The bread and butter of behavioral economics

The Business Of Behavioral Economics You’ve done everything—endured diets, purged your freezer of Ben & Jerry’s, and educated yourself on fat, sugar, and calories. Yet, you can’t manage to lose weight. What’s wrong with you? According to standard economic theory, which gives humans (perhaps too much) credit for making rational choices, those efforts should be enough to change your behavior. If you know the consequences but still get fat, you must want to be overweight. Of course not, say Leslie John and Michael Norton, professors at Harvard Business School specializing in the burgeoning field of behavioral economics. “Standard economic theory … Continue reading The bread and butter of behavioral economics

Are you enthusiastic about predictive shopping?

Shopping Made Psychic As almost everyone knows, we have entered a period in which companies can predict people’s purchases, often with uncanny accuracy. In the near future, they might even use those predictions to enroll you in special programs in which you receive goods and services, and are asked to pay for them, before you have actually chosen them. Call it predictive shopping. Some companies already encourage people to sign up for recurring purchases and deliveries — in a way, an extension of automatic bill payment. An early model is the Book-of-the-Month Club, which dates from 1926. In the modern … Continue reading Are you enthusiastic about predictive shopping?

Is the happiness of pursuit our goal?

Daniel McFadden: Understanding better how people really make choices The way our brains work is key to understanding how consumers really make choices, argues Nobel Laureate Daniel McFadden. Some consumers suffer from “agoraphobia” or a fear of markets according to new research presented by Nobel laureate Daniel McFadden that throws doubt on the classical idea that people are driven by relentless and consistent pursuit of self-interest to maximise their well-being. Professor McFadden entitled his paper The New Science of Pleasure, to purposefully play on a phrase coined by Anglo-Irish political economist Francis Edgeworth some 130 years ago. He told the … Continue reading Is the happiness of pursuit our goal?

Experiences are better than possession

Which makes you happier: anticipating an experience or a purchase? Psychologists have known for some time now that so-called “experiential purchases” (when you spend money to experience something, like a Broadway show or a vacation) make people happier than material purchases (like a couch or car). This may seem somewhat counter-intuitive because experiences always end at some point, whereas material purchases last longer. However, it’s well known that people get used to things that are around them every day, and they soon lose their appreciation for even the most expensive couches and cars. But all that’s after the fact; these … Continue reading Experiences are better than possession

The amazing story of Karfunkel Brothers

The Mitzvah Factory Imagine you and your younger brother are poor Jewish kids in mid-1950s Hungary. Unlike so many, you managed to avoid the Holocaust only to be swept up in a bitter revolt against the cruel Soviet occupation government. The revolt fails, and like tens of thousands of your countrymen you leave your homeland and its bloodshed, and manage to make your way to New York and a new future. Your name is Michael Karfunkel, your younger brother is George and, fast forwarding nearly 60 years, your future is something even Horatio Alger wouldn’t have thought possible. Quiet careers … Continue reading The amazing story of Karfunkel Brothers

Are financial markets flying from reality?

The Psychodynamics of the Stock Market We think of stock market as an indicator of economic activity. But it is also an indicator of the emotions associating with investing, and more broadly with our shared images of the future. If the market signals our collective “greed and fear, these feelings only highlight that our experience of an unknowable future leaves us vulnerable to primitive emotions. This was the basis after all for Allan Greenspan’s, the chair of the Federal Reserve Bank, famous speech in which he worried that the stock market, responding to the dotcom boom of the 1990s, was … Continue reading Are financial markets flying from reality?

Economic forecasts are just guesses

Ever felt that financial forecasters are making it up as they go along? What do you suppose is the most important statistical measure for those in charge of setting economic policy? GDP growth? The inflation rate? Unemployment? Guess again. The figure is the level of slack in the economy, also known as the “output gap”, or “spare capacity”. Presented as a percentage of GDP, it represents the gap between the level of output and the economy’s non-inflationary potential. When the figure is positive the economy can grow strongly without setting off an inflationary spiral. When the figure is negative, the … Continue reading Economic forecasts are just guesses