Customer Reviews

The Winner's Curse: Paradoxes and Anomalies of Economic Life

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As with any model claiming predictive power, economics rests on a theory of human behavior-specifically, rational choice theory, which posits decisionmakers who are autonomous individuals who make rational choices that maximize their satisfactions. Critics of economics have long complained that rational choice is, at best, an incomplete account of human behavior. The traditional response to that criticism is that rationality is simply an abstraction developed as a useful model of predicting the behavior of large numbers of people and, as such, does not purport to describe real people embedded in a real social order. A theory is properly judged by its predictive power with respect to the phenomena it purports to explain, not by whether it is a valid description of an objective reality. Indeed, important and significant hypotheses often have assumptions that are wildly inaccurate descriptive representations of reality. Accordingly, the relevant question to ask about the assumptions of a theory is not whether they are descriptively realistic, for they never are, but whether they are sufficiently good approximations for the purpose in hand. Until quite recently, empirical research tended to confirm that the rational choice model of human behavior is a good first approximation of how large numbers of people are likely to behave in exchange transactions.

Over the last 10-15 years, however, a new school of economic analysis has emerged that challenges the rational choice model precisely on its predictive power. Empirical and laboratory work by cognitive psychologists and experimental economists has identified a growing number of anomalies in which behavior appears to systematically depart from that predicted by rational choice. Some of the more important examples of these decisionmaking biases include: ** Herd behavior: Why do lemmings leap off that cliff in Norway? What explains fads like Beanie Babies and Pokémon? Herd behavior occurs when a decisionmaker imitates the actions of others, while ignoring his own information and judgment with regard to the merits of the underlying decision. ** The status quo bias: All else being equal, decisionmakers favor maintaining the status quo rather than switching to some alternative state. The status quo bias can lead to market failure where decisionmakers' preference for the status quo perpetuates suboptimal practices. The extent to which behavioral economics calls into question more traditional modes of economic analysis remains sharply contested. At the very least, however, it seems clear that attention must be paid to the possibility that behavioral analysis sheds light on policy issues.

Richard Thaler is one of the foremost behavioral economists. In this (relatively) accessible introduction to this emerging literature, he collects (and revises) a series of articles he wrote for the Journal of Economic Perspectives. As such, there book reads more like an anthology than a coherent whole. Yet, each of the chapters is highly instructive. More important for the general reader, while the selections are all highly rigorous, Thaler steers clear of the sort of recreational mathematics that plagues so much of modern economics. Of particular interest to lay readers, I suspect, will be the chapters on investing. Thaler offers a highly insightful analysis of the various anomalies in capital market behavior that appear to be inconsistent with the standard economic assumptions built into the efficient capital markets hypothesis and the capital asset pricing model. In sum, a useful introduction to the literature.

Much more fun to read than I expected. I am generally put off by economics books, but this one turned into a fascinating read.

The Winner's Curse lists a series of economic anomalies, the title being one of them. Thaler calls them anomalies since each defies 'classical' economic theory, generally the notion that markets are efficient and participants know what they are doing. Since few would accuse me of knowing what I'm doing when buying stocks, I find myself happily agreeing with Thaler's digs at Ivory tower economists.

The "winner's curse" anomaly is the notion that people who 'bid to win' at an auction, are often sorry that they won. My favorite anomalies included 'loss adversion' (we remember financial disasters, not successes), 'Intertemporal Choice' (our mental 'rate of return' analysis baffles the experts), 'the favorite factor' (yes, bet on the favorite!), and 'calendar effects' (forget about random walks down Wall Street).

How rational are human beings or how close to the economic models do they act? This book is a collection of articles by Professor Thaler which shows that we quite usually don't behave like theory predicts. Thaler's extensive research (the references are 30 pages long) gives The Winner's Curse a great academic foundation, but its maths that can be skipped and easy language makes the book acessible - and enjoyable - for every one that is just interested in Economics. To sum up, if you are studying or working with Economics, you should read this book. It will help you to be skeptical about the theory - just like every scientist should be. If you are reading it just by curiosity, it will enhance your skills when your are talking about the economy at a local pub. Actually, The Winner's Curse teaches you how to make money even in a pub. It worths the money. It's an excellent book.

This book is an excellent introduction to consumer behavior, especially behavioral finance. While it reads at times like an anthology, the book covers many discrete aspects of consumer behavior. By consumer behavior, it is meant consumer risk-taking. Many solid examples, especially in the financial arena. If you are a contrarian investor, then this book is for you--identifying why the "herd" often behaves in the manner that it does with respect to financial decisions. This book will pay for itself many times over, if only you apply it to future investment decisions

We highly recommend this classic of economic literature, one of the first (more or less) accessible presentations of the evidence against economic rationality. Economists have assumed, conventionally, that economic choice rests on a foundation of rationality. For instance, economists tend to think that people will put the same value on two mathematically identical offers. Yet laboratory experiments have proven what everyday experience suggests: people are not quite rational. Author Richard H. Thaler, a founding father of behavioral economics, presents convincing exhibits to make the case that the assumption of economic rationality is an awfully big pill to swallow. Stylistically, his book strikes a neat balance between accessibility and obscurity. A reader will need a certain amount of schooling in economics and a great deal of patience with academic prose to wade through every word of every chapter, although the payoff is substantial. However, it is possible for the impatient reader to get the gist by reading the introduction, the first page or two of each chapter and the epilogue. And even that is eminently worthwhile.

This book by one of the triumvirate of today's leading experimental economists is a solid introduction to many of the challenges which posit to unseat the rational selfish man, homo economicus. Each chapter, which is essentially derived from a corresponding published academic paper by the author on game theory and experimental economics, clearly and succinctly introduces many of the theories and problems currently being researched and debated in academic circles. For someone who is familiar with the author's work, or that of Kahneman and Tversky, the book is largely redundant. Nevertheless the book serves as a great starting point in the field of experimental economics and poses many thought-provoking questions for both the seasoned economist and the curious mind.

"The Winner's Curse" is a collection of academic articles Richard Thaler wrote for academic literature. And while Thaler thinks like a good economist, unfortunately, he writes like a good economist (that is, badly). This is a helpful book if you are interested in a rigorous mathematical treatment of economic anomalies and have a more than cursory understanding of game theory. If not, check out "Inevitable Illusions: How Mistakes of Reason Rule Our Minds" instead.

There are some interesting things that you have to think about while reading this book. From how much should you bid if there are multiple bidders in an auction to making the odds work for you in the stock market or the race track. Each chapter explores a different dilemma for the person who "wins".

The only aside I will offer is that the text is hard to read. I am a very light reader and found that the subject matter required several passes in some sections to digest what the author was presenting. Statistically oriented readers should really enjoy this book.

The "Winners Curse" is a book about behavioral economics. It applies experimental human psychological studies to economic behavior. It consists of 14 chapters, each devoted to a different "anomaly" in economic behavior. The term anomaly is used by the author to denote behavior that runs counter to the assumptions of most theoretical economic models, which assume that people act in a rational and greedy manner. To me (not an economist), that anyone would base a theory on the assumptions of rational human behavior and that people are always greedy (seeking the maximum economic gain) is a bit irrational. It does not come as a surprise to me that people act irrationally and that they can sometimes act for the common good, instead of seeking maximum personal gain.

Each chapter starts with a brief hypothetical problem. Some are based on real problems, (such as playing the lottery, betting on horses, the calendar effect on stock market prices, foreign currency exchange problems, ...) or based on model games, (such as bargaining games, games where cooperation is required, auction games,....). The results of these experimental games and the statistical data on human behavior in real situations (such as stock market purchases) are then compared to the predictions of the theoretical models that assume rationality and greed. The point of the book is that it can be experimentally shown that people act irrationally (from an economic perspective) and can act in a manner that does not seek the maximum personal gain. The author does not believe that this spells the end for theoretical economic modeling, only that more psychological input is required.

This book is interesting, but in my opinion it is neither fish nor fowl. I do not think that it is rigorous enough to satisfy an economist, but is somewhat too complicated in spots for general readers. After the general statement of the problem there is a discussion of the experimental data that bears on the problem. This discussion can be hard for a non-economist (me) to follow at times. That said, I enjoyed book and got a lot of interesting information from it. I learned why it is sometimes a good deal (yielding a positive expected value) to play the lottery and what the most commonly chosen numbers are. The author also points out that this does not mean that you will win, only that if you and your descendants played at the correct times for a thousand years or so, you would eventually make more than what you would spend on tickets. In some situations it is thus favorable to buy tickets covering all the possible combinations, but you would need millions of dollars and a way to physically buy millions of tickets. I learned the best days to buy or sell a stock (at least statistically on which days the market tends to go up and on which it tends to go down).

By the way, the Winners Curse refers to the winner of an auction being cursed because the price paid was too high. I learned that with many bidders it is best to lower the maximum price that you are willing to pay. Unfortunately, doing this means that you will seldom get the item, but when you do succeed you will not be cursed by paying too much.

All in all, stick with it. If necessary, skip over some of the discussion of the experimental data and go to the concluding remarks for each chapter. I found it to be worth the effort.

Most anyone will find this discussion of Thaler's (and his colleagues) work enough to whet their appetite for more on the subject. It is only a matter of time before you will find yourself digging up the academic papers behind the discussions. My only complaint: the supporting books by Kahneman and Tversky are expensive!