Introduction 1 About This Book 1 Conventions Used in This Book 2 What You''re Not to Read 2 Foolish Assumptions 3 How This Book isOrganized 3 Part I: Introducing Behavioral Economics: The Science of Making Real-World Choices 4 Part II: Understanding Choice 4 Part III: Growing the Economic Pie: The Economic Importance of Ethics, Well-Being, and Culture 4 Part IV: When Bubbles and Busts and Inefficiencies Are Possible: Some Behavioral Insights into the Strange World of Economic Reality 5 Part V: The Part of Tens 5 Icons Used in This Book 6 Where to Go from Here 6 Part I: Introducing Behavioral Economics: The Science of Making Real-World Choices 7 Chapter 1: Decoding Behavioral Economics 9 Making Wise Assumptions 9 Why reality matters 10 Why incentives matter -- even in behavioral economics 10 Making Sense of Choice 11 Maximizing versus satisficing 11 The effect of emotions 12 The avoidance of loss 12 How options are framed 12 Paternalism versus free choice 13 The role of social context in decision making 14 Relative positioning 14 Growing the Economic Pie 15 Deciphering Bubbles and Busts 15 Inefficient markets and investment behavior 16 Emotions, intuition, animal spirits, and business cycles 16 Understanding Happiness: Money Isn''t Everything 17 Chapter 2: Getting Real about Assumptions 19 Defining an Economic Model 20 Explaining economic phenomena 21 Making simplifying assumptions 21 Discovering the irrelevance of facts 22 Understanding the role of math in model building 23 Considering cause and effect 26 Watching out for spurious correlations 26 Contemplating Conventional Economic Assumptions and Real-World Alternatives 27 Conventional assumption #1: People''s preferences are stable and consistent 27 Conventional assumption #2: People are solitary decision makers 28 Conventional assumption #3: How people form preferences doesn''t matter 28 Conventional assumption #4: People have the same preferences 29 Conventional assumption #5: People are all maximizers 30 Conventional assumption #6: People have perfect knowledge 32 Conventional assumption #7: People have unbounded computational capabilities 33 Conventional assumption #8: People have willpower 34 Conventional assumption #9: People are capable of acting upon their preferences 35 Understanding Rational Economic Behavior 36 You can do no wrong: Errors and biases in decision making 37 Selfishness and the smart society 38 Getting to Know the Behavioral Economics Actor 39 Chapter 3: Neuroeconomics: Exploring the Brain for Economic Analysis 41 Where Neuroeconomics Fits in the Behavioral Economics Perspective 43 The Brain and Economics 45 The evolution of the human brain 45 The division of labor in the human brain 48 The Emotional Brain 49 Descartes'' error: The somatic marker hypothesis 49 Phineas Gage and the social and emotional side of rational decision making 50 How Emotions Affect Decision Making 53 Fear and decision making 53 Happiness and decision making 54 The Limits of the Human Brain and Homo Economicus 54 The brain isnot a calculating machine 55 The brain isa scarce resource 55 What Brain Sciences Confirm for the Behavioral Economist 57 People prefer the present to the future 57 People''s aversion to loss affects their decision making 58 What people feel isn''t always what they experience 58 People care about keeping up with -- and beating --the Joneses 60 People''s brains evolve over their lifetimes 61 People value fairness 62 People like to trust and be trusted 63 Chapter 4: Why Incentives and Markets Matter, but Money Isn''t Everything 65 The Role of Economic Incentives for Economic Behavior 66 Why money isall that matters in conventional economics 67 Opportunity costs for Homo economicus 69 Decision Making and Opportunity Costs 71 Using up your mind: Bounded rationality 71 Considering costs other than money: Psychological costs 72 Reducing opportunity costs in the real world: Satisficing behavior 73 Weighing the opportunity cost of altruism 75 Supply and Demand and Behavioral Economics 75 Introducing the bandwagon effect 76 Investigating the snob effect 77 Interjecting morals and ethics 78 Introducing sociology to supply and demand 79 Economic Psychology: How Thoughts and Feelings Impact Decisions 84 Loss aversion: How framing, ownership, and control affect economic behavior 85 How the fear of uncertainty influences decisions 85 The warm glow: Why people sacrifice money for fairness or justice 87 Forfeiting money for status 88 Part II: Understanding Choice 89 Chapter 5: Exploring the Limits to Free Choice 91 Free Choice in Economic Decision Making 92 What conventional economics says 92 What behavioral economics says 93 Revealed Preferences: When Choices Reveal Your Inner Self 94 The narrative about preferences 95 False preferences versus true preferences 96 The limits of revealed preferences and free choice 98 The Illusion of Free Choice 99 Advertising and preference distortions 99 Self-control and free choice 101 Defaults as a determinant of choice 102 Herding, the bandwagon effect, and free choice: Are followers irrational? 103 Constraining Choice versus Freedom of Choice 104 Information 104 Education 105 Consumer rights 105 Chapter 6: Quick and Simple Heuristics and Real-World Decision Making 107 A Bird''s-Eye View of Smart Decision Making in Conventional Economics 108 Decision-making norms in conventional economics: The human calculating machine 109 The optimizing decision-making machine in conventional economics 110 Core conventional benchmarks for rational choice: To dream an impossible dream 111 The limits of conventional rationality 112 Rethinking Bounded Rationality and the Limits of the Mind 113 Bounded rationality and satisficing: Rationality within reason 114 The two blades of the decision-making scissors: Ecological rationality 114 Prospect Theory: Describing Average Decision-Making Behavior 116 Introducing prospect theory: Real-world decision making under uncertainty 117 Thinking about prospect theory and conventional norms 118 Exploring emotions as a hot bed of irrationality 118 The fundamentals of prospect theory: Understanding the value function 119 Unveiling Some Implications of Loss Aversion 122 Loss aversion and the certainty effect 122 Risk seeking in losses 123 The endowment effect: Explaining attachment to possessions 124 Uncovering Errors and Biases in Decision Making 125 Overconfidence 125 Herd behavior 125 Confirmation bias 126 Anchoring 126 Generalizing 127 Less isBest in Decision-Making: Fast and Frugal Heuristics 127 Exploring the superiority of heuristics 128 Understanding human rationality: New benchmarks built on human capabilities 130 Chapter 7: How the Framing of Choices Affects Decision Making 131 The Framing Effect 131 Framing and the economic schools of thought 132 The effect of framing on preferences and choices 133 Appreciating the objective unimportance of frames: The errors and biases approach 133 Understanding frames as heuristics 134 Framing in Pictures: The Possibility of Cognitive Illusions 134 Framing the Mona Lisa 135 Distorting the line illusion 135 Framing faces 136 Framing automobiles: Surface beauty versus substance 137 The letter illusion 138 We''re All Framed: Framing and Decision Making 139 Framing and loss aversion: The classic Asian disease experiment 140 When money isn''t everything 142 Saving a penny to lose a bundle: Framing prices through relative positioning 143 Frames as Defaults: How Anchors Sway the Course of Decision Making 144 Changing default options and choices 144 Revisiting choice architecture 146 Framing isimportant, but so are income and prices 147 The Inescapable Frame and Rational Decision Making 148 Understanding frames as an information-generating machine 148 Repairing frames and rational decision making 148 Introducing product labels into the framing arsenal 149 Market Failure and the Framing Effect 149 Chapter 8: How Norms, Peers, History, and Culture Influence Choice 153 Making Decisions in a Bubble, the Conventional Economics Way 154 Making decisions as if other people don''t matter 155 Making decisions as if history doesn''t matter 155 Making decisions as if society doesn''t matter 157 Introducing Social Norms to Decision Making 157 Looking at some norms 158 Identifying how trust impacts economic development 161 Seeing how discriminating norms can lead to a slow economy 162 Studying the role of education in the formation of norms and the shaping of preferences 163 The carrot and the stick: Exploring the enforcement of social norms 163 Peer Pressure: Seeing How Peers Affect Decision Making 164 How History and Culture Affect Choice 165 Rooting choice in history 165.