Review of "Nudge: Improving Decisions About Health, Wealth, and Happiness"

Review of the book "Nudge: Improving Decisions About Health, Wealth, and Happiness" by Richard H. Thaler and Cass R. Sunstein

Expected utility: a defense

In recent papers Matthew Rabin and Richard H. Thaler have argued that expected utility theory generates implausible predictions about individuals' attitudes toward small vs. large risks. Specifically, these authors argued that expected utility theory, plus the assertion that individuals reject small risks that are actuarially unfavorable, implies that agents should reject large risks which in fact they would accept. In this paper we question the presumption that the small risks are in fact rejected: they have risk-return characteristics that are superior to those of the daily returns on common stocks, which individuals generally find acceptable.

Siguiendo el dinero : contabilidad mental

La contabilidad mental ha tomado fuerza en los ultimos años, desde Kanheman y Tversky hasta Richard H. Thaler. Es por esto que en el presente trabajo se retoman las teorías más fuertes y consolidadas de la contabilidad mental para responder a la siguiente pregunta: "¿Realmente los sujetos asignan un valor diferente al dinero según la procedencia de este?". Atreves de los sesgos cognitivos, heurísticas y errores comunes en los sujetos responderemos a esta pregunta.Mental accounting has gained strength in recent years, from Kanheman and Tversky to Richard H. Thaler. For this reason, in this paper the strongest and most consolidated theories of mental accounting are taken up to answer the following question: "Do subjects really assign a different value to money depending on where it comes from?" Through cognitive biases, heuristics and common errors in the subjects we will answer this question

Myopic Loss Aversion and the Equity Premium Puzzle

The equity premium puzzle, first documented by Mehra and Prescott, refers to the empirical fact that stocks have greatly outperformed bonds over the last century. As Mehra and Prescott point out, it appears difficult to explain the magnitude of the equity premium within the usual economics paradigm because the level of risk aversion necessary to justify such a large premium is implausibly large. We offer a new explanation based on Kahneman and Tversky's 'prospect theory'. The explanation has two components. First, investors are assumed to be 'loss averse' meaning they are distinctly more sensitive to losses than to gains. Second, investors are assumed to evaluate their portfolios frequently, even if they have long-term investment goals such as saving for retirement or managing a pension plan. We dub this combination 'myopic loss aversion'. Using simulations we find that the size of the equity premium is consistent with the previously estimated parameters of prospect theory if investors evaluate their portfolios annually. That is, investors appear to choose portfolios as if they were operating with a time horizon of about one year. The same approach is then used to study the size effect. Preliminary results suggest that myopic loss aversion may also have some explanatory power for this anomaly.

Libertarian Paternalism Is Not An Oxymoron

Cass R. Sunstein and Richard H. Thaler assert that while the idea of libertarian paternalism might seem to be an oxymoron, it is both possible and legitimate for private and public institutions to affect behavior while also respecting freedom of choice. Often people's preferences are ill-formed, and their choices will inevitably be influenced by default rules, framing effects, and starting points. In these circumstances, a form of paternalism cannot be avoided. Equipped with an understanding of behavioral findings of bounded rationality and bounded self-control, libertarian paternalists should attempt to steer people's choices in welfare-promoting directions without eliminating freedom of choice. Sunstein and Thaler argue that it is also possible to show how a libertarian paternalist might select among the possible options and to assess how much choice to offer. This paper gives examplesfrom many areas, including savings behavior, labor law, and consumer protection.

Can the Market Add and Subtract? Mispricing in Tech Stock Carve-Outs

Recent equity carve-outs in US technology stocks appear to violate a basic premise of financial theory: identical assets have identical prices. In our 1998-2000 sample, holders of a share of company A are expected to receive x shares of company B, but the price of A is less than x times the price of B. A prominent example involves 3Com and Palm. Arbitrage does not eliminate these blatant mispricing due to short sale constraints, so that B is overpriced but expensive or impossible to sell short. Evidence from options prices shows that shorting costs are extremely high, eliminating exploitable arbitrage opportunities.

From Homo Economicus to Homo Sapiens

During the IIFET 2000 meeting, one session was set aside to discuss issues raised in an article by Richard H. Thaler entitled "From Homo Economicus to Homo Sapiens," in a recent (2000) issue of The Journal of Economic Perspectives 14(1): 133-141. The session began with the following summary of some of the key arguments raised by Thaler