Richard H. Thaler — The Winner’s Curse and Going Against the Establishment (with Nick Kokonas)

The 'as if' argument, notably from Milton Friedman, suggests that it doesn't matter if people literally understand complex calculations; as long as their behavior is close enough to maximizing, the models hold. Behavioral economics counters this by showing that ordinary people's behaviors often deviate significantly and systematically from optimal, not just randomly, making 'as if' a poor predictor for real-world situations.

The endowment effect describes how people value something they own more highly than something they don't. In an experiment, people given a coffee mug demanded twice as much to sell it compared to what those without a mug were willing to pay to acquire it, even if they had only owned it for seconds.

Nudges are features in the environment that improve decisions without forcing anyone to do anything. An example is automatic enrollment in 401k plans, where people are pre-enrolled but can opt out, drastically increasing participation compared to requiring active sign-up.

Cognitive biases can be harnessed deliberately. For instance, using a 'commitment device' like prepaying for a gym membership or making a small bet with a friend to show up for exercise—this leverages the aversion to loss or wasted money to promote desired behavior.

Mental accounting is the tendency to categorize money into different 'mental accounts' based on its source or intended use, rather than viewing all money as fungible. This can lead to irrational decisions, like spending a specific windfall on a luxury item while other 'accounts' (like savings) are neglected, or feeling justified in buying expensive gas when a 'gas budget' is 'overflowing' during a crisis.

The sunk cost fallacy occurs when people continue to invest in something (time, money, effort) because of what they've already invested, even if continuing is not the rational choice. An example is eating an unwanted dessert because you paid for it, or going to a hated movie because tickets were purchased.

Early behavioral economics challenged traditional theories by collecting lists of 'anomalies' – real-world behaviors that defied rational economic models. Researchers then sought to quantify these behaviors and create rigorous models that accounted for them, moving beyond mere anecdotes to establish a scientific foundation.

Daniel Kahneman, a Nobel laureate psychologist and mentor to Richard Thaler, was crucial in establishing behavioral economics through his work (often with Amos Tversky) on systematic biases in human judgment and decision-making. His identification of predictable errors in human cognition helped explain why economic 'agents' don't behave rationally.

Richard Thaler's strategy of 'corrupting the youth' involved creating summer camps and accessible academic journals (like the Journal of Economic Perspectives) to introduce behavioral economics concepts to young graduate students. This fostered a new generation of economists who built upon these ideas, leading to broader acceptance and integration into the field.

The 'replication crisis' refers to concerns that many published psychological findings cannot be reliably reproduced. In updating 'The Winner's Curse', Thaler and his co-author Alex Eremis rigorously re-evaluated old experiments and anomalies to ensure they still hold up 'out of sample' and are true in the real world.

Unlike most academic journals, the Journal of Economic Perspectives is freely available online and features articles written in an accessible style for any economist, grad student, or advanced undergrad. It often includes symposia on specific topics, making complex economic ideas understandable.