Table of Contents
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Introduction
About This Book
Conventions Used in This Book
What You’re Not to Read
Foolish Assumptions
How This Book Is Organized
Part I: Introducing Behavioral Economics: The Science of Making Real-World Choices
Part II: Understanding Choice
Part III: Growing the Economic Pie: The Economic Importance of Ethics, Well-Being, and
Culture
Part IV: When Bubbles and Busts and Inefficiencies Are Possible: Some Behavioral
Insights into the Strange World of Economic Reality
Part V: The Part of Tens
Icons Used in This Book
Where to Go from Here
Part I: Introducing Behavioral Economics: The Science of Making Real-World Choices
Chapter 1: Decoding Behavioral Economics
Making Wise Assumptions
Why reality matters
Why incentives matter — even in behavioral economics
Making Sense of Choice
Maximizing versus satisficing
The effect of emotions
The avoidance of loss
How options are framed
Paternalism versus free choice
The role of social context in decision making
Relative positioning
Growing the Economic Pie
Deciphering Bubbles and Busts
Inefficient markets and investment behavior
Emotions, intuition, animal spirits, and business cycles
Understanding Happiness: Money Isn’t Everything
Chapter 2: Getting Real about Assumptions
Defining an Economic Model
Explaining economic phenomena
Making simplifying assumptions
Discovering the irrelevance of facts
Understanding the role of math in model building
Considering cause and effect
Watching out for spurious correlations

Contemplating Conventional Economic Assumptions and Real-World Alternatives
Conventional assumption #1: People’s preferences are stable and consistent
Conventional assumption #2: People are solitary decision makers
Conventional assumption #3: How people form preferences doesn’t matter
Conventional assumption #4: People have the same preferences
Conventional assumption #5: People are all maximizers
Conventional assumption #6: People have perfect knowledge
Conventional assumption #7: People have unbounded computational
capabilities
Conventional assumption #8: People have willpower
Conventional assumption #9: People are capable of acting upon their
preferences
Understanding Rational Economic Behavior
You can do no wrong: Errors and biases in decision making
Selfishness and the smart society
Getting to Know the Behavioral Economics Actor
Chapter 3: Neuroeconomics: Exploring the Brain for Economic Analysis
Where Neuroeconomics Fits in the Behavioral Economics Perspective
The Brain and Economics
The evolution of the human brain
The division of labor in the human brain
The Emotional Brain
Descartes’ error: The somatic marker hypothesis
Phineas Gage and the social and emotional side of rational decision making
How Emotions Affect Decision Making
Fear and decision making
Happiness and decision making
The Limits of the Human Brain and Homo Economicus
The brain is not a calculating machine
The brain is a scarce resource
What Brain Sciences Confirm for the Behavioral Economist
People prefer the present to the future
People’s aversion to loss affects their decision making
What people feel isn’t always what they experience
People care about keeping up with — and beating — the Joneses
People’s brains evolve over their lifetimes
People value fairness
People like to trust and be trusted
Chapter 4: Why Incentives and Markets Matter, but Money Isn’t Everything
The Role of Economic Incentives for Economic Behavior
Why money is all that matters in conventional economics
Opportunity costs for Homo economicus
Decision Making and Opportunity Costs
Using up your mind: Bounded rationality
Considering costs other than money: Psychological costs

Reducing opportunity costs in the real world: Satisficing behavior
Weighing the opportunity cost of altruism
Supply and Demand and Behavioral Economics
Introducing the bandwagon effect
Investigating the snob effect
Interjecting morals and ethics
Introducing sociology to supply and demand
Economic Psychology: How Thoughts and Feelings Impact Decisions
Loss aversion: How framing, ownership, and control affect economic
behavior
How the fear of uncertainty influences decisions
The warm glow: Why people sacrifice money for fairness or justice
Forfeiting money for status
Part II: Understanding Choice
Chapter 5: Exploring the Limits to Free Choice
Free Choice in Economic Decision Making
What conventional economics says
What behavioral economics says
Revealed Preferences: When Choices Reveal Your Inner Self
The narrative about preferences
False preferences versus true preferences
The limits of revealed preferences and free choice
The Illusion of Free Choice
Advertising and preference distortions
Self-control and free choice
Defaults as a determinant of choice
Herding, the bandwagon effect, and free choice: Are followers irrational?
Constraining Choice versus Freedom of Choice
Information
Education
Consumer rights
Chapter 6: Quick and Simple Heuristics and Real-World Decision Making
A Bird’s-Eye View of Smart Decision Making in Conventional Economics
Decision-making norms in conventional economics: The human calculating
machine
The optimizing decision-making machine in conventional economics
Core conventional benchmarks for rational choice: To dream an impossible
dream
The limits of conventional rationality
Rethinking Bounded Rationality and the Limits of the Mind
Bounded rationality and satisficing: Rationality within reason
The two blades of the decision-making scissors: Ecological rationality
Prospect Theory: Describing Average Decision-Making Behavior
Introducing prospect theory: Real-world decision making under uncertainty

Thinking about prospect theory and conventional norms
Exploring emotions as a hot bed of irrationality
The fundamentals of prospect theory: Understanding the value function
Unveiling Some Implications of Loss Aversion
Loss aversion and the certainty effect
Risk seeking in losses
The endowment effect: Explaining attachment to possessions
Uncovering Errors and Biases in Decision Making
Overconfidence
Herd behavior
Confirmation bias
Anchoring
Generalizing
Less Is Best in Decision-Making: Fast and Frugal Heuristics
Exploring the superiority of heuristics
Understanding human rationality: New benchmarks built on human
capabilities
Chapter 7: How the Framing of Choices Affects Decision Making
The Framing Effect
Framing and the economic schools of thought
The effect of framing on preferences and choices
Appreciating the objective unimportance of frames: The errors and biases
approach
Understanding frames as heuristics
Framing in Pictures: The Possibility of Cognitive Illusions
Framing the Mona Lisa
Distorting the line illusion
Framing faces
Framing automobiles: Surface beauty versus substance
The letter illusion
We’re All Framed: Framing and Decision Making
Framing and loss aversion: The classic Asian disease experiment
When money isn’t everything
Saving a penny to lose a bundle: Framing prices through relative positioning
Frames as Defaults: How Anchors Sway the Course of Decision Making
Changing default options and choices
Revisiting choice architecture
Framing is important, but so are income and prices
The Inescapable Frame and Rational Decision Making
Understanding frames as an information-generating machine
Repairing frames and rational decision making
Introducing product labels into the framing arsenal
Market Failure and the Framing Effect
Chapter 8: How Norms, Peers, History, and Culture Influence Choice
Making Decisions in a Bubble, the Conventional Economics Way

Making decisions as if other people don’t matter
Making decisions as if history doesn’t matter
Making decisions as if society doesn’t matter
Introducing Social Norms to Decision Making
Looking at some norms
Identifying how trust impacts economic development
Seeing how discriminating norms can lead to a slow economy
Studying the role of education in the formation of norms and the shaping of
preferences
The carrot and the stick: Exploring the enforcement of social norms
Peer Pressure: Seeing How Peers Affect Decision Making
How History and Culture Affect Choice
Rooting choice in history
Culture club: How culture affects the formation of preferences and choices
Chapter 9: Why Gender, Children, and Age Matter for Economic Analysis
How Gender Affects Choice
Not tonight, honey: Conventional choice theory
Household bargaining power and women’s rights
Understanding household choices when women have a voice
Exploring population growth when women’s preferences count
Understanding why women go on welfare even if they want to work
Identifying why women are more risk averse than men
Exploring women’s altruistic preferences
Examining labor market discrimination
The Role of Children in Economic Decision Making
News Flash! Preferences Change with Age
Part III: Growing the Economic Pie: The Economic Importance of Ethics, Well-Being, and Culture
Chapter 10: Why Smart People Pay Taxes, Recycle, and Even Break the Law
Why Most People Pay Taxes: The Big Stick versus the Warm Glows
How the big stick induces tax payments
The niceness effect
Social norms and taxes
A sense of fairness and tax compliance
Different Perspectives on Reducing Pollution
Exploring the economics of pollution control
Thinking about the green corporation
Understanding the links between green consumption and green production
Studying social norms and the greening of the world
Understanding the mix of economic and non-economic variables in
determining green production
Crime and Punishment
The calculating criminal
Addiction and criminal behavior
The role of identity and social networks in determining criminal behavior
Why most people don’t commit crimes even when crime pays
Chapter 11: Labor Supply in the Real World

An Introduction to Labor Supply
Decoding the reality of labor supply
Mapping out changes to labor supply
Uncovering what people do when they aren’t working
Labor Supply When People Prefer Leisure: The Conventional Economics Perspective
The income-leisure trade-off: Bribing people to work
Why economics predicts that more income reduces labor supply: Work as an
inferior good
How to increase the labor supply when people dislike work: Using the big
stick
How Economic Necessity, Norms, and Love of Work Determine Labor Supply
How target income affects labor supply
Why increasing income doesn’t reduce labor supply
Labor supply when market employment is a superior good
Social welfare programs and labor supply
Norms, anchors, default retirement age, and labor supply
Chapter 12: The Black Box of the Firm: Human Relationships and Productivity
Survival of the Fittest, the Firm, and Contemporary Economic Theory
Doing the best we can: From slave to free labor to the big boss
Determining industrial relations through market forces
Maximizing profits and minimizing costs in the calculating firm
Understanding why the behavioral firm wins out
When People Don’t Behave According to Conventional Economics: X-Inefficiency
Types of x-inefficiency
When product markets aren’t competitive enough
Increasing inefficiency, managerial slack, and the art of lobbying
Preferences, managerial slack, and x-inefficiency
How low wages produce x-inefficiency and high wages contribute to xefficiency
Efficiency wages: Connecting wages, effort, and productivity
Exploring fairness and gift exchange inside the firm
Understanding the relationship between conventional, x-efficiency, and
efficiency wage theories
Chapter 13: The Good Economy: How Ethical Behavior Can Grow the Economy
Ethical Behavior: An Introduction
The Conventional Perspective on Ethical Behavior and the Economy
The Good Company
The Compatibility between Ethics and Profits
Examining x-efficiency and the socially responsible firm
How ethical consumers sustain and grow ethical production
Chapter 14: Why Institutions Matter
What Behavioral Economics Has to Say about Institutions
The decision-making context
The theory of the firm
The New Institutional Economics
Institutions and Wealth Creation
Governance

Culture
Part IV: Then Bubbles and Busts and Inefficiencies Are Possible: Some Behavioral Insights into the
Strange World of Economic Reality
Chapter 15: Deciphering Behavioral Finance
What Behavioral Finance Is
The Efficient Asset Market Models and Their Limits
The efficient market hypothesis
The random walk hypothesis
Irrational Exuberance: Smells Like Animal Spirit
Bubbles and Busts: A Preface to Inefficient Markets
The Dutch tulip bulb bubble
Contemporary bubbles: Evidence of inefficient markets
The causes of financial bubbles
Chapter 16: Looking into Recessions and Depressions
Introducing Psychology in Business Cycle Narratives
Grasping the meaning of macroeconomics, recessions, and
depressions
Understanding animal spirits
Deconstructing business cycles: The tango between psychology
and “real” factors
Economic Psychology and Government Policy
How Fairness, Reciprocity, and Punishment Influence Wages, Effort, and the
Business Cycle
How efficiency wages cause sticky wages and involuntary
unemployment
Why businesspeople don’t like to cut wages over the business
cycle
Insights on money illusion: Tricking workers into cutting their
wages
Why high wages don’t necessarily cause higher unemployment
How unemployment undermines confidence and destroys
productivity
Chapter 17: The Art and Science of Happiness: Can You Be Happy without More
Money?
Happiness and Conventional Economics
How happiness is measured
The art of being happy
Why conventional economics assumes that money makes you
happy
Diminishing returns for income and wealth
What increasing per-capita income ignores
Happiness and Behavioral Economics
What makes us happy: The individual versus the expert
Why money alone can’t make you happy (at least if you’re well off)
The new empirics of the happiness debate
What money can’t buy (at least not easily)
How Government Policy Affects Happiness

Part V: The Part of Tens
Chapter 18: Ten (Or So) Key Public Policy Implications of Behavioral Economics
Consumer Rights and Protection and the Framing of Information
Product Labeling and Consumer Choice
Financial Markets and Information Deceit
Saving for the Future
Organ Donations
Weakness of Will and Self-Control
Labor Market Regulation and Economic Efficiency
Big Brother and Behavioral Economics: Does Government Know Best?
Crime, Punishment, and Identity
Population Growth and the Empowerment of Women
Tax Compliance: The Carrot Is as Important as the Stick
Trust and Economic Efficiency in an Imperfect World
Chapter 19: Ten (Or So) Experiments in Behavioral Economics
The Ultimatum Game: Fairness and Punishment
The Dictator Game: Being Fair Because It’s the Right Thing to Do
Fair Wage Experiments: Adventures into Labor Market Dynamics
Public Goods Games: Sacrificing for the Public Good
The Dark Side of Humanity: It Isn’t All about Lovingkindness
The Endowment Effect: How Ownership Affects Behavior
Market Games: Markets Work Even When They’re “Irrational”
Bubble Experiments: How Smart People Produce Economic Bubbles
Experiments on Bounded Rationality
Chapter 20: Ten Decision-Making Lessons from Behavioral Economics
Be Wary of Overconfidence
You Can’t Believe Everything You Read
Avoid Situations That Require More Self-Control Than You Can Muster
Don’t Blindly Follow the Herd
You Can’t Trust Everyone
Invest Simply
Pay Attention to Sample Size
Read the Fine Print
Being Nice Pays
Educate Yourself