Behavioral Economics. -From a non-Econ perspective-

I started studying on my free time about “Behavioral Economics” using The book written by Richard H. Thaler and entitled “MisBehaving : The Making Of Behavioral Economics” . The book is a masterpiece that I recommend to everyone who might be interested in understanding the human behaviors, and of course for those who are interested in Economics also.

While reading this book, and quoting other articles from here and there, I was taking notes of ideas I found interesting and tried to develop on them. And I would like to mention also that all my knowledge about Economics and Psychology is from the few books I read, but I didn’t have any formal education in neither of the two vast subjects. That’s why feel the most welcome to correct or discuss any point of this article.

*I will keep updating this article with new interesting ideas weekly, so you can check it from time to time to find what’s new here.*

1. Sunk Cost Fallacy -Or what I call : Stop pushing things-

In economics there’s a concept known as “sunk cost fallacy”, which we can explain by giving the following example. If you buy a dress for your child to wear in school but your child refuses to do that, and says she doesn’t like wearing dresses anymore, forcing her to wear the dress won’t give you your money back nor make your financial situation better, the money you spent is gone and cannot be refund. That’s to say it’s a “sunk cost”.

Another example I thought of is inspired from our daily life and things I saw a lot in people around me. We all experience hard/bad relations with friends, partners, inside family and many different other contexts. And the point I would like to talk about here is that, If you put too much effort, time or money in a relationship, but at a moment you discover that you have been intoxicated and emotionally or mentally spoiled. Continuing being in that relationship won’t give you what you lost back. But it will Indeed make your life a lot worst. It’s hard to have the self-control and the will to stop doing something you invested a lot in, but once you achieve that point of rationality, your life is going to be a lot better.

2. Endowment effect

Endowment effect or which known also as “ The mere ownership effect” is a hypothesis that put in terms the fact that people are getting attached more to the things they own. In more simple words, people would pay less for an apple they want to buy, but would ask for more high price for the same apple if they want to sell it.

In the book I’m using most of the time to write this article (MisBehaving : The Making Of Behavioral Economics), Richard introduce this hypothesis with the story he quoted from Thomas Schelling‘s essay titled “The Life You Save May Be Your Own.” The story goes as the following :

Let a six-year-old girl with brown hair need thousands of dollars for an operation that will prolong her life until Christmas, and the post office will be swamped with nickels and dimes to save her. But let it be reported that without sales tax the hospital facilities of Massachusetts will deteriorate and cause a barely perceptible increase in preventable deaths — not many will drop a tear or reach for their checkbooks.

This story introduce to us the fact the we create empathy with not only the things we own in a direct way, but also with the things that we can see the results and the changes they make, and that doesn’t require us to work a lot with statistics or numbers ““identified lives”, those which don’t lack emotional impact.

Later in the book, Richard gives a famous example of this behavior which can be resumed as the following, when people are giving mugs (they become their own mugs, they own them now) and asked to sell them “willingness to accept”, they ask for twice as high as the price they do when they are giving money and asked to buy the same mugs from other people “willingness to pay”.

To resume everything we can say, This bias occurs when we overvalue something that we own, regardless of its objective market value (Kahneman, Knetsch, & Thaler, 1991).

I hope I was able to introduce to you this hypothesis in simple words, and feel free to ask questions or correct me always.

3. Confirmation Bias

Today I’m going to prove to you that one of the most important believes you have is wrong!

For most people, your mind has created a firewall against anything I am going to say now and is ready to attack back and refuse whatever it’s. That’s a small example of the Confirmation Bias behavior I’ll introduce in a brief.

Confirmation Bias is the tendency to stay in our comfort zone and applause for information that confirms our existing beliefs and ideas. Which explains why two different people with different opinions might interpret the same information provided in different ways and come with different conclusion.

On of the famous experiments to see this behavior is a one that has been made in a Standford University study which goes as the following :

Half of the participants were in favor of capital punishment, and the other half were opposed to it. Both groups read details of the same two fictional studies. Half of the participants were told that one study supported the deterrent effect of capital punishment and the other study opposed it. The other participants read the inverse information. At the conclusion of the study, the majority of participants stuck to their original views, pointing to the data that supported it and discarding that which did not.

Embracing the new truth and be flexible to new ideas is a hard task for our survival brain which is faced with thousands of new information daily but not ready for it yet, which causes it to always to go for the easy job, which is stick in a closed chamber of holy thoughts and ideas that are always right and cannot be disproved.

Shannon L. Alder illustrates this concept in a very nice poem :

Read it with sorrow and you will feel hate.
Read it with anger and you will feel vengeful.
Read it with paranoia and you will feel confusion.
Read it with empathy and you will feel compassion.
Read it with love and you will feel flattery.
Read it with hope and you will feel positive.
Read it with humor and you will feel joy.
Read it without bias and you will feel peace.
Do not read it at all and you will not feel a thing.

And the best way to resume everything is by quoting Warren Buffet, who says :

“What the human being is best at doing is interpreting all new information so that their prior conclusions remain intact.”

*The article will be updated with new ideas weekly, so stay around :) *

• Update 0 : Endowment effect
• Update 1 : Confirmation Bias