Misbehaving

What are the big ideas?

1. The Endowment Effect and Its Implications for Consumer Behavior: This book introduces the endowment effect, a phenomenon where people value an object more highly when they own it than when they do not. This effect has important implications for understanding consumer behavior and economic decision-making, as it highlights the importance of considering psychological factors in addition to traditional economic models that focus on rational self-interest.
2. Nudging: The book discusses nudges, which are tools used to influence individuals' decisions in order to achieve better outcomes for society. Nudges are distinct from other interventions because they do not restrict or mandate certain choices; instead, they subtly guide people towards making better decisions. This approach is unique as it recognizes the importance of understanding human behavior and biases in designing effective policies.
3. Contextual Influences on Risk-Taking: The book highlights how people's risk-taking behavior can be influenced by various factors, including the context in which they make decisions. For example, people may exhibit less risk aversion and more cooperation when the stakes are lower. This insight is unique because it challenges the traditional assumption that people's risk-taking behavior is consistent across different situations.
4. Market Inefficiencies: The book argues that market inefficiencies can lead to significant misallocation of resources if left unchecked. Examples like the Palm-3Com spinoff illustrate how market inefficiencies can arise due to human biases, which cannot be explained by traditional fundamental analysis or the efficient market hypothesis (EMH). This insight is unique because it challenges the assumption that markets are always able to efficiently price assets and highlights the importance of considering behavioral factors when analyzing financial markets.
5. The Role of Transparency and Ethics in Nudging: The book emphasizes the importance of transparency and ethics when designing and implementing nudges. This is unique because it recognizes that nudges, like any other intervention, can be used for both good and bad purposes. By focusing on the ethical implications of nudging, the book encourages policymakers to consider the potential consequences of their actions and ensure that nudges are designed with the intention of benefiting society as a whole.

Summary

Preface

Takeaways

• Amos Tversky, a renowned psychologist, kept his terminal illness a secret and continued working until his death.
• He wanted to edit a book on judgment and decision-making with collaborator Daniel Kahneman before passing away.
• Amos valued work, family time, and watching basketball during his final months.
• He did not want unnecessary treatments that would make him sicker.
• Amos believed cancer is not a zero-sum game and found humor in his situation.
• Danny Kahneman considered Amos's laziness as his best quality, leading him to focus on intriguing questions.
• This book, written by the lazy Amos Thaler, will include only interesting topics for the reader.

Quotes

“The interview started. Hearing a friend tell an old story about you is not an exciting activity, and hearing someone praise you is always awkward. I picked up something to read and my attention drifted— until I heard Danny say: “Oh, the best thing about Thaler, what really makes him special, is that he is lazy.” What? Really? I would never deny being lazy, but did Danny think that my laziness was my single best quality? I started waving my hands and shaking my head madly but Danny continued, extolling the virtues of my sloth. To this day, Danny insists it was a high compliment. My laziness, he claims, means I only work on questions that are intriguing enough to overcome this default tendency of avoiding work. Only Danny could turn my laziness into an asset.”

“this book has been written by a certifiably lazy man.”

I. Beginnings: 1970–78

Takeaways

• The Gauntlet was a debate between Herbert A. Schlzinger and Amos Tversky about whether human decision-making could be explained by traditional economic models or if there were systematic biases that required new models.
• The debate centered around the Allais paradox and Ellsberg paradox, which showed that people's choices did not conform to expected utility theory.
• Amos argued that these paradoxes demonstrated the importance of framing effects, probability weighting, and loss aversion in decision-making.
• Herbert countered by proposing that these paradoxes could be explained by incentives, learning, or markets.
• The debate highlighted the need for further research to understand the nuances of human decision-making and led to the development of behavioral economics.

Quotes

“This scoring system has no effect on the grade you get in the course, but it seems to make you happier.”

“For four decades, since my time as a graduate student, I have been preoccupied by these kinds of stories about the myriad ways in which people depart from the fictional creatures that populate economic models. It has never been my point to say that there is something wrong with people; we are all just human beings—homo sapiens. Rather, the problem is with the model being used by economists, a model that replaces homo sapiens with a fictional creature called homo economicus, which I like to call an Econ for short. Compared to this fictional world of Econs, Humans do a lot of misbehaving, and that means that economic models make a lot of bad predictions, predictions that can have much more serious consequences than upsetting a group of students. Virtually no economists saw the financial crisis of 2007–08 coming,* and worse, many thought that both the crash and its aftermath were things that simply could not happen.”

“The core premise of economic theory is that people choose by optimizing.”

“It is time to stop making excuses. We need an enriched approach to doing economic research, one that acknowledges the existence and relevance of Humans.”

“We don’t have to stop inventing abstract models that describe the behavior of imaginary Econs. We do, however, have to stop assuming that those models are accurate descriptions of behavior, and stop basing policy decisions on such flawed analyses.”

“My only advice for reading the book is stop reading when it is no longer fun.”

“Giving up the opportunity to sell something does not hurt as much as taking the money out of your wallet to pay for it. Opportunity costs are vague and abstract when compared to handing over actual cash.”

“I found the concept of hindsight bias fascinating, and incredibly important to management. One of the toughest problems a CEO faces is convincing managers that they should take on risky projects if the expected gains are high enough. Their managers worry, for good reason, that if the project works out badly, the manager who championed the project will be blamed whether or not the decision was a good one at the time. Hindsight bias greatly exacerbates this problem, because the CEO will wrongly think that whatever was the cause of the failure, it should have been anticipated in advance. And, with the benefit of hindsight, he always knew this project was a poor risk. What makes the bias particularly pernicious is that we all recognize this bias in others but not in ourselves.”

“track, each one mile long, laid end to end (see figure 1). The tracks are nailed down at their end points but simply meet in the middle. Now, suppose it gets hot and the railroad tracks expand, each by one inch. Since they are attached to the ground at the end points, the tracks can only expand by rising like a drawbridge. Furthermore, these pieces of track are so sturdy that they retain their straight, linear shape as they go up. (This is to make the problem easier, so stop complaining about unrealistic assumptions.) Here is your problem: Consider just one side of the track. We have a right triangle with a base of one mile, a hypotenuse of one mile plus one inch. What is the altitude? In other words, by how much does the track rise above the ground?”

“The full treatment of the formal theory of how to make decisions in risky situations—called expected utility theory—was published in 1944 by the mathematician John von Neumann and the economist Oskar Morgenstern. John von Neumann, one of the greatest mathematicians of the twentieth century, was a contemporary of Albert Einstein at the Institute of Advanced Study at Princeton University, and during World War II he decided to devote himself to practical problems. The result was the 600-plus-page opus The Theory of Games and Economic Behavior, in which the development of expected utility theory was just a sideline. The way that von Neumann and Morgenstern created the theory was to begin by writing down a series of axioms of rational choice. They then derived how someone who wanted to follow these axioms would behave. The axioms are mostly uncontroversial notions such as transitivity, a technical term that says if you prefer A over B and B over C then you must prefer A over C. Remarkably, von Neumann and Morgenstern proved that if you want to satisfy these axioms (and you do), then you must make decisions according to their theory. The argument is completely convincing. If I had an important decision to make—whether to refinance my mortgage or invest in a new business—I would aim to make the decision in accordance with expected utility theory, just as I would use the Pythagorean theorem to estimate the altitude of our railroad triangle. Expected utility is the right way to make decisions.”

“There were a few other precedents, but they too had never taken hold. For example, the prominent (and for the most part, quite traditional) Princeton economist William Baumol had proposed an alternative to the traditional (normative) theory of the firm (which assumes profit maximization). He postulated that firms maximize their size, measured for instance by sales revenue, subject to a constraint that profits have to meet some minimum level. I think sales maximization may be a good descriptive model of many firms. In fact, it might be smart for a CEO to follow this strategy, since CEO pay oddly seems to depend as much on a firm’s size as it does on its profits, but if so that would also constitute a violation of the theory that firms maximize value.”

“Consider Jane, who makes $80,000 per year. She gets a $5,000 year-end bonus that she had not expected. How does Jane process this event? Does she calculate the change in her lifetime wealth, which is barely noticeable? No, she is more likely to think, “Wow, an extra $5,000!” People think about life in terms of changes, not levels. They can be changes from the status quo or changes from what was expected, but whatever form they take, it is changes that make us happy or miserable. That was a big idea.”

“The Weber–Fechner Law holds that the just-noticeable difference in any variable is proportional to the magnitude of that variable. If I gain one ounce, I don’t notice it, but if I am buying fresh herbs, the difference between 2 ounces and 3 ounces is obvious. Psychologists refer to a just noticeable difference as a JND. If you want to impress an academic psychologist, add that term to your cocktail party banter. (“I went for the more expensive sound system in the new car I bought because the increase in price was not a JND.”)”

“PROBLEM 1. Assume yourself richer by $300 than you are today. You are offered a choice between A. A sure gain of $100, or [72%] B. A 50% chance to gain $200 and a 50% chance to lose $0. [28%] PROBLEM 2. Assume yourself richer by $500 than you are today. You are offered a choice between A. A sure loss of $100, or [36%] B. A 50% chance to lose $200 and a 50% chance to lose $0. [64%] The reason why people are risk-seeking for losses is the same logic that applies to why they are risk-averse for gains. In the case of problem 2, the pain of losing the second hundred dollars is less than the pain of losing the first hundred, so subjects are ready to take the risk of losing more in order to have the chance of getting back to no loss at all. They are especially keen to eliminate a loss altogether because of the third feature captured in figure 3: loss aversion.”

“Examine the value function in this figure at the origin, where both curves begin. Notice that the loss function is steeper than the gain function: it decreases more quickly than the gain function goes up. Roughly speaking, losses hurt about twice as much as gains make you feel good. This feature of the value function left me flabbergasted. There, in that picture, was the endowment effect. If I take away Professor Rosett’s bottle of wine, he will feel it as a loss equivalent to twice the gain he would feel if he acquired a bottle; that is why he would never buy a bottle worth the same market price as one in his cellar. The fact that a loss hurts more than an equivalent gain gives pleasure is called loss aversion. It has become the single most powerful tool in the behavioral economist’s arsenal. So, we experience life in terms of changes, we feel diminishing sensitivity to both gains and losses, and losses sting more than equivalently-sized gains feel good. That is a lot of wisdom in one image. Little did I know that I would be playing around with that graph for the rest of my career.”

“Imagine that you are about to purchase a jacket for ($125)[$15] and a calculator for ($15)[$125]. The calculator salesman informs you that the calculator you wish to buy is on sale for ($10)[$120] at the other branch of the store, located a twenty-minute drive away. Would you make the trip to the other store?”

“Psychologists tell us that in order to learn from experience, two ingredients are necessary: frequent practice and immediate feedback.”

“We do small stuff often enough to learn to get it right, but when it comes to choosing a home, a mortgage, or a job, we don’t get much practice or opportunities to learn. And when it comes to saving for retirement, barring reincarnation we do that exactly once. So Binmore had it backward. Because learning takes practice, we are more likely to get things right at small stakes than at large stakes. This means critics have to decide which argument they want to apply. If learning is crucial, then as the stakes go up, decision-making quality is likely to go down.”

“it is thought to be somehow related to Adam Smith’s invisible hand, the workings of which are both overstated and mysterious.”

“Many people have made money selling magic potions and Ponzi schemes, but few have gotten rich selling the advice, “Don’t buy that stuff.”

II. Mental Accounting: 1979–85

Takeaways

• People tend to treat money differently depending on where it comes from or what mental account it is associated with, leading to violations of the assumption that money is fungible.
• When people win money, they often view it as "house money," which can lead them to take more risks than they otherwise would. This is known as the house money effect.
• People who are behind in a mental account may be willing to take risks to break even or get back to zero, even if they are normally risk-averse. This is known as the break-even effect.
• The house money and break-even effects can lead people to make suboptimal financial decisions and contribute to financial bubbles.
• Managers should be aware that employees who are losing money may be more willing to take risks in an effort to break even.

Quotes

“Bargains and Rip-Offs”

“They have convinced their customers that the entire shopping experience is an orgy of bargain hunting, and go out of their way to reinforce that image.”

“The bigger lesson is that once you understand a behavioral problem, you can sometimes invent a behavioral solution to it. Mental”

“Like most aspects of mental accounting, setting up non-fungible budgets is not entirely silly. Be it with mason jars, envelopes, or sophisticated financial apps, a household that makes a serious effort to create a financial plan will have an easier time living within its means. The same goes for businesses, large or small. But sometimes those budgets can lead to bad decision-making, such as deciding that the Great Recession is a good time to upgrade the kind of gasoline you put in your car.”

III Self-Control: 1975–88

Takeaways

• Self-control problems arise when people's actions today conflict with their long-term interests.
• The planner-doer model, proposed by Hersh A. Shefrin and Daniel E. Schwartz, describes how a rational planner coexists with an impulsive doer within an individual.
• The planner is responsible for making long-term plans and considering the future consequences of actions, while the doer carries out those actions in the present.
• Individuals may struggle to align their planner and doer due to self-control problems such as hyperbolic discounting or present bias.
• To address these issues, individuals can employ various strategies like mental accounting, rules, and guilt to help their planner exert control over their doer.
• The beta-delta model, proposed by David Laibson, Matthew Rabin, and Ted O'Donoghue, is a simpler alternative to the planner-doer model for understanding self-control problems. It assumes individuals have present-biased preferences, which can be either sophisticated (aware of their self-control issues) or naïve (unaware).
• The two models highlight that individuals may face challenges in aligning their short-term desires with their long-term goals and that various strategies can help address these challenges.

Quotes

“Oddly, the most well-known phrase in the book, the vaunted “invisible hand,” mentioned earlier, appears only once, treated with a mere flick by Smith. He notes that by pursuing personal profits, the typical businessman is “led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it.” Note the guarded language of the second sentence, which is rarely included (or remembered) by those who make use of the famous phrase, or invoke some version of the invisible handwave. “Nor it is always the worse for society” is hardly the same thing as an assertion that things will turn out for the best.”

“quasi-hyperbolic discounting.”

Interlude

Takeaways

• Greek Peak Ski Resort faced the challenge of selling tickets during off-peak seasons when there was less snow and fewer customers.
• Al, the owner, used a pricing strategy of selling ten-packs at 60% off retail price but only redeeming 60% of them. This strategy allowed Greek Peak to generate revenue early in the season and reduce reliance on snowfall during the peak season.
• Michael and I introduced a new pricing formula for early season or partial mountain operation, where customers paid full price but received a coupon for up to 50% off their next visit depending on the number of operating lifts.
• The psychology behind this strategy was that customers were expecting to pay full price and receiving a potential discount in the future seemed generous.
• GM faced a similar problem with seasonal sales, where consumers were reluctant to buy older models due to anticipation of new model introductions.
• GM offered a low-interest-rate loan as an alternative to rebates, which resulted in significant sales increases but raised questions about its economic value for consumers.
• I visited GM headquarters and suggested they evaluate the promotion and plan for future marketing strategies based on the success of the low-interest-rate loans. However, my recommendation was rejected, and GM continued to rely on production planning to eliminate excess inventory instead.

Quotes

“Overconfidence is a powerful force.”

IV. Working with Danny: 1984–85

Takeaways

• The endowment effect refers to the observation that people value an object more highly when they own it than when they do not.
• The endowment effect was first demonstrated in a series of experiments conducted by Kahneman, Knetsch, and Thaler (1990).
• In these experiments, subjects were given tokens or real goods (coffee mugs or pens) and asked to participate in a trading market with other subjects. The results showed that the number of trades was significantly lower than predicted by economic theory.
• Buyers were willing to pay only about half of what sellers demanded, even when both parties had equal information about the goods and the markets were conducted fairly.
• Loss aversion and status quo bias are two related phenomena that help explain the endowment effect. People are loss-averse, meaning they prefer to avoid losses than to obtain gains of equivalent value. They also exhibit inertia, or a preference for sticking with what they have unless there is a good reason to change.
• The endowment effect has been replicated numerous times and has important implications for understanding consumer behavior and economic decision-making. It highlights the importance of considering psychological factors, such as loss aversion and status quo bias, in addition to traditional economic models that focus on rational self-interest.

Quotes

“The distinguished economist and philosopher Amartya Sen famously called people who always give nothing in this game rational fools for blindly following only material self-interest: “The purely economic man is indeed close to being a social moron. Economic theory has been much preoccupied with this rational fool.”

“Further research by Ernst Fehr and his colleagues has shown that, consistent with Andreoni’s finding, a large proportion of people can be categorized as conditional cooperators, meaning that they are willing to cooperate if enough others do. People start out these games willing to give their fellow players the benefit of the doubt, but if cooperation rates are low, these conditional cooperators turn into free riders. However, cooperation can be maintained even in repeated games if players are given the opportunity to punish those who do not cooperate.”

“people are more likely to keep what they start with than to trade it, even when the initial allocations were done at random.”

“You know, at some point people reach an age at which they can no longer be considered ‘promising.’ I think it is about the time they turn forty.”

V. Engaging with the Economics Profession: 1986–94

Takeaways

• People tend to overestimate the risk of investing in stocks when looking at annual returns, but underestimate it when looking at long-term averages.
• The more frequently people evaluate their investments, the less willing they are to take risks.
• Inexperienced cab drivers tend to work fewer hours on high wage days and more hours on low wage days due to myopic loss aversion, but experienced drivers overcome this bias.
• Drivers' daily income targets can act as a self-control device, leading them to drive less on good days and more on bad days.

Quotes

“The difference between the expert’s two estimates illustrates Danny’s distinction between the inside and outside views. When the expert was thinking about the problem as a member of project team, he was locked in the inside view—caught up in the optimism that comes with group endeavors—and did not bother thinking about what psychologists call “base rates,” that is, the average time for similar projects. When he put on his expert hat, thereby taking the outside view, he naturally thought of all the other projects he’d known and made a more accurate guess.”

“But if it is crazy to turn down the 100 bets, the logic of Samuelson's argument is just reversed; you should not turn down one! Shlomo and I called this phenomenon "myopic loss aversion". The only way you can ever take 100 attractive bets is by first taking the first one, and it is only thinking about the bet in isolation that fools you into turning it down.”

“Whenever anyone asks me for investment advice, I tell them to buy a diversified portfolio heavily tilted toward stocks, especially if they are young, and then scrupulously avoid reading anything in the newspaper aside from the sports section. Crossword puzzles are acceptable, but watching cable financial news networks is strictly forbidden.#”

VI. Finance: 1983–2003

Takeaways

• The Palm-3Com spinoff provides an example of a market inefficiency where the price of one stock (Palm) was overvalued, and the price of another related stock (3Com) was undervalued.
• This anomaly could not be explained by traditional fundamental analysis or efficient market hypothesis (EMH) concepts.
• Smart money tried to exploit this inefficiency through arbitrage trades but faced challenges due to limited availability of shares to borrow for shorting Palm stock.
• Similar situations have occurred in other markets, such as DuPont and General Motors in the 1920s, and Royal Dutch Shell in the late 20th century.
• The market may not always be able to efficiently price assets, especially when behavioral biases come into play.
• Market inefficiencies can lead to significant misallocation of resources if left unchecked.
• Policy-makers should consider taking preventive measures to mitigate the risk of financial crises caused by market bubbles and inefficiencies.

Quotes

“Worldly wisdom teaches that is it is better for reputation to fail conventionally than to succeed unconventionally.”

“When closed-end funds are started they are usually sold by brokers, who add a hefty commission of around 7% to the sale price. But within six months, the funds typically trade at a discount of more than 10%. So the first puzzle is: why does anyone buy an asset for $107 that will predictably be worth $90 in six months? This pattern had induced Benjamin Graham to refer to closed-end funds as “an expensive monument erected to the inertia and stupidity of stockholders.” This was a more polite way of saying “THERE ARE IDIOTS,” which remains the only satisfactory answer to this first puzzle.† The second puzzle is the existence of the discounts and premia mentioned earlier. Why does the fund trade at a price that is different from the value of its holdings? The”

VII. Welcome to Chicago: 1995–Present

Takeaways

• People's risk-taking behavior in high stakes situations, such as on game shows or in real life, can be different from their behavior in low stakes situations.
• Experiments show that people are less risk averse and more likely to cooperate when the stakes are lower. However, there is no evidence to suggest that cooperation rates would be significantly different if the stakes were much higher.
• The "big peanuts" hypothesis suggests that what seems like a large amount of money in one context might be considered small or insignificant in another context, leading to differing behavior.
• In the Golden Balls game show, which is a variation of the Prisoner's Dilemma, young men were less likely to split the pot.
• Nick, a contestant on Golden Balls, employed an unusual strategy by promising Ibrahim that he would steal but share his winnings if Ibrahim also chose to steal. However, it turned out that Ibrahim had planned to steal as well, making their collaboration successful.
• People's actions and decisions can be influenced by various factors, including the context in which they make the decision, cultural norms, and personal motivations.

Quotes

“Of course, coaches are Humans. They tend to do things the way they have always been done, because those decisions will not be second-guessed by the boss. As Keynes noted, following the conventional wisdom keeps you from getting fired.”

“One way to salvage the Becker conjecture is to argue that CEOs, coaches, and other managers who are hired because they have a broad range of skills, which may not include analytical reasoning, could simply hire geeks who would deserve to be members of Becker’s 10% to crunch the numbers for them. But my hunch is that as the importance of a decision grows, the tendency to rely on quantitative analyses done by others tends to shrink. When the championship or the future of the company is on the line, managers tend to rely on their gut instincts.”

“This reflects a general tendency. People are more willing to lie by omission than commission. If I am selling you a used car, I do not feel obligated to mention that the car is burning a lot of oil, but if you ask me explicitly: “Does this car burn a lot of oil?” you are likely to wangle an admission from me that yes, there has been a small problem along those lines. To get at the truth, it helps to ask specific questions.”

VIII. Helping Out: 2004–Present

Takeaways

• The Behavioral Insights Team (BIT) in the U.K. and White House Social and Behavioral Sciences Team (SBST) in the United States use insights from behavioral sciences to design interventions that influence individuals' decisions, leading to better outcomes for society.
• Nudges are simply tools, and their impact depends on the intentions behind their use. They can be used for good or bad purposes.
• The BIT was established in 2010 and has since influenced various policies across different domains. It is now partially privatized and continues to grow.
• Cass Sunstein served as administrator of the Office of Information and Regulatory Affairs (OIRA) from 2009 to 2013, where he used behavioral insights to influence regulations during President Obama's first term.
• The White House SBST was established in 2014 with a team of six behavioral scientists who have embedded nudges into various federal programs.
• Nudging is not limited to economics; it involves insights from various social sciences, including psychology and sociology.
• Transparency and ethics are important considerations when designing and implementing nudges.
• The use of nudging is spreading globally, with more than 130 countries reportedly using behavioral sciences in policy making.

Quotes

“The evidence suggests that when people get a windfall—and this seems to be the way people think about their tax refund, despite it being expected—they tend to save a larger proportion from it than they do from regular income, especially if the windfall is sizable.”

“2. We can’t do evidence-based policy without evidence.”

Conclusion: What Is Next?

Takeaways

• Behavioral economics began by observing and documenting human irrationality in various economic contexts.
• Prospect theory, a behavioral economic framework, suggests that people do not make decisions based on expected utility but rather on gains and losses relative to reference points.
• Humans exhibit mental accounting, making different trade-offs for the same amount of money depending on how it is labeled or where it comes from.
• People are overconfident in their abilities and tend to underestimate risks, leading them to make poor decisions.
• Humans have limited self-control and make choices that undermine long-term goals in favor of short-term rewards.
• The availability heuristic leads people to make judgments based on easily recalled examples rather than probability statistics.
• Framing effects can significantly impact decision-making, as people respond differently to the same options presented differently.
• People are influenced by social norms and herd behavior, often conforming to group opinion without considering the underlying reasons.
• Anchoring biases lead individuals to rely too heavily on initial information when making decisions.
• Behavioral economics can improve our understanding of economic phenomena and inform better public policy design.

Quotes

“discovery starts with anomalies.”

“One overly simplistic idea is that we can improve student performance just by giving financial incentives to parents, teachers, or kids. Unfortunately, there is little evidence that such incentives are effective, but nuances matter. For example, one intriguing finding by Roland Fryer suggests that rewarding students for inputs (such as doing their homework) rather than outputs (such as their grades) is effective. I find this result intuitively appealing because the students most in need do not know how to become better students. It makes sense to reward them for doing things that educators believe are effective.”

“A third positive result even further from the traditional tool kit of financial incentives comes from a recent randomized control trial conducted in the U.K., using the increasingly popular and low-cost method of text reminders. This intervention involved sending texts to half the parents in some school in advance of a major math test to let them know that their child had a test coming up in five days, then in three days, then in one day. The researchers call this approach “pre-informing.” The other half of parents did not receive the texts. The pre-informing texts increased student performance on the math test by the equivalent of one additional month of schooling, and students in the bottom quartile benefited most. These children gained the equivalent of two additional months of schooling, relative to the control group. Afterward, both parents and students said they wanted to stick with the program, showing that they appreciated being nudged. This program also belies the frequent claim, unsupported by any evidence, that nudges must be secret to be effective.”

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

“Stories are powerful and memorable. That is why I have told so many in this book. But an individual anecdote can only serve as an illustration. To really convince yourself, much less others, we need to change the way we do things: we need data, and lots of it. [...] People become overconfident because they never bother to document their past track record of wrong predictions, and then they make things worse by falling victim to the dreaded confirmation bias - they only look for evidence that confirms their preconceived hypotheses. The only protection against overconfidence is to systematically collect data, especially data that can prove you wrong. [...] "If you don't write it down, it doesn't exist". In addition, most organizations have an urgent need to learn how to learn, and then commit to this learning in order to accumulate knowledge over time. At the very least this means trying new things and keeping track of what happens. Even better would be to run actual experiments. [...] The ideal organizational environment encourages everyone to observe, collect data, and speak up.”

“even when you are talking to the boss, you need to warn of the threat of an impending disaster.”

“Many start with unrealistic expectations about the chance of success: the vast majority believe their chance of success to be far above average, and a third or so believe their success is a sure thing (Cooper, Woo, and Dunkelberg, 1988)!”

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