Standard economic theory is built on the assumption that human beings act rationally in their own self interest. But if rationality is such a reliable factor, why do economic models so often fail to predict market behavior accurately? According to Richard Thaler, the shortcomings of the standard approach arise from its failure to take into account systematic mental biases that color all human judgements and decisions. Economics assumes behavior is consistently rational, when it is, in fact, only partially, or quasi-rational.

The papers collected in Quasi-Rational Economics represent a significant sampling of this innovative approach, written by a leader in the field along with co-authors Thomas Russell, H. M. Shefrin, Daniel Kahneman, Jack Knetsch, Werner De Bondt, Eric Johnson, Charles Lee, and Andrei Shleifer. Thaler and his colleagues challenge established economic theories in such areas as consumer choice and financial markets, offering empirical evidence and alternate models based on behavioral research about how economic decisions are actually made.

Quasi-Rational Economics deals with a number of intriguing questions. Why do people have trouble ignoring sunk costs and recognizing opportunity costs? How do people’s preferences for already endowed possessions suppress trading volume and keep markets from clearing? What are the effects on market behavior of consumer attitudes about fairness? How do people’s mental accounting procedures lead them to behave in economically inconsistent ways? Why do investors’ tendencies to overreact to past trends cause losing firms to outperform winners in the stock market?

In offering answers to these questions, Quasi-Rational Economics provides an essential introduction to a new field. It mounts a trenchant critique of current practice in economics and calls for richer, more realistic approaches to formulating and testing economic theory. More than just a call for reform, this book provides numerous illustrations of how the call can be answered.

"Richard Thaler's book offers great evidence for the importance of quasi rational behavior in economic settings, thus stimulating the reader. Its broad coverage makes an interesting introduction to a new field, as well as informing about further applications and methods." —Kyklos

RICHARD H. THALER is Henrietta Johnson Louis Professor of Economics and director of the Center for Behavioral Economics and Decision Research, Johnson Graduate School of Management, Cornell University. He is research associate at the National Bureau of Economic Research.

Modern financial markets offer the real world's best approximation to the idealized price auction market envisioned in economic theory. Nevertheless, as the increasingly exquisite and detailed financial data demonstrate, financial markets often fail to behave as they should if trading were truly dominated by the fully rational investors that populate financial theories.

These markets anomalies have spawned a new approach to finance, one which as editor Richard Thaler puts it, "entertains the possibility that some agents in the economy behave less than fully rationally some of the time." Advances in Behavioral Finance collects together twenty-one recent articles that illustrate the power of this approach. These papers demonstrate how specific departures from fully rational decision making by individual market agents can provide explanations of otherwise puzzling market phenomena.

To take several examples, Werner De Bondt and Thaler find an explanation for superior price performance of firms with poor recent earnings histories in the tendencies of investors to overreact to recent information. Richard Roll traces the negative effects of corporate takeovers on the stock prices of the acquiring firms to the overconfidence of managers, who fail to recognize the contributions of chance to their past successes. Andrei Shleifer and Robert Vishny show how the difficulty of establishing a reliable reputation for correctly assessing the value of long term capital projects can lead investment analysis, and hence corporate managers, to focus myopically on short term returns.

As a testing ground for assessing the empirical accuracy of behavioral theories, the successful studies in this landmark collection reach beyond the world of finance to suggest, very powerfully, the importance of pursuing behavioral approaches to other areas of economic life. Advances in Behavioral Finance is a solid beachhead for behavioral work in the financial arena and a clear promise of wider application for behavioral economics in the future.

RICHARD H. THALER is Henrietta Johnson Louis Professor of Economics, and director of the Center for Behavioral Economics and Decision Research, Johnson Graduate School of Management, Cornell University.

CONTRIBUTORS: Lawrence M. Ausubel, Victor L. Bernard, Fischer Black, Navin Chopra, David M. Cutler, Werner F. M. De Bondt, J. Bradford De Long, Jeffrey A. Frankel, Kenneth R. French, Kenneth A. Froot, Josef Lakonishok, Charles M. C. Lee, James M. Poterba, Jay R. Ritter, Richard Roll, Hersh M. Shefrin, Robert J. Shiller, Andrei Shleifer, Meir Statman, Jeremy Stein, Lawrence H. Summers, Richard H. Thaler, Robert W. Vishny, and Robert J. Waldmann

The social survey has become an essential tool in modern society, providing crucial measurements of social change, describing social life, and guiding government policy. But the validity of surveys is fragile and depends ultimately upon the accuracy of answers to survey questions. As our dependence on surveys grows, so too have questions about the accuracy of survey responses.

Authored by a group of experts in cognitive psychology, linguistics, and survey research, Questions About Questions provides a broad review of the survey response problem. Examining the cognitive and social processes that influence the answers to questions, the book first takes up the problem of meaning and demonstrates that a respondent must share the survey researcher’s intended meaning of a question if the response is to be revealing and informative. The book then turns to an examination of memory. It provides a framework for understanding the processes that can introduce errors into retrospective reports, useful guidance on when those reports are more or less trustworthy, and investigates techniques for the improvement of such reports. Questions about the rigid standardization imposed on the survey interview receive a thorough airing as the authors show how traditional survey formats violate the usual norms of conversational behavior and potentially endanger the validity of the data collected.

Synthesizing the work of the Social Science Research Council’s Committee on Cognition and Survey Research, Questions About Questions emphasizes the reciprocal gains to be achieved when insights and techniques from the cognitive sciences and survey research are exchanged.

"these chapters provide a good sense of the range of survey problems investigated by the cognitive movement, the methods and ideas it draws upon, and the results it has yielded." —American Journal of Sociology

JUDITH M. TANUR is professor of sociology at the State University of New York at Stony Brook. She is co-chairperson of the Social Science Research Council Committee on Cognition and Survey Research.

CONTRIBUTORS: Robert P. Abelson,  Herbert H. Clark,  Robert T. Croyle, Robyn M. Dawes,  Cathryn S. Dippo, Jack F. Dovidio,  Russell H. Fazio,  Judith Fiedler,  Ronald P. Fisher,  Nancy H. Fultz,  Anthony G. Greenwald,  Robert Groves,  Brigitte Jordan,  Mark Klinger,  Jon A. Krosnik,  Elizabeth F. Loftus,  Elizabeth Martin,  Janet L. Norwood,  Robert W. Pearson,  Kathryn L. Quigley,  Michael Ross,  Michael F. Schober,  Kyle D. Smith,  Lucy Suchman, Judith M. Tanur.  

Two sociologists and a lawyer examine here the attitudes of both survivors and attorney on various problems surrounding inheritance—from will-making through estate settlement. Within a legal frame of reference, this book is a study of what happens within a family at death—and why. The authors use the "inheritance unit" as the basis for looking at the functions of inheritance in intergenerational family continuity and the general patterns of family relationship.

MARVIN B. SUSSMAN is professor and chairman of the Department of Sociology at Case Western Reserve University.

JUDITH N. CATES is research associate of the American Psychological Association.

DAVID T. SMITH is professor of law at the University of Florida.

One of the most detailed reports ever made on an effort to establish a therapeutic community within a California prison. This work describes how the program was launched, gives a number of examples of its operation, and outlines the new problems and prospects created for inmates, staff, and the broader prison administration by this attempt to redefine the roles within the prison.

ELLIOT STUDT, a social worker, is a member of the senior research staff of the Center for the Study of Law and Society at the University of California, Berkeley.

SHELDON L. MESSINGER is Vice Chairman of the Center and is a sociologist.

THOMAS P. WILSON is assistant professor of sociology at the University of California, Santa Barbara.

Examines the conditions under which motives to achieve are fostered in children. The papers included in this volume reflect the major traditions of research in the field and bring together a set of studies for achieving a better understanding of the ways in which achievement-related personality characteristics develop and function in evaluative or competitive situations.

CHARLES P. SMITH is associate professor of psychology at Brooklyn College of the City University of New York.

CONTRIBUTORS: John W. Atkinson, Virginia C. Crandall, Sheila C. Feld, Judith Lewis, Howard A. Moss, Seymour B. Sarason, Charles P. Smith, and Joseph Veroff
 

After acts of airline terrorism, air travel tends to drop dramatically—yet Americans routinely pursue the far riskier business of driving cards, where accidents resulting in death or injury are much more likely to occur. Reporting on Risk argues that this selective concern with danger is powerfully shaped by the media, whose coverage of potentially hazardous events is governed more by a need to excite the public than to inform it.

Singer and Endreny survey a wide range of print and electronic media to provide an unprecedented look at how hundreds of different hazards are presented to the public—from toxic waste and food poisoning to cigarette smoking, from transportation accidents to famine, and from experimental surgery to communicable diseases. Their investigations raise thought-provoking questions about what the media tell us about modern risks, which hazards are covered and which ignored, and how the media determine when hazards should be considered risky. Are natural hazards reported differently than man-made hazards? Is greater emphasis placed on the potential benefits or the potential drawbacks of complex new technologies? Are journalists more concerned with reporting on unproven cures or informing the public about preventative measures? Do newspapers differ from magazines and television in their risk reporting practices?

Reporting on Risk investigates how the media place blame for disasters, and looks at how the reporting of risks has changed in the past twenty-five years as such hazards as nuclear power, birth control methods, and industrial by-products have grown in national prominence. The authors demonstrate that the media often fail to report on risks until energized by the occurrence of some disastrous or dramatic event—the Union Carbide pesticide leak in Bhopal, the Challenger explosion, the outbreak of famine in Somalia, or the failed transplant of a baboon heart to "Baby Fae." Sustained attention to these hazards depends less on whether the underlying issues have been resolved than on whether they continue to unfold in newsworthy events.

Reporting on Risk examines the accuracy and the amount of information we receive about our environment. It offers a critical perspective on how our perceptions of risk, as shaped by the media, may contribute to misguided individual and public choices for action and prevention in an increasingly complex world. The authors' probing assessment of how the media report a vast array of risks offers insights useful to journalists, policy analysts, risk specialists, legislators, and concerned citizens.

ELEANOR SINGER is senior research scholar at the Center for the Social Sciences, Columbia University, and social science analyst with the U.S. Bureau of the Census.

PHYLLIS M. ENDRENY is social research consultant in Chicago, and was previously assistant professor of mass communications and mass media at the University of Illinois at Chicago.

College campuses provide ideal natural settings for studying diversity: they allow us to see what happens when students of all different backgrounds sit side by side in classrooms, live together in residence halls, and interact in one social space. By opening a window onto the experiences and evolving identities of individuals in these exceptionally diverse environments, we can gain a better understanding of the possibilities and challenges we face as a multicultural nation. The Diversity Challenge—the largest and most comprehensive study to date on college campus diversity—synthesizes over five years’ worth of research by an interdisciplinary team of experts to explore how a highly diverse environment and policies that promote cultural diversity affect social relations, identity formation, and a variety of racial and political attitudes. The result is a fascinating case study of the ways in which individuals grow and groups interact in a world where ethnic and racial difference is the norm.

The authors of The Diversity Challenge followed 2,000 UCLA students for five years in order to see how diversity affects identities, attitudes, and group conflicts over time. They found that racial prejudice generally decreased with exposure to the ethnically diverse college environment. Students who were randomly assigned to roommates of a different ethnicity developed more favorable attitudes toward students of different backgrounds, and the same associations held for friendship and dating patterns. By contrast, students who interacted mainly with others of similar backgrounds were more likely to exhibit bias toward others and perceive discrimination against their group. Likewise, the authors found that involvement in ethnically segregated student organizations sharpened perceptions of discrimination and aggravated conflict between groups. The Diversity Challenge also reports compelling new evidence that a strong ethnic identity can coexist with a larger community identity: students from all ethnic groups were equally likely to identify themselves as a part of the broader UCLA community. Overall, the authors note that on many measures, the racial and political attitudes of the students were remarkably consistent throughout the five year study. But the transformations that did take place provide us with a wealth of information on how diversity affects individuals, groups, and the cohesion of a community.

Theoretically informed and empirically grounded, The Diversity Challenge is an illuminating and provocative portrait of one of the most diverse college campuses in the nation. The story of multicultural UCLA has significant and far-reaching implications for our nation, as we face similar challenges—and opportunities—on a much larger scale.

JIM SIDANIUS is professor of psychology and African American Studies at Harvard University.

SHANA LEVIN is associate professor of psychology at Claremont McKenna College.

COLETTE VAN LAAR is professor of social psychology at Leiden University, the Netherlands.

DAVID O. SEARS is distinguished professor of psychology and political science and director of the Institute for Social Science Research at the University of California, Los Angeles.

Liberal democracies are based on principles of inclusion and tolerance. But how does the principle of tolerance work in practice in countries such as Germany, France, India, South Africa, and the United States, where an increasingly wide range of cultural groups holds often contradictory beliefs about appropriate social and family life practices? As these democracies expand to include peoples of vastly different cultural backgrounds, the limits of tolerance are being tested as never before. Engaging Cultural Differences explores how liberal democracies respond socially and legally to differences in the cultural and religious practices of their minority groups.

Building on such examples, the contributors examine the role of tolerance in practical encounters between state officials and immigrants, and between members of longstanding majority groups and increasing numbers of minority groups. The volume also considers the theoretical implications of expanding the realm of tolerance. Some contributors are reluctant to broaden the scope of tolerance, while others insist that the notion of "tolerance" is itself potentially confining and demeaning and that modern nations should aspire to celebrate cultural differences.

Coming to terms with ethnic diversity and cultural differences has become a major public policy concern in contemporary liberal democracies, as they struggle to adjust to burgeoning immigrant populations. Engaging Cultural Differences provides a compelling examination of the challenges of multiculturalism and reveals a deep understanding of the challenges democracies face as they seek to accommodate their citizens' diverse beliefs and practices.

RICHARD A. SHWEDER, an anthropologist, is professor of human development at the University of Chicago.

MARTHA MINOW is professor of law at Harvard University.

HAZEL R. MARKUS is professor of psychology at Stanford University.

CONTRIBUTORS: Richard A. Shweder, Martha Minow, Hazel Rose Markus, Caroline Bledsoe, David L. Chambers, Jane Maslow Cohen, Joanna Davidson, Arthur N. Eisenberg, Karen Engle, Katherine Pratt Ewing, Heejung S. Kim, Corinne A. Kratz, Maivân Clech Lâm, Usha Menon, Victoria C. Plaut, Alison Dundes Renteln, Lloyd I. Rudolph, Susanne Hoeber Rudolph, Lawrence G. Sager, Austin Sarat, Claude M. Steele, Dorothy M. Steele, Nomi Stolzenberg, Marcelo M. Suárez-Orozco, and Unni Wikan.
 

Classical economic theory assumes that people in risk situations follow a course of action based on a rational, consistent assessment of likely outcomes. But as Zur Shapira demonstrates in Risk Taking, corporate managers consistently stray from the prescribed path into far more subjective territory. Risk Taking offers a critical assessment of the relationship between theory and action in managerial decision making.

Shapira offers a definitive account of the classical conception of risky decision making, which derives behavioral prescriptions from a calculation of both the value and the likelihood of possible outcomes. He then demonstrates how theories in this vein have been historically at odds with empirical observations. Risk Taking reports the results of an extensive survey of seven hundred managers that probed their attitudes and beliefs about risk and examined how they had actually made decisions in the face of uncertainty. The picture that emerges is of a dynamic, flexible process in which each manager’s personal expertise and perceptions play profound roles.

Managerial strategies are continually modified to suit changing circumstances. Rather than formulating probability estimates, executives create potential scenarios based not only on the possible outcomes but also on the many arbitrary factors inherent in their own situations. As Shapira notes, risk taking propensities vary among managers, and the need to maintain control and avoid particularly dangerous results exercises a powerful influence. Shapira also examines the impact of organizational structure, long-term management objectives, and incentives on decision making.

With perceptive observations of the cognitive, emotional, and organizational dimensions of corporate decision making, Risk Taking propels the study of managerial risk behavior into new directions. This volume signals the way toward improving managerial decision making by revealing the need for more inclusive choice models that augment classical theory with vital behavioral observations.

ZUR SHAPIRA is research professor of management and organizational behavior at the Stern School of Business at New York University.