat's Last Theorem, financial deregulation, financial innovation, full employment, index fund, invention of movable type, Isaac Newton, John Nash: game theory, John von Neumann, Kenneth Arrow, linear programming, loss aversion, Louis Bachelier, mental accounting, moral hazard, Myron Scholes, Nash equilibrium, Norman Macrae, Paul Samuelson, Philip Mirowski, probability theory / Blaise Pascal / Pierre de Fermat, random walk, Richard Thaler, Robert Shiller, Robert Shiller, spectrum auction, statistical model, stocks for the long run, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, Thomas Bayes, trade route, transaction costs, tulip mania, Vanguard fund, zero-sum game

In 1995, they launched their own firm to manage money in accordance with their contrarian model. Thaler never recovered from his early fascination with that "very interesting" disparity between prices for which people were willing to buy and sell the identical items. He coined the expression "endowment effect" to describe our tendency to set a higher selling price on what we own (are endowed with) than what we would pay for the identical item if we did not own it.* In a paper written in 1990 with Daniel Kahneman and another colleague, Jack Knetsch, Thaler reported on a series of classroom experiments designed to test the prevalence of the endowment effect.t4 In one experiment, some of the students were given Cornell coffee mugs and were told they could take them home; they were also shown a range of prices and asked to set the lowest price at which they would consider selling their mug.

NBER Reporter, National Bureau of Economic Research, Fall, pp. 9-13. Thaler, Richard H., and Hersh Shefrin, 1981. "An Economic Theory of SelfControl." Journal of Political Economy, Vol. 89, No. 2 (April), pp. 392-406. In Thaler, 1991. Thaler, Richard H., Amos Tversky, and Jack L. Knetsch, 1990. "Experimental Tests of the Endowment Effect." Journal ofPolitical Economy, Vol. 98, No. 6, pp. 1325-1348. Thaler, Richard H., Amos Tversky, and Jack L. Knetsch, 1991. "Endowment Effect, Loss Aversion, and Status Quo Bias." Journal of Economic Perspectives, Vol. 5, No. 1, pp. 193-206. Todhunter, Isaac, 1931. A History of the Mathematical Theory of Probability from the Time of Pascal to that of Laplace. New York: G. E. Stechert & Co. Originally published in Cambridge, England, in 1865. Townsend, Robert M., 1995.

.* In a paper written in 1990 with Daniel Kahneman and another colleague, Jack Knetsch, Thaler reported on a series of classroom experiments designed to test the prevalence of the endowment effect.t4 In one experiment, some of the students were given Cornell coffee mugs and were told they could take them home; they were also shown a range of prices and asked to set the lowest price at which they would consider selling their mug. Other students were asked the highest price they would be willing to pay to buy a mug. The average owner would not sell below $5.25, while the average buyer would not pay more than $2.25. A series of additional experiments provided consistent results. The endowment effect is a powerful influence on investment decisions. Standard theory predicts that, since rational investors would all agree on investment values, they would all hold identical portfolios of risky assets like stocks. If that portfolio proved too risky for one of the investors, he could combine it with cash, while an investor seeking greater risk could use the portfolio as collateral for borrowings to buy more of the same. The real world is not like that at all. True, the leading institutional investors do hold many stocks in common because the sheer volume of dollars they must invest limits them to stocks with the highest market values-stocks like General Electric and Exxon.


pages: 198 words: 53,264

Big Mistakes: The Best Investors and Their Worst Investments by Michael Batnick

activist fund / activist shareholder / activist investor, Airbnb, Albert Einstein, asset allocation, bitcoin, Bretton Woods, buy and hold, buy low sell high, cognitive bias, cognitive dissonance, Credit Default Swap, cryptocurrency, Daniel Kahneman / Amos Tversky, endowment effect, financial innovation, fixed income, hindsight bias, index fund, invention of the wheel, Isaac Newton, John Meriwether, Kickstarter, Long Term Capital Management, loss aversion, mega-rich, merger arbitrage, Myron Scholes, Paul Samuelson, quantitative easing, Renaissance Technologies, Richard Thaler, Robert Shiller, Robert Shiller, Snapchat, Stephen Hawking, Steve Jobs, Steve Wozniak, stocks for the long run, transcontinental railway, value at risk, Vanguard fund, Y Combinator

One of the ways that this manifests itself in investing is in something called the endowment effect. After consumers or investors make a purchase, we value this new possession more than we did before it was ours. Imagine you're wagering on a football game in which the two teams competing are of no rooting interest to you. It's a coin toss. You go back and forth several times, but finally decide to pull the trigger on the team with the less talented quarterback but a stronger defense. After you've walked to the counter and placed your bet, you'll immediately feel much better about your decision than before you parted with your dollars. Kahneman, Knetsch, and Thaler documented this in an experiment in their 1991 paper, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias.”1 In an advanced undergraduate economics class at Cornell, 22 students in alternating seats were given coffee mugs that sell for $6 at the bookstore.

Know when you're wrong; use price levels, dollar loss levels, or percentage loss levels. Making decisions ahead of time, especially decisions that involve admitting defeat, can help conquer one of the biggest hurdles investors face; looking in the mirror and seeing an ability that we just do not possess. Notes 1. Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias,” Journal of Economic Perspectives 5, no. 1 (Winter 1991): 193–206. 2. Robert Shiller, Irrational Exuberance (Princeton, NJ: Princeton University Press, 2000), 60. 3. David Dreman, Contrarian Investment Strategies: The Psychological Edge (New York: Free Press, 2012), 176. 4. Roger Lowenstein, Buffett (New York: Random House, 2008), 62. 5. Ibid., 93. 6.

Even with the Valeant debacle, their long‐term track record is phenomenal, but the point in all this is that if you are going to take concentrated positions, you must have the stomach for massively different results than the overall market. It's easy to look at long‐term charts of Microsoft and Apple in awe, but when you do, remind yourself of Valeant and Enron. There are a few things you can do to prevent yourself from marrying the next Valeant. If you are buying a chipmaker because you hope it gets into the next iPhone, write down your thinking. This way, if it doesn't come to fruition, you can combat the endowment effect, which is the phenomenon of people ascribing more value to something because they own it. Writing down the reason you bought something can mitigate this. The other thing you can do to prevent your own future self from getting stuck to a position is to write down an exit plan. For example, Let's say I am putting 10% of my portfolio in stock XYZ at $100, and I'm willing to risk 5% of my overall portfolio on this stock.


pages: 91 words: 22,748

Outer Order, Inner Calm: Declutter and Organize to Make More Room for Happiness by Gretchen Rubin

A Pattern Language, Airbnb, Broken windows theory, endowment effect, place-making

Either you often use that white-noise generator, bowl for loose change, or electric toothbrush, or you never use it. If you’re not using it, get it into the hands of someone who will use it. BEWARE OF THE “ENDOWMENT EFFECT.” Before you accept something for free or take advantage of a great deal, decide: Do I really need this thing? Do I love it? Keep in mind that because of the “endowment effect,” we value things more once we own them. Once that thing enters your home, it will be tough to get it out again. A mug, a hand-me-down toy, the lamp from your mother-in-law—if you don’t need it, don’t take it. If you never possess an item, you don’t have to store it, dust it, find it, or figure out how to give it away. When clearing clutter, one way to fight the endowment effect is to ask, “If I didn’t already own this possession, would I buy it?” If not, why keep it? ABANDON A PROJECT.

The easiest way to complete a project is to abandon it. Get that stuff off your shelf and off your conscience. CONSIDER THE X FACTOR. If you can’t decide whether to keep an item of clothing, ask yourself, “If I ran into my ex on the street, would I be happy if I were wearing this?” Often, the answer will give you a good clue. BEWARE OF THE “DURATION EFFECT.” In my own life, I’ve noticed a phenomenon that’s related to the endowment effect—what I think of as the “duration effect.” The longer I own a possession, the more precious it becomes, even if it has never been particularly valued. We have an ugly, badly designed pair of scissors, but my husband got them as a high school graduation gift—how can we get rid of the scissors now? This phenomenon is strongest with any possession related to my children. My daughters never played with that china tea set, but now that we’ve had it for fifteen years, how can we give it away?


pages: 324 words: 93,175

The Upside of Irrationality: The Unexpected Benefits of Defying Logic at Work and at Home by Dan Ariely

Alvin Roth, assortative mating, Burning Man, business process, cognitive dissonance, corporate governance, Daniel Kahneman / Amos Tversky, end world poverty, endowment effect, Exxon Valdez, first-price auction, Frederick Winslow Taylor, George Akerlof, happiness index / gross national happiness, hedonic treadmill, IKEA effect, Jean Tirole, job satisfaction, knowledge economy, knowledge worker, loss aversion, Peter Singer: altruism, placebo effect, Richard Thaler, Saturday Night Live, second-price auction, software as a service, The Wealth of Nations by Adam Smith, ultimatum game, Upton Sinclair, young professional

Ziv Carmon and Dan Ariely, “Focusing on the Forgone: How Value Can Appear So Different to Buyers and Sellers,” Journal of Consumer Research 27, no. 3 (2000): 360–370. Daniel Kahneman, Jack Knetsch, and Richard Thaler, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias,” Journal of Economic Perspectives 5, no. 1 (1991): 193–206. Daniel Kahneman, Jack Knetsch, and Richard Thaler, “Experimental Tests of the Endowment Effect and the Coase Theorem,” The Journal of Political Economy 98, no. 6 (1990): 1325–1348. Jack Knetsch, “The Endowment Effect and Evidence of Nonreversible Indifference Curves,” The American Economic Review 79, no. 5 (1989): 1277–1284. Justin Kruger, Derrick Wirtz, Leaf Van Boven, and T. William Altermatt, “The Effort Heuristic,” Journal of Experimental Social Psychology 40, no. 1 (2004): 91–98.

Given the arm’s limited functionality, the pain I experienced and am still experiencing, and what I now know about flawed decision making, I suspect that keeping my arm was, in a cost/benefit sense, a mistake. Let’s look at the biases that affected me. First, it was difficult for me to accept the doctors’ recommendation because of two related psychological forces we call the endowment effect and loss aversion. Under the influence of these biases, we commonly overvalue what we have and we consider giving it up to be a loss. Losses are psychologically painful, and, accordingly, we need a lot of extra motivation to be willing to give something up. The endowment effect made me overvalue my arm, because it was mine and I was attached to it, while loss aversion made it difficult for me to give it up, even when doing so might have made sense. A second irrational influence is known as the status quo bias. Generally speaking, we tend to want to keep things as they are; change is difficult and painful, and we’d rather not change anything if we can help it.

Finally, when I thought about the prospect of losing my forearm and hand, I wondered about whether I could ever adapt. What would it feel like to use a hook or a prosthesis? How would people look at me? What would it be like when I wanted to shake someone’s hand, write a note, or make love? Now, if I had been a perfectly rational, calculating being who lacked any trace of emotional attachment to my arm, I would not have been bothered by the endowment effect, loss aversion, the status quo bias, or the irreversibility of my decision. I would have been able to accurately predict what the future with an artificial arm would hold for me, and as a consequence I would probably have been able to see my situation the way my doctors did. If I were that rational, I might very well have chosen to follow their advice, and most likely I would have eventually adapted to the new apparatus (as we learned in chapter 6, “On Adaptation”).


pages: 305 words: 98,072

How to Own the World: A Plain English Guide to Thinking Globally and Investing Wisely by Andrew Craig

Airbnb, Albert Einstein, asset allocation, Berlin Wall, bitcoin, Black Swan, bonus culture, BRICs, business cycle, collaborative consumption, diversification, endowment effect, eurozone crisis, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, index fund, information asymmetry, joint-stock company, Joseph Schumpeter, Long Term Capital Management, low cost airline, mortgage debt, negative equity, Northern Rock, offshore financial centre, oil shale / tar sands, oil shock, passive income, pensions crisis, quantitative easing, road to serfdom, Robert Shiller, Robert Shiller, Silicon Valley, smart cities, stocks for the long run, the new new thing, The Wealth of Nations by Adam Smith, Yogi Berra, Zipcar

That said, people have said this about London before, and it hasn’t stopped a number of crashes occurring throughout history. The endowment effect I would argue that another reason UK prices (in sterling terms at least) have held up relatively well so far is due to another well-documented facet of human psychology: the endowment effect. Put simply, the endowment effect is when an individual believes the current price or value of something they own must be the same or more than what they paid for it – or, frequently, what their highest perceived value of it was. Human beings are inherently reluctant to acknowledge when they have made a loss. We are hardwired this way. This is why many people doggedly hold on to shares that are worth much less than they bought them for, instead watching them fall further and further. Professional traders, by contrast, are often explicitly aware of the endowment effect and ruthlessly cut their losses as a result.

The Chartered Institute for Securities and Investment (CISI) textbook for the “Principles of Investment Risk and Taxation” examination has a section on behavioural finance in which it describes no less than forty-six psychological biases or theories that can negatively affect our ability to make sensible investment decisions. We have already talked about three of these: money illusion, anchoring and the endowment effect. As a quick reminder: money illusion refers to our tendency to ignore inflation (particularly real inflation) when assessing the value of something; anchoring concerns how people are inclined to give too much weight to their recent experience (ignoring what actually happens in the long-term); and the endowment effect is where individuals demand more for something than they would be willing to pay for it themselves (and are unwilling to acknowledge their asset is worth less than it was previously). Just being aware of these three biases is a good start.

Professional traders, by contrast, are often explicitly aware of the endowment effect and ruthlessly cut their losses as a result. What happens in property markets time and time again is that when the fundamentals turn bearish (negative), there is quite a long lag before prices fall. This is often due, in part, to the endowment effect: in more difficult economic conditions, the number and wealth of potential buyers falls, for all the reasons mentioned above (less bank lending, fewer people with high-paying jobs, fewer employees making bonuses, etc.). And so someone who owns a property that was relatively recently valued at, say, £1 million will find that no one is actually willing to buy the property at that level. They will then refuse to accept that the property is now worth, say, £900,000 (the best bid they have actually received). Rather than admit their property has fallen in value, these sellers will be inclined to hold out for the number they perceive their property to be worth.


pages: 519 words: 104,396

Priceless: The Myth of Fair Value (And How to Take Advantage of It) by William Poundstone

availability heuristic, Cass Sunstein, collective bargaining, Daniel Kahneman / Amos Tversky, delayed gratification, Donald Trump, East Village, en.wikipedia.org, endowment effect, equal pay for equal work, experimental economics, experimental subject, feminist movement, game design, German hyperinflation, Henri Poincaré, high net worth, index card, invisible hand, John von Neumann, Kenneth Arrow, laissez-faire capitalism, Landlord’s Game, loss aversion, market bubble, mental accounting, meta analysis, meta-analysis, Nash equilibrium, new economy, Paul Samuelson, payday loans, Philip Mirowski, Potemkin village, price anchoring, price discrimination, psychological pricing, Ralph Waldo Emerson, RAND corporation, random walk, RFID, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, rolodex, social intelligence, starchitect, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, ultimatum game, working poor

Available at www.floridatrend.com/article.asp?aID=54506009.7270968.618345.8370013.6266116.730&aID2=47556. Keller, Maryann (2000). “Getting a Premium over List Price.” Automotive Industries, May 1, 2000. Khamsi, Roxanne (2007). “Hormones Affect Men’s Sense of Fair Play.” New Scientist, July 4, 2007. Knetsch, Jack (1989). “The Endowment Effect and Evidence of Nonreversible Indifference Curves.” The American Economic Review 79, 1277–84. Knetsch, Jack L., Richard Thaler, and Daniel Kahneman (1986). “Experimental Tests of the Endowment Effect and the Coase Theorem.” Simon Fraser University Working Paper, 1988. Kouri, Elena, Scott Lukas, Harrison Pope, and P. Oliva (1995). “Increased Aggressive Responding in Male Volunteers Following the Administration of Gradually Increasing Doses of Testosterone Cypriate.” Drug and Alcohol Dependence 40, 73–79.

Subjects were asked to pretend that they wanted to buy each bet and to state the maximum price they would be willing to pay for it. Logically, there shouldn’t be a difference in buying and selling prices for a simple money bet. The bet is worth whatever it’s worth. But Lichtenstein and Slovic found that people buying bets were less likely to assign high prices to the $ bets. The number of preference reversals greatly diminished. This was an early description of what’s now known as the endowment effect (a name coined by the University of Chicago economist Richard Thaler in 1980). In the absence of market values, selling prices are typically twice as much as buying prices (above and beyond any strategic exaggeration for the sake of bargaining). Lichtenstein and Slovic thus tried three ways of assessing value and found them all potentially contradictory. In the years since 1971, psychologists and economists alike have tried to explain preference reversal—or explain it away.

Money Pump 62 “When we had written it up”: Lichtenstein interview, July 28, 2008. 62 Article with Slovic’s name first: Slovic, Lichtenstein, and Edwards 1965. 62 “I sort of followed hubby around”: Lichtenstein interview, July 28, 2008. 62 “It was a terrific inducement”: Ibid. 63 “I remember we were in Paul’s office”: Ibid. 65 127 subjects always reversed: Lichtenstein and Slovic (eds.) 2006, 54. 65 “These reversals clearly constitute”: Ibid., 63. 66 endowment effect: The term was coined in Thaler 1980. 66 A 10/12 chance of winning $9: Lichtenstein and Slovic (eds.) 2006, 71. 66 “If the odds were . . . heavier”: Ibid., 48. 67 “The strain of amalgamating different types of information”: Ibid., 76. 68 Audio recording on the Web: The audio is on the Decision Research website at www.decisionresearch.org/mp3/PreferenceReversalInterview.mp3. 68 “I see.


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The Power of Passive Investing: More Wealth With Less Work by Richard A. Ferri

asset allocation, backtesting, Bernie Madoff, buy and hold, capital asset pricing model, cognitive dissonance, correlation coefficient, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, endowment effect, estate planning, Eugene Fama: efficient market hypothesis, fixed income, implied volatility, index fund, intangible asset, Long Term Capital Management, money market fund, passive investing, Paul Samuelson, Ponzi scheme, prediction markets, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Sharpe ratio, survivorship bias, too big to fail, transaction costs, Vanguard fund, yield curve, zero-sum game

However, I didn’t fully appreciate the strategy until the early-1990s after working on the sell side of the investment industry, and it still took me a few more years before I finally dropped all active investing entirely and switched to a fully passive approach. That was the wisest investment decision I ever made, and one of the most calming moments I recall in my investing career. As with more investors, I was completely at ease with my decision to implement a completely passive investment approach. The Endowment Effect The endowment effect occurs when an investor believes that what they own is superior to something they don’t own even though that belief is demonstratively not true.11 The owners of poorly performing actively managed mutual funds value them more than non-owners. Many people will cling to an actively managed mutual fund that has performed poorly because they see better performance down the road even though there’s nothing relevant on which to base that prediction.12 There is a tendency of investors to hold losing investments too long and sell winning investments too soon.

Nor was it justified by subsequent portfolio performance.13 Selling a loser is admitting an investment mistake. Many investors would rather hold their losing investments and wait for them to recover rather than take the loss and switch into a different strategy. I see the endowment effect at work in the investment management business. The number of new client inquiries declines sharply during a bear market as people reject the idea of changing strategies until they make up some of their loses. Taxable investors are handicapped by the endowment effect because a bear market is the ideal time to sell losing investments and switching their strategy. This period creates the lowest capital gains and generates the greatest amount of tax losses. Tax losses can be used to offset capital gains in the future and lower taxable ordinary income.

See American Stock Exchange (Amex) AQR Capital Management Art of Selling Intangibles, The (Gross) Asness, Cliff Assessments Asset allocation strategy: in 5-step process active asset classes and individual investors and for an IPS market conditions and passive risk/return assessment in strategic tactical Asset class: long-term expected risk/returns non-core asset classes volatility of Assets under management (AUM) AUM. See Assets under management (AUM) Bad accounting Banz, Rolf Barclays Capital Aggregate Bond Index Barra Inc. Basu, Sanjoy Batterymarch Financial Management Beardstown Ladies, the Bear market: advisors and endowment effect and market timing gaps and policy changes and risk and Beat-the-market advice Behavioral finance Benchmarking, improper Benchmark(s): buying defining good definition of identification of proper index funds and strategy index products and Benchmarks and Investment Management (Siegel) Benefits, passive index investing Berkshire Hathaway Inc. Bernstein, Peter Bernstein, William Beta (β): alpha (α) and coining of term Beta, firm size, and value (BtM) Beta seeking index Blake, Christopher Boggle’s Folly Bogle, John Clifton Bogleheads’ Guide to Investing, The (Larimore, Lindauer, and LeBoeuf) Bogleheads’ Guide to Retirement Planning, The Bond fund(s): fee characteristics of persistence of performance turnover rates and volatility and Bond index funds Bond-specific risk factors Book-to-market (BtM) Boston Globe Box Score Report (BSR) Brandeis, Louis D.


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Quality Investing: Owning the Best Companies for the Long Term by Torkell T. Eide, Lawrence A. Cunningham, Patrick Hargreaves

air freight, Albert Einstein, backtesting, barriers to entry, buy and hold, cashless society, cloud computing, commoditize, Credit Default Swap, discounted cash flows, discovery of penicillin, endowment effect, global pandemic, haute couture, hindsight bias, low cost airline, mass affluent, Network effects, oil shale / tar sands, pattern recognition, shareholder value, smart grid, sovereign wealth fund, supply-chain management

Accounting red flags often signal trouble ahead for a company. Investors beware. The endowment effect The quality investing method of conducting rigorous fundamental analysis and holding for the long term creates one final pool of mistakes arising from what behavioral economists call the endowment effect – an over-appreciation of things already owned compared to other opportunities. Quality investing is particularly susceptible because the considerable upfront research and extensive winnowing increases the endowment effect – the investor’s sense of ownership encompasses not just the stock but also their analysis and judgment. The emotional connection amplifies with time, increasing susceptibility the longer a stock is owned. The endowment effect may manifest itself when an investor continues to own a stock despite a drumbeat of negative events revealing a deterioration of the company’s fundamental economic characteristics.

The endowment effect may manifest itself when an investor continues to own a stock despite a drumbeat of negative events revealing a deterioration of the company’s fundamental economic characteristics. One strategy to combat this is to ask whether, with a fresh start, you would still buy the same company today. As with other sources of challenges and mistakes catalogued in this chapter, the endowment effect also plays a positive role in quality investing. It strengthens resolve amid relentless but erroneous pressures to sell. The competing factors therefore call for alertness above all. A long-term strategy must be finely balanced against the recognition that things can, and will, change. All companies evolve to some extent and closely monitoring such evolution is an essential part of the investment process. D. Valuation and Market Pricing Valuations can be powerful: if an analyst determines that something is cheap it is tempting to buy, period, even though the valuation is only an estimate and the company may face challenges from industry forces or competitive pressures.


pages: 254 words: 72,929

The Age of the Infovore: Succeeding in the Information Economy by Tyler Cowen

Albert Einstein, Asperger Syndrome, business cycle, Cass Sunstein, cognitive bias, David Brooks, en.wikipedia.org, endowment effect, Flynn Effect, framing effect, Google Earth, impulse control, informal economy, Isaac Newton, loss aversion, Marshall McLuhan, Naomi Klein, neurotypical, new economy, Nicholas Carr, pattern recognition, phenotype, placebo effect, Richard Thaler, selection bias, Silicon Valley, social intelligence, the medium is the message, The Wealth of Nations by Adam Smith, theory of mind

Such detailed discrimination of the particular should mean that people with autism are not prone to stereotyping in their thinking or memories. We should not conclude that autistics are more objective about everything (we just don’t know), but the difference in perspective is intriguing. Another well-known bias, familiar from behavioral economics, is called the endowment effect. People tend to place excess value on the objects they already own or perceive as belonging to them. Some recent research (“Explaining Enhanced Logical Consistency During Decision Making in Autism” by Benedetto De Martino et al.) suggests autistics are less likely to suffer from endowment effects and in this regard they are more likely to behave according to standards of economic rationality. A classic laboratory experiment starts people with a sum of money, in this case fifty British pounds, and offers them a comparison between two sure options: “keeping twenty pounds” and “losing thirty pounds.”

There also may be more fundamental cognitive reasons for an autistic predisposition toward cosmopolitan attitudes. A nation or culture is a bit like an endowment effect, namely that most people value it more highly, with special degrees of fervor, simply because it is theirs. Herodotus remarked long ago that each person thinks that his way of life is best. You can find exceptions, but if you look, say, at the wars in the former Yugoslavia, most Serbs favored the Serbian side, most Bosnians favored the Bosnian side, and so on. There were Soviet dissidents who hoped their country would be conquered by the United States but overall political “turncoats” of this kind are relatively rare. Most people take the side of their country or their culture or their region, simply because it is theirs. If autistics suffer less from the bias of endowment effects, perhaps they are also less likely to value a nation highly, again, simply because it is theirs.

See focusing Constitution of Liberty (Hayek), 201 consumer satisfaction, 120 control of information, 4–5 conversation summaries, 97 coordination, 132–33, 134 corruption, 208 cosmopolitanism, 196–99, 201, 203 “The Costs of Autism” (Ganz), 34 countries, travel to, 104–5 Cowansage, Kiriana, 173–75, 187–88 Cowen, Tyler (nine-year-old), 86 Craigslist, 24, 47 creativity, 58 Critique of Pure Reason (Kant), 205 culture access to, 41, 42–43, 61–63 and acculturation, 106–7 addiction to, 55–56 and attention spans, 53–55 costs of, 43 cultural literacy, 59 culture of small bits, 43–44, 50–51 diversity in, 198, 218–21 effect of the internet on, 46 and information overload, 50–51 and instant messaging, 70–71 and least-common-denominator effect, 134 and multitasking, 51–53, 56–57 romance compared to, 42, 60–62 sampling of, 41, 44–48 self-assembled blends of, 51–52, 56–58, 65, 67, 154 term, 41–42 ugliness of, 41, 59–60, 62, 63 value in, 9 Dalai Lama, 92, 95, 96, 156 Danto, Arthur, 191 Darwin, Charles, 25, 166 Dawson, Michelle, 27–28 daydreaming, 108–9 Declaration of Independence, 200 Delicious, 10–11 De Martino, Benedetto, 195 democracy, 207 detail-oriented personalities, 148–49, 176, 189 Dickinson, Emily, 166 difficulties experienced by autistics, 110, 212 Digg lists, 55 Dirac, Paul, 25, 166 discrimination aimed at autistics, 197, 221–22 Distinction (Bourdieu), 177 diversity, 198 division of labor, 215–16 Don Giovanni (Mozart), 57–58 Donohoo, Mark, 3 Don Quixote (Cervantes), 120–21 Doyle, Sir Arthur Conan, 148, 153, 154, 155–56, 160 Drake Equation, 224–25 Dudley, Leonard, 65 Dylan, Bob, 166 Dyson, Esther, 49 eating habits, 31 eBay, 47, 85 echolalia, 31, 168 Eco, Umberto, 156 economics, 121–22, 123–26, 129, 202 Edison, Thomas, 25, 166 education, 105–15 and acculturation, 106–7 and aesthetic values, 177 and autistic cognitive skills, 107, 109–11, 115, 215 and face-to-face instruction, 111–15 and focusing, 108–9, 115 limits of, 211 rate of return on, 115 signaling model of, 106, 110 8hands.com, 9 Einstein, Albert, 25, 166 email, 52, 78 e-memory, 98 employment, 69 endowment effect, 195–96, 199 engineering, 24 ethics, codes of, 199 evangelical Protestants, 107 everytrail.com, 12 exchange, benefits of, 218 expectations, 60–61, 81–82, 124 experience machine, 142–46 “Explaining Enhanced Logical Consistency During Decision Making in Autism” (De Martino et al.), 195 eye contact, 31, 36 eyesight, 18 Facebook and advanced civilizations, 227–28 and framing effects, 81–84 groups in, 86, 87 and mental ordering, 7–8, 12, 13 popularity of, 47 facial recognition, 25, 132 Fasanella, Kathleen, 1 Fauron, M., 104 FeedDemon, 85–86 Fein, Deborah, 26 Feldman, Morton, 44 Fermi, Enrico, 223 Fermi Paradox, 223, 225, 227 films, 114, 134 Finding Angela Shelton (Shelton), 86 Finland, 219–21 Finland: Cultural Lone Wolf (Lewis), 220 Flickr, 11 focal points, 130–32, 133, 136 focusing of Adam Smith, 168 of autistics, 92–94, 109, 111 and education, 108–9, 115 folksonomy, 11 food preferences, 31 framing effects and articulable interests, 89 and autistics, 196 and communication, 78–84 defined, 6 and the experience machine, 143–44 and Facebook, 81–84 and mental ordering, 6–7 freedom, 200–201, 208–9 Freud, Sigmund, 103, 179 Friedman, Milton, 179 FriendFeed, 9 friendship, 81–82, 85, 208 Fuser, 9 Ganz, Michael L., 34 Garmin Forerunner 305 GPS, 12 Gates, Bill, 25 Gathera, 9 gender imbalances, 69–70 genetic component of autism, 36 The Glass Bead Game (Hesse), 160–66 Gödel, Kurt, 202 Godfather series, 134 Gogh, Vincent van, 25, 166 goods, 139–40 Google and articulable interests, 88–89 and attention spans, 53, 54–55 and dress code, 130 and mental ordering, 13 popularity of, 46 Google Earth, 10, 131 Googlegänger, 86 Google Reader, 85–86 Google Sky, 10 Gore, Thomas, 25 Gould, Glenn, 25, 166, 167 Grandin, Temple, 24–25, 180, 216, 219 Great Depression, vii groups, 87 groupthink, 197 Guevara, Ernesto “Che,” 179 Guinness World Records, 105 Halberstadt, Germany, 44 Handbook of Autism and Pervasive Developmental Disorders, 38 Hanson, Robin, 193–94 Harlequin novels, 127 Harry Potter series, 128, 133 Hart-Davis, Guy, 5 Hassan, Mohammed, 86 Hayek, Friedrich A., 201–3 Heidegger, Martin, 142 Herodotus, 199 Hesse, Hermann, 160–66 historical figures, 166–67 Hofstetter, Steve, 8 Holmes, Mycroft (fictional character), 151–53 Holmes, Sherlock (fictional character), 148–60 brother of, 151–53 commercial success of series, 156, 165 detail-oriented personality of, 148–49, 156, 158–59 orderliness of, 150, 159 powers of reasoning of, 152, 153, 156–57 social intelligence and interactions of, 149–50, 154, 156, 157 Holt, Molly, 26 The Holy Grail, 137 homo ordo, 13 House, Gregory (fictional character), 154 household production, 141 House M.D., 154 HowManyAsMe website, 86 HTML, 71 Hume, David, 177, 204 humor, 31 Hussain, Zakir, 187 Hussein, Saddam, 122 identity, 120, 134, 136–37 incentives, 122, 123–24 Indian classical music, 187 individual, respect for the, 222–23 Inferno (Dante), 128 information, 50–51, 55 information technology, 213 infovores, 2–3, 7, 10, 45 in-group relations, 197–99 Innis, Harold, 65 instant messaging (IM), 66–71, 84 intelligence animal intelligence, 224 and autism and autistic individuals, 18–19, 21, 27–28 and Google, 54 and multitasking, 52–53 non-human, 223–28 interiority, 117, 223, 226–28 internet.


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The End of Ownership: Personal Property in the Digital Economy by Aaron Perzanowski, Jason Schultz

3D printing, Airbnb, anti-communist, barriers to entry, bitcoin, blockchain, carbon footprint, cloud computing, conceptual framework, crowdsourcing, cryptocurrency, Donald Trump, Edward Snowden, en.wikipedia.org, endowment effect, Firefox, George Akerlof, Hush-A-Phone, information asymmetry, intangible asset, Internet Archive, Internet of things, Isaac Newton, loss aversion, Marc Andreessen, means of production, minimum wage unemployment, new economy, peer-to-peer, price discrimination, Richard Thaler, ride hailing / ride sharing, rolodex, self-driving car, sharing economy, Silicon Valley, software as a service, software patent, software studies, speech recognition, Steve Jobs, subscription business, telemarketer, The Market for Lemons, transaction costs, winner-take-all economy

Taylor Swift, “For Taylor Swift, the Future of Music Is a Love Story,” Wall Street Journal, July 7, 2014, http://www.wsj.com/articles/for-taylor-swift-the-future-of-music-is-a-love-story-1404763219, accessed June 15, 2015. 34. Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler, “Experimental Tests of the Endowment Effect and the Coase Theorem,” Journal of Political Economy 98, no. 6 (1990): 1325–1348. 35. Carey K. Morewedge et al., “Bad Riddance or Good Rubbish? Ownership and Not Loss Aversion Causes the Endowment Effect,” Journal of Experimental Psychology 45, no. 4 (July 2009): 947–951. 36. Yannick Ferreira De Sousa and Alistair Munro, “Truck, Barter, and Exchange versus the Endowment Effect: Virtual Field Experiments in an Online Game Environment,” Journal of Economic Psychology 33, no. 3 (June 2012): 482–493. Although this experiment found that the endowment effect was reduced among experienced players of an online role-playing game, that finding is consistent with experiments in the offline world. 37.

The value we place on ownership also finds support from the field of behavioral economics. Over the past twenty-five years, dozens of experiments have established what researchers call the endowment effect—the widespread tendency of people to assign greater value to things they own. In one well-known example, researchers gave some participants coffee mugs. When presented the opportunity to sell or trade their mugs to other participants, mug owners demanded nearly twice as much compensation as nonowners were willing to pay.34 Subjectively, they valued the mugs they owned well above the market rate. What explains these vastly different assessments of the value of an otherwise ordinary mug? Some have suggested that the endowment effect is the result of loss aversion—the idea that people are more motivated by the fear or regret associated with loss of an item than the enjoyment of gaining it.

Some have suggested that the endowment effect is the result of loss aversion—the idea that people are more motivated by the fear or regret associated with loss of an item than the enjoyment of gaining it. But more recent research shows that we place greater value on the things we own because we own them.35 The association between an item and its owner means that we value things we own far more than things we simply use. And as that sense of ownership grows stronger, so does the value we place on the item. Recent research has also shown that the endowment effect is no less pronounced for digital goods than it is for physical ones.36 So if a Taylor Swift fan owns her 1989 mp3s, we should expect her to value them in much the same way owners of 1989 CDs or vinyl do. The psychological value of ownership might also suggest one reason for the flagging sales of digital downloads. We are used to getting reliable property rights in exchange for the money we spend on music.


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Radical Markets: Uprooting Capitalism and Democracy for a Just Society by Eric Posner, E. Weyl

3D printing, activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Airbnb, Amazon Mechanical Turk, anti-communist, augmented reality, basic income, Berlin Wall, Bernie Sanders, Branko Milanovic, business process, buy and hold, carbon footprint, Cass Sunstein, Clayton Christensen, cloud computing, collective bargaining, commoditize, Corn Laws, corporate governance, crowdsourcing, cryptocurrency, Donald Trump, Elon Musk, endowment effect, Erik Brynjolfsson, Ethereum, feminist movement, financial deregulation, Francis Fukuyama: the end of history, full employment, George Akerlof, global supply chain, guest worker program, hydraulic fracturing, Hyperloop, illegal immigration, immigration reform, income inequality, income per capita, index fund, informal economy, information asymmetry, invisible hand, Jane Jacobs, Jaron Lanier, Jean Tirole, Joseph Schumpeter, Kenneth Arrow, labor-force participation, laissez-faire capitalism, Landlord’s Game, liberal capitalism, low skilled workers, Lyft, market bubble, market design, market friction, market fundamentalism, mass immigration, negative equity, Network effects, obamacare, offshore financial centre, open borders, Pareto efficiency, passive investing, patent troll, Paul Samuelson, performance metric, plutocrats, Plutocrats, pre–internet, random walk, randomized controlled trial, Ray Kurzweil, recommendation engine, rent-seeking, Richard Thaler, ride hailing / ride sharing, risk tolerance, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Rory Sutherland, Second Machine Age, second-price auction, self-driving car, shareholder value, sharing economy, Silicon Valley, Skype, special economic zone, spectrum auction, speech recognition, statistical model, stem cell, telepresence, Thales and the olive presses, Thales of Miletus, The Death and Life of Great American Cities, The Future of Employment, The Market for Lemons, The Nature of the Firm, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade route, transaction costs, trickle-down economics, Uber and Lyft, uber lyft, universal basic income, urban planning, Vanguard fund, women in the workforce, Zipcar

Another barrier to trade, highlighted by another Nobel Laureate, Richard Thaler, is the “endowment effect.”52 Thaler found that people’s minimum willingness to pay to buy an object is usually lower than their minimum willingness to accept to part with it, even if they have never actually touched or used it. Even just owning an object in the abstract seems to make a person value it more. Some recent evidence shows that the endowment effect is less a fundamental psychological attachment and more a heuristic used to jockey for position in bargaining. If it appears you really love a possession, people are likely to think it is valuable and thus offer you a lot for it. The endowment effect does not appear with experienced traders, and it does not appear in societies where bargaining and strategic trade are uncommon.53 The endowment effect seems to be a characteristic of people who lack the time and ability to navigate the complex pricing decisions required in a market society.

The endowment effect does not appear with experienced traders, and it does not appear in societies where bargaining and strategic trade are uncommon.53 The endowment effect seems to be a characteristic of people who lack the time and ability to navigate the complex pricing decisions required in a market society. If high prices are discouraged, and property becomes more like renting, the costly barrier to trade created by the endowment effect would dissipate. Barriers to borrowing are another obstacle to trade and efficient use of resources. Many assets, from houses to factories, can be fully used only if owned (at least partially) rather than rented because a renter cannot undertake the customization and investment required. An example would be a disused factory that could be transformed into lofts. Yet in the current system of private property, buying assets outright is very expensive and thus often requires large reserves of cash or the capacity to borrow. Barriers to borrowing include lack of trust, bad incentives created by loans, and the risk created in the lending relationship.

Chad Syverson, Market Structure and Productivity: A Concrete Example, 112 Journal of Political Economy 1181 (2004); Syverson, Product Substitutability and Productivity Dispersion, 86 Review of Economics and Statistics 534 (2004); Syverson, What Determines Productivity, 49 Journal of Economic Literature 326 (2011). Not all of this misallocation is due to the monopoly problem in its simplest form. However, as we discuss below, many other problems that cause misallocation (adverse selection, endowment effects, and credit constraints) are also addressed by partial common property. We thus believe much of this misallocation can be addressed by a COST and related reforms. 8. Gareth Stedman Jones, Karl Marx—Greatness and Illusion (Belknap Press, 2016). 9. Michael Kremer, The O-Ring Theory of Economic Development, 108 Quarterly Journal of Economics 551 (1993), provides a definitive account of how large-scale enterprises typically must overcome monopoly problems. 10.


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Essentialism: The Disciplined Pursuit of Less by Greg McKeown

Albert Einstein, Clayton Christensen, Daniel Kahneman / Amos Tversky, deliberate practice, double helix, en.wikipedia.org, endowment effect, Isaac Newton, iterative process, Jeff Bezos, Lao Tzu, lateral thinking, loss aversion, low cost airline, Mahatma Gandhi, microcredit, minimum viable product, Nelson Mandela, North Sea oil, Peter Thiel, Ralph Waldo Emerson, Richard Thaler, Rosa Parks, Shai Danziger, side project, Silicon Valley, Silicon Valley startup, sovereign wealth fund, Stanford prison experiment, Steve Jobs, Vilfredo Pareto

Comfortable with cutting losses Sunk-cost bias, while all too common, isn’t the only Nonessentialist trap to watch out for. Below are several other common traps and tips for how to extricate yourself politely, gracefully, and with minimal cost. Avoiding Commitment Traps BEWARE OF THE ENDOWMENT EFFECT A sense of ownership is a powerful thing. As the saying goes, nobody in the history of the world has washed their rental car! This is because of something called “the endowment effect,” our tendency to undervalue things that aren’t ours and to overvalue things because we already own them. In one study demonstrating the power of the endowment effect, the Nobel Prize–winning researcher Daniel Kahneman and colleagues randomly gave coffee mugs to only half the subjects in an experiment.5 The first group was asked how much they would be willing to sell their mug for, while the second group was asked what they would be willing to pay for it.

The project that isn’t getting anywhere at work seems that much more critical when we’re the team leader on it. The commitment to volunteer at the local bake sale becomes harder to get out of when we’re the one who put the fund-raiser together. When we feel we “own” an activity, it becomes harder to uncommit. Nonetheless, here is a useful tip: PRETEND YOU DON’T OWN IT YET Tom Stafford describes a simple antidote to the endowment effect.6 Instead of asking, “How much do I value this item?” we should ask, “If I did not own this item, how much would I pay to obtain it?” We can do the same for opportunities and commitment. Don’t ask, “How will I feel if I miss out on this opportunity?” but rather, “If I did not have this opportunity, how much would I be willing to sacrifice in order to obtain it?” Similarly, we can ask, “If I wasn’t already involved in this project, how hard would I work to get on it?”

“Ministers Knew Aircraft Would Not Make Money,” Independent, http://www.independent.co.uk/news/uk/ministers-knew-aircraft-would-not-make-money-concorde-thirty-years-ago-harold-macmillan-sacked-a-third-of-his-cabinet-concorde-was-approved-the-cuba-crisis-shook-the-world-and-ministers-considered-pit-closures-anthony-bevins-and-nicholas-timmins-review-highlights-from-1962-government-files-made-public-yesterday-1476025.html 3. Gillman, “Supersonic Bust.” 4. Michael Rosenfield, “NH Man Loses Life Savings on Carnival Game,” CBS Boston, April 29, 2013, http://boston.cbslocal.com/2013/04/29/nh-man-loses-life-savings-on-carnival-game/. 5. Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias,” Journal of Economic Perspective 5, no. 1 (1991): 193–206, http://users.tricity.wsu.edu/~achaudh/kahnemanetal.pdf. 6. Tom Stafford, “Why We Love to Hoard … and How You Can Overcome It,” BBC News, July 17, 2012, www.bbc.com/future/story/20120717-why-we-love-to-hoard. 7. I originally wrote this in a blog post for Harvard Business Review called “The Disciplined Pursuit of Less,” August 8, 2012, http://blogs.hbr.org/2012/08/the-disciplined-pursuit-of-less/. 8.


pages: 335 words: 94,657

The Bogleheads' Guide to Investing by Taylor Larimore, Michael Leboeuf, Mel Lindauer

asset allocation, buy and hold, buy low sell high, corporate governance, correlation coefficient, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, endowment effect, estate planning, financial independence, financial innovation, high net worth, index fund, late fees, Long Term Capital Management, loss aversion, Louis Bachelier, margin call, market bubble, mental accounting, money market fund, passive investing, Paul Samuelson, random walk, risk tolerance, risk/return, Sharpe ratio, statistical model, stocks for the long run, survivorship bias, the rule of 72, transaction costs, Vanguard fund, yield curve, zero-sum game

If you have a hard time pulling the trigger on investment decisions, remember that investing is like basketball in this respect: You miss 100 percent of the shots you don't take. The Endowment Effect Many of us have a tendency to confuse the familiar with the safe and overrate the value of what we already own. That's the endowment effect. One common investment mistake caused by the endowment effect is when employees invest the bulk of their money in their employer's stock. If you believe this is a prudent thing to do, ask former employees of Enron. The employee who does this is already investing half or more of her waking hours in the company. On top of that, she is now betting a large chunk of her monetary investments on the company too. To call her undiversified is an understatement. Another common practice caused by the endowment effect is to buy only domestic funds in the belief that U.S. investments are safer.

Once again, consider the lessons from the Dalbar study about mutual fund investor performance. Following the herd will likely earn you negative real returns. The sad truth is that when it comes to investing, you can follow the herd to the slaughterhouse. Herd investors have certain traits. They don't have a sound investment plan, they listen to the noise, buy and sell at the wrong times, and have no idea how badly they underperform the market. In fact, thanks to the endowment effect, most believe their investments are performing far better than they actually are. Call it The Beardstown Ladies Effect. Since most believe they're above average, they conclude that their returns are above average, too. Mental Accounting This emotional trap causes us to be poor savers, rather than poor investors. Nevertheless, since you can't invest what you don't save, it's a habit to be aware of.

This means you and/or the person investing your money. • Loss aversion. Be a risk manager instead of a risk avoider. Believing you are avoiding risk can be a costly illusion. • Paralysis by analysis. Every day you don't invest is a day less you'll have the power of compounding working for you. Put together an intelligent investment plan and get started. If you need help, seek out a good financial planner to assist you. • The endowment effect. Just because you own it, or are a part of it, doesn't automatically mean it's worth more. Get an objective evaluation. Invest no more than 10 percent of your portfolio in your employer's stock. • Mental accounting. Remember that all money spends the same, regardless of where it comes from. Money already spent is a sunk cost and should play no part in making future decisions. • Anchoring.


pages: 898 words: 266,274

The Irrational Bundle by Dan Ariely

accounting loophole / creative accounting, air freight, Albert Einstein, Alvin Roth, assortative mating, banking crisis, Bernie Madoff, Black Swan, Broken windows theory, Burning Man, business process, cashless society, Cass Sunstein, clean water, cognitive dissonance, computer vision, corporate governance, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, delayed gratification, Donald Trump, end world poverty, endowment effect, Exxon Valdez, first-price auction, Frederick Winslow Taylor, fudge factor, George Akerlof, Gordon Gekko, greed is good, happiness index / gross national happiness, hedonic treadmill, IKEA effect, Jean Tirole, job satisfaction, Kenneth Arrow, knowledge economy, knowledge worker, lake wobegon effect, late fees, loss aversion, Murray Gell-Mann, new economy, Peter Singer: altruism, placebo effect, price anchoring, Richard Feynman, Richard Thaler, Saturday Night Live, Schrödinger's Cat, second-price auction, Shai Danziger, shareholder value, Silicon Valley, Skype, software as a service, Steve Jobs, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, ultimatum game, Upton Sinclair, Walter Mischel, young professional

James Heyman, Yesim Orhun, and Dan Ariely, “Auction Fever: The Effect of Opponents and Quasi-Endowment on Product Valuations,” Journal of Interactive Marketing (2004). RELATED READINGS Richard Thaler, “Toward a Positive Theory of Consumer Choice,” Journal of Economic Behavior and Organization (1980). Jack Knetsch, “The Endowment Effect and Evidence of Nonreversible Indifference Curves,” American Economic Review, Vol. 79 (1989), 1277–1284. Daniel Kahneman, Jack Knetsch, and Richard Thaler, “Experimental Tests of the Endowment Effect and the Coase Theorem,” Journal of Political Economy (1990). Daniel Kahneman, Jack Knetsch, and Richard H. Thaler, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias,” Journal of Economic Perspectives, Vol. 5 (1991), 193–206. Chapter 9: Keeping Doors Open BASED ON Jiwoong Shin and Dan Ariely, “Keeping Doors Open: The Effect of Unavailability on Incentives to Keep Options Viable,” Management Science (2004).

Ziv Carmon and Dan Ariely, “Focusing on the Forgone: How Value Can Appear So Different to Buyers and Sellers,” Journal of Consumer Research 27, no. 3 (2000): 360–370. Daniel Kahneman, Jack Knetsch, and Richard Thaler, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias,” Journal of Economic Perspectives 5, no. 1 (1991): 193–206. Daniel Kahneman, Jack Knetsch, and Richard Thaler, “Experimental Tests of the Endowment Effect and the Coase Theorem,” The Journal of Political Economy 98, no. 6 (1990): 1325–1348. Jack Knetsch, “The Endowment Effect and Evidence of Nonreversible Indifference Curves,” The American Economic Review 79, no. 5 (1989): 1277–1284. Justin Kruger, Derrick Wirtz, Leaf Van Boven, and T. William Altermatt, “The Effort Heuristic,” Journal of Experimental Social Psychology 40, no. 1 (2004): 91–98.

Given the arm’s limited functionality, the pain I experienced and am still experiencing, and what I now know about flawed decision making, I suspect that keeping my arm was, in a cost/benefit sense, a mistake. Let’s look at the biases that affected me. First, it was difficult for me to accept the doctors’ recommendation because of two related psychological forces we call the endowment effect and loss aversion. Under the influence of these biases, we commonly overvalue what we have and we consider giving it up to be a loss. Losses are psychologically painful, and, accordingly, we need a lot of extra motivation to be willing to give something up. The endowment effect made me overvalue my arm, because it was mine and I was attached to it, while loss aversion made it difficult for me to give it up, even when doing so might have made sense. A second irrational influence is known as the status quo bias. Generally speaking, we tend to want to keep things as they are; change is difficult and painful, and we’d rather not change anything if we can help it.


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The Confidence Game: The Psychology of the Con and Why We Fall for It Every Time by Maria Konnikova

attribution theory, Bernie Madoff, British Empire, Cass Sunstein, cognitive dissonance, coherent worldview, Daniel Kahneman / Amos Tversky, endowment effect, epigenetics, hindsight bias, lake wobegon effect, lateral thinking, libertarian paternalism, Milgram experiment, placebo effect, Ponzi scheme, post-work, publish or perish, Richard Thaler, risk tolerance, side project, Skype, Steven Pinker, the scientific method, tulip mania, Walter Mischel

A thing which you enjoyed and used as your own for a long time, whether property or opinion, takes root in your being and cannot be torn away without your resenting the act and trying to defend yourself, however you came by it. The law can ask no better justification than the deepest instincts of man.” In psychology, that idea is called the endowment effect, first articulated by Thaler in 1980. By virtue of being ours, our actions, thoughts, possessions, and beliefs acquire a glow they didn’t have before we committed to them. Sunk costs make us loath to spot problems and reluctant to swerve from a committed path. And the endowment effect imbues the status quo—what we’ve done—with an overly optimistic and rosy glow. It makes us want to hold on to it all the more. Those mysterious paintings start looking all the more real once they’ve been hanging on the walls of your home—Freedman herself purchased two, hanging them prominently in her entryway.

He had refused—although he’d equally refused to buy any additional bottles at the new, “crazy” price. He wasn’t going to get that much additional enjoyment out of them—he simply didn’t think a wine could ever justify such a price tag. He was, the behavioral economists concluded, suffering from both an endowment effect—to him, the bottles were worth even more than $200 simply because they were his, though the exact same wine bought anew would be worth substantially less—and a status quo bias—the tendency to leave things as they are, neither buying nor selling, but simply continuing on as is. Experimentally, the endowment effect is remarkably well documented. Repeatedly, people who don’t own something—say, a pen or a mug, two items often used in these studies—will be willing to pay less for it than they would to sell the exact same object. Take this example, from one of Kahneman and Thaler’s many studies.

Even still, fewer than 40 percent of the participants made the trade. The number fell to a low of just over a quarter—27 percent—when the possibility of regret was raised explicitly: there would be a public drawing, and a prior owner would know if her ticket had actually won. Even if the ticket was completely withdrawn from consideration—it couldn’t win, no matter what—fewer than half were willing to give it up. It wasn’t just about what is known as the endowment effect—the fact that we value what we already have more than what we don’t—Bar-Hillel and Neter concluded. The possibility of regret loomed so strongly on the chance that the player had given up a winner that it overcame all rational considerations. Trading pens instead of lottery tickets, in fact—an object without any uncertainty surrounding its value—yielded a 90 percent compliance rate. It wasn’t about letting go of what you had.


pages: 336 words: 113,519

The Undoing Project: A Friendship That Changed Our Minds by Michael Lewis

Albert Einstein, availability heuristic, Cass Sunstein, choice architecture, complexity theory, Daniel Kahneman / Amos Tversky, Donald Trump, Douglas Hofstadter, endowment effect, feminist movement, framing effect, hindsight bias, John von Neumann, Kenneth Arrow, loss aversion, medical residency, Menlo Park, Murray Gell-Mann, Nate Silver, New Journalism, Paul Samuelson, Richard Thaler, Saturday Night Live, Stanford marshmallow experiment, statistical model, the new new thing, Thomas Bayes, Walter Mischel, Yom Kippur War

Especially when offered the chance to trade one of their NBA players for another team’s draft picks, they’d refused deals they should have done. Why? They hadn’t done it consciously. Morey thus became aware of what behavioral economists had labeled “the endowment effect.” To combat the endowment effect, he forced his scouts and his model to establish, going into the draft, the draft pick value of each of their own players. The next season, before the trade deadline, Morey got up before his staff and listed on a whiteboard all the biases he feared might distort their judgment: the endowment effect, confirmation bias, and others. There was what people called “present bias”—the tendency, when making a decision, to undervalue the future in relation to the present. There was “hindsight bias”—which he thought of as the tendency for people to look at some outcome and assume it was predictable all along.

Why add to your misery? “I said, ‘C’mon, don’t you know about sunk cost?’” recalled Thaler. His friend was a computer scientist and didn’t know about sunk cost. After Thaler explained the concept, his friend just looked at him and said, “Oh, that’s just a bunch of bullshit.” Thaler’s list grew quickly. A lot of the items on it fell into a bucket that he eventually would label “The Endowment Effect.” The endowment effect was a psychological idea with economic consequences. People attached some strange extra value to whatever they happened to own, simply because they owned it, and so proved surprisingly reluctant to part with their possessions, or endowments, even when trading them made economic sense. But in the beginning, Thaler wasn’t thinking in categories. “At the time, I’m just collecting a list of stupid things people do,” he said.

Why were NFL teams so reluctant to trade their draft picks when it was obvious that they could often get more than the players were worth in exchange? Why were investors so reluctant to sell stocks that had fallen in value, even when they admitted that they would never buy those stocks at their current market prices? There was no end of things people did that economic theory had trouble explaining. “When you start looking for the endowment effect,” Thaler said, “you see it everywhere.” His feelings about his own field were not so very different from his feelings for Monopoly as a kid: It was boring, and unnecessarily so. Economics was meant to be the study of an aspect of human nature, but it had ceased to pay attention to human nature. “Thinking about this stuff was way more interesting than doing economics,” he said. When he called his observations to the attention of his fellow economists, they weren’t interested.


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Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions by Dan Ariely

air freight, Al Roth, Bernie Madoff, Burning Man, butterfly effect, Cass Sunstein, collateralized debt obligation, computer vision, corporate governance, credit crunch, Daniel Kahneman / Amos Tversky, David Brooks, delayed gratification, endowment effect, financial innovation, fudge factor, Gordon Gekko, greed is good, housing crisis, IKEA effect, invisible hand, lake wobegon effect, late fees, loss aversion, market bubble, Murray Gell-Mann, payday loans, placebo effect, price anchoring, Richard Thaler, second-price auction, Silicon Valley, Skype, The Wealth of Nations by Adam Smith, Upton Sinclair

James Heyman, Yesim Orhun, and Dan Ariely, “Auction Fever: The Effect of Opponents and Quasi-Endowment on Product Valuations,” Journal of Interactive Marketing (2004). RELATED READINGS Richard Thaler, “Toward a Positive Theory of Consumer Choice,” Journal of Economic Behavior and Organization (1980). Jack Knetsch, “The Endowment Effect and Evidence of Nonreversible Indifference Curves,” American Economic Review, Vol. 79 (1989), 1277–1284. Daniel Kahneman, Jack Knetsch, and Richard Thaler, “Experimental Tests of the Endowment Effect and the Coase Theorem,” Journal of Political Economy (1990). Daniel Kahneman, Jack Knetsch, and Richard H. Thaler, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias,” Journal of Economic Perspectives, Vol. 5 (1991), 193–206. Chapter 8: Keeping Doors Open BASED ON Jiwoong Shin and Dan Ariely, “Keeping Doors Open: The Effect of Unavailability on Incentives to Keep Options Viable,” Management Science (2004).

But when the lottery was over, some of them would become ticket owners, while others would not. The question was this: would the students who had won tickets—who had ownership of tickets—value those tickets more than the students who had not won them even though they all “worked” equally hard to obtain them? On the basis of Jack Knetsch, Dick Thaler, and Daniel Kahneman’s research on the “endowment effect,” we predicted that when we own something—whether it’s a car or a violin, a cat or a basketball ticket—we begin to value it more than other people do. Think about this for a minute. Why does the seller of a house usually value that property more than the potential buyer? Why does the seller of an automobile envision a higher price than the buyer? In many transactions why does the owner believe that his possession is worth more money than the potential owner is willing to pay?

., xxviii–xxx, 239–40 cost-benefit analysis in, 64–65 human rationality assumed in, xxix, xxx, 239–40 supply and demand in, 45–46 Economist subscription offers, 1–3, 4–6, 9–10 education, 84–86 igniting social passion for, 85–86 “No Child Left Behind” policy and, 85 “elderly,” behavior affected by priming concept of, 170–71 e-mail addiction, 255–59 overcoming, 259 reinforcement schedules and, 257–59 empirical tests: public policy and, 328–29 in science, xxv–xxvi, 325 employees: payment of, see compensation; salaries social vs. market norms in companies’ relations with, 80–84, 252–54 theft and fraud at workplace ascribed to, 195–96 endowment effect, 129–35 energy drinks, impact of price and hype on efficacy of, 184–87 Enron scandal, xiv, 196, 204, 219 envy, comparisons and, 15–19 epidurals, 103–4 Escape from Freedom (Fromm), 148 Europe, savings rate in, 109 evolution, dangers of globalization and, 317–18, 319 exercise, procrastination and, 111 expectations, 155–72, 269–75 art and, 274 beer experiments and, 157–59, 161–62, 163–64, 172 brand associations of Coke and Pepsi and, 166–68 conflicts and, 156–57, 171–72 depth of description in caterers’ offerings and, 164 exotic-sounding ingredients and, 164–65 football plays and, 155–56, 171 garage sales and, 162–63 knowledge before vs. after experience and, 161–64 marketing hype and, 186–87 music and, 270–73, 274 physiology of experience altered by, 161–64, 166–68, 293–94 placebo effect and, 173–94; see also placebo effect restaurant meals and, 269–70 sports car test drives and, 161 stereotypes and, 168–71 taste and, 157–68, 270 upscale coffee ambience and, 159–60 wineglasses and, 165 expense reports, dishonesty in, 223–24 experience, not learning from, xxvii experiments: extrapolation of findings in, xxxi–xxxii isolating individual forces in, xxxi see also empirical tests; specific topics F Fannie Mae, 280, 310 Fastow, Andrew, 219 Federal Depositor Insurance Corporation (FDIC), 280 Federal Reserve, 280, 284–85 Fehr, Ernst, 307–8 financial industry: conflicts of interest and, 295–96 globalization and loss of diversity in, 318–19 inherent fuzziness in, 294–95 profit made from our mistakes by, 298–304 regulation of, 296 see also bankers financial meltdown of 2008, 279–329 bailout plan and, 280, 304–6, 310–11, 312, 314, 319–20 bankers’ behavior in, 291–96 collapse of financial institutions in, 280–81, 314 compensation for bankers and, 306, 310, 311, 319–24 conflicts of interest and, 291–96 empirical testing of approaches to, 328–29 global market and, 316–19 Greenspan’s confession and, xvii-xix housing market collapse and, 265–66, 279 learned helplessness and, 314–16 limitations of rational economics and, 281–82, 324–28 media coverage of, 315–16 mortgage practices and, 279–80, 283–90 planning fallacy and, 297–304 psychological fallout from not understanding what’s going on in, 311–16 public trust and, 304–11 shared suffering in, 303 fines, in social context, 76–77 first decisions: power of, 44 shape of our lives and, 43 translation of, into long-term habits, 36–39 see also anchoring first impressions: imprinting and, 25, 34, 43 see also arbitrary coherence Fiske, Alan, 68 food: expectations and taste of, 164–65, 270 ordering process and enjoyment of, 237–38 see also taste food labels, allure of “zero” on, 61–62 football plays, expectations and perception of, 155–56, 171 Ford Motor Company, 119–21 401(k)s, xiii France, Amazon’s FREE!


Quantitative Trading: How to Build Your Own Algorithmic Trading Business by Ernie Chan

algorithmic trading, asset allocation, automated trading system, backtesting, Black Swan, Brownian motion, business continuity plan, buy and hold, compound rate of return, Edward Thorp, Elliott wave, endowment effect, fixed income, general-purpose programming language, index fund, John Markoff, Long Term Capital Management, loss aversion, p-value, paper trading, price discovery process, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Ray Kurzweil, Renaissance Technologies, risk-adjusted returns, Sharpe ratio, short selling, statistical arbitrage, statistical model, survivorship bias, systematic trading, transaction costs

Fortunately, there is a field of financial research called “behavioral finance” (Thaler, 1994) that studies irrational financial decision making. I will try to highlight a few of the common irrational behaviors that affect trading. The first behavioral bias is known variously as the endowment effect, status quo bias, or loss aversion. The first two effects cause some traders to hold on to a losing position for too long, because traders (and people in general) give too much preference to the status quo (the status quo bias), or because they demand much more P1: JYS c06 JWBK321-Chan September 24, 2008 Money and Risk Management 13:57 Printer: Yet to come 109 to give up the stock than what they would pay to acquire it (the endowment effect). As I argued in the risk management section, there are rational reasons to hold on to a losing position (e.g., when you expect mean-reverting behavior); however, these behavioral biases cause traders to hold on to losing positions even when there is no rational reason (e.g., when you expect trending behavior, and the trend is such that your positions will lose even more).

See Seasonal trading strategies Capacity, 27, 158 Capital availability, effect on choices, 15 Capital allocation, optimal, 95–103 Capital IQ, 136 Chicago Mercantile Exchange (CME), 16 Clarifi, 35 CNBC Plus, 76 Cointegrating augmented Dickey-Fuller test, 128 Cointegration, 126–133 forming a good cointegrating pair of stocks, 128–130 Compustat, 136 Contagion, financial, 104–105 Correlation, 131 Covariance matrix, 97 CSIdata.com, 37 CRSP.com, 37 D Dark-pool liquidity, 71, 73, 88 Data mining, 121 Databases, historical, 37 Data-snooping bias, 25–27, 52–60, 91 out-of-sample testing, 53–55 sample size, 53 sensitivity analysis, 60 and underperformance of live trading, 91 Decimalization of stock prices, 91, 120 Printer: Yet to come INDEX Deleveraging, 152 Despair, 110 Disasters, physical or natural, 108 Discovery (Alphacet), 35, 36, 55, 85, 122–126 charting application, 125 Dollar-neutral portfolio, 43–44 Dow Jones, 36, 75 Drawdown, 20, 21–22, 43, 95 maximum, 21 calculating, 48–50 maximum duration, 21 calculating, 48–50 DTN.com, 37 Dynamic data exchange (DDE) link, 80, 81–82, 83, 84, 85 E ECHOtrade, 70 Econometrics toolbox, 168 The Economist, 10 Elite Trader, 10, 74 Elliott wave theory, 116 E-mini S&P 500 future, 16 Endowment effect, 108–109 Equity curve, 20 Excel, 3, 21, 32, 51, 163 dynamic data exchange (DDE) link to, 80, 81–82, 83, 84, 85 using in automated trading systems, 80, 81, 83, 84, 85 using to avoid look-ahead bias, 51 using to calculate maximum drawdown and maximum drawdown duration, 48 using to calculate Sharpe ratio for long-only strategies, 45–46, 47 P1: JYS ind JWBK321-Chan October 2, 2008 14:7 Printer: Yet to come 177 Index Execution systems, 79–94 automated trading system, advantages of, 79–87 fully automated trading system, building a, 84–87 semiautomated trading system, building a, 81–84 paper trading, testing your system by, 89–90 performance, divergence from expectations, 90–92 transaction costs, minimizing, 87–88 Exit strategy, 140–143 F Factor exposure, 134 Factor models, 133–139 principal component analysis as an example of, 136–139 Factor return, 134 FactSet, 35, 36 Fama-French Three-Factor model, 134–135, 153 Financial web sites and blogs, 10 G GainCapital.com, 37 GARCH toolbox, 168 Gasoline futures, seasonal trade in, 148–151 Gaussian probability distributions, 96, 105 derivation of Kelly formula in, 112–113 Generalized autoregressive conditional heteroskedasticity (GARCH) model, 120 Genesis Securities, 70, 73, 82 Global Alpha fund (Goldman Sachs), 104 Greed, 110–111 H “Half-Kelly” betting, 98, 105–106 High-frequency trading strategies, 151–153 transaction costs, importance of in testing, 152 High-leverage versus high-beta portfolio, 153–154 High watermark, 21, 48 Historical databases errors in, 117 finding and using, 36–43 high and low data, use of, 42–43 split and dividend-adjusted data, 36–40 survivorship bias, 40–42 HQuotes.com, 37, 81 Hulbert, Mark (New York Times), 10 I Information ratio.


pages: 304 words: 22,886

Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard H. Thaler, Cass R. Sunstein

Al Roth, Albert Einstein, asset allocation, availability heuristic, call centre, Cass Sunstein, choice architecture, continuous integration, Daniel Kahneman / Amos Tversky, desegregation, diversification, diversified portfolio, endowment effect, equity premium, feminist movement, fixed income, framing effect, full employment, George Akerlof, index fund, invisible hand, late fees, libertarian paternalism, loss aversion, Mahatma Gandhi, Mason jar, medical malpractice, medical residency, mental accounting, meta analysis, meta-analysis, Milgram experiment, money market fund, pension reform, presumed consent, price discrimination, profit maximization, rent-seeking, Richard Thaler, Right to Buy, risk tolerance, Robert Shiller, Robert Shiller, Saturday Night Live, school choice, school vouchers, transaction costs, Vanguard fund, Zipcar

“Representativeness Revisited: Attribute Substitution in Intuitive Judgement.” In Gilovich, Griffin, and Kahneman (2002), 49–81. Kahneman, Daniel, Barbara L. Fredrickson, Charles A. Schreiber, and Donald A. Redelmeier. “When More Pain Is Preferred to Less: Adding a Better End.” Psychological Science 4 (1993): 401–5. Kahneman, Daniel, Jack L. Knetsch, and Richard H. Thaler. “Experimental Tests of the Endowment Effect and the Coase Theorem.” Journal of Political Economy 98 (1990): 1325–48. ———. “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias.” Journal of Economic Perspectives 5, no. 1 (1991): 193–206. Kahneman, Daniel, and Richard H. Thaler. “Anomalies: Utility Maximization and Experienced Utility.” Journal of Economic Perspectives 20, no. 1 (2006): 221–34. Kahneman, Daniel, and Amos Tversky, eds. Choices, Values, and Frames. Cambridge: Cambridge University Press, 2000.

“Availability: A Heuristic for Judging Frequency and Probability.” Cognitive Psychology 5 (1973): 207–32. “Judgment Under Uncertainty: Heuristics and Biases.” Science 185 (1974): 1124–31. —-. “The Framing of Decisions and the Psychology of Choice.” Science 211 (1981): 453–58. Van Boven, Leaf, David Dunning, and George Loewenstein. “Egocentric Empathy Gaps Between Owners and Buyers: Misperceptions of the Endowment Effect.” Journal of Personal and Social Psychology 79 (2000): 66–76. Van Boven, Leaf, and George Loewenstein. “Social Projection of Transient Drive States.” Personality and Social Psychology Bulletin 29 (2003): 1159–68. Van De Veer, Donald. Paternalistic Intervention: The Moral Bounds on Benevolence. Princeton: Princeton University Press, 1986. Vaughan, William, and Delani Gunawardena. “Letter to CMS Acting Administrator Leslie Norwalk.”

defined-benefit retirement plans defined-contribution retirement plans design: controlled by choice architects, details of, human factors incorporated into, informed, neutral, starting points inherent in, user-friendly Design of Everyday Things, The (Norman) Destiny Health Plan difficulty, degree of digital cameras discount pricing discrimination, laws against Disulfiram (antabuse) diversification heuristic divorce: and “above average” effect, and children, difficulty of obtaining, economic prospects affected by, law of, mandatory waiting period for, obtainable at will Doers dog owners, social pressures on Dollar a day incentive domestic partnership agreements “Don’t Mess with Texas,” eating: and conformity, and food display, and food selection, gender differences in Economist Econs: easy choices for, homo economicus, incentives for, investment decisions by, and money, not followers of fashion, Reflective Systems used by, unbiased forecasts made by, use of term education, accountability in, in Boston, in Charlotte, charter schools, child’s right to, and competition, complex choices in, controlled choice in, desegregation of, incentive conflicts in, No Child Left Behind, in San Marcos, Texas, school choice vouchers, status quo bias in, testing standards, test scores, underperforming in, in Worcester “efficient frontier,” Einstein, Albert elimination by aspects emails, Civility Check for Emanuel, Rahm Emergency Planning and Community Right to Know Act (1986) “emoticons,” employers: employee benefits offered by, profit-sharing plans of, and retirement plans endowment effect energy, invisibility of energy conservation: and cost-disclosing thermostats, and framing, and home-building industry, and social influences, voluntary participation programs in energy efficiency Energy Star Office Products Enron Corporation environmental issues, acid deposition program, air pollution, auto emissions, auto fuel economy, cap-and-trade system in, Clean Air Act, climate change, command-and-control regulation of, energy conservation, energy efficiency, energy use, feedback and information, greenhouse gas emissions, incentives for, international, Kyoto Protocol, nudges proposed for, ozone layer, recycling, risk labeling, and social influences, trading systems in, and tragedy of the commons, transparent costs of, voluntary participation programs Environmental Protection Agency (EPA), and auto fuel economy, Energy Star Office Products program, Green Lights program of, Toxic Release Inventory of Equities (stocks) equity premium ERISA (Employee Retirement Income Security Act of) error, expecting “everything matters,” evil nudgers expectations Experion Systems externalities FAFSA (free application for federal student aid) families, dispersion of Family and Medical Leave Act Federal Express, Federal Housing Administration (FHA) Federal Trade Commission (FTC) feedback, plans (college savings accounts) flexible spending accounts follow through failure to, Food and Drug Administration (FDA) food display food selection footnotes, uses of forced choice forcing function Ford, Harrison (k) plans framing France, organ donations in Franklin, Benjamin freedom of choice, danger of overreaching, elimination of, Just Maximize Choices, opposition to, and presumed consent, and required choice frequency Friedman, Milton friendly discouragement fungibility gains and losses gambling, low stakes, mental accounting in, self-bans, and strategy Gandhi, Mohandas gas tank caps Gateway Arch, St.


pages: 297 words: 96,509

Time Paradox by Philip G. Zimbardo, John Boyd

Albert Einstein, cognitive dissonance, Drosophila, endowment effect, hedonic treadmill, impulse control, indoor plumbing, loss aversion, mental accounting, meta analysis, meta-analysis, Necker cube, Ronald Reagan, science of happiness, The Wealth of Nations by Adam Smith, twin studies

Tversky and D. Kahneman, “Loss Aversion in Riskless Choice: A Reference-Dependent Model,” Quarterly Journal of Economics 106: 1039–61 (1991). 35. D. Kahneman, J. L. Knetsch, and R. H. Thaler, “Experimental Tests of the Endowment Effect and the Coase Theorem,” Journal of Political Economy 98: 1325–48 (1990); and D. Kahneman, J. Kentsch, and D. Thaler, “The Endowment Effect, Loss Aversion, and Status Quo Bias,” Journal of Economic Perspectives 5: 193–206 (1991). 36. L. van Boven, D. Dunning, and G. F. Loewenstein, “Egocentric Empathy Gaps Between Owners and Buyers: Misperceptions of the Endowment Effect,” Journal of Personality and Social Psychology 79: 66–76 (2000); and Z. Carmon and D. Ariely, “Focusing on the Foregone: How Value Can Appear So Different to Buyers and Sellers,” Journal of Consumer Research 27: 360–70 (2000). 37.

Rabin, “Projection Bias in Predicting Future Utility,” Quarterly Journal of Economics 118: 1209–48 (2003); G. Loewenstein and E. Angner, “Predicting and Indulging Changing Preferences,” in Time and Decision, ed. G. Loewenstein, D. Read, and R. F. Baumeister (New York: Russell Sage Foundation, 2003), 351–91; L. van Boven, D. Dunning, and G. F. Loewenstein, “Egocentric Empathy Gaps Between Owners and Buyers: Misperceptions of the Endowment Effect,” Journal of Personality and Social Psychology 79: 66–76 (2000). 14. R. E. Nisbett and D. E. Kanouse, “Obesity, Food Deprivation and Supermarket Shopping Behavior,” Journal of Personality and Social Psychology 12: 289–94 (1969); D. Read and B. van Leeuwen, “Predicting Hunger: The Effects of Appetite and Delay on Choice,” Organizational Behavior and Human Decision Processes 76: 189–205 (1998). 15.


pages: 295 words: 66,824

A Mathematician Plays the Stock Market by John Allen Paulos

Benoit Mandelbrot, Black-Scholes formula, Brownian motion, business climate, business cycle, butter production in bangladesh, butterfly effect, capital asset pricing model, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, diversified portfolio, dogs of the Dow, Donald Trump, double entry bookkeeping, Elliott wave, endowment effect, Erdős number, Eugene Fama: efficient market hypothesis, four colour theorem, George Gilder, global village, greed is good, index fund, intangible asset, invisible hand, Isaac Newton, John Nash: game theory, Long Term Capital Management, loss aversion, Louis Bachelier, mandelbrot fractal, margin call, mental accounting, Myron Scholes, Nash equilibrium, Network effects, passive investing, Paul Erdős, Paul Samuelson, Ponzi scheme, price anchoring, Ralph Nelson Elliott, random walk, Richard Thaler, Robert Shiller, Robert Shiller, short selling, six sigma, Stephen Hawking, stocks for the long run, survivorship bias, transaction costs, ultimatum game, Vanguard fund, Yogi Berra

Surprisingly, however, if the subjects are told that they’ve inherited the money but it is already in the form of municipal bonds, almost half choose to keep it in bonds. It’s the same with the other three investment options: Almost half elect to keep the money where it is. This inertia is part of the reason so many people sat by while not only their inheritances but their other investments dwindled away. The “endowment effect,” another kindred bias, is an inclination to endow one’s holdings with more value than they have simply because one holds them. “It’s my stock and I love it.” Related studies suggest that passively endured losses induce less regret than losses that follow active involvement. Someone who sticks with an old investment that then declines by 25 percent is less upset than someone who switches into the same investment before it declines by 25 percent.

Ebbers, Bernie acquisition appetite of arrogance of author emails offer of help Digex purchase down-home style of forced to sell WCOM stock fraud by pump and dump strategy and purchase of WorldCom stock by economics, human behavior and The Education of a Speculator (Niederhoffer) “efficient frontier” of portfolios (Markowitz) Efficient Market Hypothesis background of impact of accounting scandals on increased efficiency results in decreased predictability investors beliefs impacting moving averages and paradoxes of randomness and rationale for resistance and support levels and versions of Elliott, Ralph Nelson Ellison, Larry employee remuneration vs. CEO remuneration endowment effect Enron accounting practices margin calls on CEO Ken Lay environmental exploitation, as Ponzi scheme equity-risk premium Erdös, Paul Escher, M. C. European stock market euros benefits of standardizing European currencies euro-pound/pound-euro exchange rate expected excess return expected value. see also mean value covariance and formula for obtaining graphing against risk (Markowitz optimal portfolios) insurance company example “maximization of expected value,” mu (m) probability theory and exploitable opportunities, tendency to disappear Fama, Eugene Fibonacci numbers Elliott wave theory and golden ratio and fibre-optic cable fifty-two-week highs “flocking effect,” Internet Fooled by Randomness (Taleb) formulas Black-Scholes options compound interest expected value fractals Frank, Robert fraud. see also accounting scandals applying Benford’s Law to corporate fraud applying Benford’s law to income tax fraud Bernie Ebbers Salomon Smith Barney benefitting illegally from IPOs WCOM fraud wrongdoing of brokers at Merrill Lynch free market economy French, Ken Full House: The Spread of Excellence from Plato to Darwin (Gould) fund managers. see also stock brokers/analysts fundamental analysis determining fundamental value by discounting process evidence supporting present value and sequence complexity and trading rules and as sober investment strategy stock valuation with unexciting nature of future value P/E ratio as measure of future earnings expectations present value and gambler’s fallacy games gambling and probability game theory guessing games Monopoly Parrondo’s paradox St.

technical analysis trading strategies unemployment whim World Class Options Market Maker (WCOMM) present value compound interest and discounting process for stock purchases based on price movements complexity changes over time extreme movements herd-like and volatile nature of insider trading and network effect on normal curve and power law and subterranean information processing and price, P/E ratio price targets anchoring effect and hype and unrealistic prices, of stocks manipulating for own benefit (management/CEO) oscillation created by investor reactions to each other reflecting publicly available information prisoner’s dilemma private information becoming common knowledge dynamic with common knowledge market predictions and probability coin flipping game and dice and gambling games games of chance outguessing the average guess St. Petersburg paradox stock-newsletter scam based on stock options and probability theory progressive taxation psychology anchoring effect availability error behind buying more stock as price drops confirmation bias counterproductive behavior endowment effect scandal cover-ups status quo bias trying to outguess the masses publicly available information. see also common knowledge accounting scandals and Efficient market hypothesis and pump and dump strategy put options. see also stock options buying/selling puts on S&P as hedge against decline of stock selling strategies for using valuation tools for pyramid schemes quarterly estimates RagingBull railroads, depression of Ramsey, Frank random events appearance of order in Efficient market hypothesis and investing with meaning vs. predictability random sequences A Random Walk Down Wall Street (Malkiel) random walk theory rate of return arithmetic mean outstripping geometric mean Beta (B) values and determining expected excess return fixed, with treasury bills IPO purchases/sales and median vs. average minimizing risk without reducing “single index model” and standard deviation and stocks vs. bonds ratio of the excess return on a portfolio reality, inability to model reforms, accounting practices regression to the mean as contrarian measure Sport Illustrated cover jinx as illustration of widespread examples of Reminiscences of a Stock Operator (Lefevre) resistance levels risks aversion, illustrated by online chatrooms diversification and graphing against expected value (Markowitz optimal portfolios) market-related and stock-related mathematics of minimizing without hurting rate of return options and rate of return and selling short and stocks vs. bonds taking unnecessary Roschach blots Ross, Sheldon roulette rules. see trading strategies rules of thumb, as time saving device rumors conclusions based on not being able to ignore when considering investments S-shaped curve, P/E ratio S&P 500, buying/selling puts Salomon Smith Barney Samuelson, Paul scaling laws. see power law scams card tricks Ponzi schemes, chain letters, and pyramid schemes sports betting scam stock-newsletter scam scandals. see accounting scandals; fraud Scholes, Myron script, sports scam secrecy complexity resulting from lack of investment strategies and Securities and Exchange Commission (SEC) charging WorldCom of inflated earnings decimalization reforms parable of common knowledge and Security Analysis (Graham and Dodd) self-fulfilling beliefs selling on the margin. see short selling sensitive dependence, nonlinear systems sequences complexity of (mathematics of) random sequences random walk theory and share price, P/E ratio. see also prices, of stocks Sharpe, William Sherra, Jesse Shiller, Robert short selling short-term investors shorting and distorting strategy Shubik, Martin Sidgmore, John Siegel, Jeremy “single index model” (Sharpe) six sigma performance Slovic, Paul Sluggish Market Hypothesis Smith, Adam socially regressive funds Spitzer, Eliot Sport Illustrated spread, making money on St.


pages: 184 words: 35,076

Irrationally Yours: On Missing Socks, Pickup Lines, and Other Existential Puzzles by Dan Ariely, William Haefeli

endowment effect, financial independence, Google Hangouts, loss aversion, sealed-bid auction, Skype

—BARBARA First, it’s delightful that you want your son to move closer to you rather than stay on the other coast, and I am sure that he feels the same. In terms of his moving versus not moving, I suspect your son is suffering from a combination of three decision biases. The first is the endowment effect, which has to do with our tendency to use our current situation as a reference point, and view any other alternative as a negative change from where we are now. In your son’s case, moving from New York City to the West Coast has some advantages (weather, his parents, etc.) and some disadvantages (lower density, fewer art galleries, etc.), and the endowment effect suggests that he is focusing to a larger degree on the things he would give up, and not paying sufficient attention to the things that he would gain if he ever moved to the West Coast. The second decision bias your son is most likely suffering from is the status quo bias, which means that we feel very differently about a decision to stay in a situation, compared with a decision to change our situation.


pages: 291 words: 81,703

Average Is Over: Powering America Beyond the Age of the Great Stagnation by Tyler Cowen

Amazon Mechanical Turk, Black Swan, brain emulation, Brownian motion, business cycle, Cass Sunstein, choice architecture, complexity theory, computer age, computer vision, computerized trading, cosmological constant, crowdsourcing, dark matter, David Brooks, David Ricardo: comparative advantage, deliberate practice, Drosophila, en.wikipedia.org, endowment effect, epigenetics, Erik Brynjolfsson, eurozone crisis, experimental economics, Flynn Effect, Freestyle chess, full employment, future of work, game design, income inequality, industrial robot, informal economy, Isaac Newton, Johannes Kepler, John Markoff, Khan Academy, labor-force participation, Loebner Prize, low skilled workers, manufacturing employment, Mark Zuckerberg, meta analysis, meta-analysis, microcredit, Myron Scholes, Narrative Science, Netflix Prize, Nicholas Carr, P = NP, pattern recognition, Peter Thiel, randomized controlled trial, Ray Kurzweil, reshoring, Richard Florida, Richard Thaler, Ronald Reagan, Silicon Valley, Skype, statistical model, stem cell, Steve Jobs, Turing test, Tyler Cowen: Great Stagnation, upwardly mobile, Yogi Berra

We see similar dilemmas in the more systematic literature. Remember that old rule of thumb “A bird in the hand is worth two in the bush”? Economists often consider it a “bias” that we value commodities we already own much more than commodities we might acquire (this bias is also known as the “endowment effect”). But for all its apparent irrationality, maybe this is an inescapable part of anyone’s ability to be loyal to friends and family. Maybe part of true loyalty is that we can’t always apply it selectively on a moment’s notice. In that case, these endowment effects may be an essential part of the good life rather than a signal of our irrationality. I’m not saying we know this for sure, only that the models we economists devise don’t really settle it. When economists investigate human rationality, they are often too dependent on arbitrary stipulations about what is rational and what is not, expressed in the form of models.

See healthcare domestic oil production, 177 domestic productivity, 169 Dorn, David, 164 Dreber, Anna, 106 driverless automobiles, 8 drone aircraft, 20–21 Duflo, Esther, 222 Dumaine, Erika, 62 Duncan, Arne, 57 dystopian visions, 135 “Economic Growth Given Machine Intelligence” (Hanson), 135–36 economics behavioral economics, 75–76, 99, 105, 110, 149, 227 and “Big Data,” 221–22 changing emphasis in research, 221–28 computational economics, 222 development economics, 226 economic crises, 50–51, 53, 55, 232 and incentive for innovation, 138 Keynesian, 53–54, 56, 226 macroeconomics, 9, 166, 211–12, 226 microeconomics, 212, 225 and online education, 180 economies of scale, 184 Economou, Rona, 61 education and the changing labor market, 37, 168–69 chess as model for, 185–88, 191–92, 202–3 educational standards, 90 in El Paso, 246 Emporium model, 183–84 and face-to-face instruction, 194–202 and foreign competition, 176 and gaming, 185–88 and geographic trends, 171–72 and income polarization, 4 new higher education models, 188–94 online education, 179–85 and the social contract, 231 and “tutor kings,” 200–201 and wage trends, 40–41 egalitarianism, 189–90 eHarmony, 95 Einstein, Albert, 126, 211, 213, 215 El Paso, Texas, 245–46 elderly population, 51–52, 236–37, 258 elections, 10–11, 234–35 electronic shopping, 27 The Elegant Universe (Greene), 212–13 empiricism, 225–26 employer-provided healthcare, 237–38 Emporium education model, 183–84 endowment effect, 99–100 energy costs, 177 Eng, Richard, 200 engineering, 26 English boarding schools, 199 entertainment industry, 22 epigenetics, 212 Equifax, 125 Euclid, 216–17 Europe, 173–75 evolution of machines, 150–51 exclusivity, 36, 95–96, 192–94 expert testimony, 129 “Face time,” 146 Facebook, 26, 209–10, 221, 257 face-to-face education, 194–202 factor price equalization, 163 factories, 92 Fair Isaac Corporation, 124 Felin, Teppo, 139 Feller, Sébastien, 147 FICO scores, 124 financial crisis, 50–51, 53, 55 financial sector, 25, 41, 128–29, 129–30 fiscal crunch, 231–51 Fischer, Bobby, 101, 108, 188 fixed employment costs, 113 Florida, 8, 237, 241, 251–52 Florida, Richard, 256 “Flynn Effect,” 107–8 Foer, Joshua, 152 food prices, 246, 248 Ford, Martin, 6 foreign competition, 161–63, 163–71, 175–77 Foxconn, 7–8 “fracking,” 177 France, 39 Franchise (Asimov), 10–11 Franklin, Benjamin, 148 free trade, 166, 176 freelancing, 59–63 Freestyle chess compared to traditional chess, 77–83 and computer simulations, 227–28 and decision-making models, 129 described, 77–83 impact on human play, 83–86 masters of, 86–87 origin of, 46–47 and other man-machine collaborations, 86–89, 89–93 and risk-taking behavior, 75–76 and self-education, 202–3 spectator interest in, 156–57 Friendster, 209 Fritz (chess program), 68, 78, 109, 114 futurism, 6, 134 “g factor” (general intelligence), 42–44 game theory, 222 Gates, Bill, 25 Gattaca (1997), 13 Gelfand, Boris, 156 gender issues and changing worker profiles, 30–31 and chess, 106, 108 and labor force trends, 51 and wage trends, 52–53 and wealth inequality, 249 General Electric, 38, 87 general relativity theory, 211 “Generation Limbo,” 62 genetics, 17, 211–12 geographic trends, 171–75 Gerdes, Christer, 106 Germany, 39, 173–74 Global Hawk surveillance drones, 20–21 globalization, 10 Go (game), 135 Gobet, Fernand, 76 Google and availability of knowledge, 7 and “Big Data,” 221 and driverless cars, 8 and the labor market, 26, 27, 34–36 and medical diagnosis, 89 and memory, 151–52, 154 and online marketing, 22 and public trust, 217 and regulatory issues, 17 government budgets and spending, 175, 176, 198, 231–51 GPS technology, 7, 14–15, 113–15, 116–17 “Grand Unified Theories,” 212 Gränsmark, Patrik, 106 Great Recession (2008–2009), 54–59 “great stagnation,” 5 Greek symposia, 197 Greene, Brian, 212–13 Grischuk, Alexander, 109 Hanson, Gordon H., 164 Hanson, Robin, 135–36 Harvard University, 192–94, 201 Hauchard, Arnaud, 147 Hayek, Friedrich, 215 healthcare costs of, 59, 60, 113 employer-provided, 59, 113, 237–38 and the fiscal crunch, 232, 234–39, 242, 249–50 and the labor market, 31, 238 and mandates, 237–38 and physician rating systems, 124–25 and protectionism, 176 and rationing, 249–50 and regulatory issues, 16–17 and wealth inequality, 243–44 hermeticism, 153 Hernandez, Nelson, 78–79, 86, 157, 203 Higgs boson, 212 higher education, 168, 188–94, 194–202 hiring costs, 36, 59, 60 Hirschberg, Julia, 12–13 Hitt, Lorin M., 33 Hlatshwayo, Sandile, 176 Hong Kong, 200–201 Houdini (chess program), 68 household incomes, 38 housing costs, 53, 55, 63, 239–40, 244–45 human judgment and error, 102–3, 104, 131 human-machine interface, 91–92 Hydra (chess program), 69 IBM, 7, 47 imitation, 141, 144.


pages: 250 words: 88,762

The Logic of Life: The Rational Economics of an Irrational World by Tim Harford

activist fund / activist shareholder / activist investor, affirmative action, Albert Einstein, Andrei Shleifer, barriers to entry, Berlin Wall, business cycle, colonial rule, Daniel Kahneman / Amos Tversky, double entry bookkeeping, Edward Glaeser, en.wikipedia.org, endowment effect, European colonialism, experimental economics, experimental subject, George Akerlof, income per capita, invention of the telephone, Jane Jacobs, John von Neumann, law of one price, Martin Wolf, mutually assured destruction, New Economic Geography, new economy, plutocrats, Plutocrats, Richard Florida, Richard Thaler, Ronald Reagan, Silicon Valley, spinning jenny, Steve Jobs, The Death and Life of Great American Cities, the market place, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Malthus, women in the workforce, zero-sum game

Then he went to the Epcot Center and set up an ordinary-looking stall, just as he had done for years with his sports cards as a graduate student. It was the perfect opportunity to take economic experiments out of the laboratory and into the “field”—somewhere realistic. List was trying to understand this puzzlingly irrational behavior that other economists had shown in the lab: People suddenly value objects more highly simply because they own them. They won’t trade even when logic suggests they should. Economists call this “the endowment effect.” You might recognize this behavior in yourself. Let’s say you have held on to a nice bottle of wine that has been growing in value but that you would never have gone out and bought for the seventy-five dollars it is now worth, even though you could have easily sold it on eBay for that amount. The wine was yours, and even though you would have had no interest in buying it for seventy-five dollars, you were just as unwilling to sell it for that price.

Half the subjects had initially received a Valentine’s Day pin and were offered a Saint Patrick’s Day pin of roughly equivalent value; the other half, who had the Saint Patrick’s Day pin, were offered the Valentine’s Day pin. Because each subject only had a fifty-fifty chance of receiving the pin he or she preferred, each subject would have a 50 percent chance of wanting to trade—if he or she was rational. The endowment effect, though, might have been expected to dampen trades, leaving people clinging to whatever they had originally been given. That irrational clinginess is exactly what John List discovered from the inexperienced collectors. Fewer than one in five of them accepted his offer. But List also discovered that experienced pin collectors were much more likely to trade than inexperienced ones. Each experienced collector (someone who traded more than four times a month) accepted Professor List’s offer about half the time, as a rational person would.

Yet each took a cool, logical view of whether they preferred the Valentine’s Day pin or the Saint Patrick’s Day pin—that is, a view uncolored by which pin happened to be in their hands when the trade was offered. Just to prove the point, John List unloaded his inventory of baseball memorabilia at a sports card convention and found exactly the same mistakes from rookies and exactly the same rationality from experienced collectors. The endowment effect is irrational, and it’s real—but it does not influence experienced people in realistic situations. On another occasion, John List punctured some previously influential laboratory work that seemed to show a different sort of irrationality. Again, his technique was to try to repeat the laboratory experiment in a more natural setting. The original laboratory experiments had divided subjects into “employers” and “workers.”


pages: 374 words: 94,508

Infonomics: How to Monetize, Manage, and Measure Information as an Asset for Competitive Advantage by Douglas B. Laney

3D printing, Affordable Care Act / Obamacare, banking crisis, blockchain, business climate, business intelligence, business process, call centre, chief data officer, Claude Shannon: information theory, commoditize, conceptual framework, crowdsourcing, dark matter, data acquisition, digital twin, discounted cash flows, disintermediation, diversification, en.wikipedia.org, endowment effect, Erik Brynjolfsson, full employment, informal economy, intangible asset, Internet of things, linked data, Lyft, Nash equilibrium, Network effects, new economy, obamacare, performance metric, profit motive, recommendation engine, RFID, semantic web, smart meter, Snapchat, software as a service, source of truth, supply-chain management, text mining, uber lyft, Y2K, yield curve

As asserted in chapter 4, enterprise inertia often keeps organizations publishing pretty pie charts when deeper insights from advanced analytics like machine learning are readily available. As mentioned in chapter 3, most organizations are unaware of the variety of alternate information sources available, while they continue to use less accurate, complete, or timely sources “because that’s the way we’ve always done it.” The economic principle behind this is called the endowment effect, in which people ascribe a greater value to something merely because they possess it. The endowment effect quietly motivates business people to resist information and analytic progress. It’s the job of the CDO to ensure that opportunity costs for information and analytics are understood and employed to drive related strategies. As new information sources and analytic capabilities are continually presenting themselves, information and analytic opportunity cost assessment must be a periodic activity.

Index 3 “V”s of big data 101n9 Abe’s Market 39 accessibility 249 accounting: accountants and information 227–9; cashing in on information 229; information 201–5; probable economic value 229–30 ACNielsen 12, 22 Acxiom 229 Adams, Paul 168 Advanced Drain Systems (ADS) 97 Affordable Care Act (Obamacare) 98 Albala, Mark 261 algorithm(s) 84, 88–9, 94, 96, 98, 137, 199, 230–1, 279, 286, 289–91 Amazon 36, 132, 211, 217n2 American Institute of Certified Public Accountants (AICPA) 21, 205–6 analytics: actionable decision-making 89–93; advanced 289–90; advanced analytics advantage 83–5; business intelligence implementation 82; descriptive 82–3; diagnostic 82–3; exploiting Big Data 86–9; Gartner analytic ascendency model 83; identifying monetizable insights 93–9; information management 99–100; information monetization 75–6; predictive 82–3; prescriptive 82–3; value 266 application program interfaces (APIs) 34, 73 applied asset management: governance 186–9; information strategy 177–81; information vision 174–7; infrastructure 196–8; metrics 182–6; people 189–92; process 193–6; roles for infosavvy organization 198–200 Aquatics Informatics 114 Archer Daniels Midland 8 Armstrong, Neil 1 Arthur Andersen 205, 217 artificial intelligence (AI) 85, 90, 115, 286, 289–90 Art of War, The (Sun Tzu) 144n4 asset, definitions 2–3, 9–11, 214–15 asset management: barriers to information 114–16; fiduciary responsibility 164; financial methods 163–5; intangibles 168–9; lessons from sustainability 138–43; see also applied asset management; physical asset management AULIVE 12 Australian Computer Society Data Taskforce 222 Australian Privacy Commissioner 233 Automated Teller Machines (ATMs) 43–4 Auto Trader 23 Ayasdi 14, 27n6, 42, 98 balance sheet assets 158–9; physical asset management 9, 116, 158–63, 176, 184, 188–9, 198, 235 Bardin, Noam 35 bartering: favorable terms and conditions 38–9; goods and services 37–8; relationships 38–9 Becker, Gary 128 Becker, Mark 30 Beechcraft Cessna 292 Beechwood House Publishing 255–6 Bekenstein Bounds 273 Bell Helicopter 292 Bespoke Data Organisation 225 Beyer, Mark 186 Big Data 10, 12, 26n2, 49n1, 59, 212; exploiting 85–9; health insurance company 107; information trend 287; processing 40–1; roadblocks to information monetization 287–8; term 86, 101n8; variety of information 88–9; velocity of information 85–6; volume of information 87 biodiversity 136 Bippert, Doug 84 Birchler, Urs 272 blockchain 291 Bloomberg 12, 211, 229 blunderfunding 244, 268n5 Boone, Ryan 40 Box, George 246 BrightPlanet 65 Brownstein, John 96 Brynjolfsson, Erik 272 Brzmialkiewics, Caryl 44 Buchanan, Stewart 107 Bugajski, Joe 281 business: asset 10; climate 136; information 48–9; introducing a new line of 33–4; models 24–6; performance 43–4 business intelligence (BI) 14, 77, 81, 198, 211, 292; analytics 82; beyond basic 81–6; innovation 97–9; see also analytics business-to-business (B2B) 15, 38 business-to-consumer (B2C) 15 business value of information (BVI) 253–4 Bütler, Monka 272 Buytendijk, Frank 34, 281 Caltex 63 Capability Maturity Model Integration (CMMI) 148 cash 14–16, 20–1, 28, 35, 37, 39, 42–4, 96, 128, 161, 165, 188, 209, 227, 229, 257, 260, 293 Casonato, Regina 132 Casper, Carsten 244 Center for Disease Control 65; Youth Risk Behavior Surveillance System (YRBSS) 89 chief data officer (CDO) 3, 9, 17, 25: analytics 106–7; balancing act of 288–9; concept of 190; emergence of 293; hiring 211; information ecosystem 138; information leader 56–6, 155; information management 154; leadership 112; role of 192, 199–200 chief financial officer (CFO) 3, 100, 105, 107, 165, 200, 213, 245, 250 chief executive officer (CEO) 15, 32, 34, 40, 57, 100, 112, 155, 168, 175, 190, 200 chief information officer (CIO) 3, 40, 42, 58–9, 81, 106, 112, 132, 134, 175–6, 190, 200 China 35, 64, 159, 224 Christiaens, Stan 106 Cicero Group 148, 265, 269n25 Citigroup13–14, 16 Clark, Christina 243 Coca-Cola 83–4, 88, 132 Cohen, Jack 91 Coles Supermarkets 192 Collibra 106, 163 commercial data 63 commercial general liability (CGL) 241–2 competitive differentiation 36–7 completeness 248, 252 Comprehensive Capital Analysis and Review (CCAR) 14 Connotate Software 62, 65 consistency 248 content management, contending approaches for 154–5 Corbin, Stacey 63 Cordner, Matt 292 costs, defraying information management and analytics 40–1 cost savings, monetization success 74 cost value of information (CVI) 256–7, 261–2, 274–5 cultural attitudes, information management 114 customer acquisition and retention 29–31 customer relationship management (CRM) 140 D&B 22, 57, 63–4, 229 DalleMule, Leandro 176, 184 dark data 32, 42, 62–3, 141; information asset 61–2; understanding 94–5 data as a service (DAAS) 181–2 database management system (DBMS) 134, 302 Data Driven Leaders Always Win (Zaidi) 234 data governance 188–9; see also governance, information Data Management Association International (DAMA) 148 data ownership 20; see also ownership data preparation 17, 73–4, 189; for monetization use 72–3 data quality: assessing 246–9; objective metrics 248; subjective metrics 249 Data Republic 63 data science 289–90 Datateam Business Media (DBM) 221 Davis, Lord Justice 221 DB2 database 115, 228 DBS Bank 43–4 decision making: actionable 85, 89–93; complexity, activity and change 89–90; governance, risk and compliance (GRC) 91–2; optimizing business processes 90–1; scenario planning 92–3 deinformationalization 36 Deming, Edward 243 derivative data 279 Desai, Samir 58 Deutsche Telekom 225 Dibble, Bill 94 differential data 278 digerati 210 digital detritus 42 digital industry, intellectual property of 288 diminishing marginal utility 276–8; law of 276 Direct Eats 39 direct information monetization 66–8 Disney World 83 distinct data 278 diversity, people 191–2 Dollar General 32, 36, 40 Dominick, Lauren 92 Drucker, Peter 243 DSCI 63 Dun & Bradstreet see D&B Duncan, Alan 160, 272 economic attribution, monetization success 74 economics: applying concepts to information 272–3; as dismal science 271; principles 271–2; see also infonomics economic value of information (EVI) 258–9, 266 economy 11, 147, 192, 205–6, 217, 242, 272 ecosystem: definition 132–3; entities 135–6; features 136; influences 137; management 137–8; processes 136–7; sustainability principles 138–43, 180; see also information ecosystem Ehlers, Brian 183 elasticity, information pricing and 275–6 Electronic Communications Privacy Act of 1986 224 endowment effect 279 enterprise architect 10 enterprise asset management (EAM): infrastructure 197–8; systems 162 enterprise content management (ECM) 154, 181 Enterprise Data Management (EDM) Council 148 enterprise information management (EIM): impediments to maturity 111–14; leadership issues 112; levels of maturity 109–11; maturity model 108–11, 174; metrics 182–4; vision 174–7 enterprise resource planning (ERP) 140 Equifax 12, 57, 63 Equinox Fitness Clubs 58 Evans, Nina 114 Everedge 168 existence 249 exogenous information 16, 165; see also external information Experian 57, 63, 213 Experience Matters 106, 114, 148, 181, 186 external information 11, 31, 36, 55, 60–1, 165, 195, 292 Facebook 11, 21–2, 31, 34, 64, 211–13, 218n10, 232 faint signals, identifying 95–6 feasibility checklist 69–70; economical 72; ethical 72–3; legal 72; manageable 71; marketable 71; practical 70–1; scalable 71; technological 71 Federal Aviation Administration (FAA) 46 fiduciary 164, 189, 234 Financial Accounting Standards Board (FASB) 21, 206 financial valuation models, information assets 251, 255–61 Fisher, Jennifer 260 Fisher, Tony 272 Fisher, William W., III 169 FleetRisk Advisors 92 Francis, James C., IV 224 fraud and risk, identifying and reducing 44–5 Freedom of Information Act (FOIA) 17, 45–6 Friedman, Milton 128–9 Friedman, Ted 247, 268n12 fundamental valuation models, information assets 251–5 Gaia hypothesis 144n5 Ganschow, Karen 54 Gartner: enterprise information management (EIM) maturity model 108–11, 297–302; financial valuation models 251, 255–6; fundamental valuation models 251–5; Hype Cycle 281, 284n7; information asset valuation models 250; information value models 262; Magic Quadrants 68 Geis, Alex 33 General Data Protection Regulations (GDPR) 240n24 generally accepted accounting principles (GAAP) 21, 116, 217, 245 generally accepted information principles 116–19, 120n13; assumptions 117; constraints 117–18; principles 118–19 Georgia Aquarium 29–30 geographic 18, 35, 96, 235 Gledhill, David 43 goods and services, bartering 37–8 Google 11, 21, 47, 76, 211, 213, 217n2 governance: applied asset management 188–9; challenges and remedies 187; data entry 187; governance, risk and compliance (GRC) 91–2, 152; information 188, 234; information management 186–9; information management challenges 299–300; proving benefits of information 264 government 9, 17, 22–3, 41, 45–8, 61, 64, 95–6, 105, 115, 193, 206, 223–5, 237, 276, 286 Grayson-Rizzuto, Kimberly 39 Grossman, Larry 46 Hadoop 41 Hamilton, Stuart 114 Hawthorne effect 243, 268n4 Hawthorne Works 243 Health and Human Services Department 44 HealthMap 95–6 HERE Life 38 Hershberger, John 111 Higgins, Mike 97 Hillard, Rob 148, 272 Hogan, Tom 107 Holloway, Todd 32 Horrisberger, Jim 83 House of Cards (TV series) 59 Hubbard, Douglas 260 Human Capital (Becker) 128 human capital management 165–8, 184 Hutton, James 144n7 Hype Cycle 281, 284n7 IBM 87, 91, 115, 148 IMDB 34 Indigenous Land Corporation 63 indirect information monetization 68–9 industry average 283 Infinity Property and Casualty 94 infodiversity 180 infonomics 272, 285–6; concept of 3; definition 9; future of 292–5; improving information yield 281–4; information pricing and elasticity 275–6; information-related trends 286–91; managing information 106; marginal utility of information 276–9; opportunity cost for information choices 279–80; production possibilities of information 280; supply and demand of information 274–5 Informatica 163 information: accountants and 227–30; accounting for 214–17; as asset 2, 205–7; asset realization 207–8; business models and profitability 24–6; characteristics of 18–26; control of 228–9, 233; data vs 25–6, 26n4; digitalization of 288; economic alternatives for 13–14; getting more than cash for 14–16; as liability 216; liquidity of 20–1; monetizing, managing and measuring 9–11; multimedia 2; opportunity cost for information 279–80; pricing elasticity 275–6; probable economic value of 229–30; real world evidence of economic value of 210–13; replicability 23; reusable nature of 19; as second language 143–4; stop giving it away 18; supply and demand of 274–5; taxing situation 21–2; thinking beyond 16–17; transferability 23–4; uncovering hidden treasures 17–18; value of 208–10; see also ownership Information Age 3, 95, 136, 149, 160, 216 informationalize 36 informationalized product 75 information as a second language (ISL) 143–4, 192 information asset management (IAM) 107, 176; information yield 281–4; unified approach to 169–70; vision 176–7; see also applied asset management information assets 59–66; commercial data 63; commercial general liability (CGL) 241; dark data 62–3; financial valuation models 249, 255–60; fundamental valuation models 251–6; inventory 60; measuring 242–6; new supply chain model for 128–31; operational data 61; privacy and security 291; public data 64; social media data 64–5; valuation models 249–60; web content 65–6 information curation 17 information ecosystem: classic ecosystem entities concepts 135; ecosystem entities 135; ecosystem features of 136; ecosystem influences 137; ecosystem management 137–8; ecosystem processes 136–7; lessons from sustainability 138–43; preparing for 131–8; recycle 142–3; reduce 140–1; refuse 139–40; remove 143; repurpose 141–2; reuse 141; role of information in 133–5 information keiretsus 132 information lifecycle: expense 267; process challenges 301–2 information management 105–8; barriers to asset management 114–16; challenges and principles 119; cultural attitudes about 114; future of infonomics 292; generally accepted information principles 116–19; governance challenges 299–300; impediments to maturity 111–14; information metrics challenges 299; infrastructure challenges 302; leadership 112; levels of information maturity 109–11; maturity model 108–11, 174; monetization success 74; monetization to 99–100; people-related challenges 300–1; priority control 113–14; process challenges 301–2; resources 113–14; strategy challenges 298; vision challenges 297–8 information measurement, future of infonomics 294–5 information owners 222; see also ownership information ownership 222, 226–8, 232–4 information performance gap 262 information product management 56–9 information property rights 303–5; rulings affirming 303–4; rulings denying 304–5; see also information ownership; ownership information security 244 information supply chain (ISC) 8, 119; activities 131; metrics for 126–7; model for information assets 128–31; preparing for information ecosystem 131–8; scenarios 126; SCOR (Supply Chain Operations Reference) model 124–5; see also information ecosystem Information Technology Infrastructure Library (ITIL) 151–2 information valuation models 263–7; benefits of information governance 264; expanded revenue 266; innovation and digitalization 265; monetization and analytics 265–6; prioritizing IAM investments 264; reducing information lifecycle expense 267 information vision gap 262 information yield 281–4; concept 281; curve 281 infosavvy 3, 11; chief data officer (CDO) 199–200; growing market valuations 245; investors prizing, companies 211–13; roles for organization 198–200 infrastructure 12, 40–1, 47, 108, 139, 150–1, 192, 196–8, 267, 286, 290–1, 299, 302; information 290–1; information management 196; information management challenges 302 innovation 3, 26, 31, 46, 76, 97–9, 107, 113, 161, 236, 246, 265, 287, 289, 298, 301 innovation and digitalization, value 265 Instagram 34 Institute of Electrical and Electronics Engineers (IEEE) 147 intangible assets 168–9 integrity 248 intellectual property (IP) 62, 116, 128, 130, 168, 176, 181, 230–1, 288 International Accounting Standards Board (IASB) 214 International Accounting Standards (IAS) 214–15, 217 International Astronomical Union 148 International Federation of Library Association and Institutions (IFLA) 157 International Financial Reporting Standards (IFRS) 214–15; criteria 219n19 International Organization for Standardization (ISO): ISO 8000 170n2; ISO 15489–1:2016 152, 170n8, 171n10; ISO 19770–1 149; ISO 19770–2 149; ISO 19770–3 150; ISO 19770–4 150; ISO 30300:2011 170n9; ISO 55001 158; ISO/IEC 20000 170n7; ISO/IEC 27001 147, 170n3; IT asset management (ITAM) 149–50; IT service management (ITSM) 150–1 intrinsic value of information (IVI) 251–2 Intuit’s TurboTax 36 inventory, information asset 60 investor awareness, monetization success 76 IT asset management (ITAM): International Organization for Standardization (ISO) standards 149–50 IT service management (ITSM) 150–1; information strategy 180–1 J.D.


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Little Bets: How Breakthrough Ideas Emerge From Small Discoveries by Peter Sims

Amazon Web Services, Black Swan, Clayton Christensen, complexity theory, David Heinemeier Hansson, deliberate practice, discovery of penicillin, endowment effect, fear of failure, Frank Gehry, Guggenheim Bilbao, Jeff Bezos, knowledge economy, lateral thinking, Lean Startup, longitudinal study, loss aversion, meta analysis, meta-analysis, PageRank, Richard Florida, Richard Thaler, Ruby on Rails, Silicon Valley, statistical model, Steve Ballmer, Steve Jobs, Steve Wozniak, theory of mind, Toyota Production System, urban planning, Wall-E

Jerry Seinfeld: Drawn from The Comedian (DVD), Directed by Christian Charles, with Jerry Seinfeld (2002). John Legend and Kevin Brereton: Interviews with Legend and Brereton. Status quo bias and loss aversion: Origin of status quo bias terminology and research: “Status Quo Bias in Decision Making,” by William Samuelson and Richard Zeckhauser, Journal of Risk and Uncertainty, vol. 1, 1988, 7–59. Addition of loss aversion and endowment effect: “The Endowment Effect, Loss Aversion, and Status Quo Bias,” by Daniel Kahneman, Jack L. Knetsch, Richard H. Thaler, Journal of Economic Perspectives, vol. 5, 193–206. “Timid Choices and Bold Forecasts,” by Daniel Kahneman and Dan Lavallo, Management Science, 39, 17–31. Chet Pipkin: Interview with Pipkin. Procter & Gamble: Interviews with P&G innovation-focused executives Karl Ronn and Chris Thoen. The Game-Changer: How You Can Drive Revenue and Profit Growth with Innovation by A.G.


pages: 202 words: 58,823

Willful: How We Choose What We Do by Richard Robb

activist fund / activist shareholder / activist investor, Alvin Roth, Asian financial crisis, asset-backed security, Bernie Madoff, capital asset pricing model, cognitive bias, collapse of Lehman Brothers, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, delayed gratification, diversification, diversified portfolio, effective altruism, endowment effect, Eratosthenes, experimental subject, family office, George Akerlof, index fund, information asymmetry, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, lake wobegon effect, loss aversion, market bubble, market clearing, money market fund, Pareto efficiency, Paul Samuelson, Peter Singer: altruism, principal–agent problem, profit maximization, profit motive, Richard Thaler, Silicon Valley, sovereign wealth fund, survivorship bias, the scientific method, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, transaction costs, ultimatum game

And I’ll occasionally go out of my way to aid a casual acquaintance even when there are far more deserving people I could help. All the while, I think of myself as a rational person. One final confession: I’m not all that embarrassed by any of this because it’s the human condition. I don’t believe myself to be particularly afflicted with behavioral biases, the place to turn nowadays when we’re not living up to a high standard of rationality. Well, maybe I do fall into traps from time to time, like the “endowment effect” (overvaluing things I already own) or the “Lake Wobegon effect” (rating myself a better-than-average driver, for example, along with 93 percent of Americans). It’s hard to be certain—after all, behavioral economics deals with blind spots. But I don’t think that biases are the cause of my pig­headedness, aversion to leisure, letting problems build up even though I know by now that an ounce of prevention is worth a pound of cure, sloppiness with personal finances, random displays of altruism, or other seemingly nonrational behavior.

See also mercy ambiguity effect, 24 American Work-Sports (Zarnowski), 191 Anaximander, 190 anchoring, 168 angel investors, 212–213n1 “animal spirits,” 169 Antipater of Tarsus, 134–135, 137 “anxious vigilance,” 73, 82 arbitrage, 70, 78 Aristotle, 200, 220n24 Asian financial crisis (1997–1998), 13 asset-backed securities, 93–95 asset classes, 75 astrology, 67 asymmetric information, 96, 210n2 authenticity, 32–37, 114 of challenges, 176–179 autism, 58, 59 auto safety, 139 Bank of New York Mellon, 61 Battle of Waterloo, 71, 205 Bear Stearns, 85 Becker, Gary, 33, 108–109 behavioral economics, 4, 10, 198–199 assumptions underlying, 24 insights of, 24–25 rational choice complemented by, 6 Belgium, 191 beliefs: attachment to, 51 defined, 50 evidence inconsistent with, 54, 57–58 formation of, 53, 92 persistence of, 26–28, 54 transmissibility of, 92–93, 95–96 Bentham, Jeremy, 127, 197–198 “black swans,” 62–64 blame aversion, 57, 72 brain hemispheres, 161 Brexit, 181–185 “bull markets,” 78 capital asset pricing model, 64 care altruism, 38, 104, 108–114, 115, 120, 135, 201 Casablanca (film), 120, 125 The Cask of Amontillado (Poe), 126–127 challenges, 202–203 authenticity of, 176–179 staying in the game linked to, 179–181 changes of mind, 147–164 charity, 40, 45–46, 119, 128 choice: abundance of, 172–174 intertemporal, 149–158, 166 purposeful vs. rational, 22–23 Christofferson, Johan, 83, 86, 87, 88 Cicero, 133–134 Clark, John Bates, 167 cognitive bias, 6, 23, 51, 147–148, 167, 198–199 confirmation bias, 200 experimental evidence of, 10–11, 24 for-itself behavior disguised as, 200–201 gain-loss asymmetry, 10–11 hostile attribution bias, 59 hyperbolic discounting as, 158 lawn-mowing paradox and, 33–34 obstinacy linked to, 57 omission bias, 200 rational choice disguised as, 10–11, 33–34, 199–200 salience and, 29, 147 survivor bias, 180 zero risk bias, 24 Colbert, Claudette, 7 Columbia University, 17 commitment devices, 149–151 commodities, 80, 86, 89 commuting, 26, 38–39 competitiveness, 11, 31, 41, 149, 189 complementary skills, 71–72 compound interest, 79 confirmation bias, 57, 200 conspicuous consumption, 31 consumption planning, 151–159 contrarian strategy, 78 cooperation, 104, 105 coordination, 216n15 corner solutions, 214n8 cost-benefit analysis: disregard of, in military campaigns, 117 of human life, 138–143 credit risk, 11 crime, 208 Dai-Ichi Kangyo Bank (DKB), 12–14, 15, 17, 87, 192–193 Darwin, Charles, 62–63 depression, psychological, 62 de Waal, Frans, 118 Diogenes of Seleucia, 134–135, 137 discounting of the future, 10, 162–164 hyperbolic, 158, 201 disjunction effect, 174–176 diversification, 64–65 divestment, 65–66 Dostoevsky, Fyodor, 18 drowning husband problem, 6–7, 110, 116, 123–125 effective altruism, 110–112, 126, 130, 135–136 efficient market hypothesis, 69–74, 81–82, 96 Empire State Building, 211–212n12 endowment effect, 4 endowments, of universities, 74 entrepreneurism, 27, 90, 91–92 Eratosthenes, 190 ethics, 6, 104, 106–108, 116, 125 European Union, 181–182 experiential knowledge, 59–61 expert opinion, 27–28, 53, 54, 56–57 extreme unexpected events, 61–64 fairness, 108, 179 family offices, 94 Fear and Trembling (Kierkegaard), 53–54 “felicific calculus,” 197–198 financial crisis of 2007–2009, 61, 76, 85, 93–94, 95 firemen’s muster, 191 flow, and well-being, 201–202 Foot, Philippa, 133–134, 135 for-itself behavior, 6–7, 19, 21, 27, 36, 116, 133–134, 204–205, 207–208 acting in character as, 51–53, 55–56, 94–95, 203 acting out of character as, 69, 72 analyzing, 20 authenticity and, 33–35 charity as, 39–40, 45–46 comparison and ranking lacking from, 19, 24, 181 consequences of, 55–64 constituents of, 26–31 defined, 23–24 difficulty of modeling, 204 expert opinion and, 57 extreme unexpected events and, 63–64 flow of time and, 30 free choice linked to, 169–172 in groups, 91–100 incommensurability of, 140–143 in individual investing, 77–78 in institutional investing, 76 intertemporal choice and, 168, 175, 176 job satisfaction as, 189 mercy as, 114 misclassification of, 42, 44, 200–201 out-of-character trading as, 68–69 purposeful choice commingled with, 40–43, 129, 171 rationalizations for, 194–195 in trolley problem, 137 unemployment and, 186 France, 191 Fuji Bank, 14 futures, 80–81 gain-loss asymmetry, 10–11 Galperti, Simone, 217n1 gambler’s fallacy, 199 gamifying, 177 Garber, Peter, 212n1 Germany, 191 global equity, 75 Good Samaritan (biblical figure), 103, 129–130, 206 governance, of institutional investors, 74 Great Britain, 191 Great Depression, 94 Greek antiquity, 190 guilt, 127 habituation, 201 happiness research (positive psychology), 25–26, 201–202 Hayek, Friedrich, 61, 70 hedge funds, 15–17, 65, 75, 78–79, 93, 95 herd mentality, 96 heroism, 6–7, 19–20 hindsight effect, 199 holding, of investments, 79–80 home country bias, 64–65 Homer, 149 Homo ludens, 167–168 hostile attribution bias, 59 housing market, 94 Huizinga, Johan, 167–168 human life, valuation of, 138–143 Hume, David, 62, 209n5 hyperbolic discounting, 158, 201 illiquid markets, 74, 94 index funds, 75 individual investing, 76–82 Industrial Bank of Japan, 14 information asymmetry, 96, 210n2 innovation, 190 institutional investing, 74–76, 82, 93–95, 205 intergenerational transfers, 217n1, 218n4 interlocking utility, 108 intertemporal choice, 149–159, 166 investing: personal beliefs and, 52–53 in start-ups, 27 Joseph (biblical figure), 97–99 Kahneman, Daniel, 168 Kantianism, 135–136 Keynes, John Maynard, 12, 58, 167, 169, 188–189 Kierkegaard, Søren, 30, 53, 65, 88 Knight, Frank, 145, 187 Kranton, Rachel E., 210–211n2 labor supply, 185–189 Lake Wobegon effect, 4 lawn-mowing paradox, 33–34, 206 Lehman Brothers, 61, 86, 89, 184 leisure, 14, 17, 41, 154, 187 Libet, Benjamin, 161 life, valuation of, 138–143 Life of Alexander (Plutarch), 180–181 Locher, Roger, 117, 124 long-term vs. short-term planning, 148–149 loss aversion, 70, 199 lottery: as rational choice, 199–200 Winner’s Curse, 34–36 love altruism, 104, 116, 123–125, 126, 203 lying, vs. omitting, 134 Macbeth (Shakespeare), 63 MacFarquhar, Larissa, 214n6 Madoff, Bernard, 170 malevolence, 125–127 Malthus, Thomas, 212n2 manners, in social interactions, 104, 106, 107, 116, 125 market equilibrium, 33 Markowitz, Harry, 65 Marshall, Alfred, 41, 167 Mass Flourishing (Phelps), 189–191 materialism, 5 merchant’s choice, 133–134, 137–138 mercy, 104, 114–116, 203 examples of, 116–120 inexplicable, 45–46, 120–122 uniqueness of, 119, 129 mergers and acquisitions, 192 “money pump,” 159 monks’ parable, 114, 124 Montaigne, Michel de, 114, 118 mortgage-backed securities, 93 Nagel, Thomas, 161 Napoleon I, emperor of the French, 71 neoclassical economics, 8, 10, 11, 22, 33 Nietzsche, Friedrich, 21, 43, 209n5 norms, 104, 106–108, 123 Norway, 66 Nozick, Robert, 162 observed care altruism, 108–112 Odyssey (Homer), 149–150 omission bias, 200 On the Fourfold Root of the Principle of Sufficient Reason (Schopenhauer), 209n5 “on the spot” knowledge, 61, 70, 80, 94, 205 Orico, 13 overconfidence, 57, 200 “overearning,” 44–45 The Palm Beach Story (film), 7 The Paradox of Choice (Schwartz), 172 parenting, 108, 141, 170–171 Pareto efficiency, 132–133, 136, 139–140 Peirce, Charles Sanders, 53–54, 67, 94 pension funds, 66, 74–75, 93, 95 permanent income hypothesis, 179 Pharaoh (biblical figure), 97–99 Phelps, Edmund, 17, 189–191 Philip II, king of Macedonia, 181 planning, 149–151 for consumption, 154–157 long-term vs. short-term, 148–149 rational choice applied to, 152–158, 162 play, 44–45, 167, 202 pleasure-pain principle, 18 Plutarch, 180–181 Poe, Edgar Allan, 126 pollution, 132–133 Popeye the Sailor Man, 19 portfolio theory, 64–65 positive psychology (happiness research), 25–26, 201–202 preferences, 18–19, 198 aggregating, 38–39, 132, 164 altruism and, 28, 38, 45, 104, 110, 111, 116 in behavioral economics, 24, 168 beliefs’ feedback into, 51, 55 defined, 23 intransitive, 158–159 in purposeful behavior, 25, 36 risk aversion and, 51 stability of, 33, 115, 147, 207, 208 “time-inconsistent,” 158, 159, 166, 203 present value, 7, 139 principal-agent problem, 72 Principles of Economics (Marshall), 41 prisoner’s dilemma, 105 private equity, 75 procrastination, 3, 4, 19, 177–178 prospect theory, 168 protectionism, 185–187 Prussia, 191 public equities, 75 punishment, 109 purposeful choice, 22–26, 27, 34, 36, 56, 133–134, 204–205 altruism compatible with, 104, 113–114, 115–116 commensurability and, 153–154 as default rule, 43–46 expert opinion and, 57 extreme unexpected events and, 62–63 flow of time and, 30 for-itself behavior commingled with, 40–43, 129, 171 mechanistic quality of, 68 in merchant’s choice, 135, 137–138 Pareto efficiency linked to, 132 rational choice distinguished from, 22–23 regret linked to, 128 social relations linked to, 28 stable preferences linked to, 33 in trolley problem, 135–136 vaccination and, 58–59 wage increases and, 187.


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The Moral Landscape: How Science Can Determine Human Values by Sam Harris

Albert Einstein, banking crisis, Bayesian statistics, cognitive bias, end world poverty, endowment effect, energy security, experimental subject, framing effect, hindsight bias, impulse control, John Nash: game theory, longitudinal study, loss aversion, meta analysis, meta-analysis, out of africa, pattern recognition, placebo effect, Ponzi scheme, Richard Feynman, risk tolerance, scientific worldview, stem cell, Stephen Hawking, Steven Pinker, the scientific method, theory of mind, ultimatum game, World Values Survey

There are other results in psychology and behavioral economics that make it difficult to assess changes in human well-being. For instance, people tend to consider losses to be far more significant than forsaken gains, even when the net result is the same. For instance, when presented with a wager where they stand a 50 percent chance of losing $100, most people will consider anything less than a potential gain of $200 to be unattractive. This bias relates to what has come to be known as “the endowment effect”: people demand more money in exchange for an object that has been given to them than they would spend to acquire the object in the first place. In psychologist Daniel Kahneman’s words, “a good is worth more when it is considered as something that could be lost or given up than when it is evaluated as a potential gain.”33 This aversion to loss causes human beings to generally err on the side of maintaining the status quo.

., 228n61 beehive approach to morality, 89 belief: adoption of, for feeling better, 137–39 bias and, 122–26, 137, 226n36 brain science on, 11, 14, 116–22, 197n22 definitions of, 117 different categories of, 139–40 ethical beliefs, 14 extraneous information and/or context as influence on, 140–42 factual beliefs, 14 freedom of, 136–44 inseparability of reasoning and emotion, 126–31 internet’s influence on, 123 as intrinsically epistemic, 138 knowledge as, 115, 196–97n22 lie detection and, 133–36 meaning of, 115–18, 219–20n15 memory and, 116 mental properties of, 136–40 motivation for, 126 reasoning and, 122, 131–33 religious belief, 137–38, 148–54 science and, 144 wrong beliefs, 21 Benedict, Pope, 200n14 Benedict, Ruth, 20, 60–62 Bentham, Jeremy, 207n12 bias: adaptive fitness versus, 226–27n38 belief and, 122–26, 137, 226n36 decisional conflict, 231n75 definition of, 132 endowment effect and, 75 factors causing, 226n36 internet’s influence on, 123 knowledge and, 123–24 of liberals, 125–26 loss aversion, 75–77, 209n35 medical decisions and, 143, 231n75 of parents, 73 of political conservatives, 124–25 in reasoning, 132, 142–43 of science, 47 sins of commission versus sins of omission, 77 truth bias, 120, 223n26 unconscious and, 122–23 Bible, 3, 34, 38, 150, 166, 236–37n82 Biblical Creationism, 34, 37, 151, 202n19 Bin Laden, Osama, 5 Bingham, Roger, 5–6, 23 BioLogos Foundation, 169 birth control.

See also belief; uncertainty disgust, 153, 181, 212n64, 224–25n34, 233n48 diversity, bewildered by, 85–91 Dobu islanders, 60–62 dogmatism, 22–23, 53, 124–25. See also religion dopamine, 128, 152, 227n51 Douglas, Pamela, 229n62 DSM-IV, 157 Edelman, G. M., 196n16 Edgerton, Robert, 20, 197n25 Einstein, Albert, 179, 202n18, 236n77 Elliot, R., 228n61 embryonic stem-cell research, 5, 23, 171–73 emotions, 89, 126–31, 210n49. See also specific emotions, such as happiness empathy, 99, 177 endowment effect, 75 envy, 222n18 ethics. See morality; values; and headings beginning with moral Europe, 5, 145–46 Evans, Margaret, 151 evil, 27, 64–66, 100–102, 108, 109, 189–90. See also psychopathy evolution, 11, 13–14, 36, 48–53, 56–57, 147–52, 161, 175, 207–8n19, 216n101, 237–38n99 experiencing self, 184–87 extension neglect, 208n25 facts, 4, 5–6, 10–14, 24–25, 122, 143–44.


pages: 425 words: 112,220

The Messy Middle: Finding Your Way Through the Hardest and Most Crucial Part of Any Bold Venture by Scott Belsky

23andMe, 3D printing, Airbnb, Albert Einstein, Anne Wojcicki, augmented reality, autonomous vehicles, Ben Horowitz, bitcoin, blockchain, Chuck Templeton: OpenTable:, commoditize, correlation does not imply causation, cryptocurrency, delayed gratification, DevOps, Donald Trump, Elon Musk, endowment effect, hiring and firing, Inbox Zero, iterative process, Jeff Bezos, knowledge worker, Lean Startup, Lyft, Mark Zuckerberg, Marshall McLuhan, minimum viable product, move fast and break things, move fast and break things, NetJets, Network effects, new economy, old-boy network, pattern recognition, Paul Graham, ride hailing / ride sharing, Silicon Valley, slashdot, Snapchat, Steve Jobs, subscription business, TaskRabbit, the medium is the message, Travis Kalanick, Uber for X, uber lyft, Y Combinator, young professional

Even though it’s work that has value, it might be time to let it go rather than continue to hang on. And it’s only natural to overvalue what we already have when we’re at risk of losing it. This tendency is referred to as the “endowment effect.” This describes how we have an inclination to disproportionately value things because we own them. Numerous experiments have demonstrated our bias to hold on to something we own merely because it is ours—even if we are offered the fair value amount in cash. I like how Tom Stafford, a writer for the BBC, suggests we hack ourselves to sidestep the endowment effect and rationally determine how valuable something really is. He asks himself, “If I didn’t have this, how much effort would I put in to obtain it?” As he explains, “more often than not I throw it away, concluding that if I didn’t have it, I wouldn’t want this.”

., 217 Code for America, 165 Cohen, Peter, 72 cohesion horizon, 228 Collins, Jim, 260 commitments, 282–85, 318–19 communication, 153, 316 brevity in, 176 energy in, 43–45 explicitness in, 173–75 how and when to say something, 170–72 nonverbal, 172 real-time, 123 compartmentalizing, 66, 68 competition, 29, 63, 106, 139 changing landscape in, 275 channeling competitive energy, 187–91 competitive advantage, 152, 195, 214–15 diversity as, 107 outlasting as, 90 persistence as, 85 resourcefulness as, 100 self-awareness as, 54–56, 305 observing and learning from, 187–90 complacency, 191 complexity, 209–10 compromise, 178, 185 Comstock, Beth, 327 conflict, 73, 178, 185–86, 338 conformity, 57–58, 60 connectivity, constant, 327 consensus, conviction and, 203–5 context, 316–17 contribution, underestimating, 353–54 control, 32–33 Conversation, 108 ConversionXL, 162 conviction, consensus and, 203–5 cooperation, 38 Cooper-Hewitt National Design Museum, 161, 353–54 Copeland, Rob, 306, 307 copycats, 63 Corea, Matias, 108–9, 135, 144, 156, 162, 256, 319, 342 Coroflot, 187 corporate obesity, 46–48 Costello, Dick, 264 Couric, Katie, 71 Craigslist, 311 Creative Cloud, 47, 159, 347 creativity, 92, 107, 114–15, 302, 336, 373 and concern for what already is, 65–68 creative block, 192–93 creative meritocracy, 256 familiarity and, 226–27 relative joy of, 5–6 credit, 146–48, 330–32 criticism, 55, 296 culture, 114, 178 free radicals and, 137–39 stories and, 134–36 Cuomo, Rivers, 333–34 curiosity, 78–79, 93–95, 104, 129, 271–73, 336, 367 customers: engagement with engagement drivers, 269–70 mystery in, 271–73 the right customers at the right time, 251–54 following and playing to the middle, 274–75 forgiving, 251–53 ideal, 251 interest drivers and, 269–70 power users, 217 profitable, 251–53 valuable, 251–53 viral, 251, 253 willing, 251, 252 Dahis, Rafael, 299 Dalio, Ray, 305–7 D’Angelo, Adam, 167–68 data: intuition and, 300–304 metrics and measures, 28, 29, 297–99 debates and disagreements, 114 decision making, 33, 178, 184, 204, 206, 224–25, 271, 277 choices in, 284–85 satisficer and maximizer styles of, 229, 284–85 timing and, 289–90 decisiveness, 203, 224 defensiveness, 55, 71 delegation, 166–69 Delicious, 174 democracy, 333 dependency, 330 design, invisibility in, 230–31 DeviantArt, 89, 187–88 differentiation, 106–9 Digg, 267 Dignan, Aaron, 179 Dilbert, 283 disconnecting, 326–28 discussions, 112–13, 321 Disney, Walt, 222 distraction, 319, 371 diversity, 106–9, 110, 120–21 Dixon, Chris, 348 doers vs. dreamers, 118 dopamine, 26, 181, 272, 322 Dorsey, Jack, 264 doubt, 295–96 dreamers vs. doers, 118 DRI (Directly Responsible Individual), 167–68, 169 Dribbble, 188–89 Duckworth, Angela, 62–63 Duhigg, Charles, 122, 180 Dumas, Alexandre, 200–201 Dunkin’ Donuts, 44 DYFJ (do your fucking job), 49–51 dying, 26, 368–69, 373–75 early innings, 349–50, 374 easy option, 85 eBay, 258 Eco, Umberto, 374 Economist, 108 Edison, Thomas, 9–10 Edmondson, Amy, 122 ego, 330–32 ego analytics, 236, 335 eHarmony, 259 Eiffel, Gustave, 200 Eiffel Tower, 200–202 84 Lumber, 273 Einstein, Albert, 271 Eisenhower, Dwight D., 280 elephants in the room, 41, 179, 186, 338 email, 170, 171, 176, 181, 322 empathy, 71, 115, 120–21, 317, 331, 332 passion and, 248–50 employees: firing, 126–28, 178, 204 hiring, see hiring keeping people moving, 129–31 new, integration of, 121, 123 see also team endowment effect, 291 endurance, 14–15, 16, 19–92 embracing the long game, 77–92 breaking into chapters, 86–87 and doing the work, 91–92 expertise and, 88–90 and measures of productivity, 78–79 patience in, 80–85 leading through the anguish and the unknown, 23–51 corporate politics in, 46–48 DYFJ (do your fucking job), 49–51 energy in, 43–45 fighting resistance with a commitment to suffering, 35–36 friction in, 37–39 perspective in, 40–42 positive feedback and fake wins vs. hard truths, 28–31 processing uncertainty, 32–34 short-circuiting your reward system, 24–27 strengthening your resolve, 53–75 creation vs. concern for what already is, 65–68 and not fitting in, 57–58 OBECALP in, 59–61 perspective in, 62–64 reset in, 72–75 questions to prompt clarity, 69–71 self-awareness in, 54–56 energy, 43–45 Entrepreneur, 26, 73 Entrepreneurial Instinct, The (Mehta), 26 Erez, Ben, 28–29, 33 Expa, 112, 256 experience vs. initiative, in hiring, 103–5 expertise, 88–90, 105, 308 explicitness, 173–75, 271 Exposition Universelle, 200–201 Facebook, 39, 70, 167, 193, 194, 210, 227, 242, 244, 248, 249, 258, 272, 346–47, 349–50 Fadell, Tony, 63 failure, 41, 56, 94, 138, 331, 357 fairness, 259–60 false hope, 206–7 familiarity, 226–27, 308 Fast Company, 259, 272 Faulkner, William, 220 Faydi, Clément, 162, 248–49 FedEx, 210 feedback, 55, 123, 175, 281, 331 positive, and hard truths, 28–31 feelings, 55 Fernandez, Joe, 295, 296 Ferriss, Tim, 131, 221, 282–84 final mile, 339–75 approaching the finish line, 345–54 and final mile as different sport, 346–48 and resistance to outcome, 351–52 and staying in early innings, 349–50 and underestimating contribution, 353–54 finishing, 1, 6–8, 15–16, 341–75 never being finished, 365–75 continuing to learn, 366–67 living and dying, 368–69, 373–75 and trading time and money, 370–72 passing the baton, 355–63 ending gracefully, 356–57 finishing on your own terms, 361–63 identity and, 358–60 financing, 30–31, 102 firing people, 126–28, 178, 204 fitting in, 57–58 Flash, 48 flexibility, 324 focus, 282–85, 328, 335 Food and Drug Administration (FDA), 42 Forbes, 72 forgiveness, asking for permission vs., 199–202 founder-product fit, 256 Founders, 126 Four Hour Body, The (Ferriss), 283 free radicals, 137–39 French Revolution, 200, 201 friction, 37–39, 210, 371, 372 Fried, Jason, 90 fringe, 58 frugality, 140–42 Game of Thrones, 270 Gates, Bill, 295 Gebbia, Joe, 88–89, 311 General Electric (GE), 125, 130, 143, 327 Getable, 356–57 Gibson, William, 257 Giffon, Jeremy, 294 Gigerenzer, Gerd, 285 Gilbert, Dan, 196–97 Glei, Jocelyn, 181 goals, long-term, 26–27, 66, 299, 304, 350 Godin, Seth, 297, 298, 337–38 Goldberg, Dave, 39 Goldman Sachs, 125, 143, 240–41, 341 Google, 24, 25, 60, 67, 83, 93, 101, 139, 189, 239, 366–67 Maps, 210 Project Aristotle, 122 Trends, 301–2 government and politics, corporate, 46–48 grafting talent, 119–25 Graham, Paul, 193 Grant, Adam, 39 Grant, Angela, 108 grit, 62–63 Grit: The Power of Passion and Perseverance (Duckworth), 62 groups, 38–39, 107, 203–4 Gunatillake, Rohan, 360 Gurley, Bill, 79, 311 Gut Feelings (Gigerenzer), 285 hardship, 38, 39 Harvard Business Review, 39, 250 Harvard Business School, 117, 122, 160, 214, 262 Hashemi, Sam, 164–65 Hastings, Reed, 83–84, 126 HBO, 270 Heiferman, Scott, 168, 243–44 Higa, James, 141 Hindu theology, 374 hiring: adversity and, 110–11 discussions and, 112–13 diversity and, 106–9, 110 and initiative vs. experience, 103–5 of polarizing people, 114–15 and resourcefulness vs. resources, 100–102 talent and, 119–25 Hogan-Brun, Gabrielle, 107–8 Homebrew, 294, 359 honeymoon phase, 209 Hope, Bradley, 306, 307 Horowitz, Ben, 29–30 House Party, 265 humility, 56, 193, 331, 350 passion and, 248–50 Huxley, Aldous, 204 Hyer, Tim, 356–57 identity, 358–60, 362–63 if-onlys, 74 ignorance, 308–9 Illustrator, 10, 144, 162, 270 imagination, 326–28, 336 immune system: of society, 35, 36, 60 of team, 116–18, 119, 127 impact, 31 Improv Everywhere, 113 incrementalism, 207, 242–44, 289 influence, and credit, 330–32 information-gap theory, 272 initiative vs. experience, in hiring, 103–5 innovation, 57, 60, 102, 106–7, 118, 143, 183, 204, 250 inbred, 245–46 mistakes and unexpected in, 324–25 insecurity work, 66–67, 68 Instagram, 36, 44, 174, 189, 227, 235–36, 335, 349 institutions, 354 intention, 175 internet, 258 intuition, 294–96, 300–304, 321 inverted-U behavior, 272–73 investment, 78, 290 iPad, 48, 250, 306 iPhone, 63, 250, 273, 374 iPod, 63, 295, 374 Jaffe, Eric, 272 Jenks, Patty, 84 Jobs, Steve, 40–41, 63, 64, 141, 295 Johnstone, Ollie, 222 Jones, Malcolm, 104 Journal of Experimental Psychology, 228 Joymode, 295 June, 226–27 Jung, Carl, 56, 115 Kalina, Noah, 190 Kalmikoff, Jeffrey, 267–68 Kane, Becky, 229 Kaplan, Stanley, 358–59 Kay, Alan, 308 Kerr, Steve, 125 King, Stephen, 220 Klout, 295 Krop, 187 Laja, Peep, 162 language, multilingualism and, 107–9 laziness, vanity, and selfishness, 235–37 LCD Soundsystem, 92 leaders, leadership, 127, 147, 205, 277, 331 delegation and, 166–69 internal marketing and, 158–60 70/20/10 model for development of, 125 as stewards vs. owners, 258–61 timing and, 288–89 “lean start-up” methodology, 194 learning, 63–64, 366–67 LearnVest, 65–66 Lehrer, Jonah, 272 Levie, Aaron, 83, 224 Levo League, 73 LeWitt, Sol, 58 life expectancy, 26 Lightroom, 270 Linguanomics: What Is the Market Potential of Multilingualism?


pages: 254 words: 79,052

Evil by Design: Interaction Design to Lead Us Into Temptation by Chris Nodder

4chan, affirmative action, Amazon Mechanical Turk, cognitive dissonance, crowdsourcing, Daniel Kahneman / Amos Tversky, Donald Trump, en.wikipedia.org, endowment effect, game design, haute couture, jimmy wales, Jony Ive, Kickstarter, late fees, loss aversion, Mark Zuckerberg, meta analysis, meta-analysis, Milgram experiment, Netflix Prize, Nick Leeson, Occupy movement, pets.com, price anchoring, recommendation engine, Rory Sutherland, Silicon Valley, Stanford prison experiment, stealth mode startup, Steve Jobs, telemarketer, Tim Cook: Apple, trickle-down economics, upwardly mobile

Although it’s clear that Netflix’ plans failed for several reasons, increasing both the financial and the physical burden on customers, even it admitted that it introduced changes too quickly. People hate change. They love consistency. The posh name for this is status quo bias: the tendency to like things to stay relatively the same, and to perceive any change from the current situation as a loss. Loss aversion leads people to over-estimate the potential losses from a change and under-estimate the potential gains. They also tend to over-value their current situation (the endowment effect). The combinatory outcome of these behaviors is to stick with their current option. People will also stick with their current option if they feel that they have less information about their potential choices. Making people more knowledgeable about or even just giving them increased exposure to their other choices can reduce status quo bias. Netflix’ admission that its plans went too far. An apology without apologizing.

Now, to add an element of excitement, the host gives you the option to switch your choice to the other unopened door. Assuming you’re more interested in winning a car than a goat, what do you do? After the game show host opens the door, most people expect that there’s a 50-50 chance that they have already chosen the correct door. Because they have already made their choice, they are attached to their current door (the endowment effect) and so they stick with it. However, the correct answer is to always switch because there is actually a two-in-three probability that the car is behind the other door. Think of it this way: Before you made a choice, there was an equal one-in-three probability that the car was behind any door. That means there was always a two-in-three probability that the car was behind one of the two doors that you didn’t choose.


When the Money Runs Out: The End of Western Affluence by Stephen D. King

Albert Einstein, Asian financial crisis, asset-backed security, banking crisis, Basel III, Berlin Wall, Bernie Madoff, British Empire, business cycle, capital controls, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, congestion charging, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cross-subsidies, debt deflation, Deng Xiaoping, Diane Coyle, endowment effect, eurozone crisis, Fall of the Berlin Wall, financial innovation, financial repression, fixed income, floating exchange rates, full employment, George Akerlof, German hyperinflation, Hyman Minsky, income inequality, income per capita, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Kickstarter, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, London Interbank Offered Rate, loss aversion, market clearing, mass immigration, moral hazard, mortgage debt, new economy, New Urbanism, Nick Leeson, Northern Rock, Occupy movement, oil shale / tar sands, oil shock, old age dependency ratio, price mechanism, price stability, quantitative easing, railway mania, rent-seeking, reserve currency, rising living standards, South Sea Bubble, sovereign wealth fund, technology bubble, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, trickle-down economics, Washington Consensus, women in the workforce, working-age population

Gilbert (Oxford University Press, Oxford, 1993). 264 4099.indd 264 29/03/13 2:23 PM Notes to pp. 38–59 3. The Economics of Climate Change: The Stern Review (Cambridge University Press, Cambridge, 2006). 4. A. Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Book 1, ch. 8: ‘Of the Wages of Labour’. 5. D. Kahneman, J. L. Knetsch and R. H. Thaler, ‘Experimental Tests of the Endowment Effect and the Coase Theorem’, Journal of Political Economy, 98.6 (1990). 6. Source: Maddison; all data can be found at the historical statistics section at http://www.ggdc.net/maddison/oriindex.htm. 7. O. Wright and K. Rawlinson, ‘Jobseekers “Slept Rough” Then Staffed Royal Pageant for Free’, Independent, 6 June 2012, at http://www.independent.co.uk/news/uk/home-­ news/jobseekers-­s lept-­rough-­t hen-­s taffed-­royal-­p ageant-­f or-­f ree-­7 818043.html (accessed Jan. 2013). 8.

The International Monetary Fund 1945–1965: Twenty Years of International Monetary Cooperation, vol. 3: Documents, International Monetary Fund, Washington, DC, 1969 Johnson, S. and Mitton, T. ‘Cronyism and Capital Controls: Evidence from Malaysia’, NBER Working Paper No. 8521, Oct. 2001 Jones, J. ‘Americans Say Federal Government Wastes Over Half of Every Dollar’, Gallup, 19 Sept. 2011 Kahneman, D. Thinking Fast and Slow, Allen Lane, London, 2011 Kahneman, D., Knetsch, J. L. and Thaler, R. H. ‘Experimental Tests of the Endowment Effect and the Coase Theorem’, Journal of Political Economy, 98.6 (1990) Kalecki, M. ‘Professor Pigou on “The Classical Stationary State”: A Comment’, Economic Journal (Royal Economic Society), 54 (1944) Kaplan, E. and Rodrik, D. ‘Did the Malaysian Capital Controls Work?’, John F. Kennedy School of Government, Harvard University, Cambridge, MA, Feb. 2001 Keynes, J. M. ‘The Economic Consequences of Mr Churchill’, in Essays in Persuasion, Norton, New York, 1963 275 4099.indd 275 29/03/13 2:23 PM When the Money Runs Out Keynes, J.


pages: 111 words: 1

Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Nassim Nicholas Taleb

Antoine Gombaud: Chevalier de Méré, availability heuristic, backtesting, Benoit Mandelbrot, Black Swan, commoditize, complexity theory, corporate governance, corporate raider, currency peg, Daniel Kahneman / Amos Tversky, discounted cash flows, diversified portfolio, endowment effect, equity premium, fixed income, global village, hedonic treadmill, hindsight bias, Kenneth Arrow, Long Term Capital Management, loss aversion, mandelbrot fractal, mental accounting, meta analysis, meta-analysis, Myron Scholes, Paul Samuelson, quantitative trading / quantitative finance, QWERTY keyboard, random walk, Richard Feynman, road to serfdom, Robert Shiller, Robert Shiller, selection bias, shareholder value, Sharpe ratio, Steven Pinker, stochastic process, survivorship bias, too big to fail, Turing test, Yogi Berra

He then completely pulled the money, offering no explanation. What characterizes real speculators like Soros from the rest is that their activities are devoid of path dependence. They are totally free from their past actions. Every day is a clean slate. Path Dependence of Beliefs There is a simple test to define path dependence of beliefs (economists have a manifestation of it called the endowment effect). Say you own a painting you bought for $20,000, and owing to rosy conditions in the art market, it is now worth $40,000. If you owned no painting, would you still acquire it at the current price? If you would not, then you are said to be married to your position. There is no rational reason to keep a painting you would not buy at its current market rate—only an emotional investment. Many people get married to their ideas all the way to the grave.

., 1999, Well-being: The Foundations of Hedonic Psychology. New York: Russell Sage Foundation. ———, and S. Frederick, 2002, “Representativeness Revisited: Attribute Substitution in Intuitive Judgment.” In Gilovich, Griffin, and Kahneman. ———, J. L. Knetsch, and R. H. Thaler, 1986, “Rational Choice and the Framing of Decisions.” Journal of Business, Vol. 59 (4), 251–278. ———, J. L. Knetsch, and R. H. Thaler, 1991, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias.” In Kahneman and Tversky (2000). ———, and D. Lovallo, 1993, “Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk-taking. Management Science, 39, 17–31. ———, P. Slovic, and A. Tversky, eds., 1982, Judgment Under Uncertainty: Heuristics and Biases. Cambridge, Eng.: Cambridge University Press. ———, and A. Tversky, 1972, “Subjective Probability: A Judgment of Representativeness.”


pages: 274 words: 93,758

Phishing for Phools: The Economics of Manipulation and Deception by George A. Akerlof, Robert J. Shiller, Stanley B Resor Professor Of Economics Robert J Shiller

"Robert Solow", Andrei Shleifer, asset-backed security, Bernie Madoff, business cycle, Capital in the Twenty-First Century by Thomas Piketty, collapse of Lehman Brothers, corporate raider, Credit Default Swap, Daniel Kahneman / Amos Tversky, dark matter, David Brooks, desegregation, en.wikipedia.org, endowment effect, equity premium, financial intermediation, financial thriller, fixed income, full employment, George Akerlof, greed is good, income per capita, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, late fees, loss aversion, market bubble, Menlo Park, mental accounting, Milgram experiment, money market fund, moral hazard, new economy, Pareto efficiency, Paul Samuelson, payday loans, Ponzi scheme, profit motive, publication bias, Ralph Nader, randomized controlled trial, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, short selling, Silicon Valley, the new new thing, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, theory of mind, Thorstein Veblen, too big to fail, transaction costs, Unsafe at Any Speed, Upton Sinclair, Vanguard fund, Vilfredo Pareto, wage slave

The title of DellaVigna and Malmendier’s article in the American Economic Review. 13. M. Keith Chen, Venkat Lakshminarayanan, and Laurie R. Santos, “How Basic Are Behavioral Biases? Evidence from Capuchin Monkey Trading Behavior,” Journal of Political Economy 114, no. 3 (June 2006): 517–37. 14. Stephen J. Dubner and Steven D. Levitt, “Keith Chen’s Monkey Research,” New York Times, June 5, 2005. 15. Venkat Lakshminarayanan, M. Keith Chen, and Laurie R. Santos, “Endowment Effect in Capuchin Monkeys,” Philosophical Transactions of the Royal Society B: Biological Sciences 363, no. 1511 (December 2008): 3837–44. 16. Adam Smith, The Wealth of Nations (New York: P. F. Collier, 1909; originally published 1776), p. 19. Emphasis added. 17. For a version of Pareto’s original writings, see Vilfredo Pareto, Manual of Political Economy: A Critical and Variorum Edition, ed. Aldo Montesano et al.

Krasnova, Hanna, Helena Wenninger, Thomas Widjaja, and Peter Buxmann. “Envy on Facebook: A Hidden Threat to Users’ Life Satisfaction?” Wirtschaftsinformatik Proceedings 2013. Paper 92. http://aisel.aisnet.org/wi2013/92. Krugman, Paul. “What’s in the Ryan Plan?” New York Times, August 16, 2012. Krugman, Paul, and Robin Wells. Microeconomics. 2nd ed. New York: Worth Publishers, 2009. Lakshminarayanan, Venkat, M. Keith Chen, and Laurie R. Santos. “Endowment Effect in Capuchin Monkeys.” Philosophical Transactions of the Royal Society B: Biological Sciences 363, no. 1511 (December 2008): 3837–44. Lattman, Peter. “To Perelman’s Failed Revlon Deal, Add Rebuke from S.E.C.” New York Times Dealbook, June 13, 2013. Accessed December 1, 2014. http://dealbook.nytimes.com/2013/06/13/s-e-c-charges-and-fines-revlon-for-misleading-shareholders/?_php=true&_type=blogs&_r=0.


pages: 407 words: 104,622

The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution by Gregory Zuckerman

affirmative action, Affordable Care Act / Obamacare, Albert Einstein, Andrew Wiles, automated trading system, backtesting, Bayesian statistics, beat the dealer, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, blockchain, Brownian motion, butter production in bangladesh, buy and hold, buy low sell high, Claude Shannon: information theory, computer age, computerized trading, Credit Default Swap, Daniel Kahneman / Amos Tversky, diversified portfolio, Donald Trump, Edward Thorp, Elon Musk, Emanuel Derman, endowment effect, Flash crash, George Gilder, Gordon Gekko, illegal immigration, index card, index fund, Isaac Newton, John Meriwether, John Nash: game theory, John von Neumann, Loma Prieta earthquake, Long Term Capital Management, loss aversion, Louis Bachelier, mandelbrot fractal, margin call, Mark Zuckerberg, More Guns, Less Crime, Myron Scholes, Naomi Klein, natural language processing, obamacare, p-value, pattern recognition, Peter Thiel, Ponzi scheme, prediction markets, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, Robert Mercer, Ronald Reagan, self-driving car, Sharpe ratio, Silicon Valley, sovereign wealth fund, speech recognition, statistical arbitrage, statistical model, Steve Jobs, stochastic process, the scientific method, Thomas Bayes, transaction costs, Turing machine

Later, economist Richard Thaler used psychological insights to explain anomalies in investor behavior, spurring the growth of the field of behavioral economics, which explored the cognitive biases of individuals and investors. Among those identified: loss aversion, or how investors generally feel the pain from losses twice as much as the pleasure from gains; anchoring, the way judgment is skewed by an initial piece of information or experience; and the endowment effect, how investors assign excessive value to what they already own in their portfolios. Kahneman and Thaler would win Nobel Prizes for their work. A consensus would emerge that investors act more irrationally than assumed, repeatedly making similar mistakes. Investors overreact to stress and make emotional decisions. Indeed, it’s likely no coincidence that Medallion found itself making its largest profits during times of extreme turbulence in financial markets, a phenomenon that would continue for decades to come.

Department of, 24–25, 32 Déjà Vu, 272 Della Pietra, Stephen, 177, 191, 206 Della Pietra, Vincent, 177, 191, 206 Dennis, Richard, 125 Derman, Emanuel, 126 Deutsche Bank, 225, 259, 260 Dewey, Richard, 313 differential equations, 26–28, 81–83 differential geometry, 19, 20–21, 26–28 Doctor Who (TV show), 211 Dodd, David, 127 dot-com crash, 215–17, 257–58 dots and boxes, 88 Dow, Charles, 122 Dow Jones Industrial Average, 97, 122, 123, 126, 255–56, 314 Druckenmiller, Stanley, 124, 164–65 Dugard, Reggie, 77 Duke University, 207 dune bashing, 261–62 Dunkin’ Donuts, 162 Dunn & Hargitt, 75 Dwyer, David, 248–49, 259–60, 264–65 early 2000s recession, 215–17, 257–58 Eastman Kodak, 94 ectodermal dysplasia, 61 E. F. Hutton, 64 efficient market hypothesis, 111, 152, 179 Einhorn, David, 264, 309 Einstein, Albert, 27, 128 Elias, Peter, 90–91 email spam, 174 embeddings, 141 endowment effect, 152 Englander, Israel, 238, 252–54, 310 English, Chris, 298, 299 Enron, 226 Esquenazi, Edmundo, 17, 21, 38–39, 50 Euclidean Capital, 308 European Exchange Rate Mechanism, 165 European Union, 280–81 Evans, Robert, 128 Everything Must Go (movie), 270 Exxon, 132, 173 Facebook, 303–4, 318 facial dysplasia, 147 factor investing, 30, 132–33, 315 Farage, Nigel, 280–81 Farkas, Hershel, 34–35 Federalist Society, 290 Federal Reserve, 56–57, 59, 65, 151, 211 Fermat conjecture, 69–70 Ferrell, Will, 270 Fidelity Investments, 161–63 Fields Medal, 28 financial crisis of 2007–2008, 255–62, 263–64 financial engineering, 126 Financial Times, 229 First Amendment, 277 Fischbach, Gerald, 268 flash crash of 2010, 314 Food and Drug Administration, 206, 311 Fortran, 170 Fort Thomas Highlands High School, 88–89 fractals, 127 Franklin Electronic Publishers, 61 freediving, 239 Freedom Partners Action Fund, 278 Freifeld, Charlie, 38–39, 44, 67 Frey, Robert, 200, 240 at Kepler, 133, 157, 166–67, 180 Mercer and election of 2016, 302–3 at Morgan Stanley, 131, 132–33 statistical-arbitrage trading system, 131, 132–33, 157, 166–67, 186–90 Fried, Michael, 72 fundamental investing, 127–28, 161–63, 247, 310 game theory, 2, 88, 93 GAM Investments, 153–54 Gann, William D., 122–23 Gasthalter, Jonathan, 263 gender discrimination, 168, 168n, 176–77, 207 German deutsche marks, 52, 57–58, 110–11, 164–65 Geron Corporation, 310 ghosts, 111 gold, 3, 40, 57, 63–64, 116, 207 Goldman Sachs, 126, 133–34, 256 Goldsmith, Meredith, 176–77 Gone With the Wind (Mitchell), 88 Goodman, George, 124–25 Google, 48, 272–73 Gore, Al, 212 Graham, Benjamin, 127 Granade, Matthew, 312 Greenspan, Alan, 59 Griffin, Ken, 256, 310–11 Gross, Bill, 3, 163–64, 309 Grumman Aerospace Corporation, 56, 78 Gulfstream G450, 257, 267, 325 Hamburg, Margaret, 206 Hanes, 162 Harpel, Jim, 13–14, 283 Harrington, Dan, 297 Harvard University, 15, 17, 21–22, 23, 46–48, 173, 176, 185, 272 head and shoulders pattern, 123–24 Heritage at Trump Place, 278 Heritage Foundation, 278 Hewitt, Jennifer Love, 270 high-frequency trading, 107, 222–23, 271 Hitler, Adolph, 165, 282 holonomy, 20 Homma, Munehisa, 122 housing market, 224–25, 255, 261, 309 Hullender, Greg, 53–59, 74 human longevity, 276 IBM, 33, 37, 169, 171–79, 311 Icahn, Carl, 282 illegal immigrants, 290–91 information advantage, 105–6 information theory, 90–91 insider trading, 310 Institute for Defense Analyses (IDA), 23–26, 28–29, 30–32, 35, 46–49, 93–94 Institutional Investor, 218, 223 interest rates, 163–64, 224–25, 272–73 Internal Revenue Service (IRS), 227 Iraq, invasion of Kuwait, 116, 117 Israel, 184–85, 262 iStar, 26 Japanese yen, 49–50, 52–53, 54–55, 65 Jean-Jacques, J.


pages: 387 words: 120,155

Inside the Nudge Unit: How Small Changes Can Make a Big Difference by David Halpern

Affordable Care Act / Obamacare, availability heuristic, carbon footprint, Cass Sunstein, centre right, choice architecture, cognitive dissonance, collaborative consumption, correlation does not imply causation, Daniel Kahneman / Amos Tversky, different worldview, endowment effect, happiness index / gross national happiness, hedonic treadmill, hindsight bias, IKEA effect, illegal immigration, job satisfaction, Kickstarter, libertarian paternalism, light touch regulation, longitudinal study, market design, meta analysis, meta-analysis, Milgram experiment, nudge unit, peer-to-peer lending, pension reform, presumed consent, QR code, quantitative easing, randomized controlled trial, Richard Thaler, Right to Buy, Ronald Reagan, Rory Sutherland, Simon Kuznets, skunkworks, the built environment, theory of mind, traffic fines, twin studies, World Values Survey

Viewed from Monday, three or four days away is pretty close, but viewed from a Friday, three or four days away is another world away – it’s next week.11 The inconsistency in our preferences also applies to the past. When people are asked how much they would pay for an object, such as a souvenir mug or pen, they give a much lower figure than the one they come up with after they have been given the item. Known as the ‘endowment effect’, this doesn’t seem just to be a negotiating strategy. Rather, it seems to be that once we’ve mentally labelled something as ours, we value it much more highly than we did before. That’s one of the reasons so many of us find our homes full of bits and pieces that we really should have thrown out long ago, and if we saw the same type of thing in other people’s homes we’d surely think they should throw them out.

(page numbers in italics refer to illustrations) advertising: and alcohol 100–1 and humour 100 and shock 98–100, 100 and smoking 99, 100 airport expansion 98 alcohol 100–1, 127 and calories 100 and pregnancy 126–7 Alexander, Danny 281 anaesthetics 17 ‘animal spirits’ 207, 210, 211 Aos, Steve 282 Ariely, Dan 96–7, 134, 325 Aristotle 221, 240 Armstrong, Hilary 34 Asch, Solomon 26 ASH (Action on Smoking and Health) 189 Ashford, Maren 57, 83 attentional spotlight 83–4 Ayres, Ian 142 Bazerman, Max 134, 325 Beales, Greg 36 Behavioural Insights Team (BIT) (see also nudging): arguments lost by 212–14 becomes social-purpose company 350 beginnings of x–xi, 50–8, 56, 58, 341 current numbers employed by xiii, 341 current trials by 341 expansion of xiii governments follow 11 initial appointments to 56–7, 56 initial scepticism towards 9 most frequent early criticisms of 333 naming of x–xi, 52–3 objectives of 54–5 and transparency, efficacy and accountability, see under nudging and webpage design 275–9, 276 World Bank’s request to 125 year of scepticism experienced by 274 behavioural predators 312–13 Benartzi, Shlomo 64 benefits, see welfare benefits Bentham, Jeremy 221–2 BIG lottery 283 ‘Big Society’ 43, 50, 142, 250 BIT, see Behavioural Insights Team Blair, Tony 151, 225 and behavioural approaches in government 302 Brown takes over from 36, 260–1 review into tenure of 34 Strategy Unit of 31 Tories’ admiration of 50 Bogotá 135, 146 Bohnet, Iris 123 Britton, John 188 Brown, Gordon 34 becomes PM 36, 260–1 Byrne, Liam 47 Cameron, David 151 BIT set up by 8 and Coalition Agreement 38 and data transparency 159 Hilton appointed by 43 and randomised controlled trials 274 and response to notes 186 and smoking 194 and well-being 225–8, 227, 250 car tax 3, 91, 92, 275–8 carrier bags 23 Centre for Ageing Better 282 Centre for Local Economic Growth (LEG) 282, 288 Chand, Raj 146 charities 116–20, 142–4, 144 and reciprocity 116 Chetty, Raj 64 childbirth, see pregnancy and childbirth Cialdini, Robert 34–6, 47, 107–8, 109, 113, 121–2, 308, 312 Clegg, Nick, and Coalition Agreement 38 Cochrane, Dr Archie 269–71, 295, 297 Cochrane Collaboration 271 cocktail-party effect 86 cognitive dissonance 21 cognitive psychology 27–9, 28 Colbourne, Tim 215 College of Policing 282, 289 Collins, Kevan 283, 285 Community First 254–5 commuting 219–20, 263–4 conflict and war 20–1, 27, 87, 344–5 consumer feedback 161–9, 167 improvements driven by 168–9 in public sector 163–9, 167 cooling-off periods 77 Council Tax 95 crime prevention (see also theft): ‘scared straight’ approach to 266–8, 267 and ‘What Works’ institutes 289 Darley, J. 27, 110 data transparency 153–84 and better nudges 179–80 and consumer feedback 161–9, 167 improvements driven by 168–9 in public sector 163–9, 167 and food labelling 172, 178 and machine-readable code 154, 157, 159 and RACAP 157 in restaurants 178 and understandable information 176–9 on cancer 178–9 on car safety 177–8 on financial products 177 and utility suppliers 154–60, 155 Davey, Ed 157 Deaton, Angus 243 decision fatigue 141 Deep Blue 7 Diener, Ed 231 disability-adjusted life years (DALYs) 272 discontinuity design 161–2 doctors’ handwriting 72, 72 Dolan, Paul 47–8, 220 Down, Nick 113 drivers’ behaviour 18, 18 Duckworth, Angela 247 Dunn, Elizabeth 220, 237, 250, 256 Durand, Martine 243 Dweck, Carol 343 e-cigarettes 188–97, 193, 215 estimated years of life saved by 195, 216 and non-smokers 193–4 and quit rates 192–3, 193 by socio-economic grouping 195 Early Intervention Foundation (EIF) 282 EAST (Easy, Attractive, Social, Timely) framework 10, 60, 149, 349 Attractive 80–105, 81, 85, 94 Easy 62–79, 68, 72, 73 and jobcentres 200 Social 106–25, 115, 118, 120, 122 (see also social influence) Timely 126–49, 129 Easterlin, Richard 238 eating habits 139, 171, 307 (see also obesity/weight issues) and choice 306–7 and food pyramid/plate illustrations 41, 41 and food tax 301–2 and healthy/unhealthy food 41, 82, 101–2, 216, 302 ‘mindless’ 171 Economic and Social Research Council 283 economy, UK 205–12 econs 6–7, 178, 223 education 137, 282 financial 64 further 146–7 and timely intervention 146–7 and ‘What Works’ institutes 283–7, 284, 286 Educational Endowment Foundation (EEF) 282, 283–7, 284, 286 Effectiveness and Efficiency (Cochrane) 295 endowment effect 140 Energy Performance Certificate 179 energy ratings 135 energy and utility suppliers, see utility suppliers Enterprise Bill 159 Epley, Nick 260–1 established behaviour, see habits ethnicity, and recruitment 137–9, 344 experimental government 266–98, 270, 272, 276 and crime prevention 266–8, 267 ethics of 325–8 (see also nudging: and accountability) and growth vouchers 279–80 and organ donation 275–9, 276 and overseas health-aid programmes 273 and radical incrementalism 291 and ‘What Works’ institutes 281–90, 292–4 Centre for Ageing Better 282 Centre for Crime Reduction 289 Centre for Local Economic Growth (LEG) 282, 288 Early Intervention Foundation (EIF) 282, 288 Educational Endowment Foundation (EEF) 282, 283–7, 284, 286 experimental psychology 24–6 farmers 145 ‘fat tax’ 301–2 (see also eating habits) fertiliser 145 Feynman, Richard 296, 297 financial crisis 45, 46, 206, 336 (see also UK economy) financial products 177, 206 fines, collecting 3–4, 52, 89, 90–1 Fischhoff, Baruch ix Fisher, Ronald 291 Fiske, Susan 84, 86, 325, 345 food pyramid/plate illustrations 41, 41 forms, prefilling 73–4 fossils 35 Frederick the Great 15, 16 Freud, Lord 279 Gallagher, Rory 55, 88–9, 158, 197–8, 204, 343, 349 gender equality, and company boards 123 Genovese, Kitty 109–10 Gigerenzer, Gerd 178 Gilbert, Danny 139, 220 Gino, Francesca 347 giving 116–20, 142–4, 144, 250 God Complex 269 Gove, Michael 287 Grant, Adam 347 Green Book 46, 228, 258, 259 Grice, Joe 233 Gross Domestic Product (GDP) 222–4, 255 (see also UK economy) Grove, Rohan 211 growth vouchers 279–80 Gyani, Alex 197–8, 203, 204, 343, 349 habits: and early intervention 128–32 key moments to prompt or reshape 132–9 and tax payments 131 Hallsworth, Michael 48, 113 Hancock, Matthew 279 hand washing 99, 140 happy-slave problem 231 Haynes, Laura 56–7 hearing 25 Heider, Fritz 345 Helliwell, John 226–7, 232 Henry VIII 17 herd instinct 161 Heywood, Sir Jeremy 2, 215, 217, 281 The Hidden Wealth of Nations (Halpern) 44 Highway Code 20 Hillman, Nick 165 Hilton, Steve x, 43–4, 51, 53–4, 159, 190, 214, 215, 225–6, 247, 250 and randomised controlled trials 274 hindsight bias ix HMRC 2–3, 8, 87–8, 89, 113, 115, 118, 120, 181–2 (see also tax payments) BIT member’s secondment to 113 non-tax-related business communications sent via 210–11 and online tax forms 74 and randomised controlled trials 274 Homer, Lin 210 honesty 133–4 honours 98 horses’ behaviour 18–19, 19 hospitals: and doctors’ handwriting 72, 72 and patient charts 72–3, 73 Hume, David 221 Hunt, Stefan 209 Hurd, Nick 250 Hutcheson, Francis 221 hyperbolic discounting 139 imprinting 128–9, 129 infant development 128–30 (see also pregnancy and childbirth) and early mother–child ‘meshing’ 129 (see also imprinting) in geese 128–9, 129 and mother’s depression 129 Influence: The Psychology of Persuasion (Cialdini) 34–5, 312 Inglehart, Ronald F. 229 Inland Revenue, see HMRC Institute for Government 40, 46–50 J-PAL 294 jobcentres 120–1, 197–205, 200, 201, 343, 349 (see also unemployment) John, Peter 96 The Joyless Economy (Scitovsky) 223 judges 140 Kahneman, Daniel 27, 29–30, 32, 48, 220, 226, 230 BIT’s work commended by 11 Kasparov, Garry 7 Kennedy, Robert F. 218, 222 Kettle, Stuart 125 Keynes, John Maynard 210, 211–12 King, Dom 48, 72 Kirkman, Elspeth 121, 146 knife crime 122 Kuznets, Simon 222 Laibson, David 64–5, 245, 307 Latene, B. 27, 110 Layard, Richard 225, 242, 248 Lazy Town 82 Legatum Institute 242–3 letters/messages, simplifying 71–3 and handwriting 72 in hospitals 72–3, 73 and prefilled forms 73–5 Letwin, Oliver 213, 217, 281, 295 Life satisfaction (discussion paper) 225 (see also well-being) Linos, Elizabeth 137, 344 List, John 286 litter 23, 35, 94, 107–8, 114 Loewenstein, George 307, 324, 345 loft/wall insulation 3, 75–6 Lorenz, Konrad 128–9, 129 lotteries, as incentive 94–6 Luca, Michael 161–2, 166, 177 Lyard, Richard 238 Lyons, Michael 250 MacFadden, Pat 34 Mackenzie, Polly 51, 215 Major, John 46 Manzi, James 295–6 Marcel, Anthony 136 Martin, Steve 113 Matheson, Jill 227 Mayhew, Pat 66 Mazar, Nina 347 Meacher, Michael 224 mental health 246–9 Merkel, Angela 243 midata, see data transparency Milgram, Stanley 26, 327 Miliband, Ed 34 military recruitment advertising 87 Milkman, Katherine 323 Mill, John Stuart 221 MINDSPACE framework 49–50, 50, 60, 72 motorcycle helmets 66–7 Mulgan, Geoff 225, 301–2 Mullainathan, Sendhil 343 National Citizenship Service (NCS) 251–2, 251 National Institute for Health and Care Excellence (NICE) 195, 271, 281, 290 Nesta 350 Nguyen, Sam 55, 197–8, 343 The Nicomachean Ethics (Aristotle) 240 nicotine-replacement therapy (NRT) 193, 193 (see also smoking) 9/11 28 Norton, Mike 256, 347 Nudge (Thaler, Sunstein) ix–x, 6–7, 39, 157, 234 Nudge Unit, see Behavioural Insights Team nudging (see also Behavioural Insights Team; EAST framework): and accountability 324–5 and experimentation, ethics of 325–8 and the public voice 328–32, 329 defined and discussed 22–4 and efficacy 304, 315–24 and familiarity with approach 319–24 relative 318–19 improving, with better data 179–80 rediscovery of 13 and subconscious priming 136 and transparency 304–15 and behavioural predators 312–13 and choice 306, 314–15 and effective communication vs propaganda 307–11, 311 Nurse Family Partnership 129 Obama, Barack 39–40, 254 acceptance speech of 38 Obama, Michelle 101 obesity/weight issues 101, 170–3, 307 (see also eating habits) in children, levelling of 173 and food labelling 172 and ‘mindless’ eating 171 O’Donnell, Sir Gus (later Lord) 45–6, 47, 57, 225, 227, 227, 242, 258 OECD 293, 340 Office of War Information (US) 21 Olds, David 130 online shopping 109 Ord, Toby 273 organ donation 9, 37, 52, 275–9 Orwell, George 309, 311 Osborne, George 45 and data transparency 159 O’Shaughnessy, James 247 Overman, Henry 288 Paley, William 221 paternalism x, 33, 51, 316 Pelenur, Marcos 135 pensions xii, 9, 62–5, 331 and choice 307 PMSU’s paper on 33 people’s parliaments 332 perception 24–5, 25 Personality responsibility and behaviour change (discussion paper) 301–2 police, ethnic recruits into 137–9, 344 potato consumption 15–16 pregnancy and childbirth 126–7 (see also infant development) Prescott, John 302 Prime Minister’s Strategy Unit (PMSU) 31–3, 47, 53, 225, 337 and Personality responsibility and behaviour change paper 301–2 psychological operations (PsyOps) 30, 308–9, 333 Putnam, Robert 253 radical incrementalism 291 randomised controlled trials (RCTs) 8, 113, 132, 182, 252, 270, 274–5, 283, 297–8, 339 and HMRC 274 Raseman, Sophie 157 RECAP 157 recycling 35 Red Tape Challenge 57 Reeves, Richard 51 Revenue and Customs, see HMRC road fuel 23 road traffic, see vehicles Roberto, Christine 101, 178 Rogers, Todd 146, 321 Rolls-Royce 208 Roosevelt, Franklin D. 21 Ruda, Simon 125, 137, 214, 344 Sainsbury, Lord (David) 46–7 Sanders, Michael 57, 116, 119, 142–3, 146 Scheving, Magnús 81, 82–3 Scitovsky, Tibor 223 Scott, Stephen 247 Seligman, Marty 232, 247 Sen, Amartya 231 Service, Owain 2, 56, 69 Sesame Street 101 Shadbolt, Sir Nigel 158 Shafir, Eldar 343, 345 sight 24–5, 25 Silva, Rohan x–xi, 43–5, 51, 53–4, 159 Singer, Tania 345 small businesses 205–9 passim (see also UK economy) smart disclosure 157 smoke detectors 99 smoking 9, 23, 99, 100, 138 and e-cigarettes 188–97, 193, 215 estimated years of life saved by 195, 216 and non-smokers 193–4 and nicotine-replacement therapy (NRT) 193 and pregnancy 126–7 prevalence of 189 and quit rates 192–3, 193 by socio-economic grouping 195 SNAP framework 48 social influence 26–7, 106–25 and bystander intervention 110 dark side of 109–10 and litter 107–8, 114 norms of: descriptive vs injunctive 108 picking apart 107–11 in policy 111–15 and online shopping 109 and personal touch 119–21 and reciprocity 115–17 social psychology 107 Soman, Dilip 337 Southern Cross station staircase 85 speed bumps 76–7 Sportacus 81–3, 81 Stanford Prison 26–7 Steinberg, Tom 254 stickk.com 142 subconscious priming 136 suicide 67–9, 68, 77 Sunstein, Cass ix–x, 6–7, 22, 39–42, 44, 57, 73, 305, 307, 314 and RACAP 157 supermarkets 80–1, 84, 86, 171–2 and food labelling 173, 178 Sutherland, Rory 187–8 tailored defaults. 307 tax payments 3, 8, 23, 52, 87–8, 88, 89, 112–14, 118, 120, 131, 181–2 in Central America 125 Council Tax 95 and habits 131 and lottery incentive 96–7 and online tax forms 74–5 and randomised controlled trials 274 road duty 3, 91, 92, 275–8 social-norm-based approach to 113, 115 Tetlock, Philip 192 Thaler, Richard 6–7, 22, 39, 44, 50, 51, 53, 57, 305 and BIT’s name 53 and RACAP 157 theft (see also crime prevention): mobile phones 173–6, 174, 175 and target-hardening 78, 214 vehicles: cars 169–70 motorcycles 66–7 time, perception of 128 time-inconsistent preferences 128, 139–45 Times 301–2 tobacco, see smoking Turner Lord (Adair) xii, 33, 331 Tversky, Amos 27, 29, 230 UK economy 205–12, 215, 216 (see also financial crisis; Gross Domestic Product) unemployment 120–1, 122, 197–205, 200, 201, 216, 343, 349 (see also jobcentres) and well-being 255–6 utilitarianism 221–2 utility suppliers: and data transparency 154–60 switching among 153–4, 155–6, 155, 160, 213 vehicles 18–20 safety of 177–8 and speeding 76–7, 92–5, 100 varied penalties for 147 thefts of: cars 169–70 motorcycles 66–7 Victoria, Queen 17 visas 132 Vlaev, Ivo 48 Volpe, Kevin 320 voter registration 95–6 Walsh, Emily 123 Wansink, Brian 171, 306 war 20–1 war and conflict 20–1, 27, 87, 344–5 weight, see obesity/weight issues welfare benefits 8 and conditional cash transfers 135, 145 and timing of payments 135 well-being 218–65 and community 249–55, 251 and commuting 219–20, 263–4 by country 229, 238, 243 drivers of 235–41 material factors 237–9 social factors 239–41 (see also well-being: and community) sunny disposition 235–7 early concepts of 220–2 and GDP 222–4, 255 and governance and service design 258–62 and happy-slave problem 231 and income, work and markets 255–7 and Life satisfaction paper 225 measuring 222–4 big questions concerning 231–3 subjective 228–31 and mental health 246–9 and National Citizenship Service programme 251–2, 251 by occupation 244 and policy 242–3, 258 subjective 224, 228–31 and giving 250 (see also giving) by occupation 244–5 and prostitutes 231–2 UK government’s programme on 226–8, 233–5, 234, 240 unemployment’s effects on 255–6 and utilitarianism 221–2 What Works institutes 281–90, 292–4, 340 Centre for Ageing Better 282 Centre for Crime Reduction 289 Centre for Local Economic Growth (LEG) 282, 288 Early Intervention Foundation (EIF) 282, 288 Educational Endowment Foundation (EEF) 282, 283–7, 284, 286 When Harry Met Sally 160–1 ‘wicked problems’ 170 Willetts, David 165 World Bank 125, 293, 309, 340 World Values Survey (WVS) 229 yelp.com 161–2 Young, Lord 279 ACKNOWLEDGEMENTS THERE ARE MANY people who deserve thanks and credit for the work and results of the Behavioural Insights Team that this book describes, and a rather shorter list for the writing and editing of the book itself.


pages: 147 words: 45,890

Aftershock: The Next Economy and America's Future by Robert B. Reich

Berlin Wall, business cycle, declining real wages, delayed gratification, Doha Development Round, endowment effect, full employment, George Akerlof, Home mortgage interest deduction, Hyman Minsky, illegal immigration, income inequality, invisible hand, job automation, labor-force participation, Long Term Capital Management, loss aversion, mortgage debt, new economy, offshore financial centre, Ralph Nader, Ronald Reagan, school vouchers, sovereign wealth fund, Thorstein Veblen, too big to fail, World Values Survey

Millar Publishing, 1790), pp. 261–63. 9 Almost 10 percent fewer people were killed: See National Highway Traffic Safety Administration Fatality Analysis Reporting System Encyclopedia (http://www-fars.nhtsa.dot.gov/Main/index.aspx). 10 deaths and serious injuries dropped: See U.S. Bureau of Labor Statistics, economic news release: “Workplace Injury and Illness Summary,” October 29, 2009. 4. THE PAIN OF ECONOMIC LOSS 1 Princeton psychologist Daniel Kahneman: See D. Kahneman, J. L. Knetch, and R. H. Thaler, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias,” Journal of Economic Perspectives, 5, no. 1 (Winter 1991): 193–206. 2 Societies whose living standards drop: Ibid. 3 Behavioral economist Christopher Ruhm: See C. J. Ruhm, Are Recessions Good for Your Health?, National Bureau of Economic Research, March 2006. 4 The stock market crash of 1929: See Leonardo Tondo and Ross J. Baldessarini, Suicides: Causes and Clinical Management, Medscape Medical News (http://cme.medscape.com/viewarticle/413195_2). 5 “the crisis quality of a serious illness”: Robert S.


pages: 168 words: 46,194

Why Nudge?: The Politics of Libertarian Paternalism by Cass R. Sunstein

Affordable Care Act / Obamacare, Andrei Shleifer, availability heuristic, Cass Sunstein, choice architecture, clean water, Daniel Kahneman / Amos Tversky, Edward Glaeser, endowment effect, energy security, framing effect, invisible hand, late fees, libertarian paternalism, loss aversion, nudge unit, randomized controlled trial, Richard Thaler

WATCH 210, 212 (2013), available at http://econjwatch.org/articles/why-is-there-no-milton-friedman-today-RP. 11. See David Laibson, Golden Eggs and Hyperbolic Discounting, 112 Q.J. ECON. 443, 445 (1997). 12. For a discussion of some of the foundational issues, see Pedro Bordalo, Nicola Gennaioli & Andrei Shleifer, Salience Theory of Choice Under Risk, 127 Q.J. ECON. 1243 (2012); Pedro Bordalo, Nicola Gennaioli & Andrei Shleifer, Salience in Experimental Tests of the Endowment Effect, 102 AM. ECON. REV. 47 (2012). 13. See Ted O’Donoghue & Matthew Rabin, Choice and Procrastination, 116 Q.J. ECON. 121, 121–22 (2001); Richard H. Thaler & Shlomo Benartzi, Save More Tomorrow™: Using Behavioral Economics to Increase Employee Saving, 112 J. POL. ECON. S164, S168–69 (2004). 14. See Eric Johnson & Daniel Goldstein, Do Defaults Save Lives?, 302 SCIENCE 1338 (2003), available at http://papers.ssrn.com/sol3/papers.cfm?


pages: 598 words: 140,612

Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier, and Happier by Edward L. Glaeser

affirmative action, Andrei Shleifer, Berlin Wall, British Empire, Broken windows theory, carbon footprint, Celebration, Florida, clean water, congestion charging, declining real wages, desegregation, different worldview, diversified portfolio, Edward Glaeser, endowment effect, European colonialism, financial innovation, Frank Gehry, global village, Guggenheim Bilbao, haute cuisine, Home mortgage interest deduction, James Watt: steam engine, Jane Jacobs, job-hopping, John Snow's cholera map, Mahatma Gandhi, McMansion, megacity, mortgage debt, mortgage tax deduction, New Urbanism, place-making, Ponzi scheme, Potemkin village, Ralph Waldo Emerson, rent control, RFID, Richard Florida, Rosa Parks, school vouchers, Seaside, Florida, Silicon Valley, Skype, smart cities, Steven Pinker, strikebreaker, Thales and the olive presses, the built environment, The Death and Life of Great American Cities, the new new thing, The Wealth of Nations by Adam Smith, trade route, transatlantic slave trade, upwardly mobile, urban planning, urban renewal, urban sprawl, William Shockley: the traitorous eight, Works Progress Administration, young professional

Census Bureau, American Community Survey, 2006 Data Profile for the City of New Orleans and the New Orleans MSA, generated using American FactFinder. 257 putting infrastructure in a place that lost its economic rationale: A recent article estimates $142 billion in federal funds have been spent. Sasser, “Katrina Anniversary.” 261 status quo bias: Kahneman et al., “Experimental tests of the endowment effect and the Coase theorem,” 1325-48. 262 impact bias: Gilbert, Stumbling on Happiness. 263 circuitous route keeps speeds down: Dennis, “Gas Prices, Global Warming.” 264 more than 60 percent of Americans are home owners: U.S. Census Bureau, Current Population Survey, Housing Vacancies and Homeownership Annual Statistics: 2009, table 1A, “Rental Vacancy Rates, Homeowner Vacancy Rates, Gross Vacancy Rates, and Homeownership Rates for Old and New Construction,” www.census.gov/hhes/www/housing/hvs/annual09/ann09ind.html. 264 The average deduction . . . between $40,000 and $70,000: Poterba and Sinai, “Tax Expenditures for Owner-Occupied Housing.” 265 and 85 percent of such dwellings are renter-occupied: U.S.

Palo Alto, CA: Stanford University Press, 1982. Johnson, Steven. The Ghost Map: The Story of London’s Most Terrifying Epidemic—and How It Changed Science, Cities, and the Modern World. New York: Riverhead Books, 2006. Jordan, David P. Transforming Paris: The Life and Labors of Baron Haussmann. New York: Free Press, 1995. Kahneman, D., J. L. Knetsch, and R. H. Thaler. “Experimental Tests of the Endowment Effect and the Coase Theorem.” Journal of Political Economy 98 no. 6 (1990): 1325-48. http://www.journals.uchicago.edu/doi/abs/10.1086/261737. Kain, John F., and Joseph J. Persky. “Alternatives to the Gilded Ghetto.” Public Interest 14 (Winter 1969): 74-83. Kain, John F., and John M. Quigley. “Housing Market Discrimination, Home-Ownership, and Savings Behavior.” American Economic Review 62, no. 3 (June 1972): 263-77.


pages: 461 words: 128,421

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox

activist fund / activist shareholder / activist investor, Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, bank run, beat the dealer, Benoit Mandelbrot, Black-Scholes formula, Bretton Woods, Brownian motion, business cycle, buy and hold, capital asset pricing model, card file, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, discovery of the americas, diversification, diversified portfolio, Edward Glaeser, Edward Thorp, endowment effect, Eugene Fama: efficient market hypothesis, experimental economics, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, George Akerlof, Henri Poincaré, Hyman Minsky, implied volatility, impulse control, index arbitrage, index card, index fund, information asymmetry, invisible hand, Isaac Newton, John Meriwether, John Nash: game theory, John von Neumann, joint-stock company, Joseph Schumpeter, Kenneth Arrow, libertarian paternalism, linear programming, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, market bubble, market design, Myron Scholes, New Journalism, Nikolai Kondratiev, Paul Lévy, Paul Samuelson, pension reform, performance metric, Ponzi scheme, prediction markets, pushing on a string, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, road to serfdom, Robert Bork, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, shareholder value, Sharpe ratio, short selling, side project, Silicon Valley, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, statistical model, stocks for the long run, The Chicago School, The Myth of the Rational Market, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, Thorstein Veblen, Tobin tax, transaction costs, tulip mania, value at risk, Vanguard fund, Vilfredo Pareto, volatility smile, Yogi Berra

In the mid-1990s, Thaler and a former student, Shlomo Benartzi of UCLA, hit upon a way to combat this impulse. They dubbed it SMarT, a not-quite-acronym for “save more tomorrow,” and it involved getting 401(k) participants to agree to an automatic increase in their contribution rate every time they got a pay raise. By taking money that people hadn’t earned yet, the plan bypassed the natural resistance to giving up something one possesses—known as the endowment effect. And by bundling the annual choice of how much to save into a single decision that held for years, SMarT put the long-run-oriented part of the brain in charge. At the company where the plan was first tested in 1998, the 50 percent of employees who chose to sign up for the SMarT plan saw their average savings rate go from 3.5 percent of income to 11.5 percent of income in just over two years.13 That kind of success didn’t go unnoticed, and over the next decade the 401(k) was almost entirely remade along lines suggested by behaviorist research.

See also rational market hypothesis and agency costs, 162 and behavioral finance, 299–300 and the Chicago School, xiii, 101–5 and contrary evidence, 224–25 and corporate finance, 355n. 38 described, 153 and Fama, 97, 206–7 and finance, 202–6 and Friedman, 93 and Graham, 119–20 and information availability, 182 and Jensen, 107 and market anomalies, 304 and market crashes, 228, 232 and Mills, 320 and mutual funds, 125, 130, 131 origin of, 43, 73 and portfolio theory, 54–55, 57 and psychology, 201–2 resistance to, 105–7, 269–70 and risk, 139 and Samuelson, 73 and security analysis, 366n. 29 and Shiller, 196–98 and Shleifer, 247 and stock market bubbles, 315 and takeovers, 166–68 taxonomy of, 101 testing, 190, 194–95 “Efficient Markets: Theory and Evidence” (Fama), 104 Einstein, Albert, 7, 50, 66 Ellis, Charley, 130, 131 Employee Retirement Income Security Act (ERISA), 272, 290 Employee Retirement Security Act, 137–38 endogenous change, 305–6 endowment effect, 294 Engel, Louis, 97–98 Engels, Friedrich, 369n. 1 Engle, Robert, 139 Enron, 267, 283 environmental risk, 185 equilibrium theory and the Arrow-Debreu framework, 77–78 and asset pricing, 87 background of, 9–12 and behavioral finance, 301 and complexity theory, 304–6 and derivatives, 237 and intrinsic values, 193 and Keynesian economics, 35 and mathematics, 49–50 and Pareto’s Law, 349–50n. 2 and Reder, 89–90 and Samuelson, 61 equity risk premium, 141–43, 263–64 Erhard, Werner, 285, 319 Erhard Seminars Training (est), 285 event study method, 102 exchange rates, 92–93, 200, 250 executive compensation, 164–65, 274–79, 279–80, 284–85 expected utility, 51–52, 54, 75, 80, 176–77, 193 experimental economics, 188–90 Fallows, James, 365n. 8 Fama, Eugene, 323 and Alexander, 72 and Asness, 259–60 and behavioral finance, 295–96, 296–97, 298, 299–300 and the Chicago School of Economics, 96 and computing, 99–100 and the efficient market hypothesis, 101, 103–5, 193–94, 204, 206–8 and equity risk premium, 263 and experimental economics, 190 and the Journal of Financial Economics, 201 and Mandelbrot, 70, 134 and market crashes, 232 satirical depiction of, 287–88 and Shleifer, 248, 252 and stock price momentum, 209–10 and value stocks, 225 Fannie Mae, 313 Farmer, J.


pages: 190 words: 53,409

Success and Luck: Good Fortune and the Myth of Meritocracy by Robert H. Frank

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, Amazon Mechanical Turk, American Society of Civil Engineers: Report Card, attribution theory, availability heuristic, Branko Milanovic, Capital in the Twenty-First Century by Thomas Piketty, carried interest, Daniel Kahneman / Amos Tversky, David Brooks, deliberate practice, en.wikipedia.org, endowment effect, experimental subject, framing effect, full employment, hindsight bias, If something cannot go on forever, it will stop - Herbert Stein's Law, income inequality, invisible hand, labor-force participation, lake wobegon effect, loss aversion, minimum wage unemployment, Network effects, Paul Samuelson, Report Card for America’s Infrastructure, Richard Thaler, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Rory Sutherland, selection bias, side project, sovereign wealth fund, Steve Jobs, The Wealth of Nations by Adam Smith, Tim Cook: Apple, ultimatum game, Vincenzo Peruggia: Mona Lisa, winner-take-all economy

Chunliang Feng, Yi Luo, Ruolei Gu, Lucas S Broster, Xueyi Shen, Tengxiang Tian, Yue-Jia Luo, Frank Krueger, “The Flexible Fairness: Equality, Earned Entitlement, and Self-Interest,” PLOS ONE 8.9 (September 2013), http://www.plosone.org/article/info%3Adoi%2F10.1371%2Fjournal.pone.0073106. 7. Mechanical Turk, https://www.mturk.com/mturk/welcome. 8. John Locke, Second Treatise on Civil Government, 1689, chap. 5, section 27, http://www.constitution.org/jl/2ndtr05.htm. 9. Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias,” Journal of Economic Perspectives 5.1 (1991): 193–206. 10. Liam Murphy and Thomas Nagel, The Myth of Ownership, New York: Oxford University Press, 2001. 11. David DeSteno, Monica Y. Bartlett, Jolie Baumann, Lisa A. Williams, and Leah Dickens, “Gratitude as Moral Sentiment: Emotion-Guided Cooperation in Economic Exchange,” Emotion 10.2 (2010): 289–93. 12.


pages: 512 words: 165,704

Traffic: Why We Drive the Way We Do (And What It Says About Us) by Tom Vanderbilt

Albert Einstein, autonomous vehicles, availability heuristic, Berlin Wall, call centre, cellular automata, Cesare Marchetti: Marchetti’s constant, cognitive dissonance, computer vision, congestion charging, Daniel Kahneman / Amos Tversky, DARPA: Urban Challenge, endowment effect, extreme commuting, fundamental attribution error, Google Earth, hedonic treadmill, hindsight bias, hive mind, if you build it, they will come, impulse control, income inequality, Induced demand, invisible hand, Isaac Newton, Jane Jacobs, John Nash: game theory, Kenneth Arrow, lake wobegon effect, loss aversion, megacity, Milgram experiment, Nash equilibrium, Sam Peltzman, Silicon Valley, statistical model, the built environment, The Death and Life of Great American Cities, traffic fines, ultimatum game, urban planning, urban sprawl, women in the workforce, working poor

Fox, Christopher Trepel, and Russell A. Poldrack, “The Neural Basis of Loss Aversion in Decision-Making Under Risk,” Science, vol. 315, no. 5811 (26 January 2007), pp. 515–18. See also William J. Gehring and Adrian R. Willoughby, “The Medial Frontal Cortex and the Rapid Processing of Monetary Gains and Losses,” Science, vol. 295, no. 5563 (2002), pp. 2279–82. “endowment effect”: D. Kanheman, J. L. Knetsch, and R. H. Thaler, “Experimental Tests of the Endowment Effect and the Coase Theorem,” Journal of Political Economy, vol. 98 (1990) pp. 1325–48. to the person leaving it: The parking lot studies were chronicled in R. Barry Ruback and Daniel Juieng, “Territorial Defense in Parking Lots: Retaliation Against Waiting Drivers,” Journal of Applied Social Psychology, vol. 27, no. 9 (1997), pp. 821–34. The authors suggest another theory: that fighting for the “symbolic value” of the parking space when it is threatened by an intruder helps give the parking spot owner a feeling of heightened control over the situation.


pages: 270 words: 64,235

Effective Programming: More Than Writing Code by Jeff Atwood

AltaVista, Amazon Web Services, barriers to entry, cloud computing, endowment effect, Firefox, future of work, game design, Google Chrome, gravity well, job satisfaction, Khan Academy, Kickstarter, loss aversion, Marc Andreessen, Mark Zuckerberg, Merlin Mann, Minecraft, Paul Buchheit, Paul Graham, price anchoring, race to the bottom, recommendation engine, science of happiness, Skype, social software, Steve Jobs, web application, Y Combinator, zero-sum game

Students who spaced out their commitments did well; students who did the logical thing and gave no commitments did badly. Steer clear of offers of low-rate trial periods which auto-convert into automatic recurring monthly billing. They know that most people will procrastinate and forget to cancel before the recurring billing kicks in. Either favor fixed-rate, fixed-term plans — or become meticulous about cancelling recurring services when you’re not using them. 6. Utilize the Endowment Effect Ariely and Carmon conducted an experiment on Duke students, who sleep out for weeks to get basketball tickets; even those who sleep out are still subjected to a lottery at the end. Some students get tickets, some don’t. The students who didn’t get tickets told Ariely that they’d be willing to pay up to $170 for tickets. The students who did get the tickets told Ariely that they wouldn’t accept less than $2,400 for their tickets.


Bulletproof Problem Solving by Charles Conn, Robert McLean

active transport: walking or cycling, Airbnb, Amazon Mechanical Turk, asset allocation, availability heuristic, Bayesian statistics, Black Swan, blockchain, business process, call centre, carbon footprint, cloud computing, correlation does not imply causation, Credit Default Swap, crowdsourcing, David Brooks, Donald Trump, Elon Musk, endowment effect, future of work, Hyperloop, Innovator's Dilemma, inventory management, iterative process, loss aversion, meta analysis, meta-analysis, Nate Silver, nudge unit, Occam's razor, pattern recognition, pets.com, prediction markets, principal–agent problem, RAND corporation, randomized controlled trial, risk tolerance, Silicon Valley, smart contracts, stem cell, the rule of 72, the scientific method, The Signal and the Noise by Nate Silver, time value of money, transfer pricing, Vilfredo Pareto, walkable city, WikiLeaks

EXHIBIT 4.6 Confirmation bias is falling in love with your one‐day answer. It is the failure to seriously consider the antithesis to your thesis, ignoring dissenting views—essentially picking low hanging mental fruit. Anchoring bias is the mistaken mental attachment to an initial data range or data pattern that colors your subsequent understanding of the problem. Loss aversion, and its relatives, the sunk cost fallacy, book loss fear, and the endowment effect, are a failure to ignore costs already spent (sunk) or any asymmetric valuing of losses and gains. Availability bias is use of an existing mental map because it is readily at hand, rather than developing a new model for a new problem, or just being influenced by more recent facts or events. Overoptimism comes in several forms including overconfidence, illusion of control or simply failure to contemplate disaster outcomes.


Engineering Security by Peter Gutmann

active measures, algorithmic trading, Amazon Web Services, Asperger Syndrome, bank run, barriers to entry, bitcoin, Brian Krebs, business process, call centre, card file, cloud computing, cognitive bias, cognitive dissonance, combinatorial explosion, Credit Default Swap, crowdsourcing, cryptocurrency, Daniel Kahneman / Amos Tversky, Debian, domain-specific language, Donald Davies, Donald Knuth, double helix, en.wikipedia.org, endowment effect, fault tolerance, Firefox, fundamental attribution error, George Akerlof, glass ceiling, GnuPG, Google Chrome, iterative process, Jacob Appelbaum, Jane Jacobs, Jeff Bezos, John Conway, John Markoff, John von Neumann, Kickstarter, lake wobegon effect, Laplace demon, linear programming, litecoin, load shedding, MITM: man-in-the-middle, Network effects, Parkinson's law, pattern recognition, peer-to-peer, Pierre-Simon Laplace, place-making, post-materialism, QR code, race to the bottom, random walk, recommendation engine, RFID, risk tolerance, Robert Metcalfe, Ruby on Rails, Sapir-Whorf hypothesis, Satoshi Nakamoto, security theater, semantic web, Skype, slashdot, smart meter, social intelligence, speech recognition, statistical model, Steve Jobs, Steven Pinker, Stuxnet, telemarketer, text mining, the built environment, The Death and Life of Great American Cities, The Market for Lemons, the payments system, Therac-25, too big to fail, Turing complete, Turing machine, Turing test, web application, web of trust, x509 certificate, Y2K, zero day, Zimmermann PGP

This rather scary approach to making users think about security has been suggested in other areas as well, often by the users themselves [55]. As a generalisation of this, we know from extremely comprehensive research carried out for marketing purposes [56] that people can develop intense attachments to certain types of items, something that psychologists call the endowment effect. Unfortunately technological artefacts rate relatively low on this scale compared to items like tattered teddy-bears, and getting users to store their keys in tamagotchi probably isn’t workable as a strategy for taking advantage of the endowment effect. All this is before we even get to cross-cultural differences, with different cultures exhibiting very different levels of attachment to different types of objects [57]. Unfortunately even this doesn’t work in practice though. Microsoft used a combined employee ID card and smart card for both building and computer access control purposes, but found that users were leaving the cards in the readers when they walked away from their desks, so that they ended up locked out of the building, stuck in lifts/elevators, or stuck on the wrong floor for lack of an access card.

At this point you’ll have about 6,000 traders for which you’ve just made five totally accurate, flawless stock predictions in a row. Now charge them all $1,000 to read your next prediction. It’s not just the (coincidental) “winners” in this process that this will work on. There’s a bunch of psychological biases like confirmation bias (“he was right all the other times, it must have been just a fluke that this one was wrong”) and the endowment effect/sunk cost fallacy (“we’ve come this far, no turning back now”) that will ensure that even the losers will keep coming back for more, at least up to a point. It terms of return on investment it’s a great way to make a return from the stock market for very little money down, you’re merely offering no-strings-attached advice so it’s not fraud (although you’d have to come up with some better method of drawing punters than spamming them), and the people taking your advice probably aren’t that much worse off than with any other prediction method they might have chosen to use.

This is a usage scenario that’s often used to justify session timeouts, but you need to carefully examine the actual usage situation to see whether it’s really justified or not. The way an Internet café works is that you pay for a block of time, typically in fixed 15- or 30-minute segments. Once your time is up, you’re forcibly logged off the entire machine, not just your Internet session. The endowment effect (see “Psychology” on page 125) combined with other phenomena like the sunk cost fallacy, which requires “getting your money’s worth” even if it doesn’t make much sense, means that people tend to use up their entire block of time once they’ve paid for it, even if it’s just by browsing random web sites. However some subset of people will leave before their time is up, and an even smaller subset of people will forget to log out when they leave in this manner.


pages: 267 words: 78,857

Discardia: More Life, Less Stuff by Dinah Sanders

A. Roger Ekirch, Atul Gawande, big-box store, Boris Johnson, carbon footprint, clean water, clockwatching, cognitive bias, collaborative consumption, credit crunch, endowment effect, Firefox, game design, Inbox Zero, income per capita, index card, indoor plumbing, Internet Archive, Kevin Kelly, late fees, Marshall McLuhan, McMansion, Merlin Mann, post-work, side project, Silicon Valley, Stewart Brand

Instead of sliding our fresh selves into the world and leaving our old snakeskins behind, we retain every one, acting as both collector and specimen. We run our own fan clubs. The San Francisco haulage program RecycleMyJunk.com tweaked this sentiment delightfully with signs on their trucks reading, “The Smithsonian already has one.” Our attachment to physical objects is tightly related to what behavioral scientists call the “endowment effect”; in other words, just owning something makes us less inclined to consider getting rid of it. However, recent studies by Stanford University and University of Pennsylvania psychologists, as cited by Katharine Sanderson in Nature News, have shown that the pain of parting does not derive from overvaluing the item but is pure aversion to losing something regardless of its current utility to us.


pages: 277 words: 79,360

The Happiness Curve: Why Life Gets Better After 50 by Jonathan Rauch

endowment effect, experimental subject, Google bus, happiness index / gross national happiness, hedonic treadmill, income per capita, job satisfaction, longitudinal study, loss aversion, Richard Thaler, science of happiness, Silicon Valley, Skype, Steve Jobs, Steve Wozniak, upwardly mobile, World Values Survey, zero-sum game

Quotations are from page 143 and various locations in chapter 5. Also foundational is the work of Martin E. P. Seligman, whose 2002 book Authentic Happiness: Using the New Positive Psychology to Realize Your Potential for Lasting Fulfillment (Atria Books) provides much insight, as well as the useful happiness formula which I adapted. The 1990 experiment by Kahneman, Knetsch, and Thaler on endowment bias is reported in “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias,” published in the Journal of Economic Perspectives 5:1 (1991). Tali Sharot and various collaborators have published extensively on optimism bias. Sharot lays out her findings concisely and readably in her ebook The Science of Optimism. Other Sharot work I consulted includes “The Optimism Bias” in Current Biology 21:23 (2011); “Neural Mechanisms Mediating Optimism Bias,” coauthored with Alison Riccardi, Candace Raio, and Elizabeth Phelps, in Nature 450 (2007); “Selectively Altering Belief Formation in the Human Brain,” coauthored with Ryota Kanai, David Marston, Christoph W.


pages: 258 words: 74,942

Company of One: Why Staying Small Is the Next Big Thing for Business by Paul Jarvis

Airbnb, big-box store, Cal Newport, call centre, corporate social responsibility, David Heinemeier Hansson, effective altruism, Elon Musk, en.wikipedia.org, endowment effect, follow your passion, gender pay gap, glass ceiling, Inbox Zero, index fund, job automation, Kickstarter, Lyft, Mark Zuckerberg, Naomi Klein, passive investing, Paul Graham, pets.com, remote working, Results Only Work Environment, ride hailing / ride sharing, Ruby on Rails, side project, Silicon Valley, Skype, Snapchat, software as a service, Steve Jobs, supply-chain management, Tim Cook: Apple, too big to fail, uber lyft, web application, Y Combinator, Y2K

And in knowing all you know at this point, would you pursue the project all over again? If the answer is yes, if you still think your original idea was valid, can be profitable in some way, and is worth pursuing, you should carry on. If not, if you’re continuing only because you’ve put so much of your time and energy and heart into the project, then it’s not logical to keep at it. If you’re overvaluing your plan because it’s your plan (known as the “endowment effect”), then you should probably quit. The idea that winners never quit is both overly simplistic and completely false. Most successful founders of companies have quit several times. In fact, it’s their quitting that led them to the success they found after they failed. In his 1937 book Think and Grow Rich, Napoleon Hill said, “A quitter never wins and a winner never quits,” but that just doesn’t hold true.


pages: 253 words: 79,214

The Money Machine: How the City Works by Philip Coggan

activist fund / activist shareholder / activist investor, algorithmic trading, asset-backed security, Bernie Madoff, Big bang: deregulation of the City of London, bonus culture, Bretton Woods, call centre, capital controls, carried interest, central bank independence, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, disintermediation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, endowment effect, financial deregulation, financial independence, floating exchange rates, Hyman Minsky, index fund, intangible asset, interest rate swap, Isaac Newton, joint-stock company, labour market flexibility, large denomination, London Interbank Offered Rate, Long Term Capital Management, merger arbitrage, money market fund, moral hazard, mortgage debt, negative equity, Nick Leeson, Northern Rock, pattern recognition, purchasing power parity, quantitative easing, reserve currency, Right to Buy, Ronald Reagan, shareholder value, South Sea Bubble, sovereign wealth fund, technology bubble, time value of money, too big to fail, tulip mania, Washington Consensus, yield curve, zero-coupon bond

Such accounts traditionally paid no interest whereas the banks could charge as much as 20 per cent on overdrafts – a fairly hefty profit margin. Banks without retail deposits have to borrow at market rates in the money market in order to obtain funds. It can be said in justification of the retail banks that the costs of such a large network of branches, in terms of buildings, staff and paperwork, take a substantial slice of that margin. This so-called endowment effect started to disappear in the 1980s when competition from building societies forced the banks to offer interest-bearing accounts. In the late 1990s, retail deposits started to look as much of a burden as a boon. The problem was that servicing those depositors required the maintenance of a vast and expensive branch network. Rivals emerged with the ability to ‘cherry pick’ the best retail customers.


pages: 309 words: 81,975

Brave New Work: Are You Ready to Reinvent Your Organization? by Aaron Dignan

"side hustle", activist fund / activist shareholder / activist investor, Airbnb, Albert Einstein, autonomous vehicles, basic income, Bertrand Russell: In Praise of Idleness, bitcoin, Black Swan, blockchain, Buckminster Fuller, Burning Man, butterfly effect, cashless society, Clayton Christensen, clean water, cognitive bias, cognitive dissonance, corporate governance, corporate social responsibility, correlation does not imply causation, creative destruction, crony capitalism, crowdsourcing, cryptocurrency, David Heinemeier Hansson, deliberate practice, DevOps, disruptive innovation, don't be evil, Elon Musk, endowment effect, Ethereum, ethereum blockchain, Frederick Winslow Taylor, future of work, gender pay gap, Geoffrey West, Santa Fe Institute, gig economy, Google X / Alphabet X, hiring and firing, hive mind, income inequality, information asymmetry, Internet of things, Jeff Bezos, job satisfaction, Kevin Kelly, Kickstarter, Lean Startup, loose coupling, loss aversion, Lyft, Marc Andreessen, Mark Zuckerberg, minimum viable product, new economy, Paul Graham, race to the bottom, remote working, Richard Thaler, shareholder value, Silicon Valley, six sigma, smart contracts, Social Responsibility of Business Is to Increase Its Profits, software is eating the world, source of truth, Stanford marshmallow experiment, Steve Jobs, TaskRabbit, the High Line, too big to fail, Toyota Production System, uber lyft, universal basic income, Y Combinator, zero-sum game

Studies show you probably won’t: William Samuelson and Richard Zeckhauser, “Status Quo Bias in Decision Making,” Journal of Risk and Uncetainty 1 (1988), 7–59, https://sites.hks.harvard.edu/fs/rzeckhau/status%20quo%20bias.pdf. The same is true: James J. Choi, David Laibson, and Brigitte C. Madrian, “Plan Design and 401(k) Savings Outcomes,” working paper 10486 (Cambridge, MA.: National Bureau of Economic Research, 2004): www.nber.org/papers/w10486.pdf. We prefer to stick with what we’ve got: Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias,” Journal of Economic Perspectives 5, no. 1 (1991), doi:10.1257/jep.5.1.193. “put a man on the moon”: Astro Teller, “Google X Head on Moonshots: 10x Is Easier Than 10 Percent,” Wired, February 11, 2013, www.wired.com/2013/02/moonshots-matter-heres-how-to-make-them-happen. “All models are wrong”: George E. P. Box and Norman R. Draper, Empirical Model-Building and Response Surfaces (New York: John Wiley & Sons, 1987), 440.


pages: 257 words: 84,498

Admissions: A Life in Brain Surgery by Henry Marsh

cognitive dissonance, Daniel Kahneman / Amos Tversky, endowment effect, fear of failure, Google Earth, invisible hand, placebo effect, profit motive, selective serotonin reuptake inhibitor (SSRI)

Those who had been treated with high doses of a drug called haloperidol – there had once been a fashion for high-dose treatment until the side effects became clear – suffered from constant and grotesque movements of the face and tongue. Over the next few weeks, before I was sent to work on the psychogeriatric ward, I slowly got to know some of them as individuals. I noticed how they would collect and treasure pebbles and twigs from the bleak hospital garden and keep them in their pockets. They had no other possessions. Psychologists talk of the ‘endowment effect’ – that we are more concerned about losing things than gaining them. Once we own something, we are averse to losing it, even if we are offered something of greater value in exchange. The pebbles in the madmen’s pockets became more valuable than all the other pebbles in the hospital gardens simply by virtue of being owned. It reminds me of the way that I have surrounded myself with books and pictures in my home, rarely look at them, but would certainly notice their absence.


pages: 288 words: 81,253

Thinking in Bets by Annie Duke

banking crisis, Bernie Madoff, Cass Sunstein, cognitive bias, cognitive dissonance, Daniel Kahneman / Amos Tversky, delayed gratification, Donald Trump, en.wikipedia.org, endowment effect, Estimating the Reproducibility of Psychological Science, Filter Bubble, hindsight bias, Jean Tirole, John Nash: game theory, John von Neumann, loss aversion, market design, mutually assured destruction, Nate Silver, p-value, phenotype, prediction markets, Richard Feynman, ride hailing / ride sharing, Stanford marshmallow experiment, Stephen Hawking, Steven Pinker, the scientific method, The Signal and the Noise by Nate Silver, urban planning, Walter Mischel, Yogi Berra, zero-sum game

The Marshmallow Test: Why Self Control Is the Engine of Success. New York: Little, Brown, 2014. Mitchell, Deborah, J. Edward Russo, and Nancy Pennington. “Back to the Future: Temporal Perspective in the Explanation of Events.” Journal of Behavioral Decision Making 2, no. 1 (January 1989): 25–38. Morewedge, Carey, Lisa Shu, Daniel Gilbert, and Timothy Wilson. “Bad Riddance or Good Rubbish? Ownership and Not Loss Aversion Causes the Endowment Effect.” Journal of Experimental Social Psychology 45, no. 4 (July 2009): 947–51. Mullally, Sinead, and Eleanor Maguire. “Memory, Imagination, and Predicting the Future: A Common Brain Mechanism?” The Neuroscientist 20, no. 3 (June 2014): 220–34. Munnell, Alice, Wenliang Hou, and Anthony Webb. “NRRI Update Shows Half Still Falling Short.” Center for Retirement Research at Boston College, no. 14–20, December 2014. http://crr.bc.edu/briefs/nrri-update-shows-half-still-falling-short.


pages: 302 words: 83,116

SuperFreakonomics by Steven D. Levitt, Stephen J. Dubner

agricultural Revolution, airport security, Andrei Shleifer, Atul Gawande, barriers to entry, Bernie Madoff, Boris Johnson, call centre, clean water, cognitive bias, collateralized debt obligation, creative destruction, credit crunch, Daniel Kahneman / Amos Tversky, deliberate practice, Did the Death of Australian Inheritance Taxes Affect Deaths, disintermediation, endowment effect, experimental economics, food miles, indoor plumbing, Intergovernmental Panel on Climate Change (IPCC), John Nash: game theory, Joseph Schumpeter, Joshua Gans and Andrew Leigh, longitudinal study, loss aversion, Louis Pasteur, market design, microcredit, Milgram experiment, oil shale / tar sands, patent troll, presumed consent, price discrimination, principal–agent problem, profit motive, randomized controlled trial, Richard Feynman, Richard Thaler, selection bias, South China Sea, Stanford prison experiment, Stephen Hawking, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, ultimatum game, urban planning, William Langewiesche, women in the workforce, young professional

Katz and Alexi A. Wright, “Circumcision—A Surgical Strategy for HIV Prevention in Africa,” New England Journal of Medicine 359, no. 23 (December 4, 2008); also drawn from author interview with Katz. EPILOGUE: MONKEYS ARE PEOPLE TOO See Stephen J. Dubner and Steven D. Levitt, “Monkey Business,” The New York Times Magazine, June 5, 2005; Venkat Lakshminarayanan, M. Keith Chen, and Laurie R. Santos, “Endowment Effect in Capuchin Monkeys,” Philosophical Transactions of the Royal Society 363 (October 2008); and M. Keith Chen and Laurie Santos, “The Evolution of Rational and Irrational Economic Behavior: Evidence and Insight from a Non-Human Primate Species,” chapter from Neuroeconomics: Decision Making and the Brain, ed. Paul Glimcher, Colin Camerer, Ernst Fehr, and Russell Poldrack (Academic Press, Elsevier, 2009). / 212 “Nobody ever saw a dog”: see Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, ed.


pages: 383 words: 92,837

Incognito: The Secret Lives of the Brain by David Eagleman

Ada Lovelace, Albert Einstein, Any sufficiently advanced technology is indistinguishable from magic, Columbine, Daniel Kahneman / Amos Tversky, delayed gratification, endowment effect, facts on the ground, impulse control, invisible hand, Isaac Newton, Johann Wolfgang von Goethe, out of africa, Pierre-Simon Laplace, Ralph Waldo Emerson, Robert Shiller, Robert Shiller, Rodney Brooks, Saturday Night Live, selective serotonin reuptake inhibitor (SSRI), Steven Pinker, Thales of Miletus

Terzian, H., and G. D. Ore. 1955. “Syndrome of Klüver and Bucy: Reproduced in man by bilateral removal of the temporal lobes.” Neurology 5 (6): 373–80. Tinbergen, N. 1952. “Derived activities: Their causation, biological significance, origin, and emancipation during evolution.” Quarterly Review of Biology 27: 1–32. Tom, G., C. Nelson, T. Srzentic, and R. King. 2007. “Mere exposure and the endowment effect on consumer decision making.” Journal of Psychology 141 (2): 117–25. Tong, F., M. Meng, R. Blake. 2006. “Neural bases of binocular rivalry.” Trends in Cognitive Sciences 10: 502–11. Tramo, M. J., K. Baynes, R. Fendrich, G. R. Mangun, E. A. Phelps, P. A. Reuter-Lorenz, and M. S. Gazzaniga. 1995. “Hemispheric specialization and interhemispheric integration.” In Epilepsy and the Corpus Callosum. 2nd edition.


pages: 309 words: 95,495

Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe by Greg Ip

Affordable Care Act / Obamacare, Air France Flight 447, air freight, airport security, Asian financial crisis, asset-backed security, bank run, banking crisis, break the buck, Bretton Woods, business cycle, capital controls, central bank independence, cloud computing, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, Daniel Kahneman / Amos Tversky, diversified portfolio, double helix, endowment effect, Exxon Valdez, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, global supply chain, hindsight bias, Hyman Minsky, Joseph Schumpeter, Kenneth Rogoff, lateral thinking, London Whale, Long Term Capital Management, market bubble, money market fund, moral hazard, Myron Scholes, Network effects, new economy, offshore financial centre, paradox of thrift, pets.com, Ponzi scheme, quantitative easing, Ralph Nader, Richard Thaler, risk tolerance, Ronald Reagan, Sam Peltzman, savings glut, technology bubble, The Great Moderation, too big to fail, transaction costs, union organizing, Unsafe at Any Speed, value at risk, William Langewiesche, zero-sum game

The economist Richard Thaler ran a series of experiments like the following. Coffee mugs were randomly distributed to half the students in a class, then all students were invited to trade so that those who value the mugs the most could buy them from those who valued them the least. On average, students demanded twice as much to sell what they already had as they would pay for something they did not yet have. Thaler dubbed this “the endowment effect”: people put greater value on something when they own it than when they don’t. They also feel worse about losing something they already own than failing to get it in the first place. The reasons why vary: you may have mental associations with something that you don’t want to give up; you may worry about regret, or retribution, for giving up something you once had. Uncertainty—not knowing whether you will have more money, or less—taxes the psyche.


pages: 343 words: 101,563

The Uninhabitable Earth: Life After Warming by David Wallace-Wells

"Robert Solow", agricultural Revolution, Albert Einstein, anthropic principle, Asian financial crisis, augmented reality, basic income, Berlin Wall, bitcoin, British Empire, Buckminster Fuller, Burning Man, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, carbon-based life, cognitive bias, computer age, correlation does not imply causation, cryptocurrency, cuban missile crisis, decarbonisation, Donald Trump, effective altruism, Elon Musk, endowment effect, energy transition, everywhere but in the productivity statistics, failed state, fiat currency, global pandemic, global supply chain, income inequality, Intergovernmental Panel on Climate Change (IPCC), invention of agriculture, Joan Didion, John Maynard Keynes: Economic Possibilities for our Grandchildren, labor-force participation, life extension, longitudinal study, Mark Zuckerberg, mass immigration, megacity, megastructure, mutually assured destruction, Naomi Klein, nuclear winter, Pearl River Delta, Peter Thiel, plutocrats, Plutocrats, postindustrial economy, quantitative easing, Ray Kurzweil, rent-seeking, ride hailing / ride sharing, Sam Altman, Silicon Valley, Skype, South China Sea, South Sea Bubble, Steven Pinker, Stewart Brand, the built environment, the scientific method, Thomas Malthus, too big to fail, universal basic income, University of East Anglia, Whole Earth Catalog, William Langewiesche, Y Combinator

Among the most destructive effects that appear later in the behavioral economics library are these: the bystander effect, or our tendency to wait for others to act rather than acting ourselves; confirmation bias, by which we seek evidence for what we already understand to be true, such as the promise that human life will endure, rather than endure the cognitive pain of reconceptualizing our world; the default effect, or tendency to choose the present option over alternatives, which is related to the status quo bias, or preference for things as they are, however bad that is, and to the endowment effect, or instinct to demand more to give up something we have than we actually value it (or had paid to acquire or establish it). We have an illusion of control, the behavioral economists tell us, and also suffer from overconfidence and an optimism bias. We also have a pessimism bias, not that it compensates—instead it pushes us to see challenges as predetermined defeats and to hear alarm, perhaps especially on climate, as cries of fatalism.


pages: 411 words: 108,119

The Irrational Economist: Making Decisions in a Dangerous World by Erwann Michel-Kerjan, Paul Slovic

"Robert Solow", Andrei Shleifer, availability heuristic, bank run, Black Swan, business cycle, Cass Sunstein, clean water, cognitive dissonance, collateralized debt obligation, complexity theory, conceptual framework, corporate social responsibility, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-subsidies, Daniel Kahneman / Amos Tversky, endowment effect, experimental economics, financial innovation, Fractional reserve banking, George Akerlof, hindsight bias, incomplete markets, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, iterative process, Kenneth Arrow, Loma Prieta earthquake, London Interbank Offered Rate, market bubble, market clearing, money market fund, moral hazard, mortgage debt, Pareto efficiency, Paul Samuelson, placebo effect, price discrimination, price stability, RAND corporation, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, source of truth, statistical model, stochastic process, The Wealth of Nations by Adam Smith, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, ultimatum game, University of East Anglia, urban planning, Vilfredo Pareto

After Hurricane Katrina in August 2005, the government initially fell short in its response but subsequently has spent billions to compensate the victims and increase the protections against future flood risks. Many economists debated the wisdom of rebuilding New Orleans and strengthening the protections against future flooding given the inherent riskiness of the Gulf Coast region. Such musings may have academic interest but are of little practical consequence: The city is being rebuilt. A well-established finding in behavioral economics is the “endowment effect,” whereby people place an inordinately large value on assets in their possession. New Orleans itself might be viewed as one such asset that we collectively possess, as it ranks among the most important cities in the United States in terms of historical and architectural interest. Individual property values there certainly understate the worth of New Orleans to the country. So, politically, any plan of action that does not ensure the survival of New Orleans is simply a nonstarter.


Capital Ideas Evolving by Peter L. Bernstein

Albert Einstein, algorithmic trading, Andrei Shleifer, asset allocation, business cycle, buy and hold, buy low sell high, capital asset pricing model, commodity trading advisor, computerized trading, creative destruction, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, diversification, diversified portfolio, endowment effect, equity premium, Eugene Fama: efficient market hypothesis, financial innovation, fixed income, high net worth, hiring and firing, index fund, invisible hand, Isaac Newton, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Arrow, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, market bubble, mental accounting, money market fund, Myron Scholes, paper trading, passive investing, Paul Samuelson, price anchoring, price stability, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, statistical model, survivorship bias, systematic trading, technology bubble, The Wealth of Nations by Adam Smith, transaction costs, yield curve, Yogi Berra, zero-sum game

Thaler, Richard, 1992. The Winner ’s Curse: Paradoxes and Homilies of Economic Life, Princeton, NJ: Princeton University Press. Thaler, Richard, and Eric Johnson, 1990. “Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice,” Management Science, Vol. 36, No. 6 ( June), pp. 643– 660. Thaler, Richard, Daniel Kahneman, and J. L. Knetsch, 1992. “The Endowment Effect, Loss Aversion and Status Quo Bias,” in Richard Thaler, The Winner ’s Curse, Princeton, NJ: Princeton University Press. Temin, Peter, and Hans-Joachim Voth, 2003. “Riding the South Sea Bubble,” MIT Economics Department Working Paper No. 04-02 ( December). Treynor, Jack, 1961. “Toward a Theory of Market Value of Risky Assets.” Unpublished manuscript. Treynor, Jack, and Fischer Black, 1973. “How to Use Security Analysis to Improve Portfolio Selection,” Journal of Business, Vol. 46, pp. 66–73.


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The New Trading for a Living: Psychology, Discipline, Trading Tools and Systems, Risk Control, Trade Management by Alexander Elder

additive manufacturing, Atul Gawande, backtesting, Benoit Mandelbrot, buy and hold, buy low sell high, Checklist Manifesto, computerized trading, deliberate practice, diversification, Elliott wave, endowment effect, loss aversion, mandelbrot fractal, margin call, offshore financial centre, paper trading, Ponzi scheme, price stability, psychological pricing, quantitative easing, random walk, risk tolerance, short selling, South Sea Bubble, systematic trading, The Wisdom of Crowds, transaction costs, transfer pricing, traveling salesman, tulip mania, zero-sum game

Roy Shapiro, a New York psychologist from whose article the title of this subchapter is borrowed, writes: “With great hope, in the private place where we make our trading decisions, our current idea is made ready…. one difficulty in selling is the attachment experienced toward the position. After all, once something is ours, we naturally tend to become attached to it…. This attachment to the things we buy has been called the “endowment effect” by psychologists and economists and we all recognize it in our financial transactions as well as in our inability to part with that old sports jacket hanging in the closet. The speculator is the parent of the idea…. the position takes on meaning as a personal extension of self, almost as one's child might…. Another reason that Johnny does not sell, even when the position may be losing ground, is because he wants to dream….


pages: 481 words: 125,946

What to Think About Machines That Think: Today's Leading Thinkers on the Age of Machine Intelligence by John Brockman

agricultural Revolution, AI winter, Alan Turing: On Computable Numbers, with an Application to the Entscheidungsproblem, algorithmic trading, artificial general intelligence, augmented reality, autonomous vehicles, basic income, bitcoin, blockchain, clean water, cognitive dissonance, Colonization of Mars, complexity theory, computer age, computer vision, constrained optimization, corporate personhood, cosmological principle, cryptocurrency, cuban missile crisis, Danny Hillis, dark matter, discrete time, Douglas Engelbart, Elon Musk, Emanuel Derman, endowment effect, epigenetics, Ernest Rutherford, experimental economics, Flash crash, friendly AI, functional fixedness, global pandemic, Google Glasses, hive mind, income inequality, information trail, Internet of things, invention of writing, iterative process, Jaron Lanier, job automation, Johannes Kepler, John Markoff, John von Neumann, Kevin Kelly, knowledge worker, loose coupling, microbiome, Moneyball by Michael Lewis explains big data, natural language processing, Network effects, Norbert Wiener, pattern recognition, Peter Singer: altruism, phenotype, planetary scale, Ray Kurzweil, recommendation engine, Republic of Letters, RFID, Richard Thaler, Rory Sutherland, Satyajit Das, Search for Extraterrestrial Intelligence, self-driving car, sharing economy, Silicon Valley, Skype, smart contracts, social intelligence, speech recognition, statistical model, stem cell, Stephen Hawking, Steve Jobs, Steven Pinker, Stewart Brand, strong AI, Stuxnet, superintelligent machines, supervolcano, the scientific method, The Wisdom of Crowds, theory of mind, Thorstein Veblen, too big to fail, Turing machine, Turing test, Von Neumann architecture, Watson beat the top human players on Jeopardy!, Y2K

Rubber was doomed to specialized usage because of its failure to withstand extreme temperatures—until Charles Goodyear slipped up and dropped some rubber on a hot stove. Instead of taking steps to ensure no future mistakes, Goodyear noticed something interesting, and the result was vulcanized, weatherproof rubber. Finally, consider the power of human “bugs”—our biases. For example, optimism makes us believe we can get to the moon, cure all diseases, and start a successful business in a terrifying location whose previous tenant fled. The endowment effect causes us to overvalue what we have, what we ideate, and what we create—even when no one else agrees. But is abandoning all endeavors at the first sign of failure and pursuing one that seems more successful always optimal? The dogged scientists (think of Galileo and Darwin) who persist in the face of generally accepted explanations are being stubborn—being buggy—but the result can be genius.


pages: 1,073 words: 314,528

Strategy: A History by Lawrence Freedman

Albert Einstein, anti-communist, Anton Chekhov, Ayatollah Khomeini, barriers to entry, battle of ideas, Black Swan, British Empire, business process, butterfly effect, centre right, Charles Lindbergh, circulation of elites, cognitive dissonance, coherent worldview, collective bargaining, complexity theory, conceptual framework, corporate raider, correlation does not imply causation, creative destruction, cuban missile crisis, Daniel Kahneman / Amos Tversky, defense in depth, desegregation, Edward Lorenz: Chaos theory, en.wikipedia.org, endogenous growth, endowment effect, Ford paid five dollars a day, framing effect, Frederick Winslow Taylor, Gordon Gekko, greed is good, information retrieval, interchangeable parts, invisible hand, John Nash: game theory, John von Neumann, Kenneth Arrow, lateral thinking, linear programming, loose coupling, loss aversion, Mahatma Gandhi, means of production, mental accounting, Murray Gell-Mann, mutually assured destruction, Nash equilibrium, Nelson Mandela, Norbert Wiener, Norman Mailer, oil shock, Pareto efficiency, performance metric, Philip Mirowski, prisoner's dilemma, profit maximization, race to the bottom, Ralph Nader, RAND corporation, Richard Thaler, road to serfdom, Ronald Reagan, Rosa Parks, shareholder value, social intelligence, Steven Pinker, strikebreaker, The Chicago School, The Myth of the Rational Market, the scientific method, theory of mind, Thomas Davenport, Thomas Kuhn: the structure of scientific revolutions, Torches of Freedom, Toyota Production System, transaction costs, ultimatum game, unemployed young men, Upton Sinclair, urban sprawl, Vilfredo Pareto, War on Poverty, women in the workforce, Yogi Berra, zero-sum game

Individuals compared alternative courses of action by focusing on one aspect, often randomly chosen, rather than keep in the frame all key aspects.14 Another important finding concerned loss aversion. The value of a good to an individual appeared to be higher when viewed as something that could be lost or given up than when evaluated as a potential gain. Richard Thaler, one of the first to incorporate the insights from behavioral economics into mainstream economics, described the “endowment effect,” whereby the selling price for consumption goods was much higher than the buying price.15 Experiments Another challenge to the rational choice model came from experiments that tested propositions derived from game theory. These were not the same as experiments in the natural sciences which should not be context dependent. Claims that some universal truths about human cognition and behavior were being illuminated needed qualification.

This fit in with studies that showed economists to be more corruptible and less likely to donate to charity.25 One researcher suggested that the “experience of taking a course in microeconomics actually altered students’ conceptions of the appropriateness of acting in a self-interested manner, not merely their definition of self-interest.”26 In studies of traders in financial markets, it transpired that while the inexperienced might be influenced by Thaler’s “endowment effect,” for example, the experienced were not.27 This might not be flattering to economists, but it did show that egotistical behavior could also be quite natural. This argument, however, could be played back to the formal theorists. To be sure, it showed the possibility of self-interested and calculating behavior but it also required a degree of socialization. If it could not be shown to occur naturally and if it had to be learned, then that demonstrated the importance of social networks as a source of guidance on how to behave.


pages: 369 words: 128,349

Beyond the Random Walk: A Guide to Stock Market Anomalies and Low Risk Investing by Vijay Singal

3Com Palm IPO, Andrei Shleifer, asset allocation, buy and hold, capital asset pricing model, correlation coefficient, cross-subsidies, Daniel Kahneman / Amos Tversky, diversified portfolio, endowment effect, fixed income, index arbitrage, index fund, information asymmetry, liberal capitalism, locking in a profit, Long Term Capital Management, loss aversion, margin call, market friction, market microstructure, mental accounting, merger arbitrage, Myron Scholes, new economy, prediction markets, price stability, profit motive, random walk, Richard Thaler, risk-adjusted returns, risk/return, selection bias, Sharpe ratio, short selling, survivorship bias, transaction costs, Vanguard fund

Stein. 1999. A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets. Journal of Finance 54(6), 2143–84. Kadlec, Gregory B., and John J. McConnell. 1994. The Effect of Market Segmentation and Illiquidity on Asset Prices: Evidence from Exchange Listings. Journal of Finance 49(2), 611–36. Kahneman, Daniel, Jack L. Knetsch, and Richard H. Thaler. 1991. Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias. Journal of Economic Perspectives 5(1), 193–206. Kahneman, Daniel, and Amos Tversky. 1979. Prospect Theory: An Analysis of Decision Under Risk. Econometrica 47(2), 263–92. Mackenzie, Craig. 1997. Where Are the Motives? A Problem with Evidence in the Work of Richard Thaler. Journal of Economic Psychology 18(1), 123–35. Merton, Robert C. 1987. Presidential Address: A Simple Model of Capital Market Equilibrium with Incomplete Information.


Crisis and Leviathan: Critical Episodes in the Growth of American Government by Robert Higgs, Arthur A. Ekirch, Jr.

Alistair Cooke, American ideology, business cycle, clean water, collective bargaining, creative destruction, credit crunch, declining real wages, endowment effect, fiat currency, fixed income, full employment, hiring and firing, income per capita, Jones Act, Joseph Schumpeter, laissez-faire capitalism, manufacturing employment, means of production, minimum wage unemployment, plutocrats, Plutocrats, post-industrial society, price discrimination, profit motive, rent control, rent-seeking, Richard Thaler, road to serfdom, Ronald Reagan, Sam Peltzman, Simon Kuznets, strikebreaker, The Wealth of Nations by Adam Smith, total factor productivity, transaction costs, transcontinental railway, union organizing, Upton Sinclair, War on Poverty, Works Progress Administration

Fialka, "Oregon Congressman Outflanks the Pentagon In Single-Minded, Single-Handed Weapon War," Wall Street Journal (Sept. 13, 1985): 54. 29. Victor R. Fuchs, "The Economics of Health in a Post-Industrial Society," Public Interest (Summer 1979): 16; Shultz and Dam, Economic Policy Beyond the Headlines, pp. 51-52; John Mark Hansen, "The Political Economy of Group Membership," American Political Science Review 79 (March 1985): 81. 30. See the related discussions of the "endowment effect" by Richard H. Thaler, "Illusions and Mirages in Public Policy," Public Interest (Fall 1983): 64-65; of "hysteresis" by Hardin, Collective Action, pp. 82-83; of "universalism and reciprocity" by Alt and Chrystal, Political Economics, pp. 196-197. 31. Nordlinger, Autonomy, p. 38; Dye and Zeigler, The Irony of Democracy, pp. 98-99, 101-102; Dye, Understanding Public Policy, p. 199; Karl, Uneasy State, p. 226; Mancur Olson, The Rise and Decline of Nations: Economic Growth, Stagflation and Social Rigidities (New Haven, Conn.: Yale University Press, 1982), p. 71; Karen A., Rasler and William R.


pages: 470 words: 148,730

Good Economics for Hard Times: Better Answers to Our Biggest Problems by Abhijit V. Banerjee, Esther Duflo

"Robert Solow", 3D printing, affirmative action, Affordable Care Act / Obamacare, Airbnb, basic income, Bernie Sanders, business cycle, call centre, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, charter city, correlation does not imply causation, creative destruction, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, decarbonisation, Deng Xiaoping, Donald Trump, Edward Glaeser, en.wikipedia.org, endowment effect, energy transition, Erik Brynjolfsson, experimental economics, experimental subject, facts on the ground, fear of failure, financial innovation, George Akerlof, high net worth, immigration reform, income inequality, Indoor air pollution, industrial cluster, industrial robot, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Jane Jacobs, Jean Tirole, Jeff Bezos, job automation, Joseph Schumpeter, labor-force participation, land reform, loss aversion, low skilled workers, manufacturing employment, Mark Zuckerberg, mass immigration, Network effects, new economy, New Urbanism, non-tariff barriers, obamacare, offshore financial centre, open economy, Paul Samuelson, place-making, price stability, profit maximization, purchasing power parity, race to the bottom, RAND corporation, randomized controlled trial, Richard Thaler, ride hailing / ride sharing, Robert Gordon, Ronald Reagan, school choice, Second Machine Age, secular stagnation, self-driving car, shareholder value, short selling, Silicon Valley, smart meter, social graph, spinning jenny, Steve Jobs, technology bubble, The Chicago School, The Future of Employment, The Market for Lemons, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, total factor productivity, trade liberalization, transaction costs, trickle-down economics, universal basic income, urban sprawl, very high income, War on Poverty, women in the workforce, working-age population, Y2K

,” Quarterly Journal of Economics 130, no. 3 (2015): 1329–67. 45 Ernst Fehr, “Degustibus Est Disputandum,” Emerging Science of Preference Formation, inaugural talk, Universitat Pompeu Fabra, Barcelona, Spain, October 7, 2015. 46 Alain Cohn, Ernst Fehr, and Michel Andre Marechal, “Business Culture and Dishonesty in the Banking Industry,” Nature 516 (2014): 86–89. 47 For an overview of their work, see Roland Bénabou and Jean Tirole, “Mindful Economics: The Production, Consumption, and Value of Beliefs,” Journal of Economic Perspectives 30, no. 3 (2016): 141–64. 48 William Julius Wilson, When Work Disappears: The World of the New Urban Poor (New York: Knopf Doubleday, 1997). 49 J. D. Vance, Hillbilly Elegy: A Memoir of a Family and Culture in Crisis (New York: Harper, 2016). 50 Dan Ariely, George Loewenstein, and Drazen Prelec, “’Coherent Arbitrariness’: Stable Demand Curves without Stable Preferences,”Quarterly Journal of Economics 118, no. 1 (2003): 73–106. 51 Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler, “Experimental Tests of the Endowment Effect and the Coase Theorem,” Journal of Political Economy 98, no. 6 (1990): 1325–48. 52 Dan Ariely, George Loewenstein, and Drazen Prelec, “’Coherent Arbitrariness’: Stable Demand Curves without Stable Preferences,” Quarterly Journal of Economics 118, no. 1 (2003): 73–106. 53 Muzafer Sherif, The Robber’s Cave Experiment: Intergroup Conflict and Cooperation, (Middletown, CT: Wesleyan University Press, 1998). 54 Gerard Prunier, The Rwanda Crisis: History of a Genocide (New York: Columbia University Press, 1997). 55 Paul Lazarsfeld and Robert Merton, “Friendship as a Social Process: A Substantive and Methodological Analysis,” in Freedom and Control in Modern Society, eds.


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The Secret of Our Success: How Culture Is Driving Human Evolution, Domesticating Our Species, and Making Us Smarter by Joseph Henrich

agricultural Revolution, capital asset pricing model, Climategate, cognitive bias, Daniel Kahneman / Amos Tversky, delayed gratification, demographic transition, endowment effect, experimental economics, experimental subject, Flynn Effect, impulse control, Monkeys Reject Unequal Pay, Nash equilibrium, out of africa, phenotype, placebo effect, profit maximization, randomized controlled trial, risk tolerance, side project, social intelligence, social web, Steven Pinker, The Wisdom of Crowds, theory of mind, ultimatum game

“Evolution of learning strategies in temporally and spatially variable environments: A review of theory.” Theoretical Population Biology 91:3–19. Apesteguia, J., S. Huck, and J. Oechssler. 2007. “Imitation—theory and experimental evidence.” Journal of Economic Theory 136 (1):217–235. Apicella, C., E. A. Azevedo, J. A. Fowler, and N. A. Christakis. 2014. “Isolated hunter-gatherers do not exhibit the endowment effect bias.” American Economic Review 104(6) 1793–1805. Apicella, C. L., F. Marlowe, J. Fowler, and N. Christakis. 2012. “Social networks and cooperation in Hadza hunter-gatherers.” American Journal of Physical Anthropology 147:85–85. Archer, W., D. R. Braun, J. W. K. Harris, J. T. McCoy, and B. G. Richmond. 2014. “Early Pleistocene aquatic resource use in the Turkana Basin.” Journal of Human Evolution 77:74–87. http://dx.doi.org/10.1016/j.jhevol.2014.02.012.


pages: 1,106 words: 335,322

Titan: The Life of John D. Rockefeller, Sr. by Ron Chernow

business cycle, California gold rush, collective bargaining, death of newspapers, delayed gratification, double entry bookkeeping, endowment effect, family office, financial independence, Frederick Winslow Taylor, George Santayana, God and Mammon, income inequality, invisible hand, Joseph Schumpeter, Louis Pasteur, Mahatma Gandhi, Menlo Park, New Journalism, oil rush, oil shale / tar sands, passive investing, plutocrats, Plutocrats, price discrimination, profit motive, Ralph Waldo Emerson, refrigerator car, The Chicago School, Thorstein Veblen, transcontinental railway, traveling salesman, union organizing, Upton Sinclair, white picket fence, yellow journalism

He had Junior approach Seth Low, the president of Columbia College, about endowing a professorship in psychology for Charles, who increasingly studied both psychology and philosophy in his work. Junior suggested that it would be more gracious to endow the chair and then let the college voluntarily appoint him, rather than to demean Charles by creating a chair expressly for him. Senior followed this advice and, after making sure that Columbia would give him the chair, gave the school a $100,000 endowment, effectively buying his son-in-law’s job at considerable expense. For a time in the early 1900s, Rockefeller saw a lot of Charles and Bessie, thanks in part to his newfound passion for golf. Desperate for a place where he could extend Pocantico’s limited golf season, he found it in the tony resort of Lakewood, New Jersey, where George Gould and other rich residents played polo, attended tea parties, rode to hounds, and held cotillions.