We aren't rational. We like to think we are, but it just isn't so. Instead, we treasure things we have already to the extent that we'll demand people pay us more for our own goods than we would pay for them in the first place (the endowment effect). We experience the pain of financial loss more strongly than the joy of financial gain (loss aversion). We rate new information more highly than old and don't notice how much that skews our judgement (recency bias) and we just hate change (status quo bias).
That you aren't 100% clear-minded, analytical and rational might come as no surprise to most of you. But to many economists it is a bizarrely new thought and one for which Richard Thaler has just been awarded the 79thNobel Prize in Economic Sciences. This is shocking in one sense: how can the economics profession have got itself into such a formulaic rut that having the common sense to point out that people react to more than one influence at a time became an insight so radical that it is worthy of a Nobel prize? But the fact that behavioural science is gaining ground in economics is also encouraging.
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