Most Important Concepts:

• Traditional economic models assume perfect rationality, but human decision-making is influenced by biases, emotions, and cognitive limitations.
• People mentally allocate money into categories (e.g., "savings," "entertainment") and behave irrationally within these buckets.
• Risk-taking increases when people perceive themselves as "behind" (trying to break even) or "ahead" (playing with house money).
• Fairness matters to customers, employees, and stakeholders. Unfair actions, even if rational, can provoke backlash.

How I Can Use This Info:

Chapter Recap:

Part 1 - Beginnings: 1970-78

1 - Supposedly irrelevant factors

• The premises on which economic theory rests are flawed.
  • First the optimization problems that ordinary people confront are often too hard for them to solve.
  • Second, the beliefs upon which people make their decisions are not unbiased.
  • Third, there are many factors that the optimization model leaves out.

2 - The endowment effect

• The current estimate of the value of a life is about ~$7 million.
• People value things that are already in their possession more highly than identical things that aren’t.

3 - The list

• People have predictable biases.

4 - Value theory

• Two types of theory:
  • Normative theory is logically consistent.
  • Descriptive theory
• There is diminishing sensitivity for both losses and gains.
  • However, losses are felt with a greater magnitude.

5 - California dreamin’

6 - The Gauntlet