What are you thinking?
What are you thinking?
Robert J. Shiller
What is behavioral?
Nicholas C. Barberis, Ulrike M.
Malmendier, Shane Frederick, and
Andrew J. Redleaf
Do you need a nudge?
Richard H. Thaler
Can behavioral economics
Are we good at making
James Choi, M. Keith Chen,
What does a choice
inside the brain
What was Polaroid
How faulty assumptions hampered
Sharon M. Oster
Dean and Frederic D. Wolfe Professor of
Management and Entrepreneurship
Associate Dean for Communications
Jonathan T.F. Weisberg
and Judith A. Chevalier email@example.com
74 Does money change your Online Editor
Kathleen D. Vohs
90 Is risk rational? Staff Writer
Andrew W. Lo
Concept and design by 2x4
Office of Communications
Yale School of Management
PO Box 208200
New Haven, CT 06520-8200
Qn, a publication of the Yale School of Management, is
published twice a year under the auspices of the Dean,
Yale School of Management.
Q6 is a magazine of opinion. The views expressed in Q6
are the views of the authors and contributors, and do
not reflect the views of the Yale School of Management.
Q6 was typeset in American Typewriter, DTL Elzevir,
and Swiss fonts.
The greenhouse gas emissions associated with the
production of this magazine have been offset through
the purchase of renewable energy certificates.
Back cover photograph by Richard Mosse
Adjacent photograph by Tony Rinaldo
Interviews for Q6 were conducted from
July through September 2009.
Visit qn.som.yale.edu for updates and ongoing discussion.
Printed on recycled paper.
Cover photograph by Richard Mosse
Q6 2009 Dialog 5
What are you Decades of economic research have
assumed people pursue their goals
thinking? in a rational manner, discounting
the effects of emotion, bias, error,
and other irrational forces. Robert
Shiller argues that economists need
to take a closer look at how people
Robert J. Shiller
Arthur M. Okun Professor of Economics, Yale University
Interview conducted and edited by Jonathan T.F Weisberg
Photograph by Richard Mosse
Q6 2009 Robert J. Shiller 7
What are you thinking?
Q: How important is it to understand what people are thinking and feeling when you
are trying to understand the economy as a whole?
That’s been a controversial question in economics for a long time. Milton
Friedman wrote a collection of essays in 1953 called Essays in Positive
Economics, in which he argued that you shouldn’t try to infer what people
are thinking because people really can’t tell you what they’re thinking. If you
ask people why they did something, they will give you a conventional answer
or mislead you. The idea was that the essence of economics is to look at the
constraints that people have and assume that people are behaving rationally,
subject to those constraints, and interpret economic data as reflecting that
rational behavior. That is the defining characteristic of economics as a
discipline — as opposed to psychology as a discipline — that, in understand-
ing something as massive as the economy, it’s best to look at people’s actions,
not their ostensible reasons. There is some appeal to that. I just wish it
were more right.
I can get enthusiastic talking about this theory because, in some respects,
it is good. To give an example, suppose you are trying to understand the
seasonality of food prices — why they go up in the winter and down in the
summer. Well, it’s pretty obvious that it has something to do with the wea-
ther as a constraint, but you better think it through, because we live in a
global economy, and when it’s winter up here, it’s summer down south.
Obviously they’ll ship food from one hemisphere to another. That puts a limit
on seasonality. This is pure economics, and I’m sure it’s right, because the
seasons occur year after year after year, and you have people whose job is to
ship fruits and vegetables and food around. They’re going to find the best
pattern of shipping, given all the costs. It wouldn’t make a lot of sense to
ignore that. Thinking that people get emotional in the summer, or some-
thing like that, would probably be wrong.
The problem is that positive economics has been carried too far. Part of
the reason is an institutional specialization problem in academia. Academics
have to specialize in some method of research; you can’t know it all. This
positive economics took over, and I think there’s an institutional reason why
it got overemphasized.
Fortunately, there’s a lot of enthusiasm among some people for behavioral
economics now. It’s obvious that there are certain phenomena that don’t
fit into Friedman’s prescription of positive economics, and those include
speculative bubbles, for example. They’re kind of hard to pin down, but they
really are there.
8 Q6 2009 Robert J. Shiller 9
What are you thinking?
Q: Some economists say that the positive approach gets you 99% of the way there There was the beginning of a turnaround in confidence and the market going
and behavioral is about that last 1%. up stimulated people to be more optimistic, and then there is a feedback loop.
The market is not really responding to any information. I’ve argued in books
I’ve heard that before. I’ve written that these are social epidemics. Ideas have a contagion, just like a
disease has a contagion, and a certain idea may spread only because, for some
cultural reason, the contagion rate is high.
Q: Where do you put the number?
I think that the failure to predict this financial crisis had something to do Q: How do you go about making an idea like that into something that’s testable?
with failing to understand behavioral economics. So I don’t think that it’s
99% there. I think it’s kind of the other way around. Positive economics It seems to me that we have to read the whole array of psychological research
is great for explaining the seasonality of fruit and vegetable prices, but and sociological research and try to put it together into a view of the world.
if you want to know why we go through financial crises, I think you need And conventional econometrics plays a role. Another direction is neuro-
behavioral economics. science, which has started to change our ways of thinking.
The problem with science, any science, is that it’s hard to move linearly
forward. You have some breakthrough, and you explore that to the end. And
Q: The disciplinary problem you describe in economics seems to have a very direct then you feel like you’re wasting your time and you have to go back and reflect
effect on economic activities outside of academia. about something different. And it may be very different. It may be some-
thing that’s really off the track that you were on before. And then we gradually
Right. This world now has over six billion people. We couldn’t have grow into an understanding. I think that mathematical models play a role in
sustained this number of people 100 or 200 years ago. In order to sustain this. But they’re not the only thing; they’re just part of the story. I’m thinking
them, we need modern, big business activities going, and the framework for of great breakthroughs in science: Darwin’s theory of evolution — there’s
that is the financial framework. We have to recognize that billions of lives very little mathematics in it, but it’s a very powerful theory. I think behavioral
depend on this. Finance, and economics more broadly, is a technology that economics is a bit like that.
has brought us to a very different world, and it’s a necessary technology now. Economics is describing a very complex phenomenon. You can’t reduce it
to a simple formula. We have to understand that what concerns us about the
economy is a bit psychological and sociological. That’s just reality.
Q: You mentioned speculative bubbles as an example where you might need a
behavioral explanation. Can you explain your thinking behind that?
Q: I imagine that simple models or simple explanations are well received, though.
I think that there was a huge error in overstressing efficient markets. The idea
developed that the stock market was smarter than any individual, because it It’s also a challenge that academia rewards teaching. It’s good that professors
pools the wisdom of all individuals. And so it becomes an oracle. In ancient want to be successful at teaching, of course. But sometimes that leads them to
times, when a snake was found on the steps of the Roman Senate, or something oversimplify. You don’t want to say “on the other hand” too many times in your
like that, it would be considered a hugely important omen and all the wise men lecture, because then it starts to feel unsatisfying. So there is a tendency to want
would be asked to interpret it. Well, we’re doing the same thing with the stock to have some core theory or framework that students will memorize. And it
market. There is this theory that when it moves up, that that’s revealing some has to be iconic. That may be the problem with behavioral economics: there is
information. Even now, for example, the general interpretation of the recovery no simple paradigm. There’s no supply and demand curve or IS-LM model
that we’ve had is that the markets saw some good news coming and that the that is considered the deep insight of the theory. In my new book, Animal Spirits,
stock market, after March 2009, started to react to good information. Later written with George Akerlof, we talk about Keynes’s theory and why it was
information confirmed that we were coming out of this crisis. But I don’t think such a revolution. And we think it was partly because it was early behavioral
that that’s the right interpretation. This is what I think, though I can’t prove it: economics. It recognized some realities that weren’t modeled.
10 Q6 2009 Robert J. Shiller 11
What are you thinking?
that some people are very worried about the future and then they tend to
Q: I wanted to get to some of the specific points in your book. Could you start with behave differently. I think there’s enough evidence that it’s important.
why you chose the term “animal spirits”? We have been producing the Stock Market Confidence Indexes here at
SOM. But the problem with collecting data as a research agenda, by the way,
Well, Akerlof and I thought that the most essential thing that we were saying is that you can do it for 20 years without anyone paying much attention,
was that traditional macroeconomics leaves out something very fundamental. It unless you have enough data that it starts to correlate with historic events. It
leaves out what’s driving people’s changing patterns of thinking. Economists isn’t a very rewarding career strategy to start collecting data and wait 20 years.
like to think that people are rational and that means they never change their
mind about anything. That doesn’t accord with the reality that I know.
So we thought of our book as reflecting a different approach to economics.
Q: How much do those confidence surveys tell you?
“Animal spirits” represents this, at least for people who know what it means.
The term goes back to ancient Rome and the physician Galen, who talked
They give you a snapshot of what people are thinking. It’s fundamental to
about spiritus animalis, meaning the animating spirit that drives people.
my understanding of what has been going on in the stock market and the
And it’s used in one of the most important passages in Keynes’s works. In
housing market, but I don’t try to publish this in scholarly journals. They
that passage, in the General Theory of Employment, Interest, and Money
just don’t respect it. They want to be scientists. That’s good, but in practice
in 1936, he stresses the fundamental lack of knowledge about the future —
it often seems to mean to them that they will not try to figure out what mo-
you just don’t know what’s coming. If people were completely rational, they
tivates people. I think that leaves out a whole world of things that are obvious,
might be paralyzed by the uncertainty. But people have a natural urge to
and have to be studied to be understood.
action. That’s what we mean by animal spirits. They’re going to do some-
For example, Akerlof and I talk about the changes in corruption and bad-
thing. Maybe it’s dangerous, but you’re not going to stay home and just stay
faith behavior. The capitalist economy is forever vulnerable to declines in
in bed all day. Or maybe you would, and that’s an economic depression. A
business ethics. We live in a society with rules, and enforcement of rules that
depression is a period when the animal spirits are beaten down. I remember
attempts to bring people back when they deviate from what we call ethical
reading an article from around 1933 by a psychiatrist and he said that what
behavior. But we rely on their good will. That’s part of animal spirits, that
struck him about the Great Depression was that people were dejected. He
people have a sense of good will and tolerance toward others. It fluctuates
said that they would go home at night — or maybe they’d be home all day
with time. That’s what matters. Look at this financial crisis that we got into
because they couldn’t find a job — and just listen to the radio. He said a
— a big part of it was the emergence of the subprime lending business, which
slave mentality had returned. That’s an extreme form, but more moderate
had somewhat lower standards of business ethics. People didn’t appreciate
variations in our animal spirits are driving the economy.
that that was happening. The mortgage-broker industry was evolving and
We thought that that phenomenon really deserves the central place in
it wasn’t regulated, and so we started to see some processes set in motion
macro theory. And it’s not even mentioned. How can you have a theory that
that would eventually lead to disappointment. And now we’re there. And
doesn’t mention the driving force that makes everything move? It’s like
you won’t find this in a macroeconometric model.
astronomy without gravity.
Q: The idea of fairness is something else you say has been left out. How has that
Q: You see confidence as a major part of animal spirits. We hear the word all the
time, but is it well understood or measured now?
I did a survey comparing economists with the general public. I asked the
Keynes talked about it in the 1930s and lamented that nobody studied it.
same questions of professional economists and the general public, and I
The first people that studied it, as far as I know, were at the University of
found a totally different world view in terms of fairness. Economists don’t
Michigan more than 50 years ago, when they started the Consumer Sentiment
rank fairness as important for their thinking about the economy.
Index. But academic economists have generally ignored it. There’s only been
One of the questions asked how “the effects of general inflation on wages
a little bit of research on it, and I think that it has been encouraging. It’s been
or salary relates to your own experience and your own job.” And Choice 1
shown that consumer confidence at an individual level drives human actions,
12 Q6 2009 Robert J. Shiller 13
What are you thinking?
was, “My employer will see no reason to raise my pay.” Choice 2 was, “Com- and hard work and accumulation. We’ve had many scientific advances in
petition among employers will cause my pay to be bid up.” And Choice 3 history, but they all have a qualitatively different story. I think that the
was, “A sense of fairness and proper behavior will cause my employer to internet and the associated communications revolution was fundamental
raise my pay too.” We found that 60% of the economists tended to pick 2, because it was intrusive in our lives in a new way. Compare it with other
and only 11% of the general public picked that. They thought about their major technological advances, like nuclear power. Right now, the state of
relationship with their employer. Either he was a good person who would Connecticut gets most of its electricity from nuclear power. But that really
raise their wage, or he was just an evil person. That’s a totally different worldview. doesn’t have much psychological impact. In fact, most people don’t even
Keynes talked about how important fairness is. In particular, it is hard know that. The internet and communications revolution led to different
to cut wages in an economic downturn, partly because somebody has to cut stories because it changed what we were doing for a good fraction of our time.
them first. If I get a wage cut and other people don’t, then I’m very upset. More people got computers and spent time searching for something on the
So there’s a coordination problem. If we could all agree at once to cut wages, web. You’d see these new businesses that were populated by young people
it would be easier, but there doesn’t seem to be any such agreement. So you who became millionaires. It made the old story seem worn and outdated. I
end up laying people off. think it encouraged the development of interest in finance and business, and
In times like the Great Depression, when prices were falling, this really encouraged the development of business media outlets, and it ultimately led
inhibited the labor market, and that was part of the reason for the massive to the real estate boom as well.
unemployment then. In the Depression, you can find references to the It is not entirely logical. It’s all about a story. They make a movie about
obvious fact that if employers cut wages, workers could still buy as much, Superman, and then millions want Superman memorabilia around for their
because everything was getting cheaper. But that feeling was limited to an kids. There’s nothing logical about that. It follows the dictates from the story.
enlightened few, and many others were mistrustful and cynical, and assumed
that their employers were trying to take advantage of them.
Truman Bewley, a professor here in economics, wrote a book titled Why
Q: You’re saying that the logic of the story shapes people’s expectations. The
Wages Don’t Fall during a Recession. He interviewed people who set wages and
story of the internet entrepreneur becomes widespread and all of a sudden you
salaries in a company, and it really confirmed Keynes’s story: issues of
have different expectations about what you should be doing next week or next year.
fairness and morale dominated. You don’t want to do something that
disrupts the morale of your labor force.
And then we try to reinvent ourselves along those lines. I was just talking
about Superman. I happened to read that he appears to wear colorful tights.
But Superman was invented in the 1930s, and such tights were not available
Q: Could you explain how stories influence animal spirits? yet, because they hadn’t invented Spandex yet. It was invented in 1959 by
Joseph Shivers at DuPont. So what happened was our inventors invented the
In Animal Spirits, we emphasize the work of Robert Abelson, who wrote sort of clothes, Spandex, that athletes wear now. So the story becomes reality.
with Roger Schank a series of papers about narrative-based thinking. The
idea that they pushed forward was that the human brain has certain built-in
organizational patterns, and one of them is to organize memories around
Q: And athletes tend to look a little like Superman…
stories. We build our lives into a story. And I think that each story evolves
through time, and it ultimately changes our economic behavior — it has to.
Somehow, the story became reality. You see bicycles going by, and the riders
In the boom period of the 1990s, for example, a different story about our
look like Superman out there.
lives developed. It was the internet boom. Why did the boom end up affec-
ting all of the economy, beyond its direct application in technology? I think
it had a big psychological impact because it changed people’s assumptions
about what kind of life they were leading, and it made people worry about
being left out of the story of the time. The boom was associated with stories
about entrepreneurial success, and it pushed aside stories of labor solidarity
14 Q6 2009 Robert J. Shiller 15
What are you thinking?
be good. Sometimes there’s a conflict between different groups. And
Q: How does putting animal spirits in a primary place in your thinking about the sometimes businesspeople don’t like the rules imposed on them. We also have
economy affect your view of the role of government? If the economy functions self-regulatory organizations and self-appointed trade groups and the like that
rationally and well on its own, that seems to lead to one view of what government impose voluntary rules on their members. That is all part of rule making. It’s part
should do… of what makes the economy work.
I think we have to redefine our views. The efficient markets revolution had
a profound impact on people’s thinking. It led people to think that the Q: One criticism I’ve heard is that policymakers are just as flawed and
government is mostly incompetent and a nuisance. This is one of Milton act as irrationally as anyone else.
Friedman’s legacies, as well — that most of the things a government does
are veiled attempts to grab something. In his 1962 book Capitalism and We all make rules for ourselves. I’m going to exercise every day. Or I’m not
Freedom, he talks about licensing. You can’t, for example, be a dentist or going to eat that whole box of chocolates. And we try to enforce that rule
any number of things without being licensed. And that usually means pass- through some psychological mechanism. As soon as children are put together
ing an exam to demonstrate competence. Friedman said that, in fact, on the playground and they’re playing some game, they’ll make rules. And
licensing is just a veil for monopoly power. He gave as an example the licens- they’ll enforce rules. That’s part of human nature. The regulator doesn’t have
ing of barbers, and argued there is no need to license barbers because all to be smarter than us. I think of it as being like the player in a sports event
that would happen if we had unlicensed barbers is you’d have one bad haircut who may shout at the referee, but ultimately wants the referee there, because
and you wouldn’t go back. Maybe he’s right about licensing of barbers. But I otherwise the game would be intolerable. People would be getting hurt.
think that they carried it so far that they missed the essence of our economy. The criticism is often worse than what you just said. The people who
The essence of our economy is that we have elaborate rules that make our are opposed to regulation tend to have a view that the regulators are not only
competition work to the benefit of the general public. Otherwise, com- not smarter, but that they’re idiots, because they are people who couldn’t make
petition would be vicious and destructive. And so it’s the rules that matter. it in the real world. And I think that is a pernicious view. The regulators I’ve
The rules have to be complicated, because the regulations that the govern- met, who have reached important positions in the government, seem to be
ment makes have to work around all the complexity of human nature. And perfectly thoughtful and intelligent people. I think that’s a place where we
you have to keep adjusting past structures to create a congenial environment want to place some of our graduates, as regulators, and I’m just as proud of
for entrepreneurship and business. them as the ones who make huge fortunes.
Learn more about Shiller’s research at qn.som.yale.edu.
Q: In Animal Spirits you compare government to a parent, who has to be neither
too strict nor too lenient. The metaphor itself seems to put government in a role
of having a lot of influence.
We maybe shouldn’t have used the parent/child metaphor, because that
metaphor sounds, well, paternalistic. It’s really setting our own rules as a
society. There is no parent. The basic truth is that human reproduction
produces millions of highly competent people, and there is no one who is
super-competent. Even Einstein — he was asked to be president of Israel
in 1952 but he turned it down, I suppose because he knew his limits. He’s
not able to run all of our society. He’s not that smart. That’s the problem.
So I like to think about regulations of industry and finance as not
imposed by the government, but chosen by us. The government responds to
suggestions by people who are doing business as to what kind of rules would
Paris, France (photograph by Ian Berry)
Q6 2009 Dialog 19
What is A host of studies and academic theories that
apply psychological insights to economic
behavior have been grouped under the label
“behavioral.” Is this growing field changing
how the economy is studied — and how it
Nicholas C. Barberis
Stephen and Camille Schramm Professor of Finance, Yale School
Ulrike M. Malmendier
Associate Professor of Economics, University of California, Berkeley
Associate Professor of Marketing, Yale School of Management
Andrew J. Redleaf
Founder and CEO, Whitebox Advisors LLC
Interview conducted and edited by Jonathan T.F Weisberg
Q6 2009 Barberis, Malmendier, Frederick, Redleaf 21
What is behavioral?
Q: What does “behavioral” mean in preferences. What that means is the following:
your field? While we have been working with a certain
set of preferences and utility functions in
Nicholas C. Barberis: When I hear the word traditional economics — typically they involve
“behavioral,” what I think of is trying to un- the maximization of our own well-being —
derstand behavior that might be the result of in reality, people have different preferences.
less than fully rational thinking. So when we A famous example is self-control problems.
talk about behavioral finance, which is my own People join the gym and plan to go regularly.
area of interest, we’re trying to understand That’s why they get a monthly membership,
whether things that happen in financial mar- which only pays off if you are actually going
kets might be the result of less than regularly. They end up not doing it. There is
fully rational thinking. an inconsistency between their preferences
Three areas of behavioral finance have re- about future actions and their preferences
ceived a lot of attention. One is what I might when they actually are choosing the action.
call applications to asset pricing — trying to The same phenomenon can be observed in
understand the pricing of stocks, the pricing finance — people choose a certain means of
of houses, bubbles in financial markets, and financing, like a credit card, which is the right
so on. A second area is investor behavior. For instrument if you pay everything back at the
example, we know that many people invest end of the billing cycle, but then they end
heavily in the stock of their own company, and up not doing so. There is this discrepancy
we think that perhaps that’s not wise from the between how I want to act from a long-term
perspective of diversification, and it might be perspective, and how I do act, which is one
the result of less than fully rational think- example of nonstandard preferences. Others
ing. The third area is corporate finance, where are social preferences, such as altruism, shame,
we’re trying to understand whether managers guilt, conformity.
of firms do things that might be the result of Then, as the third deviation, there is what
less than fully rational thinking. We know, for people call “failure to optimize” or “failure
example, that there is a lot of merger and to maximize.” We don’t have a good term for
acquisition activity that goes on in the cor- that third deviation, but what that means is,
porate sector, but the evidence suggests that even if an economic agent had the standard
there’s not a lot of value creation for the ac- preferences we assume in traditional econom-
quiring firm. So then why do we see so many ics and even if he formed rational beliefs, the
M&A transactions? whole maximization process doesn’t always
work out perfectly. We sometimes just don’t
Ulrike M. Malmendier: One way to concep- get it right, not because we are irrational or
tualize deviations from a standard economic because we have funny preferences, but be-
model is to say that there are three types of cause we have limited processing capacity or
deviations. The first one is in terms of belief. limited attention. It’s Friday, and we are plan-
We don’t always form rational beliefs. We ning our activities for the long weekend.
don’t form the right expectations, given the Sometimes, even if you’re fully rational
information we have. and have standard preferences, you may not
The second deviation is nonstandard act according to standard economic textbooks.
Shane Frederick: In my view, at least, a per- Q: Do you take behavioral insights and
son or a study is behavioral to the extent that find advantage in them in practice?
there is an explicit recognition of the distinc-
tion between a formal characterization of Redleaf: Yes and no. Yes in the sense that if
some choice object and the mental represent- you’re confronted with something that seems
ation of that object — the idea that people may anomalous or seems to not make economic
think about the same thing in different ways. sense, that should create dissonance and you
The same object can yield systematically dif- should approach with some caution. If you
ferent evaluations by focusing attention on a can find explanations that make the anomaly
subset of features or by describing the feat- coherent or understandable, then you can be
ures differently. Everybody who is behavioral more comfortable. You can have some sense
accepts that, and people who are not behav- that what you see is a deviation from pure
ioral generally don’t. They want to define the rationality, and a deviation from where an
object in terms of its formal properties. It has asset should be priced. In my experience, I’ve
this probability and it has this amount of done much better on things where I can figure
winning, for example. out what I thought people were thinking, and
In marketing, I think there is really no re- have a story or an explanation for why it was
sistance to the idea that people are behavioral. wrong, rather than just having the argument
We know that all light beers are more or less that it’s wrong without understanding the
indistinguishable. And yet many marketing genesis of the anomaly.
efforts go toward changing people’s mental
representations of those objects. Marketing Malmendier: This is parallel to why I find
— at least a big part of marketing — is behav- behavioral economics so important. What I
ioral at its core, and has been historically. really love about behavioral economics is the
big emphasis on trying to get it right when
Andrew J. Redleaf: Financial markets may be explaining why humans make decisions. We
the last area that isn’t cognizant that the eco- are trying to be humble as economists, and
nomy is made up of interactions between hu- to learn from evidence in psychology about
man beings rather than automatons. In busi- why people think the way they think and
ness school, when you’re taking the class in why they are choosing the actions they are
negotiation, they will not tell you to start choosing, rather than saying, “Our standard
with the assumption that the person across economic model may not get the psychology
Ulrike M. Malmendier photographed by Steve Skoll
the table from you is an automaton with a right, but it predicts what the correct action
predetermined set of instructions, which eith- is.” No, we really would like to understand
er you can know or anticipate, in trying to the truth. We would like to go inside the
figure out what’s important to him, how he black box and be able to ask why a person is
values different trade-offs, and where the making a certain choice. The benefit is, of
possibilities for a win-win outcome are. On course, that we will have better predictions
the other hand, if you’re a banker or investor for new situations.
talking to a CFO about the company’s capital
structure, the presumption is that here is an
automaton running an optimization program.
In a lot of ways, financial markets are either
paradigmatic or completely exceptional.
Q: Nick, what do you think are the
exciting areas in your field right now?
Frederick: There’s a really interesting study
about organ donations by Eric Johnson pub- “ What’s important
to me is to really try
lished in Science, where they showed that
Barberis: There are a couple of things that whether or not people elect to have their
have been in the news quite a lot, and I think organs donated if they should die in an auto
to capture the truth
those are indeed some of the exciting things. accident goes pretty much from 0% to 100% ,
The first is associated with this well-known depending on whether you are defaulted in
book, Nudge, by Richard Thaler and Cass as an organ donor or defaulted as a non-
Sunstein. The rough idea there is that, look, donor. This default setting has as big an eff-
of what’s driving
people make incorrect decisions sometimes, ect as you could imagine for one of the more
so can we help them? Can we perhaps nudge important decisions you could imagine.
them towards making the right decision, but I don’t think there’s anything in market-
human thinking and
without actually taking any options away ing that’s as exciting or as important as that.
from them? Thaler and Sunstein call their What I do find exciting is the work on the
philosophy “libertarian paternalism.” One role of metacognitive judgments — for in-
actions, whether it’s
example is that a lot of people don’t save as stance, that people form a sense of whether
much as they’d like to for retirement, so one they are an expert or not based on cues as
specific policy change that was made recently subtle as the font in which something is print-
was to switch 401(k) plans from opt-in plans, ed. If the font is unclear or if it’s an atypical or
where the default is that you are not enrolled
and you have to fill out a bunch of forms to
become enrolled, to opt-out, where the default
is that you are enrolled and you have to fill
unfamiliar font, you get the sense that this is
hard to process and feel insecure. And from
that, your choice strategy actually differs.
You couldn’t imagine, ex ante, that these
rational or irrational.”
out a bunch of forms to get out of the plan. subtle changes could have these significant
Now, in a world where everyone is fully ra- effects. These things are real discoveries,
tional, it shouldn’t make a difference what so I find that pretty exciting.
the default is. You can just choose whatever
you want. But we know that in the real world, Q: Thaler says that he thinks marketers
where people have inertia and they procras- and advertisers have been nudging forever.
tinate, the default really matters. And so we Does that make sense to you?
might predict that the people who are auto-
matically enrolled will end up saving more Frederick: I think that’s certainly true. Along
than people who are automatically not en- with two of my colleagues at Yale, we just
rolled. Studies have demonstrated exactly published a paper which featured an experi-
that. That simple policy change could have a ence I had once had in a store. I was buying
real impact on how much people are able to a stereo, and wasn’t sure which one to buy —
save for retirement. the cheaper one for $600 or the more expen-
And the second thing I’d mention that sive one for $900. And then the salesperson
has also been in the news a lot, obviously, is said, “Think of it this way — if you buy the
the financial crisis, the housing bubble. I $600 stereo, you can have $300 worth of CDs.”
don’t know if I can call the work on this excit- Suddenly, the choice, which had been very
ing, because it’s still at an early stage, but we tough, was quite clear. I would buy the cheap-
have an amazing event in history to work on. er one.
How did this housing bubble form? For a neoclassical economist, this makes
Q6 2009 Barberis, Malmendier, Frederick, Redleaf 27
What is behavioral?
no sense whatsoever, because the decision to have an opt-in savings plan versus an opt-out
buy should go through the concept of op- savings plan, because I’m nervous about who
portunity costs. Is the opportunity cost to have decides which is actually optimal. I’m for
the nicer stereo worth it or not? But here’s heightening awareness of any insights that
somebody who studied decision making for come out of this line of inquiry, as opposed
a decade, and I just didn’t think of the choice to explicit use by government.
in that way. Have people been nudging for de-
cades? Yeah, this guy did. Q: Why do you think behavioral approaches
have become more prominent recently?
Malmendier: Given that we’ve shown that
being serious about behavioral insights can Barberis: By the time we reached the 1990s
make a big difference to important economic it just became clear that lots of things in fi-
decisions, both firms and policymakers are nance were hard to explain in a model where
becoming more open to our data demands everyone in the economy was rational. I think
and our suggestions. For example, in 25 when the tech-stock bubble came along, peop-
minutes I’m going to be running a behavioral le were more convinced that we had to find
lunch. One of the projects we’ll discuss is a an alternative to the rational paradigm, and
weatherization program, which is supposed that the behavioral finance paradigm seemed
to help more low-income households with like a very plausible alternative. Now that
insulation and other energy-saving remodel- we’ve been through the housing bubble, I
ing. Having in mind that people who want think people are all the more convinced that
to apply for the funding might procrastinate, this is a very promising direction to explore.
the Department of Energy is open to allow- The field has also gotten an extra push in the
ing some randomization in how the procedure past year because of the new administration
is implemented, which will help researchers in power in Washington. A lot of the econom-
gather good data on the relevance of this ic advisors to President Obama have actually
behavioral bias and ultimately to improve the worked on behavioral economics and behav-
process. ioral finance during their academic careers.
I do want to say one other thing, which is
Redleaf: I have to say, listening to all of this, about the power of a conceptual advance. If
I find it interesting, but I also feel some trepi- you talk to people on the street and say, “If
dation. I want the world to be materially and people are irrationally exuberant, they’re go-
economically better off, and I think the right ing to push the stock market up, and if they
Andrew Redleaf Photographed by Joe Treleven
use of all of this information is to better al- are irrationally pessimistic, they’re going to
locate resources. And it seems to have great push the stock market down,” that sounds
potential there. But I also worry that the insights very plausible. But when you think about it,
are apt to be taken in policy directions that it’s not so clear. If irrationally pessimistic
I don’t like and that have the risk of making people push the stock market down, then there
people worse off. I mean, most of the time, is a very strong incentive for smart people, for
market imperfection is used as an excuse for hedge fund managers, for example, to come
government expansion, which is anathema to in and buy the stock at those bargain prices
people on my side. So I’m made nervous by and thereby push the stock market back up
people saying you get different results if you to its correct level. This is sometimes called
the arbitrage argument, and it suggests that researchers would look at why farmers don’t
irrational people cannot affect the prices use fertilizers that would increase their in-
of financial assets for a very long period of come. They thought there must be standard
time. That argument was very convincing to economic mechanisms at work, such as asym-
academics for decades, and it’s the reason that metric information about the usefulness of
the rational paradigm was so dominant in fertilizers, so let’s do an experiment which
universities. What happened in the early reduces asymmetric information and see
1990s was we realized that this argument whether that will have an effect. They found
didn’t make sense. Irrational people can affect very little effect. Once they opened up to the
prices for a significant amount of time, be- idea of a time-inconsistency problem — if I
cause it’s actually not so easy for hedge fund give the farmers the money for fertilizers now,
managers to correct mispricing. Hedge fund they may waste it on going out for drinks or
managers face a lot of risks in correcting mis- other spending that doesn’t help in the long
pricing and so they may allow mispricings to term, but if you offer them a commitment de-
survive for quite a long period of time. It was vice, maybe that makes a difference and they
really that conceptual advance that opened do actually go for the fertilizer — they found
the gates to more behavioral finance research. huge effects. And so people in development
have started to be serious about modeling be-
Malmendier: What I’ve observed over my havioral traits and incorporating them into
research life — the last five or ten years — is the design of their field experiments.
a change in the presumption that if you go
outside of the standard models and assump- Redleaf: It’s an interesting question to what
tions with which we work, you’re giving up extent the academic belief in efficient markets
all rigor and discipline. This was, of course, filtered down to the masses, as it were, to inves-
always a very weird argument, if you think tors — and to what extent that has facilitated
about it, for scientists. We want to understand bubble behavior and the bubbles that we’ve
what truly drives economic decision making had in the subprime area. At the cultural level,
and how we can better predict how people people know to be wary of used car salesmen
will act in the future, not how to squeeze it and to take what they say with the appropri-
into an existing but possibly wrong model, ate shakers of salt. On the other hand, even for
just to prove our “rigor.” relatively financially unsophisticated people, I
I would say that ultimately the truth won. think they have a sense that financial markets
We economists realized that we could only are different somehow. It’s not just that the
get so far with the assumption of rationality. practitioners are professionals with profes-
And we realized that we don’t let hell break sional codes different than used car salesmen.
loose if we allow for some novel assumption. I think there’s some sense that financial mar-
If we dare to allow for unconventional but re- kets get things right. If I can get this loan,
alistic assumptions about human behavior, I must have a reasonable prospect of being
we find that they have a really big impact on able to pay it back, even if it doesn’t seem to
investment decision making, consumer deci- add up to me. Because it’s touching finance,
sion making, or firm decision making and it must be okay. They gave me the loan, after
help us to explain some long-standing puzzles. all. So apart from explicit fraud on either the
For instance, in development economics, lender’s or the borrower’s part, there was a
30 Q6 2009 Barberis, Malmendier, Frederick, Redleaf 31
What is behavioral?
susceptibility on both sides, given a cultural is forcing people to give a public rationale for ence sufficient to justify the extra expendi- and then analyze it from a behavioral perspective.
understanding of the efficiency of the finan- their actions. ture? It becomes a much more complicated As I said in the beginning, what’s impor-
cial markets. I don’t think behavioral finance decision and people have a certain distaste tant to me is to really try to capture the truth
has changed that yet. Redleaf: In financial markets, writ large, for that. of what’s driving human thinking and actions,
though, I don’t think that behavioral econom- I love Brian Wansink’s work on anchoring. whether it’s rational or irrational, standard
Q: Are there ways that behavioral research ics has had any effect to date. I would guess He has taken this basic insight that you can preferences or nonstandard.
is filtering out to have an impact on the that that would be at least 10 years off. specify any number and people will anchor
spheres of business and policy? on that, and he put up signs saying “limit of 12
Frederick: I agree that not a lot of ideas have per customer” for cans of soup. People weren’t
Barberis: One set of people that has been made it into business. One thing that I’ve buying 12, they weren’t buying close to 12.
interested in behavioral finance is the invest- recognized recently in our field is that there’s But the faux limit put this notion in people’s
ment management community. And there are a lot of attention to one-off behaviors, like heads that 12 is the reasonable number of cans
a number of large investment firms out there whether you can get people to choose option A of soup that they should buy. And he showed
that, I would say, fall under the umbrella of rather than option B by setting up the choice that you sold significantly more soup in that
behavioral finance in the sense that they see set in just such a way in the stylized micro- case. Some things like that are catching on.
themselves as systematically exploiting mis- world of the experiment. The assumption is
takes made by less sophisticated investors. that if you can do so, that translates directly to Malmendier: When I hear that question, I
An interesting question I have been get- business. But what I think is often ignored is immediately reverse it. I get my ideas from
ting in recent years from investment manag- that there are downstream effects. Suppose, for business. For example, I have worked on how
ers is, okay, we know the ways in which people example, you trick me into buying something firms design the pricing of goods that chal-
are less than fully rational. Can you now help too expensive, say, a dinner, by the way you lenge consumers’ self-control. Namely, if firms
us design an investment process that will get set up the menu. I end up spending $120 on know that their good is tempting and people
rid of those errors in our own thinking? I’ll dinner and wine. Afterward, I might feel bad will tend to over-consume, firms charge a
just give you one example that I heard from about that. And so I have this negative affective low flat fee and then charge above-market
a hedge fund manager in New York. He said, tag associated with the restaurant experience, costs each time you consume — for instance,
“When my analysts pick a stock, they often set and I don’t go back there again. While you each time you use your credit card to borrow
a target price, as well. So I’m buying a stock at have succeeded in a narrow sense, the bigger money. If there’s a good that you will un-
$50 and I expect to sell it when it reaches $65.” message is lost: Was this good for business? deruse, because it’s something like going to
What he was finding was, often, when the It’s not entirely clear. the gym, which you hope you will do a lot but
stock reached $65, his analysts wanted to put I do think there are some ideas that people you’re not going to end up doing it, then firms
on a second-round bet that the stock would outside the academy are considering more charge you a whole lot up front and less per
rise even higher. And he often found that that now. The idea that complexity is bad is catch- usage. That study was inspired by talking to
second-round bet didn’t work out. He put it ing on. We did a field study where we had health clubs, originally, and later the credit
down to some kind of overconfidence — hav- prices for juice that were either all high or a card industry. I wrote another paper compar-
ing seen their initial hunch confirmed, these mixture of high and low. Strict economics ing how large investors and small investors
analysts became too confident. To try to solve would say it’s a pretty clear knife-edge predic- react to analysts’ recommendations. People
this problem, he instituted a policy where ev- tion what’s going to happen: You should sell often under-appreciate incentive misalign-
ery time an analyst in his firm wanted to raise more in the second case. At least for awhile, ment, so, small investors don’t understand
the target price, they had to send an email we sold less. Psychologically you can sort of that analysts tend to exaggerate recommenda-
to everyone in the firm explaining why. This see why. The decision becomes very complex tions — a hold recommendation really means
removed the problem. Indeed, he was just us- with multiple prices. It’s not just a question sell, buy means hold, et cetera. That idea was
ing a well-known technique in the psychology of which is my favorite fruit juice, it’s which already out there. Very often, as an academic,
literature for de-biasing overconfidence, which is my favorite and is the intensity of my prefer- I learn from what’s done in the business world
São Paulo, Brazil (photograph by Stuart Franklin)
Q6 2009 Dialog 35
Do you need
Richard Thaler outlines how principles
from behavioral economics can help
policymakers — and managers — achieve
Ralph and Dorothy Keller Distinguished Service Professor of
Behavioral Science and Economics, University of Chicago Booth
School of Business
Interview conducted and edited by Ted O’Callahan
Photograph by Matthew Gilson
36 Q6 2009 Richard H. Thaler 37
Do you need a nudge?
Q: Could you explain some of the key Q: Could you give some examples of Q: How is it that nudges haven’t been you want to repeal the inheritance tax,
ideas in Nudge: nudges, choice archi- where nudges have influence? the norm all along? it’s very smart to call it a death tax.
tecture, and libertarian paternalism? Probably the areas that have received the They are the norm. We’ve been nudged for-
“Libertarian paternalism” suggests that most attention so far are savings and ever. Eve and the serpent nudged Adam. Q: How do defaults get set poorly in
these two seemingly contradictory terms investment. The simplest example of a Religions have been nudging us for thou- the first place?
can actually define a non-contradictory successful nudge is the default option. A sands of years. Marketers nudge us. The status quo is typically the default.
and attractive policy alternative. By default option is simply what happens if Ads are nudges. We can be nudged for And the choice architect typically doesn’t
“libertarian” we simply mean respect- you do nothing. Normally, nothing hap- good or for evil. There is a company we think very carefully about this. Let me
ing people’s right to choose, whenever pens, but sometimes even when you do talk about in the book that pipes the give you an example. In most companies
possible. And by “paternalism” we mean nothing, something happens. So while sweet-smelling aroma of their extremely now, there is a period of open enroll-
caring about the outcomes for people, I’m sitting here talking to you, if I do fattening cinnamon buns out into the ment, typically in November, where you
as judged by themselves. So we would nothing on my computer long enough, hall, which acts a bit like the sirens in The get to rethink your benefit package. And
like to create environments where people pretty soon the screen saver will come Odyssey in terms of drawing people in. at least at the University of Chicago,
are more likely to choose things that on. How long it is until that happens was We don’t claim to have invented nudges. you’re required to do this online. Of
they, themselves, think are good for them. itself a default option that came with my What we are suggesting is that in lots course, some people are going to forget.
Now, the person who is in charge of computer that I never changed. What we of domains, people aren’t thinking about And the choice architect has to decide
that choice environment is somebody know is that default options are extreme- them as much as they should be. Mar- what to do with the people who forget.
we call a “choice architect.” There are ly powerful. Many people just go with keters do think about them, but econo- Now, typically there are two options to
choice architects in virtually every en- the flow and take whatever the default is. mists are often in charge of many aspects consider. I call them “same as last year”
vironment. When a professor teaches a That means that the choice architect has of public policy and they could think and “back to zero.” For your healthcare
course, he is the choice architect. When immense power by choosing the default, about them more. plan, back to zero is pretty harsh. So
somebody puts this magazine together, sometimes knowingly and sometimes In the book we distinguish between most places go with “same as last year.”
they will decide in what order the articles unknowingly. two types of creatures: humans and Econs. But for flexible spending accounts, where
appear and what illustrations and photos A good example is in the area of pen- Humans are the people we interact with you lose that money if you don’t spend
accompany them that may or may not sion policy. In many 401(k) plans, the every day, and Econs are these strange it, many places say, well, I don’t want to
attract people’s attention. That’s a good default option is not to join. If you are creatures only found in economics text- presume that people want to put money
example, because people are free to throw going to join, you have to fill out some pa- books that are unemotional, really smart, away since they would lose it if they
the magazine away. They are free to read perwork. Some companies have tried the and never have self-control problems. If don’t spend it, so we’ll make that one
whatever they want, but the magazine opposite default, which is that you are you want to design policies that will “back to zero.”
designer will have some influence on enrolled unless you fill out some paper- work, you want to design them for hu- Now, at Chicago I had scheduled a
which articles they read, and in which work. We know that speeds enrollment mans unless you live in a world of Econs, meeting to talk to some of the top admin-
order. And what we know is that all greatly and doesn’t really cost anything. which, if you do, you have my sympathy. istrators at the university about chang-
kinds of small things, like whether there Shlomo Benartzi and I have added to A simple example of a nudge in the ing the default on the supplemental
is an illustration that accompanies an that a policy called Save More Tomorrow, politics domain is the brilliant strategy of savings account where you could put in
article, will influence whether people where people are invited to join a plan in the Republicans to rename the inheri- money on top of the usual pension. The
read that article. And those small things which they agree to increase their savings tance tax the “death tax.” Polls show that default was “back to zero,” and I was sug-
are what we call “nudges.” So a nudge contribution every time they get a raise. a majority of Americans are opposed to gesting changing it to “same as last year.”
is any small feature of the environment That’s another good example of libertar- the death tax and in favor of an inheri- It turned out that that meeting occurred
that attracts people’s attention and alters ian paternalistic policy. No one is forced tance tax. Econs would know that the on, just by coincidence, the last day that
their behavior but does so in a way that to join it. People sign up of their own free death tax and the inheritance tax are people had to log on and re-enroll, and
doesn’t compel. will, but in the first company where we did the same thing. But humans might be in none of the people at the meeting had
this we more than tripled savings rates. favor of one and against the other. So if yet done that. And that made my case
Q6 2009 Richard H. Thaler 39
Do you need a nudge?
“Government has Q: In some cases, when there is an ef-
fort to switch the default, there’s resis-
as minor. There is a nice example, I
think, in some research that we mention
to make decisions.
tance. What can cause that? in Nudge. If you tell people on their elec-
Most of the time, you change the default tricity bill how much energy they are us-
and nobody notices. There can be some ing compared to their neighbors — and
special circumstances in which people get there’s a company called Positive Energy
They have to nudge. their backs up. Maybe a good example
of that is organ donation. In the U.S., the
default is that unless you do something,
that has been doing this — you can
reduce energy utilization by something
between 2% and 6%. Now that sounds
So why not do it
your organs will not be made available if like not a very big deal. But if you think
you die in an automobile accident or some about it, these messages cost nothing.
such. Some of the European countries have You have to send out electricity bills any-
the opposite default — what they call pre- way. If by changing the information you
sumed consent, so you are presumed to put on the bill, you reduce energy use
give your consent unless you choose other- by 2% to 6%, why in the world wouldn’t
wise. There have been attempts to switch to we do it? If we can come up with 100 of
that presumed consent in some countries, those ideas, we can have a significant im-
most recently in the UK, and that was pact on the climate.
met with resistance, in particular from the
Muslim community. Illinois has adopted Q: People seem to have a hard time
my favorite solution to this problem, and making decisions that don’t give feed-
it’s a neat little compromise which is back for a long time. How do nudges
called mandated choice. When you go to re- address these long-term issues?
new your driver’s license and get a new The solution to all such problems is to re-
picture, which you have to do periodically, ward short-term behavior. So going back
they simply ask, do you want to be a do- to the previous example, it turns out that
nor or not? You must answer that question. if they put a little smiley face on the bill if
They won’t hand you your license until you’re using less power than your neigh-
you say yes or no. And about half the bors, that helps. In some places, they
people say yes. And that, as near as I can let owners of hybrids use the carpool
tell, has met with exactly zero resistance. lanes on the highway. Maybe you’ll get
somebody who doesn’t really care about
Q: And does that increase the number the environment but cares about getting
of donors? somewhere on time to switch from a gas-
Yes, because it is easy and people are re- guzzler to a Prius. That’s going to help. I
minded that right now is a good time to don’t care what motivations they have if
do this. we can get the right outcome.
Q: Nudges can appear very small and Q: Who decides what the best out-
straightforward, yet, played out on a come is?
big scale, they become significant. Well, there’s the question. Clearly it’s
I think that’s right. Because the manipula- not Richard Thaler and Cass Sunstein.
tions can be small, people think of them One criticism I frequently hear is that we
40 Q6 2009 Richard H. Thaler 41
Do you need a nudge?
think we know what’s best for people I think that can be a problem, and one own choices, and that’s the essence of lib-
and this is elitist thinking. I think in possible solution is what we call struc- ertarian paternalism.
many situations, it is pretty easy for the tured choice. Let’s go back to 401(k)
choice architect to have a good idea what plans. When they first came in, they Q: Is there research behind this? Do
choices people would really prefer. I think if only had about half a dozen options. we perform better if we have a sense
we go back to default options in the open And choices were pretty easy. But then of freedom and choice?
enrollment period, do we think that a subset of employees would lobby for I’m not sure we can give a satisfactory
people who forget to enroll are going to the fund that invests in Slavic tech funds, answer to that, but I think most of us
want no healthcare? Probably not. So it’s and so on and so forth, and now plans would prefer to live in such a society. I
not that we think we know what’s best have 100 options. And the research also think it’s pragmatic in the sense
for them. It’s that we have a pretty good shows that with more options, people that maybe I want lots of wine options
idea of what they would want the default are slower to join. because I know something about wine,
to be if they were the choice architect. So what’s the solution to that? One but I want somebody else to help me pick
Sure, there may be some tough cases, would be to reduce the number of a computer. We don’t want a one-size-
but I think most of us would rather be choices, which we don’t like. We prefer fits-all solution to any kind of problem.
healthier. We’d rather have our kids to start out with a good default fund
be well educated. We would rather not and say to somebody that’s joining the Q: What can managers take from
starve in retirement. We would rather not plan, okay, there’s lots of choices here, this work?
wake up some morning and have our mort- but if you don’t want to make a decision, Managers are choice architects. They
gage doubled because of some term that here’s a default investment strategy that need to structure environments to im-
was buried in the fine print. So I think some experts think might work for you. prove behavior. It shouldn’t be surpris-
we can make a lot of progress without It might be what they call a target date ing that many of the traders who took
much controversy. And there will be a few fund, so the fund will change your asset down companies were doing what they
cases where it’s harder, and that’s what allocation as you age. Would you like were doing, because they were getting
the politicians are elected to deal with. that, or would you like to make a more paid lots of money while they were
active decision? If you say you’d like to doing well, and then could walk away
Q: How do politicians sort out those make a more active decision, then maybe when it blew up. There is a famous old
hard cases amid conflicting interests? the second stage would be a choice be- paper in organizational behavior: “On
It’s difficult. I want to emphasize that we tween aggressive or conservative target- the Folly of Rewarding A, While Hop-
don’t envision a larger role for govern- date funds. Would you like to pick one of ing for B.” If a manager understands be-
ment. Government has to make deci- those? No? Okay, here are all 100 funds. havioral economics, she will not be able
sions. They have to nudge. So why not Go for it. Have fun. I think that that’s the to change her employees into Econs, but
do it effectively and transparently? And way to handle this. We wouldn’t want she will be able to mitigate some of the
if we don’t like the way the government the government to say there should biases through clever choice architecture.
is doing it, then throw the bums out and only be three funds.
elect somebody who will do a better job. I think the nudge philosophy is prag-
Read more from Richard Thaler on the development of behavioral economics at
matic, and it says that in some sense we
Q: Could you talk a bit about choice? can get the best of all worlds. We can
Some research suggests too much make it easy for neophytes to get some-
choice can be problematic, but the thing reasonable. At the same time we
libertarian aspect of nudging is all can make it possible for sophisticated
about making choice available as investors — or those who wrongly think
often as possible. they’re sophisticated — to make their
Tokyo, Japan (photograph by Chris Steele-Perkins)
Q6 2009 Vignette 45
a choice look
A number of economists, psychologists,
and neuroscientists are using imaging
studies to peek at the brain in action —
trying to better understand why we
make some of the choices we do.
By Ted O’Callahan
The sealed and soundproofed room could be a recording studio. It Our neural
is windowless except for a plate-glass panel looking into a control
booth. But rather than recording albums in this basement lab on the
Princeton University campus, a team of scientists is recording brains
out of millions
making decisions. Cords and cables snake in and out of a multi-mil-
lion-dollar, liquid-helium-cooled MRI machine. A graduate student
volunteer is fed into the mouth of the machine with the aim of gain-
of years of evolution;
ing insight into a troubling modern problem: how, despite our best
intentions, we end up watching too much TV.
For two hours, the subject remains strapped to the bed of the
MRI. He is shown previews of Saturday Night Live sketches; he can
choose to watch the sketches, but for each one he selects in the
what now appear
to be irrational
first hour, he will have a period of silence one and a half times as
long during the second hour. Headphones pipe in the soundtrack
and muffle the firing of the machine, which sounds like a jack ham-
mer striking concrete at a carefully calibrated 17 times a second. In
the control booth, monitors show a 3-D image of the subject’s brain.
This is a functional MRI (fMRI) study: in addition to showing the
have made perfect
anatomy of the brain, the scanners collect data on activity in the
brain as the subject makes decisions. When neurons fire, they need
oxygenated blood. The blood rushing to those neurons shows up
sense in other
on the fMRI. Correlating the flow of blood with the moment the sub-
ject presses a button to play a sketch may help tease out how the
prefrontal cortex, a reasoning part of the brain, negotiates with the
nucleus accumbens, a region which is responsive to immediate
gratification. Fundamentally, this experiment is aimed at increasing
our understanding of choice, which, in the eyes of some, makes it an
economics experiment, or more precisely, a neuroeconomics experiment.
A small group of economists are trying to peek inside the black
box of the brain. For years economists have tried to understand de-
cision making by using theory, constructing complex mathematical
models, and mining data sets from real economic interactions. So
how could mapping blood moving through the brain add to this
work? “There are some economists who say brain data is just out-
side the domain of economics,” says David Laibson, a professor of
economics at Harvard University and one of the researchers working
48 Q6 2009 What does a choice look like? 49
on the Saturday Night Live study. “Economists have a very spare In most circumstances, when there is a purely rational choice to
framework for understanding human behavior. The framework is op- be made, the appropriate region of the brain takes the lead making
timization. And that is a wonderful tool for understanding most eco- that choice. And when you touch a scalding object, a different, in-
nomic behavior, but there is a lot of economic behavior that deviates stinctive part of the brain takes over: there is no listing of pros and
from full optimization.” Laibson doesn’t want to abandon economics cons before you pull your hand away. But in some situations, what
as it has been done but neither does he want to exclude potentially region of the brain should be taking charge is not as clear. Neuro-
useful information. economists are very curious about how our brain negotiates those
“What has been and will be successful in economics are elegant, situations that aren’t black or white. But understanding the brain,
powerful mathematical models that explain the world and success- whether at the level of interactions among specialized regions or the
fully predict what will happen next,” Laibson says. “What has level of a single neurotransmitter, is in no way simple. Human brains
changed is the presumption that the good models will be perfectly have 100 billion neurons, and each makes contact with about a
rational and free of psychological mechanisms.” He adds, “More thousand others, creating more potential pathways for connections
and more economists are saying even though choice is the preemi- than there are stars in our galaxy.
nent object of analysis we’re interested in, to the extent they help us Though neuroeconomics is perhaps a decade old, it is generat-
better understand choices, the underlying mechanisms that effect ing a tremendous amount of new information in forms that econo-
economic behavior belong in the economic models.” And the activ- mists don’t typically deal with. Some neuroeconomics looks at the
ity in the brain in the seconds leading up to a decision may be the molecular level, where the biochemistry of trust, which spills into the
ultimate underlying mechanism. world as the social cooperation at the foundation of every financial
Jonathan Cohen, a professor of psychology at Princeton Univer- transaction, appears to be controlled by oxytocin and the dopamine
sity and co-director of the Princeton Neuroscience Institute, is work- system seems to be a fastidious bean counter tracking rewards. Ani-
ing with Laibson. Cohen says psychology and neuroscience have mal studies record the sound of a single neuron firing. Then there
traditionally been heavily experimental, but he shares an econo- are eye-tracking studies, and an alphabet soup of fMRI, TMS, PET,
mist’s presumption of optimization, with a caveat. Our neural archi- EEG, and MEG data.
tecture comes out of millions of years of evolution; what now appear Camelia Kuhnen, a professor of finance at the Kellogg School of
to be irrational behaviors might have made perfect sense in other Management, has correlated risk profiles from neuroeconomic stud-
environments. For example, people have a difficult time saving ies with genetic markers and found that two genes may predict a
enough for retirement. They seem to irrationally value the present great deal about our risk tolerance or aversion. She quickly cautions
over the future. “When we were lizards there were no bank accounts, that “genetic factors only account for about 30% of the variation
there were no refrigerators, and there were no property rights, so across people in how much financial risk they take. The other 70%
there was no future. There was just what you had right now. We de- comes from non-genetic factors like culture, education, and experi-
veloped steep discount rates — use it or lose it,” Cohen says. “Over ence in the marketplace.” Parsing the roles of nature and nurture in
the course of evolution we ended up developing, as humans, a part financial behavior could help both individuals and policymakers.
of our brain, the prefrontal cortex, that knows how to think about the Neuroeconomics may help resolve the information inefficiencies
future. I would contend that it is the very part of the brain that gave and fairness issues that have made economically optimal decisions
us things like bank accounts and refrigerators and property rights. It about public goods impossible. Whether the public good is national
created a world in which there was a future.” defense, clean air, or a town swimming pool, because everyone can
Q6 2009 What does a choice look like? 51
Human brains share the benefits equally, each person has an incentive to under-
have more potential
state its value to him or her, in order to minimize his or her contribu-
tion toward funding it. This leaves leaders without accurate informa-
tion. Antonio Rangel, an economist at Caltech, led an experiment in
pathways for which a group of volunteers assigned values to a mock public good
while being scanned in an fMRI machine. Knowing that all of the
participants’ valuations would be corroborated with fMRI scans,
each person gave very accurate information, eliminating the “free
there are stars in
Though the technology is expensive and the applications largely
experimental right now, Rangel looks into the future, imagining how
this approach could be used to address a variety of problems. He
speculates that a technology that provided ongoing neural feedback
might let people making decisions with high uncertainty in high
pressure environments, such as a financial trader or a commander
on a battlefield, correct bad decisions before they are implemented.
The promise of neuroscience makes him willing to do exploratory
work that may straddle disciplines awkwardly for a time. “I believe
strongly that neuroscience is reaching a critical point with a set of
tools and a set of theories that are allowing us to test for the first
time the basis of human nature in a number of domains, especially
how we make decisions. And I think over the next couple of de-
cades that is going to fundamentally change how the world under-
stands what a human being is,” Rangel says. “At the same time, it is
not obvious at all how this is going to change the way economics is
done on a day to day basis.”
The mix of excitement and uncertainty is common among those
working in the field of neuroeconomics. Laibson says, “In the long
run, it is going to be a very, very useful body of work. In the short
run, it is impossible to tell whether anything we have done to date
will have merit as insights unfold over the next 20 years.”
Paris, France (photograph by Patrick Zachmann)
Q6 2009 Dialog 55
Can behavioral Economics has long been used to evaluate
the law. But what happens when economics
gets things wrong? Law professor
Christine Jolls describes the role behavioral
economics can play.
Gordon Bradford Tweedy Professor of Law and Organization,
Yale Law School
Interview conducted via email by Ted O’Callahan
56 Q6 2009 Christine Jolls 57
Can behavioral economics improve law?
Q: How has economics influenced law and what impact is behavioral human behavior. Naturally, this approach carries strong poten-
economics having? tial to improve the predictive power of law and economics, and
the success of behavioral law and economics in recent years
Most people would agree that to decide if a particular law is
has borne out this hope.
good or bad, one important factor is the effects of the law. Eco-
A simple example comes from employment law. Some
nomics has long provided a powerful tool for analyzing a law’s
critics of laws requiring specific workplace safety measures
effects. Imagine a major new piece of legislation that provides a
say that such laws are objectionably “paternalistic” and that
range of protections to employees. Economics can help both to
it should be enough to warn workers of the risks of an unsafe
predict and to test empirically how these protections may affect
workplace. Behavioral economics suggests that warnings will
employees’ treatment on the job, their wages, and their chances
lead some workers to underestimate their own personal risks
of being hired and fired. Knowing those things helps to deter-
and, thus, accept jobs that they actually would not want to take
mine whether the new legislation is having its desired effects.
if they didn’t erroneously assume — like the business school
Law and economics is the field that uses economic analysis to
students — that they would all prove to be “above average.”
study the effects and desirability of legal rules.
While this example is straightforward, my research has
But sometimes economic theory mispredicts the effects
explored many diverse aspects of the relationship between
of law. This happens because traditional economics relies on
employment law and behavioral economics.
highly unrealistic assumptions about human behavior. If a risk
facing individuals is 1%, economic theory assumes that people
will use the 1% figure in making their decisions. In fact, a large
Q: How does less-than-rational behavior in the legal process affect
body of evidence suggests that most people will tend to think
lawyers, defendants, judges, legislators, etc.?
that their personal risk is far less than 1%. A wonderful illustra-
tion of “unrealistic optimism” from the business school environ- A large body of research in behavioral law and economics
ment is a study that asks MBA students to predict their perfor- explores this question. An important example is the effect of
mance in a class before the term begins. Students select the hindsight bias in the legal system. People tend to give far too
decile in which they believe their performance will fall. Neces- much weight to outcomes of uncertain events when analyzing
sarily only 20% of the class can be in the top two deciles, but in those events after the fact — a phenomenon common enough
fact most students believe they will be in these top two deciles. in sports to have a name: “Monday morning quarterbacking.”
Less than 5% of the class expects to perform below the median, Hundreds of empirical studies demonstrate the extent of the
where necessarily 50% of the students must fall. And it’s not just hindsight bias, and it’s of particular importance to the court sys-
the students: 94% of professors at one university rated them- tem because judges and juries are almost entirely in the busi-
selves as above average. ness of assessing situations after the fact. Various measures
If most people living under a particular legal rule — say, can be, and in many instances have been, adopted to reduce
a rule requiring a warning statement describing the risks of a “Monday morning quarterbacking” within the legal system. For
product — will tend to assume, as a result of their unrealistic instance, sometimes it is possible to keep information about
optimism, that the risks are much lower for them personally, how a situation ended up unfolding out of the hands of jurors,
then the legal rule will not have the effects that traditional eco- thus forcing them to confront the same uncertain decision that
nomic theory would predict. the defendant in the lawsuit faced.
Behavioral law and economics seeks to modify traditional
law and economics by incorporating the growing body of em-
pirical evidence on the biases and confusions that often afflict
Q6 2009 Christine Jolls 59
Can behavioral economics improve law?
“ Behavioral law and
Q: How has behavioral economics affected your thinking about antidis-
crimination laws? How do the law and legal theory work through issues
of implicit bias?
economics seeks This is, to me, one of the most exciting areas of behavioral law
and economics today. Just as people may misestimate the
to incorporate the
probability of a harm because of unrealistic optimism or hind-
sight bias, they may misestimate the risk of poor performance
by an employee who comes from a traditionally disadvantaged
growing body of
racial group. The employer is not “prejudiced” against the
employee in the traditional sense; instead, the employer simply
undersells the employee’s abilities as a factual matter. The em-
ployer has no awareness of treating members of the traditionally
disadvantaged racial group any differently and in fact might be
horrified to learn of such behavior. In response to this sort of
on the biases and
“implicit racial bias,” my research suggests the ways in which
antidiscrimination law might, and to some degree already does,
seek to reduce the level of implicit bias.
often afflict human
Q6 2009 Dialog 61
Are we good Do the choices we make as consumers
serve our economic interests? Do they
even reflect our real preferences? Three
Yale scholars discuss research — their
own and others’ — that sheds light on
choices? these questions.
Interview conducted and edited by Ben Mattison
Photograph by Richard Mosse
Judith A. Chevalier
William S. Beinecke Professor of Finance and Economics,
Yale School of Management
Assistant Professor of Finance,
Yale School of Management M. Keith Chen
Associate Professor of Economics,
Yale School of Management
64 Q6 2009 James Choi, M. Keith Chen, Judith A. Chevalier 65
Are we good at making choices?
James Choi: Over the last ten years I’ve been doing a lot of work on how people make choices at Tuesday, you hugely discount Wednesday’s gain relative to Tuesday’s pain, and you decide
in retirement savings plans, and whether they appear to be optimizing in the way that we think not to exercise on Tuesday. You see these choice reversals: when you’re choosing between two
that rational economic agents would. One of the main decisions we make in our financial lives future periods, you’re relatively willing to delay gratification, but when you’re choosing between
is how much to save. And one of the best ways to save for retirement is a 401(k) plan because it’s pleasure now versus pleasure in the future, you’re very impatient. This can generate a kind of
tax-advantaged and typically there’s a matching contribution from the employer. procrastination, where you delay sacrifice today, thinking that you’ll be more patient tomorrow
Because this is a high-stakes decision that has major implications for your material well-being and will get to it then. But in fact when tomorrow rolls around, again, you become impatient and
in retirement, economists have traditionally thought that people would put a lot of thought into want to push the sacrifice off one more day.
this decision and make it in a sensible way. One feature of sensible decision making is that the Of course, there are other things that also give the default power. For example, we know that
outcome doesn’t depend on characteristics of the situation that don’t affect its fundamental there’s something called the endorsement effect, where people believe that a default that the
economics. One such characteristic is what happens when somebody doesn’t act. In traditional employer has set carries implicit advice about what the right choice is.
economic theory, not acting is, in and of itself, a decision that reveals something about your
preferences. So if I’m passive and as a result don’t get enrolled in my 401(k) plan, then traditional Judy Chevalier: Especially if they have what you might think of as high cognitive
economic theory would say that I’ve revealed that I don’t want to be in the plan. If you change costs for dealing with this particular problem.
the plan so that I’m automatically enrolled unless I opt out, traditional economic theory would
say that the outcome should be exactly the same: I would act so that I still end up not enrolled Choi: Exactly. There’s some evidence now that people have much better ideas about what a good
in the plan. savings rate is than what a good asset allocation is. You actually see in the data that savings rate
In fact, what we’ve observed is that when the default is being enrolled in the plan, many more defaults are less sticky than asset allocation defaults. When you ask people, “What do you think
people — the overwhelming majority — end up enrolling in the plan than if the default is not the right savings rate for you is?” they give answers that sound pretty sensible if you compare
enrolling. Most automatically enrolled people come into the plan at the default, which might them to what professional financial advisors would recommend, usually something like 12, 13,
be something like a 6% contribution rate invested in a lifecycle fund. Four years after the initial 14% of income. So I don’t think the primary problem for people is not knowing how much to
automatic enrollment in the plan, about half the people are still at these defaults, which they save; it’s just that they can’t get themselves to save that much.
would not have chosen if they had to actively opt into the plan. But asset allocation, I think, is completely baffling to most people. This is something that
A major reason why people get pushed around like this is that they procrastinate. Quite people have to pick up on their own. Most people have no formal education in asset allocation.
frankly, the cost of delaying action in your retirement plan just one more day is not that large, And so they’re looking for anything in the environment that’s going to give them clues, and the
and there are all sorts of things that are pressing today that you’d rather be tending to — the default is one such clue.
kid is screaming, dinner’s not ready, the game is on TV — and thinking about your retirement Now the problem is that, historically, these defaults were not chosen because the employer
savings plan is something that can wait until tomorrow. Of course, when tomorrow rolls around, necessarily thought that they were the best choice for people. They were chosen because employers
other issues are pressing and you again choose to delay. Before you know it, a couple of years did not want to get sued. There was a concern that if employers chose to include stocks in the
have gone by and you haven’t changed from the status quo in your retirement plan. That’s why default 401(k) asset allocation and then the stock market fell, employers would face litigation
the default is so powerful. risk. And so the defaults became very conservative — very low savings rates, typically invested
in a money-market fund or stable-value fund, which most experts think is not a good idea. But
Keith Chen: Do you think that it’s exclusively hyperbolic discounting that’s the Pension Protection Act of 2006 created a safe harbor where employers could create asset
driving this phenomenon? allocation defaults and contribution rate defaults that are more aggressive and not worry about
getting sued by their employees.
Choi: I think hyperbolic discounting plays a big role. Let me describe what hyperbolic discount-
ing is. Generally, when economists have modeled inter-temporal choice — that is, choices between Chevalier: There’s an interesting question about which kinds of decisions people
two different times — we’ve treated your discount rate as not systematically depending on how are good at making, and which they’re not. I have a paper that I wrote with Austan
imminent the earlier time period is. But if you’re a hyperbolic discounter, then the present gets Goolsbee, looking at the college textbook market. You might think, these are college
over-weighted relative to the future. students, they’re not thinking rationally about these decisions. And I’ve certainly seen
Say the choice is whether to bear a little pain by exercising on Tuesday for the sake of better lots of things written about college textbooks that make you think that not everybody
health on Wednesday. On Monday, you feel that this tradeoff between Tuesday and Wednesday thinks about the college textbooks market the right way. But what we find in the paper
is a good deal, because Wednesday’s gain doesn’t get discounted so much relative to Tuesday’s is that students actually get it right.
pain. So you’re happy to plan on Monday to exercise on Tuesday. But once you actually arrive One thing we know about college textbooks is that they tend to be revised every
few years. When a book is not revised, the student can buy it at the beginning of the “ Thinking about
semester and sell it back at the end of the semester, usually for half of the purchase
price. So, a $100 book will have cost the student $50 in total for the semester if it’s
sold back at the end. But when a book is revised, the book can’t be sold back. A $100 your retirement
book costs $100 to use for the semester. In our paper, we look at books in economics,
psychology, and biology, and we look at student purchasing behavior. And we show
that the students’ elasticity of demand looks about the same when you compare
savings plan is
changes in book prices and changes in the probability that the students are going to be
able to sell back the used book. So if the book is a new edition, the probability that a
student is going to be able to sell back the book is really high, and the students appear
something that can
in the data to be willing to pay plenty for it, because they are almost certainly going to
be able to sell it back for half price to the college bookstore. But when the book gets
close to the end of its expected life, when there is a high risk that they’re not going to
wait until tomorrow.
be able to sell it back, then the same $100 looks very expensive, and students are less
likely to buy it.
In general, we find that the students do a pretty good job planning for the
Of course, when
future in that market. So what is the set of things about which people do a pretty good
job? They manage to avoid buying books that they’re not going to be able to sell back;
why do they do that well, if they don’t invest well in their 401(k) plan?
Training is probably part of the answer. It’s not training by us as their
professors, but there’s a sort of received wisdom that is more or less right. In the
example about asset allocation that James gave, it’s not that crazy to think that your
around, other issues
employer would set the default in a way that is more or less appropriate for the average
employee. It turns out that for various institutional reasons that’s a bad assumption.
But I think that textbooks is an area where there’s this intense cultural training where
are pressing and
students pass on this wisdom to each other.
you again choose
Chen: Maybe another difference between your setting and James’s setting
is that in James’s setting, what we’ve seen, if anything, is that the short run
feedback may actually push people to make the wrong decision, like when
they pay too much attention to short-run fluctuations in the stock market
and they push their allocation further toward bonds. And the ultimate feed-
back that would push them toward the right decision is far into the future —
it’s hypothetical and requires some kind of mental simulation that they can’t
really do. Whereas the short-run feedback in your setting actually pushes
people toward the right decision.
Chevalier: Yes, if they blindly purchase their books in their first semester in college
and they get hammered on the one that they can’t sell back, they won’t make that
68 Q6 2009 James Choi, M. Keith Chen, Judith A. Chevalier 69
Are we good at making choices?
Choi: I think the feedback is very important. There is a big difference in the quality of the feed- five pounds, then I’ll return the money to you. People are generally very reluctant to write those
back. With savings, it is not at all clear whether you’ve made the right asset allocation, ex ante. kinds of contracts, even though they would like to lose those five pounds.
It’s very easy, ex post, to play Monday morning quarterback and say, oh, I shouldn’t have been in Of course, self-commitment devices exist in the world. For example, personal trainers are
the stock market in 2008. That’s not a very useful form of feedback when you’re trying to make arguably a self-commitment device. They provide some know-how, but do I need a personal
asset allocations for the next 30 years of your life. trainer to tell me to work on the treadmill for 20 minutes at a reasonable pace? Probably not.
Primarily I think the value is in the commitment to show up three times a week, and if I don’t
Chen: There is some new and very exciting work in the animal literature in show up, then I’m out $100.
this area. For example, it’s not a paper of mine, but there’s a new bird paper out
where pigeons are pecking levers. These levers are going to pay off in food, and Chevalier: There is some literature about the role of educational interventions. I can
they are going to pay off in different amounts of food in different amounts of really explain to people why they need to save more, but it turns out that it’s not all
time. So if the pigeon pecks the left lever, it gets one cup of bird seed in one min- that effective, I believe. What’s the state of the art on educational interventions?
ute. If it pecks the right lever, it gets three cups of bird seed in, say, two minutes.
But the levers are mutually exclusive, so once you peck a lever, both levers disappear. Choi: There is still disagreement, but my view is that education is remarkably ineffective, unless
Now what’s interesting is that about two-thirds of the pigeons peck the left it’s tied to an action that people can take in response to the education immediately. You walk
lever when they’re presented with the levers. So the pigeons appear to have an out of the financial seminar room, go home, and turn on the TV and eat some dinner — at that
unusually high discount rate, which is consistent with the behavior that James point you’ve basically lost it. You need to have some way in the financial seminar itself to push
is talking about… a button and increase your savings rate while it’s still at the front of your mind. Generally when
you interview people coming out of these financial seminars, they say that they are going to raise
Chevalier: The other third of pigeons are the ones that take over the world. their savings rate; they’re going to change their asset allocation. You check the administrative
data afterwards, and they’ve pretty much done nothing.
Chen: Right, the other third of the pigeons actually go to the Ivy League
schools. And all of the other pigeons are working for them. Chevalier: To get back to the pigeons, are there examples of self-commitment devices
But what’s interesting in this new study is: Suppose you take a pigeon — and that work?
you already trained it in the other settings so it would know that this is what
the levers do — suppose you present the pigeons another two levers. And what Choi: One thing that we have seen in the marketplace is food packages that serve out very small
these levers do is prevent that original left lever and the original right lever portions — cans of soda that are extremely small and hundred-calorie snack packs. Of course,
from appearing to you in the future. So you have Left One and Right One. If the question is whether or not that actually reduces consumption. The way it’s marketed is that
you peck Left One, Left Two never shows up. And if you peck Right One, Right with these smaller package sizes, you commit yourself not to consume too much. And there is
Two never shows up. So now the pigeon can decide to make sure that he doesn’t work by Brian Wansink of Cornell University suggesting that portion size has a large impact in
see one of these levers in the future. how much we end up consuming.
And what it turns out is that very quickly, almost every pigeon learns to peck
Left One, in some sense to prevent themselves from having the temptation in Chen: There’s actually a huge amount of self-control literature in the animal
the future of getting the immediate but poor payoff. Now, whether or not the literature. Just anecdotally, I see monkeys, when they know that they should
pigeons are actively thinking of this as a self-control device or something like pull Lever B, but are tempted by Lever A — they’ll sit on their hands or they
that is unclear. I think it’s suggestive, but there could be just some very simple will turn away or go to the other side of the cage, as far away from Lever A as
reinforcement story underlying this. they can, and stare into the corner. There’s a lot of self-generated self-control
devices that you see.
Choi: There’s an interesting tension between this work and what we see in the market. The
pigeons seem to have a strong demand for self-commitment. And yet when you look at the Choi: You would think that technology could lead to more sophisticated and more pervasive
marketplace among humans, we see surprisingly little demand for self-commitment. Suppose self-commitment devices. You could program your refrigerator not to open between the hours
you’re trying to lose five pounds, and I offer you a self-commitment contract: you post a $1,000 of 7:30 p.m. and 6:00 a.m. And that could conceivably do a lot to reduce food consumption. But
bond to me, and if you don’t lose your five pounds, then I’ll keep your $1,000. If you lose the this is not in demand, as far as I can tell.
Q6 2009 James Choi, M. Keith Chen, Judith A. Chevalier 71
Are we good at making choices?
“People tend to Chevalier: I wouldn’t want that. I also think that the lack of a commitment device in
choose things that
the marketplace could well be informative about people’s motives. I mean, people don’t
want to starve in retirement. We know that to be true. So we feel comfortable imposing
on them some of these defaults which are really quite paternalistic. But there may be a
are going to make
lot of people who, if you asked them, would say, yeah, I’d rather be five pounds lighter
than I am, but not actually at the expense of not eating. I’d like it if I didn’t want my
them happier, Chen: I have some new research on cognitive dissonance that basically says that
the choices that people make say a lot about what they really want.
There has been a really long psychology literature that claims that the mere
even though they
act of choosing changes the way we feel about things, because we like to think
of ourselves as people who make good decisions. These experiments ask a
bunch of people to make choices between simple consumer goods. So, which of
may not be able
these two things would you like to take home with you today? Which of these
posters would you like to take home with you today and hang in your dorm
room? And there has been a really, really long line in the psychology research
that claims that, not only in adults but also in monkeys and in four-year-old
to express why.”
children and in people who have neural damage and don’t even remember what
choices they make, that the mere act of choosing between CD A and CD B —
say, a Debbie Gibson CD and a Madonna CD — causes people to like the good
that they chose more after making the choice than before.
My research is about how that appears to be slightly true, but not nearly as
much as the psychologists were claiming. In fact, the reason that this literature
has actually been misleading for such a long time is because it hasn’t taken into
account how, on some level, people tend to be very, very careful in the choices
they make, and choose things that are going to make them happier or choose
things that make them better off, even though they may not be able to express
why this will make them happier or make them better off. We may actually be
better about expressing our preferences by making choices about things than
when we try to describe why we think like we do.
Learn more about the research of Choi, Chen, and Chevalier at
Sofia, Bulgaria (photograph by Donovan Wylie)
Q6 2009 Dialog 75
Does money You encounter it every day. You might count it or
spend it or wish you had more of it. But can just
thinking about money affect your behavior?
Kathleen D. Vohs
Associate Professor of Marketing, McKnight Land-Grant Professor,
and McKnight Presidential Fellow, Carlson School of Management
at the University of Minnesota
Interview conducted and edited by Ben Mattison
76 Q6 2009 Kathleen D. Vohs 77
Does money change your thinking?
You’ve done a series of studies looking at how money affects people Then they were given either a challenging task or an actu-
psychologically. Why do you think this is an important question? ally impossible task to perform, and we let them know that they
could ask for help. For example, the experimenter would say,
Money is ubiquitous. The possibilities for psychological effects
“I’m right outside if you need anything — if you want any tips
are innumerable because of the number of times we are ex-
or advice or want to know how best to go about the puzzle.” In
posed to the concept of money. So its frequency in the natural
another experiment, we sat a peer in the same room as the
environment in and of itself makes it important to know about.
subject and we said, “She just completed the experiment that
you’re doing. I’ll be back in a little while, but if you have any
In one of your studies you tested how money affected people’s willing- questions, you could ask her.”
ness to help others and their desire to get help. How did you test that, In both of those settings, we found that when people were
and what were your results? reminded of money, they were less interested in receiving help
from others, suggesting not that money makes people selfish,
First we exposed the subjects to concepts of money in very subtle
but that it makes people self-sufficient, that they are interested
ways. For example, we would have some Monopoly money on the
in performing tasks and goals on their own.
table on which they were working, or we would have them do
a word task that involved unscrambling words that made up
logical phrases, and sometimes those phrases related to money.
There was another series of experiments that were done in China, on
Then we gave subjects the opportunity to help someone else. For
how money affects the perception of pain, both physical pain and the
example, in one experiment, after the subjects were either remind-
pain of social rejection.
ed of money or not, the experimenter would take them across the
room, when they’re intercepted by another person. That person is In that study, the subjects came into the lab and were ran-
part of the experiment, but it looks like she is just generally working domly assigned to do either one of two what we told them were
for the laboratory. She is holding in her arms a whole lot of different “finger dexterity tasks.” One of the finger dexterity tasks had
things — papers and pencils, and in particular she has a manila them count out 80 slips of paper and the other one had them
envelope full of those little tiny golf pencils. She drops the pencils count 80 bills of currency — each bill was equivalent to $14 in
right in front of the subject. the United States. Ten minutes later, we brought them into a
So the question is how many pencils the subject helps her different room and had them put their hands in either very hot
pick up. And it turns out that it varies as a function of whether water or only warm water. Subjects who had earlier counted out
or not they earlier were reminded of money. Subjects who money felt the pain of that hot water as being far less painful —
were reminded of money were less helpful than subjects not in fact, it looked equivalent, statistically, to their ratings when
reminded of money. they put their hands in the warm water.
You also found that people ask for help less for themselves.
You also tested how people would react to social rejection. How did you
Yes, we designed some experiments to see whether we could do that?
determine whether people were simply being selfish when they
We used an online virtual game, where subjects log in and
were reminded of money, or whether they were what we would
meet two other players and the three of them pass a virtual ball
call self-sufficient — wanting to do things on their own but also
back and forth. So you can set up the game such that the other
wanting other people to do their goals and tasks on their own.
two players are playing naturally and inclusively with the subject
So we engineered a few situations where subjects were either
— we call that the normal play condition — or you can rig it so
reminded about money or not. For example, some of them read
that the subject is passed the ball a few times in the beginning
an essay about what life was like having a lot of money.
but then is subsequently ignored by the other two players. The
subject spends the rest of the game watching the two players
78 Q6 2009 Kathleen D. Vohs 79
Does money change your thinking?
pass the ball back and forth with no one passing the ball to him One thing that struck me about your work is that when you’re testing
or her. This is a commonly used experimental game, and it’s people, they don’t actually own the money. They just have to touch it or
well known to have these social exclusion effects: people feel think about it to feel these effects. Given that there are lots of ways to
bad and lonely and they feel like no one likes them. get a hold of money without owning it fully — taking out a home-equity
So we had the subjects go online and play the game in loan, for example — might people think that they are more self-sufficient
one of those two conditions — either normally or in the social than they are, and would that cause them to do things that maybe aren’t
rejection condition — and then subsequently we said, “How did the wisest choices?
you feel during that game?” And we saw that after subjects had
That’s where I would go with it as well. I think that that’s exactly
been counting out money, they weren’t that bothered by being
right, because you don’t actually need to own that money or be
socially rejected. The reminders of money seemed to amelio-
endowed with that money, and yet it has these effects on you. It
rate social pain as well as physical pain.
speaks to the power that these effects could have on people in
their daily decisions. That may be where that linkage to irratio-
nal decision-making comes in.
Do you connect that with the idea of self-sufficiency?
I do. A self-sufficient person is going to have the mindset that
I have to live life on my own and I have to be able to achieve
whatever goals I want on my own. Being able to withstand pain
is a big part of that, since you only have yourself to rely on. We
didn’t say it like that in the paper, but that was what I think the
Much of economics is based around the idea that people respond to
situations in terms of their economic self-interest. If when you introduce
money into the equation, they start to respond in ways that have to do
with these additional factors, does that mean they’re behaving irrationally?
That’s an interesting question. It’s paradoxical: reminders of
money might make people less interested in behaving rationally.
I wouldn’t say that we’ve tested that directly. You could, I sup-
pose, make the case that people perceiving painful experiences
as less painful is irrational. But it can be seen as very rational
when you’re thinking about goal achievement, because goal
achievement means that you have to overcome some discom-
fort or inconveniences or displeasure. And so in order to achieve
your goal, you have to be able to stand pain, broadly defined.
Dublin, Ireland (photograph by Stuart Franklin)
Q6 2009 Vignette 83
Polaroid went from ubiquity to
obsolescence as digital photo-
graphy replaced the print.
But as early as the 1960s, Polaroid
had been doing research into
digital imaging. Did mistaken
assumptions keep the company
from making the transition
to the digital world?
By Andrea Nagy Smith
Photograph by Tony Rinaldo
84 Q6 2009 What was Polaroid thinking? 85
Polaroid was one of America’s early high-tech success stories. First, Polaroid leaders believed that customers would always want
Founded in 1937 by scientist Edwin Land, the company built its a hard-copy print. In his 1985 letter to stockholders, CEO I. MacAl-
initial business during the interwar period, prospered as a defense lister Booth reasoned,
contractor during World War II, and then found new success as an
As electronic imaging becomes more prevalent, there
innovator in the post-war boom years.
remains a basic human need for a permanent visual record.
In 1948, in response to a question from his young daughter, Land
Whether that record fulfills an emotional requisite in the
invented a camera that produced finished photographs in minutes.
visual diaries of amateur photography or provides practical
The invention was an immediate success, and over the next two de-
data in an industrial or scientific setting, the universal insa-
cades, the instant camera became widely used both in the consum-
tiable appetite for visual communication and portable infor-
er market and in the business market for such purposes as driver’s
mation will be constant, reflecting a continuing need for
licenses, crime reports, and real estate advertising.
instantly available, high-quality print media.
By the 1960s and early ’70s, Polaroid held a monopoly in the
instant photography market, and its sales accounted for about 20% Through the 1990s, Polaroid executives continued to believe in the
of the overall market for film and 15% of the U.S. market for cameras. importance of the paper print. Gary DiCamillo, CEO from 1995 to
At its peak the company employed 21,000 people. 2001, said in a 2008 interview at Yale, “People were betting on hard
The basis for the instant camera was a chemical process that copy and media that was going to be pick-up-able, visible, seeable,
mimicked the darkroom. However, Polaroid was not unaware of the touchable, as a photograph would be.”
progress of electronic imaging; on the contrary, the company was When customers abandoned the print, Polaroid was taken by sur-
involved in developments in the field early on. During the mid-1960s, prise. “It’s amazing, but kids today don’t want hard copy anymore,”
Polaroid took out some of the first patents on electronic shutters. said DiCamillo. “This was the major mistake we all made: Mac
Then in 1981, an official electronic imaging group was set up to de- Booth, Gary DiCamillo, people after me…. That was a major hypoth-
velop a “printer in the field,” an instant camera that would produce a esis that I believed in my marrow that was wrong.”
film-based print from a digital image. Even though it performed thorough market research, Polaroid
By 1989, 42% of Polaroid’s research and development funding was was unable to foresee that the photo album would be replaced by
being spent on digital imaging. By the late 1990s Polaroid was a top the digital slide show.
seller of digital cameras. A related mistaken belief was that the Polaroid Corporation would
However, the company was unable to capitalize on this success. always be able to make money through developments in chemis-
As digital cameras flooded the market, Polaroid began losing some try, especially photographic chemistry. In spite of its early research
of its big customers in the real estate, insurance, and photo identi- in digital photography, the company culture had a bias against
fication businesses. Film sales plummeted, and in October 2001, electronics that went back to the days of Edwin Land. According to
Polaroid filed for bankruptcy. former vice president Sheldon Bucker, Land was skeptical about in-
Why was Polaroid unable to make the transition to digital photog- vesting in electronics:
raphy? The key may have been some fundamental assumptions that
From his point of view, instant photography was going to
did not allow top management to adjust to new market realities.
be his legacy. It was going to last forever. And the idea that
there was some kind of fancy new technology from the
86 Q6 2009 What was Polaroid thinking? 87
physics side, in contrast to instant photography, which was which are produced instantly, can be carried in one lightweight de-
heavily founded in chemistry, that was going to displace the vice. Now that the camera has been joined to the cell phone and
creation of his genius was not a pleasant thought. other handheld devices, it is truly “a continuous partner of most hu-
man beings.” Ironically, the fulfilling of Land’s vision led to the end
Another former Polaroid executive, Hugh MacKenzie, recalled that
of his company.
Polaroid researchers resisted the whole idea of making money on
hardware: “The culture of the leadership was chemistry and media
The author of this piece, Andrea Nagy Smith, is a member of the Case Study Research
first. It had little respect for hardware…. They had a considerable
and Development team at Yale SOM and also wrote a case about Polaroid that has been
amount of fear from the chemical and film people about what would used in a class at the school.
their job be if we got into electronics.”
The sheer profitability of film sales created another obstacle to
thinking about new business models. When sales began to decline,
Polaroid was on the horns of a dilemma. As former CEO DiCamillo
We knew we needed to change the fan belt, but we couldn’t
stop the engine. And the reason we couldn’t stop the engine
was that instant film was the core of the financial model
of this company. It drove all the economics – not instant
cameras and not hardware or any other product; it was in-
stant film…. So we knew that we had to watch the film and
its rate of decline or erosion, and we had to replace it with
something that was equally profitable or approximately as
profitable. And instant film had gross margins well in excess
of 65%. So if you’re dealing with a media change, how do
you replace that with something that’s almost or probably
as profitable as instant film?
When Edwin Land first invented his camera and film, he imagined
that instant photography would change people’s lives. He said that
the camera should “go beyond amusement and record-making to
become a continuous partner of most human beings...a new eye,
and a second memory.”
Land did not realize how right he was. When he wrote those
words, the camera was a bulky appliance, and the print was stored
in a heavy album. Today the camera and hundreds of images,
Tokyo, Japan (photograph by Stuart Franklin)
Q6 2009 Dialog 91
Is risk rational? Misunderstanding of risk was a major factor
in the subprime crisis and ensuing recession.
Andrew Lo argues that one has to look at both
logical and emotional parts of the brain to grasp
how people respond to financial risk.
Andrew W. Lo
Harris & Harris Group Professor of Finance, MIT Sloan School of Manage-
ment; Founder and Chief Scientific Officer, AlphaSimplex Group, LLC
Interview conducted and edited by Jonathan T.F. Weisberg
92 Q6 2009 Andrew W. Lo 93
Is risk rational?
Q: What is risk? It seems like a multi- that same circuitry kicks in — increased heart imposing that deadline. And yet when we are Q: In one article, you compare a disaster
faceted term, ranging from how I decide rate, blood pressure, and so forth. While that overwhelmed by extreme emotional stimulus — that befell a mountain climbing expedition
to drive down the highway to how hedge response may be very helpful in protecting us for example, losing half of your 401(k) plan on Mt. Hood to what has happened in the
funds are related to banks. from physical threats, it’s actually counterproduc- over the course of three months last year — that financial system. Could you explain that?
In order to fully understand what’s been going tive in protecting us from financial threats, can be extraordinarily traumatizing. The That was a situation where some very experi-
on in the financial crisis, we need to go back which are much more subtle and require the use fight-or-flight response may very well have enced climbers made what many considered
to basics and define what we mean by risk. of different parts of the brain, parts that shut kicked in for a large number of people around a rookie mistake. And the reason was because
For individuals, risk is anything that they per- down in the face of extreme emotional stimulus. the world. And that will lead to potentially their perception of risk was actually quite a
ceive as threatening their well-being. Threats unproductive responses. bit lower than the reality. We all have mental
come in many different forms, so that risk is, Q: Is emotion a clouding factor when models of the world — all of us, except perhaps
in fact, a multidimensional attribute. We have you’re thinking about investing? Q: It seems like self-interest, which is the a few fortunate Zen masters. In many cases,
to remember that fact as we start consider- Yes, extreme emotion is. Recent research in basis of the rational model, is also at the those mental models are misleading. Some
ing economic contexts, because individuals the neurosciences has greatly enhanced our heart of your emotional response, right? of us think of ourselves as better athletes
very often will confuse risks to their financial understanding of the role of emotion. For ex- Exactly. But when emotion gets out of balance than we are, or as more attractive than we
wealth with risks to their physical health. ample, Antonio Damasio at USC has reached with the logical faculties of our brains, that’s may be. It’s important to bring these models
That’s perfectly natural, because the decision- the rather startling conclusion that emotion when behavior becomes irrational. into agreement with reality when discrepan-
making mechanisms that we have developed is absolutely essential for what we consider to cies can actually hurt us. Ultimately we do
over thousands of years of evolution don’t be rational behavior. In his wonderful book Q: And the rational model of economics that through the forces of natural selection.
always distinguish between those two. If we Descartes’ Error, he describes patients who have doesn’t necessarily take that into account. We learn by trial and error. In the case of the
begin with that definition, we can start to see undergone surgeries to remove tumors The rational framework of neoclassical eco- mountain climbers, unfortunately, the error
how it is that behavior ends up going off the in regions of the brain responsible for emotion, nomics and the efficient markets hypothesis was extraordinarily costly in terms of taking
rails in so many different contexts. and afterwards these individuals act very ir- are not completely wrong; they’re simply in- their lives.
rationally, focusing on minute and irrelevant complete. They focus on the behavior of mar-
Q: What kinds of emotional responses do tasks for hours on end without any concern kets and economic agents during “normal” Q: And you see a similar dynamic in the
people have to risk, and when do they be- for missed deadlines, waiting clients, and times, during times when there is that proper build-up to the financial crisis.
come inappropriate in a financial context? other responsibilities. balance between emotion and logical delibera- Absolutely. The example of the mountain
The first point to make is that humans have You need a certain degree of emotion to tion. What the behavioral economists have fo- climbers is so instructive. Many people are
very elaborate neural systems to address just get up in the morning and get things cused on is just the opposite — circumstances now asking, “How could it be that some of
threats. We didn’t get this far by being passive done. You’re going to write this article for where that balance is out of whack and people the most sophisticated financial institutions
with respect to our environment. But there is the magazine because there’s a deadline and act quite irrationally. in the world ended up making what now, in
a very important distinction between threats because you want to achieve something, and In fact, neither of these schools of thought retrospect, seem like rookie mistakes, such
in the modern world versus threats on the if you don’t, you will be suitably embarrassed, is correct; they are both different halves of the as taking on too much leverage?” But the fact
plains of the African savanna at the time we frustrated, and stressed out. All of those reac- complete picture, which I call the “Adaptive is, when you’re building a business and the
branched off from chimpanzees and other tions are emotional responses that help you to Markets Hypothesis.” In that framework, in- perceived risks have declined because of years
great apes. In particular, the emotional circuitry get things accomplished in your life. Imagine dividuals are simply biological agents that end of success and prosperity, well, you become
that all of us have as part of our so-called if all of those emotions suddenly disappeared. up reacting, adapting, mutating, competing, complacent about some of those risks in the
mammalian brains kicks in to protect us from But with too much emotion, we very quick- and evolving. Instead of focusing on either of same way that these very experienced moun-
perceived threats. We’ve all heard of the “fight- ly become overwhelmed and the ancient circuit- the two extremes of rationality and irrational- tain climbers figured this was not a very chal-
or-flight” response. That’s probably the most ry that protects our physical existence kicks ity, we should acknowledge both aspects of lenging mountain. It was that false sense of
significant kind of emotional circuitry to be in. The fight-or-flight response is probably our behavior and try to understand how and security and perceived lack of risk that led to
activated when we are threatened. Unfortu- not an appropriate reaction to your deadline; why we switch from one mode to the other. their demise.
nately, when we are faced with threats from you don’t want to run away from that respon- This is not just a metaphor. This is exactly
the modern world, such as financial threats, sibility, nor do you want to kill your editor for what happened with those financial market
94 Q6 2009 Andrew W. Lo 95
Is risk rational?
participants who took on too much risk, who mented a number of new sources of risk that not about losing money. People have been los- I think the government has a very big role to
over-leveraged, who became too aggressive didn’t exist 15 or 20 years ago, largely be- ing money ever since there has been money. play, but not in the way that most people have
about building their businesses. They didn’t cause of the tremendous influx of assets into The real problem is when the wrong parties been arguing. I don’t believe that government
think it was all that risky. They actually thought various exotic trading strategies. One way to lose money, and by that I mean parties that can possibly engage in the fine tuning of sys-
that they had been able to deal with those deal with these complexities is to design more are not properly prepared for those losses. temic risk. It’s just not something that we have
risks reasonably well. Unfortunately they sophisticated tools, in the same way that we For example, when a hedge fund investor been able to do in the past, and I don’t see why
were wrong. developed the wheel, the lever, and all of the loses 50% of her investments, that’s unfortunate, we’ll be able to do it any better going forward.
tools that are responsible for the wonderful but it’s hardly a national tragedy. On the other For example, the Federal Reserve System was
Q: Can I push the comparison one step prosperity that we enjoy in modern society. hand, when a money market fund, a bank, or set up for addressing bank runs and other
further? The climbers were tied to each an insurance company loses 50% of its assets, liquidity crises. Over the last 15 or 20 years,
other, and then they were right above an- Q: Do you think you’re close to having im- that’s a major problem, because those institu- the Federal Reserve has been very active, and
other group, right? All the ties between proved tools? tions (and their clients) are not prepared for yet it’s been clear that they were not able to
people and institutions seem important. Absolutely. In fact, we’ve had them over the those losses. And it must be the case that forecast, much less prevent, the current crisis.
Yes, we are all “tied” to each other. In fact, last five years. In papers that I wrote in 2004 those institutions were either mis-measuring The financial system today is far too com-
there is an interesting although somewhat and 2005, my co-authors and I warned about their risk exposures or, somehow, the risks plex for any single organization to be able to
morbid phrase that the mountain climbers the impending crisis, because we actually saw they were taking were inconsistent with the address it. One of the biggest challenges is to
use: When you tie yourself to another climber it in the data using some of these new tools. risks their clients and counterparties were develop additional expertise and understand-
and that other climber doesn’t engage in “be- The New York Times wrote an article in Sep- expecting. So the first point about dealing ing for how the financial system imposes sys-
laying,” that is, securing himself to the side of tember of 2005 where they pointed out that with crisis is to make sure we have an accurate temic risks that didn’t exist a decade ago. I’ve
the mountain using pitons, screws, and other the hedge fund industry was heading for a ma- measure of the actual risks that investments called for the establishment of an equivalent
devices, then you’ve entered into a “suicide jor dislocation, according to our research. And are providing to their investors, in order to of a National Transportation Safety Board
pact” with the other climber — your fate is liter- it was ignored, because, as the former CEO properly prepare for those risks. You cannot for financial markets, sort of a Capital Mar-
ally tied to the other climber’s fate. And, in of Citigroup, Chuck Prince, said, if the music manage what you do not measure. kets Safety Board, whose sole function is to
effect, all of us were tied to the U.S. residen- is playing, you’ve got to dance. So people Once we understand exactly what types investigate financial “accidents” and produce
tial housing market. We just didn’t know it. continued dancing. Until the music stopped. and magnitudes of risks we’re facing, it’s actu- reports detailing the underlying causes. The
ally not that difficult to prepare for them. NTSB does not regulate the airline indus-
Q: Is it much easier to overlook the risk in Q: You run a hedge fund. How do you han- One cannot legislate away hurricanes, but one try; all the NTSB does is examine accident
that sort of tie than one that is a threat to dle risk from the practical end, as opposed can provide early warning and preparation. sites, collect the black boxes, sift through
our physical well-being? to the theoretical end? It turns out that if you provide localities with the wreckage, and produce publicly available
The financial world that we live in is so much I think that the tools that we developed are, just a few hours notice about the impending reports that describe what happened, how
more complex than even 10 or 15 years ago. in fact, quite practical. So we practice what arrival of a hurricane, you can reduce the losses it happened, why it happened, and how we
Fifteen years ago, the word “subprime” meant we preach. And so far it has held up well, pre- from that hurricane by a tremendous amount. might keep it from happening again. If we
sub-standard beef. The modern world is cisely because we manage those risks aggres- Insurance companies have figured this out. did this for every single financial crisis or
fraught with dangers that our biology is not sively and dynamically. That’s one of the most Similarly, if we can properly warn the various blow-up that occurs, then, over time, we’re
adapted to address naturally. So we have to exciting aspects of academic finance — some parties that they are about to get exposed to going to see common patterns and themes
work at it. We have to engage in research and of the most esoteric analytics have immediate major financial dislocations, they can prepare that will enable us to better prepare for these
development and create technologies to pro- practical applications. for them, and we can reduce the degree of col- kinds of dislocations. Once we understand
tect ourselves from these kinds of dangers — lateral damage significantly — pun intended. better what the underlying mechanisms are
in the same way that mountain climbers use Q: What are some of your ideas for im- for these kinds of crises, we can then impose
different technologies like pitons, crampons, proving how the whole industry responds Q: The government has ended up being the appropriate safeguards. We certainly don’t
and synthetic ropes to protect themselves. to risk? the insurer in the case of the financial hur- need more regulation; we just need smarter
In some of the research I’ve done over these The first point that I’ve made in some of my ricane. How big a role do you see for the regulation.
last few years on hedge fund risks, I’ve docu- writings is that the financial crisis is really government?
Fall 2009 Fall 2009
What areare you thinking?
What you are you thinking?
Coming in Q7: look like? like?
Shiller look look
Robert J. Robert J. Shiller
Robert J. Shiller like?
What a choice
What does does
What does a choicea choice
Neuroeconomists peek peek
Can we afford sustainability?
What isWhat is behavioral?
Nicholas Barberis, Ulrike M. M.
Nicholas Nicholas C. Barberis, Ulrike M.
C. C. Barberis, Ulrike
inside theinside the brain
inside the brain 2009 Fall
Fall Fall 2009 2009
Malmendier, Shane Frederick, 82 What was Polaroid
What was Polaroid
Malmendier, Shane Frederick, and and82 What was Polaroid
Malmendier, Shane Frederick, and 82
Sharon M.Sharon M. Oster
Andrew J. Redleaf
Andrew J. Redleaf Redleaf
Andrew J. thinking?
need a a nudge?
DoDo you needneed a nudge?
you Do younudge?
How faulty assumptions hampered
How assumptions hampered
How faulty faulty assumptions hampered
the the company
Dean Dean and Frederic D. Professor of
Frederic D. D. Wolfe Wolfe of
Dean andand FredericWolfe Professor Professor of
Management andand Entrepreneurship
Management and Entrepreneurship
Ongoing discussion of past questions at
Richard H. Thaler
Richard H. ThalerH. Thaler Elizabeth Stauderman
Associate Dean for Communications
Dean for Dean for Communications
Can behavioral economics
Can behavioral economics
Can behavioral economics
4 54 54
improve law? law?
Christine Christine Jolls Jonathan Weisberg Weisberg
Jonathan T.F. T.F. Weisberg
What’s the new capital up to?
Are Are we making
good at at making
Are wewe goodgood at making
60 60 firstname.lastname@example.org
choices? Mattison Mattison
Jon Carson ’84, CEO of BiddingFor-
James Choi, M. Keith Chen, Chen,
James Choi, M. Keith
James Choi, M. Keith Chen, Managing Editor
Managing Managing Editor
Judith A. Judith A.
and A. Chevalier
andand JudithChevalier Chevalier email@example.com
Good, and Scott Griffith, CEO of Zipcar,
Does money change your
Does money your
Does money change change your
discuss for-profit social enterprise.
Kathleen D. Vohs
Kathleen D. Vohs D. Vohs
0 90 Is risk rational?
Is risk rational?
Is risk rational?
Staff Writer Writer
Where’s the value in globalization?
Andrew W. Lo Lo W. Lo
Concept design by 2x4 2x4
Concept and by
Concept andand designdesign by 2x4
Princeton philosopher Peter Singer Office Office of Communications
Office of Communications
Yale School of Management
Yale School of Management
Yale School of Management
discusses the responsibilities of Box 208200 208200
PO PO Box 208200
New Haven, CTHaven, CT 06520-8200
New Haven, 06520-8200
New CT 06520-8200
individuals for addressing global poverty. Qn, a publication ofYale Yale School of Management,
Qn, of the the School Yale School of Management, is
Qn, a publicationa publication of the of Management, is is
published twice a under a year under of auspices
published twice the the auspices of the Dean,
published twice a year year underauspices thethe Dean, of the Dean,
School of Management.
Yale School of Management.
Yale Yale School of Management.
Plus more on What are you thinking? a is a magazine of opinion. views expressed in Q6 Q6
Q6 is a magazine of The views expressed in
Q6 isQ6magazine of opinion. The opinion. The views expressed in Q6
are the viewsarethe authors and contributors,contributors, and do
are the views of views of the authors and and do do
of the the authors and contributors, and
not reflect the views of views of School of Management.
not reflect the the School Yale School of Management.
not reflect the views of the Yale Yale the of Management.
Subscribe to our RSS feed: qn.som.yale.edu/
Q6 was typeset in American Typewriter, Elzevir, DTL
Q6 was typeset in American Typewriter,
Q6 was typeset in American Typewriter, DTL DTL Elzevir, Elzevir,
and Swiss fonts.
and Swiss fonts. Swiss fonts.
The greenhouse gas emissions associated with
The greenhouse gas emissions associated
The greenhouse gas emissions associated with the the with the
rss.php. Follow us on Twitter: twitter.com/qn_ production of this magazine been offset through
production of this magazine have been offset
production of this magazine havehave been offset through through
the purchase of renewable energy energy certificates.
of purchase energy certificates.
the purchasethe renewableof renewablecertificates.
cover photograph by Richard Mosse
Back cover photograph by Mosse
BackBack cover photograph by Richard Richard Mosse
Adjacent photograph by Rinaldo
Adjacent photograph Rinaldo
Adjacent photograph by TonyTony by Tony Rinaldo
Interviews for were Q6conducted from from
Interviews were were conducted
terviews for Q6 Q6forconducted from
July through September 2009. 2009.
July through September
uly through September 2009.
Visit qn.som.yale.edu for updates ongoing discussion.
Visit qn.som.yale.edu for updates and ongoing discussion.
sit qn.som.yale.edu for updates andand ongoing discussion.
Printed on recycledrecycled paper.
Printed on paper.
Printed on recycled paper.
Cover photograph by Richard Mosse Mosse
Cover photograph by Richard
ver photograph by Richard Mosse