Sunday, January 25, 2009

Five best: books on irrational decision-making

For the Wall Street Journal, Jonah Lehrer, author of Proust Was a Neuroscientist and the forthcoming How We Decide, named a five best list of books on irrational decision-making.

One title on the list:
The Winner's Curse
By Richard H. Thaler
Princeton, 1992

In 2000, the Texas Rangers signed Alex Rodriguez to the richest contract in baseball history after participating in a blind auction. If the team had consulted Richard H. Thaler's "The Winner's Curse," it would have known that such auctions invariably lead to irrational offers -- and, indeed, the Rangers' bid (a 10-year contract for $252 million) overshot the next highest offer by about $100 million. In addition to documenting how bidders at auctions operate, Thaler -- a behavioral economist at the University of Chicago -- examines other anomalies, such as the stock market's seasonal fluctuations (nearly one-third of annual returns occur in January) and the surprising unselfishness of people playing economic games. When given $10 and told to share the money with someone else, most people don't keep it all, or even most of it. Instead, they tend to split the cash equally, which is neither selfish nor rational. As Thaler notes, people have a powerful instinct for generosity, which can lead them to do things that flagrantly violate the model of Homo Economicus.
Read about the oldest book on Lehrer's list.

--Marshal Zeringue