Unscramble the Essence of "Wrong Behavior"

Richard taylor, winner of the 20 17 Nobel Prize in Economics, is a professor of finance and behavioral science at the University of Chicago and one of the pioneers of behavioral economics theory.

About this book

This book is a representative work in the field of behavioral economics and an academic autobiography of richard taylor. In this book, Sailor presents his thoughts and theoretical contributions in behavioral economics completely, and also tells how he embarked on the research road of behavioral economics and the process from being ignored to being gradually accepted by mainstream economists. It can be said that after reading this book, you will understand behavioral economics.

Core content

The hypothesis of rational broker in traditional economics has great defects, and the interpretation and prediction of reality have been challenged and questioned more and more. Behavioral economics holds that human rationality is limited, and those "irrational" factors neglected by traditional economics are the key to economic decision-making and economic behavior. Endowment effect, mental account and consumption utility are the most important factors.

Wrong Behavior, written by richard taylor, was the winner of the Nobel Prize in Economics in 20 17. This book is a masterpiece of behavioral economics. It will tell you how the traditional hypothesis of rational economic man is overthrown step by step, how behavioral economics is recognized by mainstream economics, and how it helps us make decisions.

Seiler is a professor of finance and behavioral science at the University of Chicago and one of the pioneers of behavioral economics theory. He introduced psychological factors into the analysis of economic decision-making long ago, thinking that human rationality is limited, and all kinds of economic behaviors in human real life are bound to be influenced by various "irrational" factors.

For example, if the two products are both cheap 10 yuan, you may prefer to buy a cheap 10 yuan alarm clock rather than a cheap 10 yuan TV. For a rational economic man, there is no difference between 10 yuan and 10 yuan, but why is there such a difference? Because people will compare the money saved with the price of the goods themselves. If the proportion of money saved is very low, the value of this decision will be relatively low, and we tend to ignore it. For another example, we all think that the phenomenon of "chasing up and killing down" that often appears in the stock market is irrational, but Seiler believes that when people refer to the historical price of stocks, they are always prone to be overly optimistic about stocks with good historical performance and overly pessimistic about stocks with poor performance. This is the true state of human nature, which can be proved by psychological experiments. This is the normal state of the market. In other words, we are not rational.

However, the basic premise of traditional economics is to assume that the participants in economic activities are absolutely rational economic men. Under this basic premise, traditional economics has designed various economic models. However, these models' explanation and prediction of real economic activities have been questioned and challenged more and more, and they can't even explain many abnormal phenomena in life.

Behavioral economics is to pay attention to those factors that traditional economics seldom pays attention to, such as human behavior, cognition, emotions, psychological effects, personality traits, even prejudices and mistakes, and how they affect the economic decisions of individuals and groups, thus affecting the entire economic system. This is also the hottest branch of economics in recent years.

The book Wrong Behavior is a masterpiece in the field of behavioral economics, and it can also be regarded as richard taylor's academic autobiography. In this book, on the one hand, Sylar tells his thoughts and theoretical contributions in behavioral economics, on the other hand, he tells how he embarked on the research road of behavioral economics, and the process of behavioral economics from being ignored to being gradually accepted by mainstream economists. It can be said that after reading this book, you will understand a large part of behavioral economics.

Well, I have extracted three key contents from this book, which are also the essence of behavioral economics. The first point is why the assumption of rational economic man in traditional economics is flawed. The second point is, what is the endowment effect and what impact it will have on economic decision-making. This was first put forward by richard taylor, the main research achievement that helped him win the Nobel Prize, and one of the core theories of behavioral economics. The third point is how mental account and consumption utility affect your consumption decision.

first part

Let's first look at the first key content, why the assumption of rational economic man in traditional economics is flawed.

With the development of traditional economics, the system becomes more and more huge and complex, and various models emerge one after another. But behind all this, there is actually a very simple assumption, that is, the hypothesis of rational economic man.

Specifically, traditional economists assume that participants in various economic activities are not real ordinary people, but virtual and completely rational economic people. What are the characteristics of this rational economic man? Is to know clearly what you like, and you know how to get the most desired result according to your own preferences. Just like giving you 100 yuan to go shopping in the supermarket, you have the ability to find the most satisfactory shopping combination every time. In short, rational economic men always follow the principle of optimization when making choices.

The hypothesis of rational economic man is actually just for the convenience of research at first, just like physicists study mechanics and assume an ideal state without any interference. However, because it is so convenient to use, the more traditional economists use it, the more addicted they become, and they have a huge dependence on it, even superstition. From the supply-demand curve in western economics textbooks to the dazzling capital market model on Wall Street, a lot of traditional economic achievements we can see today are based on the hypothesis of rational economic man.

However, more and more people begin to question it, because people find that the model based on this assumption, although it looks scientific and rigorous in form, is often unable to explain the economic phenomena in real life, let alone predict the economic operation and market trend.

For example, in June 1987 65438+1October19, there was no war, no terrorist attack, no central bank declared bankruptcy and no substantial negative news. However, the global stock market plummeted by more than 20%, the technology stock bubble burst, and the real estate bubble burst, which eventually triggered the global economic crisis. Economists were dumbfounded. No one has ever seen such a situation. Their handy theories and models are useless. Investors all over the world rushed to sell stocks in panic. It stands to reason that if you are a rational economic man, the fundamentals of the global economy have not deteriorated substantially at that time, and the stock market will still pick up after the plunge. At this time, it should be a calm position to buy. However, in the rapid decline of the market, few investors can remain rational, and most people just follow the crowd in panic. This situation will be repeated in every economic crisis. In this case, can you still believe that the market is full of rational economic people? Can we make economic decisions on the basis of rational economic man?

It is precisely because of the defects in the hypothesis of rational economic man that it is difficult to explain many phenomena in real economic life, which has aroused more and more doubts and criticisms. Among many criticisms, behavioral economics is the most powerful.

Behavioral economics criticizes the hypothesis of rational economic man in three steps:

In the first step, behavioral economics introduces psychological research results to prove that people's perception, memory, judgment and decision-making are determined by our brain and nervous system, and everyone's brain and nervous system are not perfect. So human beings can't be completely rational.

The second step, traditional economists who advocate the hypothesis of rational economic man, in the face of doubts and challenges, the most common routine is to use "mistakes" to explain. They also admit that in real life, there is no rational economic man capable of making completely rational economic decisions. But they insist that through repeated study and decision-making practice, you can get closer to rationality.

Behavioral economics also admits that learning and practice are useful, but people's time and energy are always limited, and any learning needs costs. Maybe you can really gain something by studying, but maybe you have spent your whole life, and your ability to choose and make decisions on some issues is far from the rationality required by the hypothesis of rational economic man.

This problem is particularly serious in decision-making involving major events. Because great events don't happen often, you have no chance to improve your "rationality" level through repeated study and practice. For example, for daily events, such as deciding what to eat for lunch, do it every day. You must decide what to buy in the supermarket every week. In such a choice, you do have the opportunity to keep learning and accumulate experience. However, for normal people, there are not many opportunities to repeat learning in life, but these important things require you to make rational decisions. At the same time, because there are few opportunities for study and practice, when you face these major problems, you are more irrational than the daily repeated decision-making behaviors such as buying lunch and fruit.

In addition, behavioral economics reminds you that people's rationality is also greatly limited by their own abilities. People's ability is limited, and it is impossible to exert their ability to the extreme in the face of any decision. Take supermarket shopping as an example. You go to the supermarket to buy daily necessities with 100 yuan. According to the hypothesis of rational economic man, you should be able to find a perfect shopping combination with rationality. However, the reality you encounter is whether to buy food or detergent first, whether to buy washing powder or liquid detergent, and which brand of liquid detergent to buy ... Every decision is difficult, and the final decision may be just an instant impulse and intuition. Rational? Preference? Maximize utility? How do economists pat their heads?

Many choices and decisions in economic life are hundreds of times more complicated than those in supermarkets. In this case, how to maintain confidence in the hypothesis of rational economic man? Behavioral economics believes that many times, due to the limitation of time and ability, what really guides people to make decisions is not so-called absolute rationality, but simple empirical judgment, that is, your seemingly irrational intuition.

The third step for behavioral economics to criticize the hypothesis of rational economics is to point out an important fact. The concept of rationality is also problematic, and there is a lack of standards in many cases.

Imagine a family getting extra income 1000 yuan. What will happen to their consumption?

According to Keynes, when household income increases, it will be used for consumption according to a certain proportion, which is the so-called "marginal propensity to consume". If this family with extra income has a marginal propensity to consume of 95%, it means that after they get 1000 yuan, they will spend in 950 yuan. How to spend this 950 yuan?

Milton friedman, an economist, has a persistent income hypothesis that when families get extra income, they will not spend it all that year, but distribute the increased consumption equally in the next few years. He thinks they will generally consider the situation in the next three years. Therefore, in this example, families will distribute the extra consumption quota of 950 yuan equally in the next three years. Another economist also put forward the life cycle hypothesis, arguing that people will not only consider the next few years, but also consider the income and consumption of a lifetime. So this family will distribute 950 yuan equally in the next few decades.

that this is not the important question. The model of an economist at Harvard University points out that people will not only care about their own life, but also care about the future life of future generations. Therefore, this family should not only consider themselves, but also consider future generations when distributing. This 950 yuan can't just send flowers to himself, but also share them with future generations.

If you think about it carefully, all the theories mentioned above seem to have a premise, that is, rational economic man assumes that decision makers are rational in the view of every economist, but do you find any problems? What is rationality? Is it rational to spend the money in three years or leave it to future generations? It is difficult for rationality to have a definite standard, otherwise there will always be stronger and more advanced rationality above rationality. There is no end to rationality, and the absolute rationality possessed by rational economic man does not exist at all.

Well, what I told you above is the first key content, which is the criticism of behavioral economics on the hypothesis of rational economic man, and it is also a powerful challenge of behavioral economics to traditional economics. Traditional economics does not consider all kinds of complex factors of human behavior, but behavioral economics believes that those irrational and imperfect behaviors of people are sometimes the key factors of economic choice and decision-making. In richard taylor's view, the most important thing is the endowment effect.

the second part

Next, let's talk about the second key content, what is the endowment effect and what impact it will have on economic decision-making. It is particularly worth mentioning that the main achievement that helped Sailor win the 20 17 Nobel Prize in Economics was his theory of endowment effect.

The concept of endowment effect was first put forward by Sylar in 1980. It means that once a person owns an item, he will feel that the value of this item is particularly great, much greater than before. Sailor believes that due to the existence of endowment effect, people's balance of "interests" in the decision-making process is not balanced, and the consideration of "seeking advantages and avoiding disadvantages" is far greater than "seeking advantages". It is easy to understand that the pain of losing 100 yuan is far greater than the happiness of finding 100 yuan.

The psychological basis of endowment effect is that your judgment of commodity value is not rational enough. From the point of view of rational economic man, there is no difference between 100 yuan in wallet and 100 yuan on the ground. However, with 100 yuan in your wallet, you may have made a plan for it, it has something to do with your life, and you may have poured some emotions into it. For example, you are going to use this 100 yuan to buy a bunch of flowers for your lover. If you lose this 100 yuan, it not only means a loss of money, but also an emotional frustration. The 100 yuan on the ground has nothing to do with your life and mood, but a cold windfall. It is not difficult to understand that the utility loss of throwing 100 yuan cannot be compared with the utility increase of picking 100 yuan.

Sailor's contribution is that he first put forward the concept of endowment effect in the field of economics. He also referred to modern psychological methods and proved that the endowment effect does exist in real economic activities through well-designed experiments.

For example, in the classic mug experiment, the researchers randomly assigned 1 1 mug to 22 students who participated in the experiment, and then organized the students to trade freely. Each mug can be traded at most once. Ideally, at most 1 1 transactions can be completed in each round. However, after four consecutive rounds of experiments, only 2.25 transactions were completed in each round.

Why are there so few transactions? Sailor found that the crux of the problem lies in the huge gap between sellers and buyers' psychological evaluation of mugs. The seller who already owns the mug has a median valuation of $5.25, while the buyer without the mug has a median valuation of only $2.25.

This experiment has been done for several rounds, and each round has been redistributed, and the results are similar. It seems that the key to this difference is that students think that mugs are more valuable after they have them. This is the endowment effect. This is people's psychological inertia, a part of true human nature, and a factor that should not be ignored in economic research and decision-making.

More importantly, Seiler's in-depth research points out the influence of endowment effect on economic activities and how to improve our economic decision-making with full consideration of endowment effect.

For example, let's look at the influence of endowment effect on personal economic decision-making. Suppose you get two job opportunities, other conditions are basically the same, the only difference is that the salary of job A is 1000 yuan per month, but the vacation time is two days less. Work B is just the opposite. The monthly salary 1000 yuan is less, but the holiday is two days longer. If you get the employment notice of job A first and are ready to accept the job, it will be more difficult for job B to call you again at this time to change your decision. Because for you, the extra salary of 1000 yuan from work A is already something you have. Your evaluation of its utility will add extra value. or vice versa, Dallas to the auditorium If you accept job B first, you will also refuse the notice of job A. This decision does not conform to the routine of rational economic man, but it reflects the endowment effect. It enlightens us that in the face of some occasions that need to influence others' decision-making, we should make our trading conditions bring psychological expectations to others, and sometimes it can bring great advantages.

The endowment effect also has a more macro application. There is a very famous viewpoint in traditional economics, which is called Coase theorem. What it says is that for an economy, as long as the property rights are clear and the transaction costs are zero or small, no matter who the property rights are given, the benefits can be maximized through market transactions. For example, suppose a country is distributing property rights, giving mines to Zhang San, who is good at fishing, and giving fishing grounds to Li Si, who is good at mining. It seems very inefficient. It doesn't matter. According to Coase theorem, as long as the transaction cost is low enough, Zhang San and Li Si can always find a balanced price acceptable to both sides and complete the exchange. Zhang sanguan fishing ground, Li siguan mine, profit maximization.

However, considering the existence of endowment effect, will things be so simple? Obviously not. Because of the endowment effect, although Zhang San is not good at mining, he still feels that his mine is very valuable, and the fishing ground he didn't get is worthless. Li Si is just the opposite. There is a huge difference in the valuations of the two people, and this seemingly beautiful transaction is likely to never be completed. This situation, the ideal state described by Bekos's theorem, is closer to reality.

What does this example tell us? Obviously, on the issue of property rights distribution, the government can't be lazy, and can't think that everything will be fine if property rights are clear and transaction costs are reduced. The initial distribution of property rights is also crucial. Because under the influence of endowment effect, the initial state may be difficult to improve through market regulation. If it is bad and inefficient at first, it is likely to be inefficient in the end. On second thought, this example also tells us that we can't be superstitious about the market, and we can't trust the market's ability to adjust the allocation of resources too much, just as you can't be superstitious about the rationality of economic people.

What I told you above is the second key content. What is the endowment effect and what impact it will have on economic decision-making. This effect is an irrational "prejudice" to the hypothesis of rational economic man. But it is the core concept of behavioral economics and an important weapon for behavioral economics to explain real economic activities.

the third part

Behavioral economics has many weapons. Among them, Sylar used two famous weapons to explain personal consumption behavior, one is called psychological account, and the other is called transaction utility. These two concepts were first put forward by him, and they are also an important part of his Nobel Prize. Next, I want to talk about the third important content, how psychological accounts and transaction effectiveness affect your consumption decision.

Let's talk about psychological accounts first. Sailor believes that when people make consumption decisions, they will classify money in their hearts, just like setting up a small account in their hearts. Classification is sometimes based on the source of money, sometimes on the purpose and other factors. Then when making a consumption decision, you will first calculate the cost in each small account and evaluate whether the transaction is worthwhile.

Sailor tells such an experiment in the book. Imagine that you are going to a concert in the evening, and the ticket price is 200 yuan. You need to buy a ticket on the spot when you arrive. I lost a phone card when I was about to leave, which was also 200 yuan. Will you go to the concert as planned? According to the questionnaire survey, most people will still go.

What if things change a little? Before you left, what you lost was not the phone card, but the 200 yuan money you bought in your pocket. Will you continue your trip? Most people choose to give up the concert.

For a rational economic man, no matter what he loses is the phone card or the money for buying a ticket, he loses 200 yuan. There is no difference and it should not produce different results. But for ordinary people, losing a calling card is another psychological account, which has nothing to do with the decision to buy concert tickets; But if you lose the money for the ticket, the loss will be credited to the psychological account belonging to the concert. If you overpay 200 yuan for a ticket, it looks like an overpayment to 400 yuan, and the result of the decision will naturally be different. This is the power of mental accounts.

Let's talk about the validity of the transaction first, which is also Sailor's original idea. In other words, every consumer will compare the price of goods with the expected reference price in his mind. If the price is much lower than your heart's price, you will find the deal worthwhile and attractive enough. Suppose this transaction is efficient.

Many times, this rational economic man does not pay attention to the transaction effectiveness, but it is the decisive factor of transaction and price. For example, on a hot summer day, you are on the beach, expecting a cold beer. At this time, your partner can bring you back a bottle of beer. There are two beer shops near the beach, one is a shabby shop and the other is a high-end resort hotel. The beer served in the two places is exactly the same, and because you take the beer out to drink, it doesn't matter to you what the environment of the place where you sell the wine is. However, if beer is bought from a high-end resort hotel, the price you can accept will be higher, much higher than that of a shabby shop.

The experiment also proves this point. The median price people are willing to pay for beer in resort hotels is $7.25. If beer comes from shabby shops, they are only willing to pay $4./kloc-0.

There is no difference in beer, but the source of beer is different, which leads to a great difference in your expected reference price. In the case of the same transaction price, the beer in the resort hotel will bring you greater transaction effectiveness, so you are more willing to accept higher prices, which is the magic of transaction effectiveness.

Transaction utility can explain many economic phenomena and has a very wide range of applications. For example, businesses will try their best to influence consumers' psychology and raise the reference price in consumers' minds. For example, on the price tag of a product, the so-called market reference price is marked significantly higher. Even though most people know that this reference price is unreliable, it can still have an impact on consumers' psychology. There is another common example. When adjusting commodity prices, more discounts are adopted, rather than direct price reduction. Because, in the case of discount, the so-called original price is likely to be automatically converted into the reference price in the minds of consumers, so that you will get great trading utility between the difference between the reference price and the actual price. Although in the final analysis, it is only a psychological effect, even an irrational and preconceived "prejudice", it does affect many people's consumption decisions.

abstract

Speaking of which, the content of this book is almost finished. Here is a brief summary of what I have shared with you.

First of all, we use the theory of behavioral economics to criticize the hypothesis of rational economic man in traditional economics. Because people's time, energy and ability are limited, it is limited to improve the effectiveness of rationality through continuous learning and accumulation of experience, and the standard of rationality itself is also problematic. Therefore, the hypothesis of rational economic man in traditional economics has great defects. The main body in economic activities is not rational economic man, but ordinary people affected by various emotions and even prejudices.

Then, we talked about endowment effect. According to this effect, after you own an item, you will have a higher evaluation of it. This effect seems irrational, and even can be regarded as a kind of prejudice, but it comes from the instinct that human beings "seek advantages and avoid disadvantages" is higher than "seek advantages". This is the core concept of behavioral economics theory, which has an important influence on various economic decisions.

Finally, we discussed the psychological account and the validity of the transaction. Among them, the psychological account effect allows you to decompose the income and expenditure of money into separate small accounts, and the transaction effect allows you to compare the price of goods with the expected reference price in your mind. These two factors are also ignored by rational economic people, but they have a great influence on your consumption decision.

It is worth mentioning that the book Wrong Behavior not only introduces the important concepts and viewpoints of behavioral economics, but also clearly combs the development of behavioral economics from the perspective of richard taylor's personal research career.

The germination of behavioral economics can be traced back to 1950s, when people found that the rational economic man hypothesis in traditional economics could not explain more and more "abnormal" phenomena. Seiler's personal research is also based on these "abnormal phenomena". However, behavioral economics was not taken seriously at first, and it didn't formally grow into an important branch of economics until 1970s and 1980s. At that time, economists represented by Seiler formally introduced social science methods such as psychology, and successively put forward important viewpoints such as prospect theory, endowment effect, mental account and transaction utility, which gradually promoted the systematization of behavioral economics theory. Since 1980s, Sailor began to pay attention to the application of behavioral economics theories and methods in financial markets, and launched a boosting plan in 1990s, arguing that people's economic decision-making can be improved by actively exerting moderate influence on the basis of the research results of behavioral economics. For example, he put forward a boosting scheme of "saving more for tomorrow". The company provides employees with a pension plan, and the contracted employees automatically increase the pension savings rate when their wages increase, so as to promote employees to save their pensions.

Since the 20th century, behavioral economics has launched a comprehensive "counterattack" against traditional economics. In recent years, the Nobel Prize in Economics has been awarded to behavioral economists three times, namely Daniel Kahneman in 2002, Robert Shiller in 20 13 and richard taylor in 20 17.

Why can behavioral economics achieve counterattack? On the one hand, this is the result of the gradual maturity of behavioral economics itself, and on the other hand, the traditional economic theory system has been questioned and challenged more and more. Especially when the world financial crisis broke out in 2008, the hypothesis of rational economic man, the basis of traditional economics, was completely ineffective and discredited, and behavioral economics attacked on a large scale.

However, economist Liang commented that behavioral economics is not a denial of mainstream economics, but a sublation: it is to abandon the bad side and carry forward the good side. On the one hand, behavioral economics makes up for the shortcomings of mainstream economics and corrects the mistakes of mainstream economics. On the other hand, many concepts and analytical methods used in behavioral economics still come from mainstream economics. Behavioral economics can't replace mainstream economics, but this branch of discipline can make economics closer to reality and help us make better decisions.