Hidden Brain Podcast – Follow the Anomalies

Intro

In this episode of the Hidden Brain podcast, titled “Follow the Anomalies,” host Shankar Vedantam explores the power of anomalies in driving scientific invention and understanding human behavior. He delves into the work of Richard Thaler, a behavioral economist, who has spent decades studying the psychology behind our everyday choices. Thaler’s collection of anecdotes, known as “the list,” challenges traditional economic assumptions and sheds light on the hidden logic behind our decisions.

Main Takeaways

Anomalies and Scientific Invention

• Anomalies have been a powerful driver of scientific invention throughout history.
• Paying attention to anomalies can reveal where maps and models of the world are wrong.

Richard Thaler and Behavioral Economics

• Richard Thaler, a behavioral economist, has spent decades studying the psychology of everyday choices.
• Thaler’s interest in anomalies led him to collect anecdotes of people behaving in odd ways, which he found more interesting than traditional economics.
• Thaler’s work focuses on understanding the hidden logic behind our everyday choices, which is often not rooted in rationality.

Deviation from Economic Models

• Economic models of people’s decision-making often ignore self-control and other anomalies, such as the value of sunk costs and context-dependent valuations.
• People may prefer to have choices removed, even if it goes against the principle of more choices always making you better off.

The Sunk Cost Fallacy

• The sunk cost fallacy can lead people to make irrational decisions, such as going to a game despite a snowstorm because they already paid for tickets.
• Thaler’s anecdotes aim to cure people of the sunk cost fallacy.

Psychological Factors and Economic Behavior

• Economics used to ignore psychological factors that influence our choices.
• People are not just economic actors, they care about social norms, relationships, and hierarchies.
• Anomalies in economic behavior are guided by feelings, worries, and biases.

Behavioral Economics and Systematic Bias

• Behavioral economics is a powerful vehicle for understanding human nature and the systematic bias that exists in human behavior.
• Systematic bias exists in human behavior, pointing to underlying patterns.

The Endowment Effect

• The endowment effect is when people demand more to give something up than they would be willing to pay to get it.
• This effect can be seen in economic transactions such as buying and selling a house or a coffee mug.

Mental Accounting and Target Income

• Mental accounting is the idea that we have different mental buckets in our heads.
• A study of taxi drivers in New York City found that they had a target income they wanted to make and would work less on busy days and more on slow days to reach that target.

The NFL Draft and Mispricing Players

• The NFL draft system allows teams to pick new players each year, with the worst teams from the previous year getting to pick first.
• Teams overvalue the first pick in the NFL draft, and the eighth pick is worth half as much as the first pick.
• Mispricing players can cost teams a lot of money, especially since there is a salary cap in the National Football League.

Impact of Richard Thaler’s Work

• Richard Thaler’s work has transformed the way many companies and nations construct models of human behavior.
• Thaler’s research challenges the traditional economic assumption that people always act rationally and in their best interests.
• Thaler’s book, “Nudge,” explores how small changes in the environment can encourage people to make better decisions.
• Thaler’s work on behavioral economics has influenced policy decisions, such as automatic enrollment in retirement savings plans.

Summary

Anomalies and Behavioral Economics

Anomalies have played a crucial role in driving scientific invention throughout history. Richard Thaler, a behavioral economist, has dedicated his career to understanding the hidden logic behind our everyday choices, which often deviate from rationality. Thaler’s collection of anecdotes, known as “the list,” challenges traditional economic models that ignore psychological factors and anomalies such as the sunk cost fallacy. By studying these anomalies, Thaler has transformed the way companies and nations construct models of human behavior, leading to policy changes that encourage positive decision-making.

The Power of Systematic Bias

Thaler’s work in behavioral economics has revealed the existence of systematic bias in human behavior. People’s decisions are influenced by social norms, relationships, and biases, leading to deviations from economic models. The endowment effect, mental accounting, and mispricing players in the NFL draft are examples of how biases impact economic transactions. Thaler’s research highlights the importance of understanding these biases to make more accurate predictions and create effective interventions.

Implications for Decision-Making and Policy

Thaler’s insights have broad implications for decision-making and policy. Recognizing the influence of psychological factors and anomalies can help individuals and organizations make better choices. Small changes in the environment, known as nudges, can encourage positive behaviors by leveraging people’s natural tendencies. Thaler’s work has influenced policy decisions such as automatic enrollment in retirement savings plans, aiming to improve individuals’ long-term financial well-being. By understanding the hidden logic behind our everyday choices, we can navigate the complex world with greater awareness and make decisions that align with our true values and goals.

Conclusion

Richard Thaler’s exploration of anomalies and behavioral economics has revolutionized our understanding of human behavior. By challenging traditional economic assumptions and shedding light on the hidden logic behind our decisions, Thaler has paved the way for more accurate models of human behavior and informed policy decisions. His work reminds us that we are not purely rational beings, but complex individuals influenced by social norms, biases, and psychological factors. By embracing these insights, we can make more informed choices and create environments that nudge us towards better decisions.