misbehaving the making of behavioral economics richard h thaler

The endowment effect may also lead us to overprice items we are trying to sell. Not getting the refund means we have spent money we could have otherwise saved. For example, if we buy a new winter coat, only to realize it does not suit us as we hoped it would, we may have trouble returning it for a refund due to the sense of ownership we have over it. This can lead us to spend more on certain items than we had originally intended. This bias describes the phenomena by which we assign greater value to an item when we own it than we would if we did not own it. Thaler in Nudge: Improving Decisions About Health, Wealth, and Happiness “A choice architect has the responsibility for organizing the context in which people make decisions.”

He has since collaborated with Daniel Kahneman and Jack Knetsch to conduct a series of studies to provide empirical evidence in support of the endowment effect’s existence. In his 1980 paper, Thaler provides several examples of where this bias might occur. He developed the endowment effect to explain the irrational behavior often seen in buying and selling. He refers to these as “anomalies” and has dedicated much of his career to explaining them. Early in his career, Thaler noticed several patterns of irrational behavior that did not align with the theories of the time. The assumption was, and often still is, that people consistently make rational decisions, something Thaler feels to be unrealistic. The endowment effect is one example of how Thaler’s work challenges the predominant theories of economics. 2 It is a cognitive bias that significantly impacts our decision-making by leading us to value our possessions more than we would if we did not own them.

Thaler presents the theory behind the endowment effect in “Toward a Positive Theory of Consumer Choice” (1980). ― Richard H Thaler in Misbehaving: The Making of Behavioural Economics The endowment effect – We value items more when they belong to us “Psychologists tell us that in order to learn from experience, two ingredients are necessary: frequent practice and immediate feedback.”

Misbehaving the making of behavioral economics richard h thaler