Do you prefer 70 out of 100 points or 96 from 137 ?
This year’s Nobel laureate for Economics, Richard Thaler, noticed that students preferred the latter. Yet a rational thinking economist should say a 70% on a test is a 70% no matter what the point score (check….96 on 137 is what as a percentage?).
Therefore Richard Thaler developed a new theory, behavioral economics, which aims to take into account the fact that consumers and producers do often behave irrationally. He suggests that economic policy makers should try to “nudge” people in certain directions in order to provide optimal outcomes.
For example, in order to maximize tax revenue, it may be more efficient to tell people that all their peers are paying taxes rather than setting up tax evasion penalties.
Another interesting area is how we tend to look at past outcomes in order to decide whether to continue with a project or a type of behaviour rather than assessing the future rationally.
Here, Richard Thaler, appears as a cameo part in the film “The Big Short”, which is a fictionalised account of the 2008 banking crisis. It first appeared in 2015 and I happened to watch it for the second time last night (I am still trying to understand exactly the events of 2008). I had forgotten that Richard Thaler himself tries to explain the irrationality that occurred/