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69 of 72 people found the following review helpful:
4.0 out of 5 stars
Useful introduction to a controversial field, June 8, 2000
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.
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42 of 45 people found the following review helpful:
5.0 out of 5 stars
Economic behavior puzzles the experts, June 8, 2000
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).
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20 of 20 people found the following review helpful:
5.0 out of 5 stars
How to make money in a pub?, June 1, 2001
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.
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