On the mistake of believing findings from behavioural science are only relevant to trivial purchases

After my first lecture, Binmore offered a version of the “low stakes” critique. He said that if he were running a supermarket, he would want to consult my research because, for inexpensive purchases, the things I studied might possibly matter. But if he were running an automobile dealership, my research would be of little relevance. At high stakes people would get stuff right.

The next day I presented what I now call the “Binmore continuum” in his honor. I wrote a list of products on the blackboard that varied from left to right based on frequency of purchase. On the left I started with cafeteria lunch (daily), then milk and bread (twice a week), and so forth up to sweaters, cars, and homes, career choices, and spouses (no more than two or three per lifetime for most of us). Notice the trend. 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 practise or opportunities to learn. And when it comes to saving for retirement, barring reincarnations 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.

Excerpt from: Misbehaving: The Making of Behavioural Economics by Richard H Thaler

On our tendency to be unrealistically optimistic

People are unrealistically optimistic even when the stakes are high. About 50 percent of marriages end in divorce, and this is a statistic most people have heard. But around the time of the ceremony, almost all couples believe that there is approximately a zero percent chance that their marriage will end in divorce — even those who have already been divorced! (Second marriage, Samual Johnson once quipped, ‘is the triumph of hope over experience.’) A similar point applies to entrepreneurs starting new businesses, where the failure rate is at least 50 percent. In one survey of people staring new businesses (typically small businesses, such a contracting firms, restaurants, and salons), respondents were asked two questions: (a) What do you think is the chance of success for a typical business like yours? (b) What is your chance of success? The most common answers to these questions were 50 percent and 90 percent, respectively, and many said 100 percent to to the second question.

Unrealistic optimism can explain a lot of individual risk taking, especially in the domain of risks to life and health.

Excerpt from: Nudge: Improving Decisions About Health, Wealth and Happiness by Richard Thaler and Cass Sunstein