Why is definitely the discomfort of losing 100 yuan far greater than the happiness of 100 yuan? .TXT

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Good book of this situation: Richard Seller's trilogy 'The Curse on the Winner' 'Bad Behavior' and 'Promotion'

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As an alternative to accept fate arrangements, it really is superior to create rational choices

Author丨He Fan, Professor of Economics, HSBC Business enterprise School, Peking University

Frequently speaking, scholars who won the Nobel Prize in Economics won prizes not on their behalf, but on behalf of their field. Usually speaking, when an economist wins the Nobel Prize in Economics, it indicates that his field has entered the mainstream of economics. Generally speaking, after its field enters the mainstream of economics, the originality of this field will weaken, and subsequent influxes are numerous studies that stick to suit.

Even so, the 2017 Nobel Prize winner Richard Seller is various.

Even when he won the Nobel Prize in Economics, Siler was nevertheless filled with a 'heresy' temperament. Following winning the award, he gave a brief speech at the University of Chicago exactly where he taught. He stated in his speech that perhaps this was the first time that the dean and the dean from the division didn't use the word 'scrambled' to describe him. Then, he 'make up a knife': whether leaders will use this word to describe him within the future, he's not positive. As you'll be able to envision, the dean and head of your division, at the same time as various senior professors who had always been at odds with Seller, hated itchy teeth but had to pretend to become generous and content.

Thale's research location is behavioral economics. This really is 1 on the fastest-growing fields of economics in the previous decade, and it truly is also one of the couple of fields of economics that by no means expels the 'foreign population'. Economists always believe that their subject could be the jewel in the crown of social sciences. They usually do not 'invade' other disciplines, but give them an awesome face. How can they tolerate the 'invasion' of economics in other disciplines? The only thing inside the tent of behavioral economics is that there are three religions and ninth class, all sorts of folks, etc., each ideal and incorrect. To the orthodox older generation of economists, behavioral economics is just a mess. The colleague of Saler, also the Nobel Prize winner in economics, Professor Eugene Fama after commented on Saler: 'The investigation he did is very intriguing, but it has no value.' Fama was sort to Saler. The two in some cases play golf with each other. Another economic bull in the University of Chicago, who also won the Nobel Prize in Economics, was Professor Merton Miller. It truly is mentioned that he saw Siler inside the corridor without having even saying hello.

No matter whether you like it or not, the lifeless economics most have to have is often a new 'paradigm revolution', and whether or not it can be hunting around or seeking far, it can be implicitly equipped to challenge the original 'hegemony' and launch a brand new field of revolution , May also be behavioral economics. Even, we may possibly expect that the future social sciences will break down barriers and unify into a social science, then the birthplace of this social science is the camp of behavioral economics.

Richard Seller has 3 significant books, a single is his academic autobiography 'The Behavior of Wrong', the other is 'The Curse on the Winner', along with the third would be the 'Help' co-authored using the popular jurist Cass Sunstein Push'. CITIC Publishing Co., Ltd. now publishes these 3 significant works collectively, which can assist Chinese readers to greater realize Professor Seller and behavioral economics.

01

'Wrong Behavior' and Thaler's Academic Road

Professor Seller was born in New Jersey, USA in 1945. His family members was Jewish immigrants from Ukraine towards the Usa. Professor Seller’s father is an actuary of an insurance company and his mother is usually a teacher. As opposed to other college tyrants, Seller went to a college that was not the best-his undergraduate degree at Case Western Reserve University (MasterWesternReserveUniversity), master's degree and doctorate have been studied at the University of Rochester. To create an inappropriate analogy, this knowledge can be a bit like a Chinese student who has completed an undergraduate degree at a essential university and after that went to an ordinary university to study to get a master's degree and also a doctorate. You ought to know that a lot of financial tyrants happen to be study each of the way from best prestigious schools like Harvard and MIT. For anyone who is studying economics at Harvard and MIT, the advantage is that you may directly adhere to the tutor (especially the younger tutor) to enter the academic frontier and take a shortcut. A schooling knowledge like Professor Seiler might have to rely much more on his personal, nevertheless it could also be that he has taken a various path and produced him distinctive and distinctive.

It's destined to become full of hardships to embark on this road of 'tradition'. Mr. Rosen, a Ph.D. thesis supervisor at Celler in the University of Rochester, said that at that time, Celler’s teachers had “no higher expectations” for what he could attain. When he had just graduated using a Ph.D., Celler had a hard time obtaining a formal job and had to become a lecturer related to 'temporary worker' at the University of Rochester. His papers usually are not in line together with the tastes of mainstream academic journals and are tough to publish. What is a lot more terrible is that Seller feels that the basic principles of mainstream economics are incorrect.

Mainstream economics assumes that people are rational people-if you're a consumer, you can not invest a penny. Ads, salesmen, and 'Double 11' have no impact on you; when you are a producer, you'll not lose the opportunity to produce every single profit. Decision making errors, impulsive impulses, and missed opportunities are merely impossible for you. As Professor Seller stated, mainstream economics assumes that we all possess the similar IQ as Einstein, the exact same memory because the laptop, as well as the willpower of Mahatma Gandhi. The rational man hypothesis just isn't just a functioning hypothesis of economists. Within the end, this hypothesis created in to the belief of economists. Given that absolutely everyone is a rational person, their decisions inside the market economy will certainly result in the optimal allocation of all resources. Therefore, the market place economy is perfect, and all government interventions are wrong. Speaking of which, you might fully grasp why mainstream economists have vowed to defend the 'rational man' hypothesis.

In 'The Incorrect Behavior', Saler talks about how he escaped from this 'paradigm'. Though he was still a Ph.D. student in the University of Rochester, Celler found a strange phenomenon. He did a questionnaire survey, which asked the interviewee two questions:

A. If a deadly illness is prevalent in society, the infected individual will die with out discomfort inside a week. Your probability of contracting this illness is one particular in 10,000. Excuse me, assuming you might be regrettably sick, how much funds would you be prepared to devote to treat this disease?

B. This is the identical illness. Suppose your boss desires to send you for the epidemic region to investigate the predicament. Soon after reaching the epidemic area, your probability of contracting the illness is one particular in ten,000. May possibly I ask just how much compensation your boss has to provide you before you decide to are willing to visit the affected area?

In line with the theory of mainstream economics, these two concerns are equivalent, and they are each asking 'how a great deal will be the mortality price per ten,000', but the respondents' answers to these two inquiries are very distinctive. Lots of individuals choose to devote less income on treatment inside the first case, but require large compensation within the second case. Why is this so? Saler went to his instructor for assistance. His instructor said, never waste time on this type of challenge.

So, Saler had to seek out the answer by himself. On one occasion, he study concerning the analysis on selection psychology of two Israeli psychologists Kahneman and Tversky, and heard that they had been going to Stanford University to study, he went to California to seek out Kahneman. And Tversky. Kahneman could be the author on the best-selling book 'Thinking, Quick and Slow' as well as the winner of the 2002 Nobel Prize in Economics. Tversky is often a collaborator of Kahneman. If he died early, he would be able to win the prize collectively. The three of them shared related concepts and jointly produced behavioral economics. The difference is the fact that: Kahneman and Tversky entered the economic camp from psychology, while Siler opened the door to economics and welcomed the entry of psychology.

How would Kahneman and Tversky clarify the anomalies found by Seller? They put forward the 'foreground theory'. In accordance with this theory, choice makers will pick a reference point, and their judgments on gains and losses are normally depending on the reference points, and men and women are a lot more sensitive to losses than gains. That is to say, if it can be time for you to earn money, needless to say, the far more folks earn, the happier they're. Within the experiments of Kahneman and Tversky, the intensity of happiness brought about by the raise in revenue is about 0.5 to 1 occasions the boost; but if it is actually in the time of losing revenue, the far more individuals shed, the extra unhappy they may be. Inside the experiments of Kahneman and Tversky, the pain caused by the improve in loss is about 2.5 instances the improve in the very same get. In other words, people are specifically reluctant to endure losses.

Sayler proposed the 'endowment effect', which was mutually confirmed with the 'foreground theory'. The “endowment effect” is about individuals getting really reluctant to lose what they believed they have been. This theory has a fantastic influence on economics. As an example, according to the “endowment effect”, even though transaction fees are usually not considered, the initial allocation of ownership will greatly have an effect on the final allocation of resources.

Professor Seller went additional and further around the road against the assumption of 'rational man'. The 'endowment effect' really still assumes that just about every choice maker will endeavor to maximize his preference, but only to consider a 'reference point', that is certainly, 'endowment' (the initial allocation of ownership). Later, Professor Seller place forward the 'mental accounting' theory. This theory additional deviates from mainstream economics, but is closer to reality.

The 'psychological account' theory notes that buyers divide their expenditures into distinctive accounts, for instance dollars spent on clothing, money spent on travel, or income spent on food. Should you visit Hainan for any holiday, it charges 20,000 yuan. I just came back and heard the travel agency say that there's a tour group to Hokkaido that could offer you a special discounted cost. The original tour price tag was 20,000 yuan, but now it only costs 5,000 yuan. Will you take into consideration it? Many people will hesitate. Nonetheless, in the event the mall is discounted at this time, the original value of 20,000 yuan for brand-name clothes is now five,000 yuan, would you take into consideration purchasing it? I believe many individuals will straight away spend for it. This shows that customers put the money for traveling and the dollars for garments in unique 'psychological accounts'.

Why is there a 'psychological account'? Professor Sale said that this really is connected to our 'self-control'. The cause why we place our funds in unique 'psychological accounts' is usually to avoid ourselves from spending revenue indiscriminately. Based on the theory of 'psychological account', Professor Seller additional proposed that the utility of customers contains two parts, one is always to obtain utility, that is certainly, the satisfaction obtained following shopping for goods and solutions, as well as the other would be the transaction utility. It truly is associated for the transaction price. Transaction effectiveness is also connected towards the difference amongst the 'fair price' anticipated by shoppers and also the actual transaction cost. When the customer feels that the transaction price tag is higher than the 'fair price' in his thoughts, even though he buys some thing he has long wanted, he will really feel very unhappy.

To sum up, in the opinion of Professor Siller, human nature is additional complicated than imagined by the 'rational man' hypothesis. Man is not totally rational, but bounded rational. Individuals have no powerful willpower, only restricted willpower. Moreover, individuals will not be absolutely selfish, so the concern of fairness has constantly attracted people's consideration.

02

'The Curse of the Winner' and 'Abnormality' in Economics

'The Curse on the Winner' can be a collection of columnary articles published by Professor Seller inside the Journal of Economic Outlook. His group of articles aims to discover 'anomalies' in economics. 'The Curse with the Winner' is among the most famous articles.

Inside the 1970s, various engineers who studied oilfield auctions discovered an interesting phenomenon. Suppose there's an oilfield whose exploitation rights are to be auctioned, and several oil providers bid. No one knows how massive the underground reserves of this oil field are, and may only guess on their very own. Each business will give a valuation to this oil field, and every corporation will quote in line with its own valuation of this oil field.

Typically speaking, the enterprise will quote at a value decrease than its personal valuation, along with the business with all the highest cost will acquire the exploitation correct from the oil field. But inside a real auction, what was the outcome? The 3 engineers located that, typically speaking, the winners in the auction frequently turn into losers. Why do you say that? Simply because, in the worst case, the actual worth from the oil field is not as high as the bid price tag on the effective bidding organization. The extra funds this firm spends, the a lot more losses it is going to make. A slightly much better situation is the fact that the value of this oil field is greater than the company's quotation, but no company's original valuation is greater, so the company will also feel that it can be losing revenue. This is known as the 'curse on the winner.'

Is there definitely a 'curse with the winner'? In 1983, two economists Bazelman and Samuelson performed an experiment. They auctioned a piggy bank in class, and also the jar was filled with coins. The students never know how much funds is in it. Each and every student guesses just how much cash there is. Immediately after guessing, the bid is created, as well as the student with all the highest bid can get the jar plus the coins inside. There are actually actually $8 coins in the jar. They have accomplished numerous experiments. Students’ guesses vary, with an typical valuation of $5.13. In other words, most students' valuation of jars is significantly reduce than their true worth. But the average bid in the winner is $10.01, which means that on average, each and every winner loses $2.01.

best partition recovery may not be representative of the genuine world, but in actual life, the 'curse in the winner' abounds. As an example, within the 1969 Alaska North Bay Oilfield auction, the winner’s bid was $900 million, even though the second highest bid was $370 million. This can be not in line with all the rational assumption. In accordance with the rational assumption, the winner's provide really should be similar towards the next highest present. Is this just a unique case? of course not. Researchers have observed several oilfield auctions and located that in 26% from the situations, the winning price is four occasions or larger than the second highest cost, and in 77% with the situations, the winning price tag is at least twice the second highest price tag.

From 1954 to 1969, the Gulf of Mexico auctioned more than 1,000 leases, of which 62% of the leases lost revenue, and one more 16% from the leases had been barely flat. Only 22% in the leases ultimately made money, however the price of return Not higher. Let's have a look at the examples about us. By far the most standard one could be the CCTV marketing 'Biao Wang'. Because the mid-1990s, a variety of corporations have scrambled to invest heavily on CCTV to snatch the crown of 'Biao Wang'. In 1995, the winning volume of the Confucius Palace Banquet was RMB 31 million. In 2015, Pterosaur Loan spent RMB 369.51 million prior to winning the title of 'Biao Wang'. There are definitely data recovery from deleted partition that have won the throne of 'Biao Wang', such as Maotai, but most of the 'Biao Wang' quickly became 'Inverted King'. Listen to me report their names: Confucius Banquet Wine, Qin Chi Wine, Aiduo VCD, BBK and Panda Mobile. The 'curse of the winner' is entangled with these once-brilliant enterprises: In 2002, the Confucius banquet was declared bankrupt; Qin Chijiu was no longer known; in 2004, Hu Zhibiao, the head of Aiduo VCD, was sentenced to eight years in prison; In 2005, Ma Zhiping, the former owner of Panda Mobile, was arrested on suspicion of “false reporting of registered capital”. And those 'Biaowang' enterprises which have not gone bankrupt have seriously made their mark after becoming 'Biaowang'? I am afraid that it's sad, only they know it.

Why is there normally a 'curse with the winner'? There are actually two causes. Very first, by far the most basic purpose may be the info asymmetry, because the bidders do not know the true worth with the topic matter, so they are able to only rely on subjective guessing, which will bring about judgment errors. Secondly, one of the most direct explanation is arrogance. Winners are too arrogant and often feel that they're far more correct than other participants inside the industry, and they may be determined to win. With such a mentality, it is actually abnormal to make blunders.

03

'Boost' and 'Patriarchy of Free of charge Will'

Within the view of an intense financial liberal, given that persons are rational, rational persons will naturally be accountable for all their actions. By way of example, in the event the driver will not wear a seat belt as well as the motorcycle rider does not wear a helmet, that is definitely their own selection. The government must stipulate that everybody wear a seat belt or put on a helmet, which will not be productive, and everybody will not listen for the government. What if somebody utilizes drugs or prostitution? Inside the view of intense financial liberals, whether you like it or not, this can be one thing you can not interfere with. Opposing drug abuse or prostitution will only result in drug abuse or prostitution to go underground, nevertheless it will be more tough to manage and more dangerous to society, so the very best way is to legalize drug abuse or prostitution.

I think most economists will oppose direct government intervention. The government stipulates what understanding my young children will have to study, which can be very ridiculous in my opinion. It is actually also unacceptable for the government to regulate my diet regime, even if the government says that such eating plan is healthier and more reasonable. However, via the study of behavioral economics, we can understand that absolutely everyone is likely to make mistakes, and it is straightforward to create possibilities that are basically not conducive to oneself. What should really we do in this circumstance? Need to the government support individuals prevent generating incorrect decisions?

In 2008, Professor Seller and jurist Cass Sunstein co-authored The Increase. This book immediately became a global bestseller and also attracted the attention of governments. The book mentions that we can adopt a 'liberal paternalism' (libertarianpaternalism) to improve people's final decisions. No cost will and patriarchy sound incompatible, but they can reach a delicate balance. Free will means that we desire to retain people's ideal to make independent choices. Patriarchy indicates that we can properly influence people's decision-making method so that they're able to make far more favorable alternatives for themselves.

By way of example, in the event the government mandates that individuals shouldn't eat junk meals and only eat healthy meals, this is a rough intervention. While the government's intentions may possibly be superior, the outcome have to be terrible. This brutal authoritarianism could be seen everywhere in reality. But what if we transform the way? One example is, we are able to offer fresh fruits to customers at a reduce value and much more easily. Then, it is actually likely that more customers will actively decide on healthier foods. This really is what Saler and Sunstein named 'boosting.'

Whether or to not eat healthful food is really a trivial matter. A pension strategy is actually a huge event not only for individuals but for the whole society. The pension technique in the Usa is quite complex, and staff want to select from many different options. As we stated, the more alternatives you can find, the significantly less prepared individuals are to make possibilities. As a result, quite a few Americans gave up participating within the pension insurance plan. This decision just isn't very good for you personally, because soon after retirement, the revenue degree of workers will decline; that is also bad for the government, simply because within the end, the government will have to pay for it. Some American businesses have created a compact adjustment. The preceding strategy was that you just had to take the initiative to join the pension insurance plan. The existing strategy is the fact that should you do not object, you agree to participate in the pension insurance strategy.

Seiler and Sunstein proposed a 'saving extra tomorrow' plan, as well as the joint support of conservatives and liberals inside the US Congress is also a miracle in American politics. 'Save much more tomorrow' is definitely the company's pension plan for its personnel. When an employee who signs this contract raises his salary, his savings within the pension account will also be automatically increased, so the savings price rises as wages rise. If personnel really feel that they've saved too substantially, they also have the freedom to opt out in the strategy. This program will not force any individual to do what they don't want to do, nor does it have any fraud or concealment, however it skillfully combines people's lazy nature with their long-term interests, permitting individuals to make more favorable possibilities themselves.

According to Seiler and Sunstein, in lots of cases, we can make drastic adjustments to the outcome of choices by producing modest adjustments. For example, someone will always urinate outdoors the urinal in the public toilet. Nonetheless, if a fly is carved into the urinal, the man will automatically aim at the fly to urinate, so the phenomenon of urination outside the urinal It has been lowered by 80%. In the event you want men and women to save energy, it's useless to merely post some slogans 'Save power and defend the environment' on the wall. If each and every loved ones can see the comparison in between their own electricity consumption and that of their neighbors after they get the bill, then, out with the 'peer pressure', lots of people have higher consciousness Spend attention to saving sources. This shows that the ideal way to aid folks increase their behavior is always to deliver feedback.

I've a cautious reservation about whether or not to adopt the 'free will patriarchy' method in policy style, simply because we have to initially think that the government is selfless and sort before we can believe that it'll aid us improve decision-making for our benefit. Nevertheless, this technique also gives us lots of inspiration in every day life. Parents’ enjoy for children is selfless, and teachers’ care for students is also in the heart. As a way to let kids and students make much better selections, we should really pursue the principles of liberalism and dictatorship with out intervention. Or come across a modest 'free-will patriarchy'?

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