Podcast Summary
Challenging the rational economic assumption: Behavioral economics, pioneered by Richard Thaler, challenges the traditional economic assumption of rationality and studies real people's economic behaviors, leading to a more nuanced understanding of human behavior in economic contexts.
Behavioral economics, a field pioneered by Richard Thaler, challenges the traditional economic assumption that people are rational and emotionless. Thaler, who was awarded the Nobel Memorial Prize in Economic Sciences in 2017, is known for his laid-back approach and his focus on studying real people and their economic behaviors. He and his colleague, Daniel Kahneman, have shown that people often make irrational decisions and exhibit biases, leading economists to reconsider their models. Thaler's work, as described in his book "Misbehaving," has made a significant impact on economics, leading to a more nuanced understanding of human behavior in economic contexts. This shift from studying fictional, rational "econs" to studying real people has been a game-changer in the field.
Understanding Mental Accounting in Relationships: Mental accounting can impact relationships by leading to unexpected behaviors and potential issues. Separate checking accounts for individual spending and a joint account for shared expenses can help manage mental accounting and maintain financial harmony.
Mental accounting, the tendency to label and categorize money in our minds, can lead to unexpected behaviors and even potential issues in relationships. Mental accounting is the idea that money is not fungible, and we assign labels to different uses of money. For instance, having separate jars for rent, utilities, and food. While this concept was more literal in the past, we still practice mental accounting mostly in our heads. A personal example shared in the discussion was how one's satisfaction with a meal can be increased when not paying with one's own money. The recommended solution to this issue is to have separate checking accounts for individual spending while maintaining a joint account for shared expenses. This approach ensures transparency and trust while allowing for individual splurges and gifts to come from one's own funds. By acknowledging and managing mental accounting, couples can maintain financial harmony and a stronger relationship.
Mental accounting impacts earning and spending decisions: People treat different sources of income differently, influencing their earning and spending habits.
Mental accounting, a behavioral economics concept, influences how people decide to earn and spend money. Cab drivers in the study set targets for their daily earnings, causing them to leave early on rainy days with high demand, even if they haven't reached their desired income. Economically, they should work longer hours on busy days and less on slow ones. However, mental accounting causes people to treat different sources of income differently. A study by Viviana Zelizer found that sex workers in Oslo spent welfare checks responsibly but spent earnings from sex work on non-essential items. This shows that the source of money can significantly impact spending habits.
How our perception of money changes with its source: Winning a large sum of money can lead to a shift in priorities and lifestyle, and experiences bring more happiness than material possessions.
The source of money greatly influences how we perceive and spend it. As illustrated in the clip from "Welcome to Me," a woman's reaction to suddenly winning $86 million is vastly different from how she would have spent a $200 honorarium 15 years ago. Studies show that people derive more happiness from experiences like vacations than material possessions like cash bonuses. This could be due to the fact that experiences create lasting memories and provide a sense of accomplishment and fulfillment that material possessions may not. Additionally, the woman in the clip, Alice, uses her winnings to live extravagantly and host her own talk show, demonstrating how winning a large sum of money can lead to a shift in priorities and lifestyle.
The Challenge of Self-Control: Self-control is a valuable skill that requires effort and energy, often overlooked in economic theories.
Self-control requires effort and can be challenging, even for adults. This was highlighted in a discussion between Shankar Vidantham and behavioral economist Richard Thaler, who shared a personal experience of sending his daughter the funds for baseball tickets instead of the tickets themselves. The daughter, despite initial excitement, did not use the money as intended. This situation illustrates how humans may struggle with self-control and delaying gratification. Thaler also referenced the marshmallow experiment conducted by Walter Michel in the 1970s, where children were given the choice between one marshmallow immediately or two marshmallows if they waited. The experiment demonstrated that self-control is a valuable skill that requires effort and energy, and economic theories often overlook this aspect.
Understanding the challenges of self-control: People's ability to resist temptation can fluctuate, and using external enforcers can aid in maintaining self-control.
Self-control is a challenge for many Americans, as demonstrated by high obesity rates and insufficient retirement savings. Our ability to resist temptation can vary greatly depending on our emotional state and external factors. The marshmallow experiment is a classic example of this, showing that people may resist immediate gratification when they are not hungry, but give in when they are. To combat this, some people try to use external enforcers to help maintain self-control. This concept dates back to the myth of Ulysses, who had himself bound to the mast of his ship to resist the sirens' song. In modern times, this can take the form of asking a friend to help keep us away from temptations, like desserts. Larry David from the TV show Curb Your Enthusiasm provides a humorous example of this. Ultimately, understanding the challenges of self-control and exploring ways to address them can help individuals and society as a whole make better choices for their long-term well-being.
The hot-cold empathy gap and our changing decisions: Our emotions and situations can influence our decisions, even if we've made a commitment earlier, creating a gap between our hot and cold emotional states.
Our decisions can be influenced by our emotions and the situation we're in, even if we've made a commitment earlier. This concept is known as the hot-cold empathy gap. For instance, in the discussion, the woman initially said she wouldn't have dessert but later changed her mind. This change occurred due to her emotional response to the dessert in front of her. Richard Thaler, a behavioral economist, explains this phenomenon in his book "Misbehaving." This week's episode was produced by Karima Gargalesen, Maggie Penman, and Max Nestrec, with contributions from Tara Boyle, Reina Cohen, Parth Shah, Jennifer Schmidt, and Renee Clark. A special thanks to the unsung heroes, Adam Osman, Nikki Strickland, Thomas Bussy, and Don Gooden, who worked tirelessly to help NPR move to a new floor and create a productive workspace. Their understanding of the importance of a good environment for creativity and focus was crucial to the transition.
