Thaler has a mischievous mind. At the same time that he was producing his math-heavy dissertation, he started asking people two questions. The first: How much would you pay to eliminate a mortality risk of 1 in 100,000? The second: How much would you have to be paid to accept a mortality risk of 1 in 100,000? According to standard economic theory, people’s answers to the two questions should be essentially identical. But they weren’t. Not close. The answers to the second question were much higher (often in the range of $500,000) than the answers to the first (often in the range of $2000). In fact some people responded to the second question, “there is no amount you could name.” According to economic theory, that’s serious misbehaving.
Thaler showed his results to Rosen, who told him to stop wasting his time, but Thaler was hooked. As he eventually demonstrated, the disparity in people’s responses to the two questions reflects the “endowment effect,” which is now a centerpiece of behavioral economics: People value goods that they have more than they value exactly the same goods when they are in the hands of others. If you are asked to give up a right (say, to be free from a risk), you’ll demand a lot more than you will pay to get that same right. The endowment effect can be found for countless things, including coffee mugs, candy bars, lottery tickets, environmental amenities (such as clean air), and legal protection of many different kinds.
It would be an overstatement to say that behavioral economics was born with this little survey, but Thaler started to collect anomalies, often involving the misbehavior of his friends, and resulting in what he called the List. As he explains it here, the List captures a series of differences between Econs (an imaginary species much discussed by economists) and Humans (our actual species). Here’s one example: “Stanley mows his lawn every weekend and it gives him terrible hay fever. I ask Stan why he doesn’t hire a kid to mow his lawn. Stan says he doesn’t want to pay the $10. I ask Stan whether he would mow his neighbor’s lawn for $20 and Stan says no, of course not.” But Thaler didn’t know what to do with his List, thinking that no one would want to publish an academic paper called “Dumb stuff people do.”
More here – The New Rambler Review