2017 Nobel-winning economist uncovered a lot of quirky human behavior

From saving to the urinal fly, Nobel-winning economist uncovered a lot of quirky human behavior

By Thomas Franck
October 10, 2017

Behavioral economist Richard Thaler won the 2017 Nobel Prize in Economics Monday amid an impressive career spent working to uncover how humans are not always rational beings. Along the way, he discovered many quirky things about how we live our lives.

Critical to Thaler's work is the idea of the "nudge," or small nonmandated suggestions people or businesses can make to dramatically affect future behavior by individuals.

CNBC tracked down a few of Thaler's most famous experiments and conclusions about human behavior.
* People value something more if it's theirs
* Drawing a fly in a urinal reduced bathroom cleaning costs
* Cheapest place to buy plywood? Home Depot before a hurricane
* People want to save, just not RIGHT NOW
* NFL teams overpay for top draft picks

More details in https://www.cnbc.com/2017/10/09/lessons-...haler.html

Human beings are mostly rational, their actions only appear to be irrational because many don't deliberate before they act (rash decisions), or they don't have sufficient information/knowledge (who then rely on heuristics) to make a wise decision.

Effort and information are what separates the plebs from people like Buffet.

(10-10-2017, 05:24 PM)lilvestor Wrote: Human beings are mostly rational, their actions only appear to be irrational because many don't deliberate before they act (rash decisions), or they don't have sufficient information/knowledge (who then rely on heuristics) to make a wise decision.

Effort and information are what separates the plebs from people like Buffet.

If you read some of the earlier economics Nobel prize winner that specialize in the same field like Daniel Kahneman, and then look at yourself (myself) - you (one) will realize that human being are mostly irrational as been the norm. The mostly rational human being only appears in economics textbooks, because they contain enough mathematical equations and are logically sound.

If "deliberation" is the key, then we wouldn't spend more effort deliberating on a car/iphone or any other high end/high tech toy (fill in the blanks?), compared to our financial well-being/retirement planning. We could be deliberating intensely, but about the wrong things.

If only sufficient information/knowledge is required to make a wise decision, why do some people get even more convinced when they use forums/blogs to present/read/debate their stance, or go to seminars to present their opinions - and the best thing is - when they meet dissenting views, they mostly end up with even higher conviction that they are right, and others are wrong.

In equity markets, when prices rise --> why do more buyers come in and buy? When it gets more expensive, it attracts more people. From rational human being, increase price reduces demand, but the converse is always true? (It works similarly on the way down - low prices should increase demand, but it always reduces aggregate demand). The only time market acts rationally - (1) Prices are so high that supply overwhelms demand to call the end of the bull, and (2) prices drop so low that demand overwhelms supply to call the end of the bear market.

(10-10-2017, 11:07 PM)weijian Wrote:

(10-10-2017, 05:24 PM)lilvestor Wrote: Human beings are mostly rational, their actions only appear to be irrational because many don't deliberate before they act (rash decisions), or they don't have sufficient information/knowledge (who then rely on heuristics) to make a wise decision.

Effort and information are what separates the plebs from people like Buffet.

If you read some of the earlier economics Nobel prize winner that specialize in the same field like Daniel Kahneman, and then look at yourself (myself) - you (one) will realize that human being are mostly irrational as been the norm. The mostly rational human being only appears in economics textbooks, because they contain enough mathematical equations and are logically sound.

If "deliberation" is the key, then we wouldn't spend more effort deliberating on a car/iphone or any other high end/high tech toy (fill in the blanks?), compared to our financial well-being/retirement planning. We could be deliberating intensely, but about the wrong things.

If only sufficient information/knowledge is required to make a wise decision, why do some people get even more convinced when they use forums/blogs to present/read/debate their stance, or go to seminars to present their opinions - and the best thing is - when they meet dissenting views, they mostly end up with even higher conviction that they are right, and others are wrong.

In equity markets, when prices rise --> why do more buyers come in and buy? When it gets more expensive, it attracts more people. From rational human being, increase price reduces demand, but the converse is always true? (It works similarly on the way down - low prices should increase demand, but it always reduces aggregate demand). The only time market acts rationally - (1) Prices are so high that supply overwhelms demand to call the end of the bull, and (2) prices drop so low that demand overwhelms supply to call the end of the bear market.

In local terms is called KIASU during bull market so must follow and buy buy buy. 

Followed by KIASI during bear market so sell sell sell. 

To make $$ just be opposite loh. When everyone KIASU you KIASI. When everyone KIASI you have to KIASU.

Now STI is 3288, I am a bit KIASI already. ;D

(10-10-2017, 11:07 PM)weijian Wrote:

(10-10-2017, 05:24 PM)lilvestor Wrote: Human beings are mostly rational, their actions only appear to be irrational because many don't deliberate before they act (rash decisions), or they don't have sufficient information/knowledge (who then rely on heuristics) to make a wise decision.

Effort and information are what separates the plebs from people like Buffet.

If you read some of the earlier economics Nobel prize winner that specialize in the same field like Daniel Kahneman, and then look at yourself (myself) - you (one) will realize that human being are mostly irrational as been the norm. The mostly rational human being only appears in economics textbooks, because they contain enough mathematical equations and are logically sound.

If "deliberation" is the key, then we wouldn't spend more effort deliberating on a car/iphone or any other high end/high tech toy (fill in the blanks?), compared to our financial well-being/retirement planning. We could be deliberating intensely, but about the wrong things.

If only sufficient information/knowledge is required to make a wise decision, why do some people get even more convinced when they use forums/blogs to present/read/debate their stance, or go to seminars to present their opinions - and the best thing is - when they meet dissenting views, they mostly end up with even higher conviction that they are right, and others are wrong.

In equity markets, when prices rise --> why do more buyers come in and buy? When it gets more expensive, it attracts more people. From rational human being, increase price reduces demand, but the converse is always true? (It works similarly on the way down - low prices should increase demand, but it always reduces aggregate demand). The only time market acts rationally - (1) Prices are so high that supply overwhelms demand to call the end of the bull, and (2) prices drop so low that demand overwhelms supply to call the end of the bear market.

The findings from their experiments are not conclusive (just like most experiments that involve human behaviour in controlled groups), other psychologists have performed the exact same experiments but they have had different results, there is certainly no lack of criticism. Economic models are usually built around 2 main assumptions - rationality and perfect knowledge. We know perfect knowledge is impossible in the real world, without which there can be no rational decisions, one cannot make a rational decision if he has flawed information. 

You might be surprised to learn that studies show most people don't even read the financial statements of the company they are investing in, if this isn't evidence that most people don't put in enough effort in the things that matter (they are lazy), I don't know what is. There is nothing irrational about people spending more time deliberating on what toy to get rather than spending that same time reading financial statements, the former is fun/exciting, the latter is dull and often confusing. 

"Sufficient" information isn't the same thing as perfect information. Corporate insiders are the only people with perfect information, everyone else is merely gambling (and the odds are poor because the overwhelming majority of market participants fail to beat the market in the long run). Of course, other than fund managers most people do not know that the odds are not good, so they continue to gamble.

Stocks are assets (investment), they are not commodities or consumer goods so I don't think the theory of demand fits in here. For everything else we see markets moving back into equilibrium after price spikes (due to short term speculation) without a corresponding increase in demand, oil is a very good example of this.

Just saying that in this internet age, sufficient information is out there, the problem is filtering and effort. People always say once it is in the internet it is always there... I find that not to be totally true cause info that I want that is 10-20 years ago can't be readily be found unless they are "trending info". To me that is the reason why fake news thrives because they are conveniently available.

Personally I find that the most searched in UK google a day after Brexit vote was "What is the EU" is educational, perplexing and horrifying at the same time, and also relevant to our topic here.

* Drawing a fly in a urinal reduced bathroom cleaning costs

I can totally understand this. Not sure if it has anything to do with being rational or not but certainly having this mischievous (albeit cruel?) thinking.

sub-consciously cruel?

(11-10-2017, 10:23 AM)lilvestor Wrote: The findings from their experiments are not conclusive (just like most experiments that involve human behaviour in controlled groups), other psychologists have performed the exact same experiments but they have had different results, there is certainly no lack of criticism. Economic models are usually built around 2 main assumptions - rationality and perfect knowledge. We know perfect knowledge is impossible in the real world, without which there can be no rational decisions, one cannot make a rational decision if he has flawed information. 

You might be surprised to learn that studies show most people don't even read the financial statements of the company they are investing in, if this isn't evidence that most people don't put in enough effort in the things that matter (they are lazy), I don't know what is. There is nothing irrational about people spending more time deliberating on what toy to get rather than spending that same time reading financial statements, the former is fun/exciting, the latter is dull and often confusing. 

"Sufficient" information isn't the same thing as perfect information. Corporate insiders are the only people with perfect information, everyone else is merely gambling (and the odds are poor because the overwhelming majority of market participants fail to beat the market in the long run). Of course, other than fund managers most people do not know that the odds are not good, so they continue to gamble.

Stocks are assets (investment), they are not commodities or consumer goods so I don't think the theory of demand fits in here. For everything else we see markets moving back into equilibrium after price spikes (due to short term speculation) without a corresponding increase in demand, oil is a very good example of this.

I do not wish to dwell more into your basis on "one cannot make a rational decision if he has flawed information" as it seems like you have great conviction in it - An online argument goes nowhere with the "backfire effect".

https://rationalwiki.org/wiki/Backfire_effect

Just 3 comments:
- To you, it seems like having excess time and using it to "choosing a tech toy for fun/excitement" to get a best deal over "reading financial statements" that can increase your odds of making more money is in fact rational. Read more about behavorial finance, this isn't rational behavior.
- If "corporate insiders are the only people with perfect information", why do they (as a group) tend to buy back their stock when they are at the highest and issue deeply discounted stock when they are at multiple year lows? (i am not even talking about business acumen, but simply their asset allocation decision making based on their "perfect information")
- If you think stocks are not governed by simple supply and demand mechanics, then i guess there is no common ground we can discuss further on this

Here are examples of strictly non-rational behavior that is observed in real life. You will still get this behavior even with "perfect information".

1. Maintaining a credit card debit balance which costs you 12%, even when you have a savings account that gives you 0.25%. ("Mental accounting").

2. Selling winners too soon. Holding on to losers too long. (from "Prospect Theory" or aka loss aversion and risk aversion respectively).

3. Throwing good money after bad especially if the loser is well below water. (Sunk cost fallacy).

4. Believing that a sequence of high daily returns will increase the chances of a reversion to a mean. (representativeness).

5. Believing that a sequence of high daily returns means the next return must also be high (availability)

6. Buying flood insurance immediately after you got hit with a flood (availability/saliency). Canceling flood insurance after years of no claim (loss aversion).

7. Purchasing expensive car or travel insurance which is bundled with your car rental or air fare purchase (saliency).

8. Making Eldershield a "opt-in" by default, requiring an active choice for consumer to opt out (choice architecture. Menu effects. Default option). Ditto with organ donation (explain why some countries have very high "Organ donation" opt in rates).

9. Retirees in the US with pensions (defined benefit plans) are approximately richer than retirees with with defined contribution plans (IRA). The difference is about the amount of pension.

10. Once enrolled into a defined contribution plan at 3%, almost never change the percentage. Once enrolled in a investment plan with a 50-50 equity-bond mix, almost never change the mix (rebalance). (status quo bias).

11. Buying something that is a 20% discount from "list price" but not buying something that is a 20% increase in price even when the net price is the same (framing).

12. Displaying a large expensive television set front and centre and priced at $5000. Display another tv set below that for $3000, which sells (framing, extremeness aversion).



I could go on and on.