The primary reason for adding humans to economic theories is to improve the accuracy of the predictions made with those theories.

Beliefs upon which people make their choices are not unbiased.īehavioral economics: Economics done with strong injections of good psychology + other social sciences.

Optimization problems that people confront are often too hard for them to solve.

Misbehaving - Behavior that is inconsistent with the idealized model of behavior that is at the heart of what we call economic theory.Įconomic theory is mostly flawed for two reasons:.Or is it? The two companies may be privy to your reasoning – because they can simulate it from experience and perspective taking, and are therefore willing to pay (WTP) more (less) if there is a (no) profit. If these predictions of others’ reservation prices are accurate, then your willingness to accept (WTA) different pay is not irrational. Yet, you would presumably charge the NFP less because you expect their reservation price (the highest amount they are willing to pay) to be lower than the reservation price of the profit company. If in Thaler’s beach story the consumption utility is the same, here the disutility of having to do the work is the same. This would be so, although Thaler’s condition of equality is satisfied. Will you charge a different rate? Intuition and limited experience say that you would expect less pay from the latter than from the former. Suppose you have professional services to offer, such as legal advice or IT expertise, and you can sell it to a for-profit business and to a NFP business. Imagine you are a seller – not the would-be buyer in Thaler’s beer tale.

Thaler gives several examples, and here is his most famous one, quoted in full: Assessment of the good- or badness of a deal requires comparisons. Richard Thaler (1983) introduced the concept of transaction utility to account for that part of a good’s total utility that comes from your impression that its acquisition is a good (or bad) deal. Folk psychology is familiar with the idea of the good deal, or the perception thereof. If, for example, you perceive a product or an experience to be in short supply, you may be willing to pay more for it, and you may indeed enjoy its consumption more. Utility means ‘use,’ or ‘pleasure,’ or ‘ happiness.’ On the one hand, utility is a personal construct on the other hand, it is a term that is affected by social forces, or rather your perception of them. What's a cynic? A man who knows the price of everything and the value of nothing.Īccording to standard economic thinking, you should pay for a good or an experience according to the utility that you get out of it.

Richard thaler's misbehaving