Chapter 117 Chapter 9 When Psychology Meets Economics

Why does Cornell University have a bad reputation for a high student suicide rate when its actual suicide rate is clearly far below the national university average? Why do real estate agents often show clients two almost identical houses, but one is cheaper and better than the other? Why is Victoria's Secret offering multi-million dollar diamond-encrusted bras when no one ever buys them? Why do some brands of ice cream only sell small portions, while others only sell large portions? Why are hotels in host cities completely unavailable on Super Bowl weekend? Why are more and more companies outsourcing security work?

Why is it that people are often willing to return the cashier's extra change, but if an item is not charged, few people return it? Why would a New Jersey telecom company reward employees with a free BMW instead of cash for a seat? Why are so many people still not wearing shoes that use Velcro? Why do women's clothing sold in the United States indicate the size according to the label size, while men's clothing directly uses the measured size? Why do most department stores put men's clothing on the lower floors and women's clothing on the upper floors? Why do baseball coaches wear uniforms?

Why are supermarkets aggressively promoting prescription drugs from in-store pharmacies? Why does humility sometimes lead to reduced efficiency on a one-way bridge? Economists often assume that people are rational and, in a narrow sense, selfish, but the emerging behavioral economics challenges such assumptions.For example, we leave tips even at restaurants we’ll never return to, and our decisions are often influenced by irrelevant information. Most of the foundational works of behavioral economics were completed by two psychologists in Israel, namely Daniel.Kahneman (Daniel Kahneman) and the late Amos.Amos Tversky.In one experiment, they asked a group of college students to estimate what percentage of African countries were members of the United Nations.Most of the students have no idea, but their task is to come up with a number.The mystery of this experiment is: before asking this question, the experimenter also asked the students to turn the number wheel once, and the turntable will randomly turn out 1︱100 digits.The students clearly understood that this number had no logical connection to the answer to the question.Students who could roll ten or less on the dial gave an average estimate of twenty-five percent, while those who rolled sixty-five or more gave an average estimate of forty-five percent .

Much of the behavioral economics research has focused on these kinds of cognitive errors.The first examples in this chapter show that people sometimes rely on wrong information when making decisions, and other times they draw wrong conclusions from good information.