Friday, May 29, 2015

The Economist who realized how crazy we were

Profile of Richard Thaler from Bloomberg:

...Thaler began to keep a list of things that people did that made a mockery of economic models of rational choice. There was the guy who planned to go to the football game, changed his mind when he saw it was snowing, and then, when he realized he had already bought the ticket, changed his mind again. There was the other guy who refused to pay $10 to have someone mow his lawn but wouldn't accept $20 to mow his neighbor's. There was the woman who drove 10 minutes to a store in order to save $10 on a $45 clock radio but wouldn't drive the same amount of time to save $10 on a $495 television. There were the people Thaler invited over to dinner, to whom he offered, before dinner, a giant bowl of nuts. They ate so many nuts they had no appetite for the far more appealing meal. The next time they came to dinner Thaler didn't offer nuts -- and his guests were happier.

3 comments:

  1. There is a lot of crazy stuff that we do yet we need to be strong enough to face it up and only then we will get any success. I am lucky to be working with OctaFX broker where I get excellent chance of making money due to their superb facilities which includes low spread of 0.2 pips, high leverage up to 1.500 and super smooth trading platform, it will makes my life easier and allows me to get over any crazy stuff from trading!

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  2. ESC. Economics FALL 2015

    We all place a value on everything. What seems crazy to one is perfectly normal to someone else. Consider the woman who drove 10 minutes to save $10 on a $45 clock radio, but wouldn’t travel to save the same $10 on a $495 TV… If one’s time is valued at $25 per hour, a 10 minute drive is worth approximately $4 (Think $25 per hour / 60 minutes = .41 per minute) .. But that same 10 minutes needs to be driven 2x, therefore the savings would be $10 – ($4+$4)= 2.00 in savings. Honestly, I wouldn’t have done it for either because the stress and annoyance at traffic wouldn’t be worth the $2 to me. I’d have to save a lot more than that!

    Investopedia states that economic value is the “worth of a good or service as determined by people’s preferences and tradeoffs they choose to make”. Market value is “the minimum amount a consumer will pay”. This means that the woman must have decided that the 10 minute drive tradeoff didnt provide enough of an economic value, or that the $495 less $10 still did not place the television at her market value.

    Economic Value. Investopedia. http://www.investopedia.com/terms/e/economic-value.asp?optm=sa_v1

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  3. b) This is an interesting post. As I am reading I am thinking that the economic models do not take into account the changing moods of the people in the examples. I thought, perhaps the woman who wouldn’t drive to save the $10 on the television was perhaps tired that day as opposed to the day she saved $10 on the clock radio. The changing moods of the average consumer I would suspect is one of the variables that make predicting market changes so difficult. Additionally, the average consumer is likely not making purchased based on common sense and rationale. The average consumer if likely to make purchases based on mood and other ever changing factors such as the availability of their money when the product is in their line of sight. For example, grocery stores keep “impulse items” at the checkout lanes. The average consumer is probably very impulsive. They are not buying these items based on reason and research. They are buying these items because perhaps they just got their weekly pay check and hey that looks tasty!

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