Behavioral Economics

for Kids

by
&
Neil Bendlheen
Philip C
Behavioral Economics
for Kids by
&
Neil Bendlheen
i p C
Phil

Published by FehrAdvice
 don’t change people – change their behavior!
As experts for behavioral change in organisations and corporations
we deal with human behavior on a daily basis. We know from a variety
of experiments by behavioral economists, that deep knowledge of
the sometimes funny patterns of human behavior is the key to inspire
people to behave more to their advantage.
On the other hand, we see time and time again that even this
scientifically-based knowledge is not always enough. We humans are not
as smart as we would like to be. We humans usually do not decide as
rationally as we think. We humans behave like kids most of the time.
This is the reason why we decided to publish this book together with
it’s authors Neil Bendle and Philip Chen. Each of the the chapters teach
us one thing: If we want to change ourselves for the better, we have to
change our behavior.
Have fun with Behavioral Economics for Kids.

Gerhard Fehr, CEO FehrAdvice & Partners AG, 2013

4
Behavioral Economics for Kids
The aim of this book is to illustrate what we already know.
People behave in predictable ways that don’t always reflect the ideal
behavior that social scientists like to theorize about. On the negative
side sometimes our choices are short-sighted, incoherent, self-
destructive or even malicious. On a more positive note, sometimes we
are more sociable than might be predicted by a traditional economic
view of decision making. Furthermore most of us seem to do a
surprisingly good job of coping with a ridiculously complex world.
The behaviors that violate various social scientists’ ideals can be seen
even amongst children. Indeed this little book starts from the premise
that while adults do grow up a little we all remain big kids. The actions
that we see our children doing can help to explain our own behavior.
Of course we could do a dense tome with lots of footnotes, pompous
words and caveats but we figure that like kids most of us prefer it when
pictures explain the world.
In the following pages we detail some of the most significant elements
of modern behavioral research. This should be of interest to students,
teachers, researchers and even children who want to know why their
sister always wants the last M&M.
This is Behavioral Economics for Kids.

Neil Bendle and Philip Chen, 2013

5
 1 1 1 1 1 1 1 1 1 1 1
1 1 1 1 1 1 1 1 1
1
1 Endowment
11The 1 1 1 1 1
Effect
1
1 1 1 1 1 1 1 1 1 1
11 1111111 1111
1 1 1 1 1 1 1 1 1 1
1 1 1 1 1 1 1
111 1111111 111
1 1 1 1 1 1 1 1 1
1 1 1 1 1 1 1 1 1
11 11 1 1
11The Endowment Effect
11
11
“The doll we own has more value to us than a stack of
identical dolls.“

11
People are willing to pay less to buy something they
don’t own than they are willing to accept payment
for an identical item they own. “Possessing”
something makes it more valuable.

11
Trades are harder to make than implied by
traditional economics. This is because where we
start from in any trade matters to the outcome.

111
11
Read: Jack Knetsch (1989), The Endowment Effect and Evidence of
Nonreversible Indifference Curves, The American Economic Review,
79 (5), 1277-1284.

7
 2 2
2 222222 22
2 2 2
2 2
2 Sunk2Cost Bias
2 2 2 2
2 2 2 2 2 2 2
22 22222 222
22 222222 22
2 2
2 22222 22 2 2
2
2 2222 2 2 2
2 2 2 2 2 2 2
2 2
2 2Sunk Cost Bias
2
22
“Past losses matter when deciding whether to commit
to one more heave.”

22
People consider sunk costs. Sunk costs are
irrecoverable whatever option is chosen. They are
therefore irrelevant to the decision at hand.

22
People “pour good money after bad”, fight on in
wars they should abandon and double down on
failing projects. Prior investments drive people’s
new investments not just the predicted results of
the investment.

22
22
Read: Barry Staw and Ha Hoang (1995) Sunk Costs In The NBA:
Why Draft Order Affects Playing Time And Survival In Professional
Basketball, Administrative Science Quarterly, (40)3, 474-494

9
 3 3
3 333333 33
3 3 3
3 3
3 Hyperbolic 3 3
Discounting
3 3
3 3 3 3 3 3 3 3
33 33333 333
33 333333 33
3 3
3 33333 33 3 3
3
3 3333 3 3 3
3 3 3 3 3 3 3
3 3
3 3Hyperbolic Discounting
3
33
“A marshmallow in the hand is worth two
promised later“

33
When offered a cookie today or two cookies
tomorrow waiting seems intolerable and we eat
today. When offered one cookie in 365 days or two

33
in 366 days the wait seems easy and we say we will
wait.
People more heavily discount the immediate than
distant future. The implications go well beyond
dieting. Such inconsistency threatens much of
social science. It suggests what we want depends

33
upon when you ask us.

33
Read: Stefano Della Vigna and Ulrike Malmendier, (2006), Paying
Not To Go To The Gym, The American Economic Review, 96 (3),
694-719

11
 4 4
4 444444 44
4 4 4
4 4
4 Reference 4 4
Dependence
4 4
4 4 4 4 4 4 4 4
44 44444 444
44 444444 44
4 4
4 44444 44 4 4
4
4 4444 4 4 4
4 4 4 4 4 4 4
4 4
4 4Reference Dependence
4
44
“That you already have an ice cream doesn’t matter.
What matters is the additional sprinkles you must have.“

44
We evaluate offerings not on an absolute scale
but relative to what we already have (or were
expecting).

44
We acclimatize to our current state. What was
once a wonderful feature of a product becomes
something boring that consumers simply expect.

44 Read: Amos Tversky and Daniel Kahneman, (1991), Loss Aversion in

44
Riskless Choice: A Reference-Dependent Model, The Quarterly Journal
of Economics, 106 (4), November

13
 5 5
5 555555 55
5 5 5
5
5 Framing
5 5 5 5 5
5 5 5 5 5 5 5 5
55 55555 555
55 555555 55
5 5
5 55555 55 5 5
5
5 5555 5 5 5
5 5 5 5 5 5 5
5 5
5 5Framing
5
55
“I prefer mummy sharing the bad news about bedtime
strategically.“

55
The person being communicated with can perceive
the same information as different depending upon
how the information is presented.

55
Your choice of communication strategy matters to
the decision that will be made. Losses are not the
mirror image of gains.

55
55
Read: Amos Tversky and Daniel Kahneman, (1981), The Framing Of
Decision And The Psychology Of Choice, Science, 211, 418, January 30

15
 6 6
6 666666 66
6 6 6
6 6 6
6 Trust6 6 6 6 6 6 6
6
6
66 66666 666 6 6
66 666666 66
6 6
6 66666 66 6 6
6
6 6666 6 6 6
6 6 6 6 6 6 6
6 6
6 6Trust
6
66
“She is surprisingly trustworthy but beware some
leaps of faith.“

66
Your sister, friend or even a random stranger is
often much more trustworthy than economists
assume.

66
Assumptions of rampant opportunism are too
simplistic. Trust, if clearly defined, may be a useful
concept in economic analysis. (That said we don’t
want to be too panglossian. Sometimes trust isn’t
a good idea especially if the person isn’t capable of
helping you even if they want to).

66
66
Read: Joyce Berg, John Dickhaut and Kevin McCabe, (1995), Trust,
Reciprocity, and Social History, Games and Economic Behavior, 10
(1), 122–142

17
 7 7
7 777777 77
7 7 7
7
7 Fairness
7 7 7 7 7
7 7 7 7 7 7 7 7
77 77777 777
77 777777 77
7 7
7 77777 77 7 7
7
7 7777 7 7 7
7 7 7 7 7 7 7
7 7
7 7Fairness
7
77
“Being fair matters but who wouldn’t take the leftover
chocolate egg?“

77
We free-ride in social situations but also show
evidence of wanting to stop behavior that is
perceived as unfair. To this end we may seek to

77
punish those whose behavior is perceived as unfair.
People don’t seem to be merely profit maximizers
but have social preferences. They care at least
somewhat about fairness.

77
77
Read: Ernst Fehr and Klaus M. Schmidt, (1999), A Theory Of Fairness,
Competition, And Cooperation, The Quarterly Journal of Economics,
(114) 3, 817-868

19
 8 8
8 888888 88
8 8 8
8 8
8 Loss 8
Aversion
8 8 8 8
8 8 8 8 8 8 8
88 88888 888
88 888888 88
8 8
8 88888 88 8 8
8
8 8888 8 8 8
8 8 8 8 8 8 8
8 8
8 8Loss Aversion
8
88
“The chocolate you lost can
never be replaced.“

88
Surely $10 is $10? We know differently. If you lose $10 and
win the same amount you may be unhappy. “If only I had
been more careful and not lost the money”.

88
This basic effect underlies a number of findings. It creates
messy asymmetries in economic models. It has been
suggested as the reason for the relative expensiveness of
safe investments. (You effectively pay not to experience the
pain of losses which comes with volatile stocks).

88
88
Read: Shlomo Benartzi and Richard Thaler, (1995) Myopic Loss Aversion and the
Equity Premium Puzzle, The Quarterly Journal of Economics 110 (1)

21
 9 9
9 999999 99
9 9 9
9 9
9 Mental 9
Accounting
9 9 9
9 9 9 9 9 9 9 9
99 99999 999
99 999999 99
9 9
9 99999 99 9 9
9
9 9999 9 9 9
9 9 9 9 9 9 9
9 9
9 9Mental Accounting
9
99
“Ice-cream money is very different from money for
doll’s clothes“

99
We don’t perceive money as totally fungible. How
we label income and expenditure matters. Money
received as a windfall, e.g. a bonus, is more likely to

99
be spent on treating oneself than ordinary salary.
People don’t maximize their utility across
dimensions but hold themselves to budgets in
different categories.

99
99
Read: Richard Thaler, (1985), Mental Accounting and Consumer
Choice, Marketing Science, 4 (Summer), 199-214.

23
 10 10
0 0 10 10 1 10 1 0 1 0 1
0 1
1Dishonesty0 10 10 0
10 10 1 1 0 1 0 1
0
1 10 10 10 0 10
10 10 10 10 1 0 1
10
10 10 10 10 1 0 100 1
10 10 10 10 1 0 1
10 10 0 1 0 1
01
10Dishonesty
0
10
“Taking one chocolate isn’t cheating.“

10
We like to think of ourselves as honest but can be
surprisingly inventive in deciding what constitutes
honesty.

0
If you want to reduce dishonesty don’t just focus

1
on increasing punishments. Structure the decisions

0
to reduce people’s ability to be dishonest without
feeling bad about their actions.

10
10
Read: Nina Mazar, Om Amir and Dan Ariely, (2008), The Dishonesty
of Honest People: A Theory of Self-Concept Maintenance, Journal of
Marketing Research, (45) 6, 633-644.

25
 11 11
1 1 11 11 1 11 1 1 11 1
1 1
1Base Rate Neglect
1 11 1 1 1
11 11 1 1 1 11 1
1
1 11 11 11 1 11
11 11 11 11 1 1 1
11
11 11 11 11 1 1 11 1 1
11 11 11 11 1 1 1
11 11 1 11 1
11
11Base Rate Neglect
1
11
“She looks like a princess, not a doctor.“

11
When judging probabilities we often ignore
frequencies and concentrate on appearance cues.
The tiny number of princesses in the world means

1
even the poshest woman you meet is unlikely to be

1
one, especially if she is going into a hospital benefit

1
dinner.
People make mistakes in judging probabilities. This
has quite scary implications for medical decision
making and witness testimony in trials.

11
11
Read: Amos Tversky and Daniel Kahneman, (1974), Judgment Under
Uncertainty: Heuristics And Biases, Science, 185 (4157), 1124-31.

27
 12 12
2 2 12 12 1 12 1 2 12 1
2 1
1Competitor2 1 2 1 2
Orientation 2
12 12 1 12 12 1
2
1 12 12 12 2 12
12 12 12 12 1 2 1
12
12 12 12 12 1 2 122 1
12 12 12 12 1 2 1
12 12 2 12 1
21
12Competitor Orientation
2
12
“Its not about how many toys I have. It is about having
more toys than my sister”

12
Beating others is sometimes a goal in itself. I don’t
care as much about what I get as I care about
getting more than someone else.

2
This conflicts with the economic view of a decision

1
maker as profit maximizing. The competitively

2
orientated person prefers earning $100 while
another person earns $0, to earning $200 when
the other person gets $300. Relative success
matters.

12 Read: J. Scott Armstrong and Fred Collopy, (1996) Competitor

12
Orientation: Effects Of Objectives And Information on Managerial
Decisions And Profitability, Journal of Marketing Research 33 (2)
188-199

29
 13 13
3 3 13 13 1 13 1 3 1 3 1
3 1
1Overweighting
3 13of13
Small 3
13 13 1 1 3 1 3 1
3
1 3 13 3
Probabilities
1 13
1
1 13 13 13 1 3 1
3 3
13
13 13 13 13 1 3 13 3 1
13 13 13 13 1 3 1
13 13 3 1 3 1
31
13Overweighting of Small Probabilities
3
13
“One in a million approximately equals one in a
hundred.“

13
People exhibit problems understanding the
difference between unlikely and practically
impossible. That this young girl will become a

3
doctor is merely unlikely, that she will become the

1
next Hannah Montana practically impossible.

3
Lottery tickets are bought despite fact there is no
reasonable chance “it could be you”.

13
13
Read: Daniel Kahneman and Amos Tversky (1979), Prospect Theory:
An Analysis of Decision Under Risk, Econometrica, 47, 263-291.

31
 14 14
4 4 14 14 1 14 1 4 1 4 1
4 1
1Overconfidence
4 14 14 4
14 14 1 1 4 1 4 1
4
1 14 14 14 4 14
14 14 14 14 1 4 1
14
14 14 14 14 1 4 144 1
14 14 14 14 1 4 1
14 14 4 1 4 1
41
14Overconfidence
4
14
“Nothing is impossible to a big girl.“

14
We sometimes exhibit seemingly unreasonable
assessments of our probability of being correct or
nothing going wrong.

4
People may be willing to spend too much pursuing

1
goals that are objectively unlikely to ever be

4
achieved. This may help explain failed plans, poor
investment decisions and even doomed corporate
acquisitions.

14
14
Read: Ulrike Malmendier and Geoffrey Tate, (2005), CEO
Overconfidence And Corporate Investment, The Journal of Finance,
(60)6, 2661

33
 15 15
5 5 15 15 1 15 1 5 1 5 1
5 1
1Identity 5 15 15 5
15 15 1 1 5 1 5 1
5
1 15 15 15 5 15
15 15 15 15 1 5 1
15
15 15 15 15 1 5 155 1
15 15 15 15 1 5 1
15 15 5 1 5 1
51
15Identity
5
15
“Sometimes we make questionable choices to preserve
our group identity.“

15
We forgo profitable and enjoyable opportunities
to preserve our attachment to a specific group
identity. Men who would make great nurses, and

5
women who would make great firefighters don’t do it.

1
They feel that is not what their gender does.

5
Economic and social outcomes are reduced. People
do what they feel they should not what they are
best at, or what is most needed.

15
15
Read: George A. Akerlof and Rachel E. Kranton (2000), Economics
And Identity, The Quarterly Journal Of Economics, Volume CXV,
August (3), Pages 715-753

35
AVIO R K I D S O M I C S R A L
I C S F O L E C O N H A V I O
NO M I O R A S B E

Behavioral
B E H A V O R K I D O N O M
KIDS I C S F R A L E C
O N O M H A V I O K I D S
R A L E C S B E C S F O R
VIO O R KI D N O M I O R A
M I C S F L E C O E H A V I
A

Economics
ON O A V IO R I D S B O M
B E H F O R K E C O N
R K I D S O M I C S I O R A L
E C O N B E H A V O R K I D
I O R A L K I D S M I C S F
AV S F O R E C O N O A V I O R

for Kids
N O M I C O R A L B E H
C O E H AV I R K I D S N O
I D S B I C S F O A L E C O
O R K O N O M A V I O R K I
R AL E C S B E H S F O R
HA V I O O R K I D N O M I C
I C S F L E C O E H A V I O
O N O M V I O R A I D S B
EC S B E H A
S F O R K E C O N
R K I D O M I C I O R A L
FO E C O N B E H A V
AL
 L
MICSBehavioral Economics for Kids
S BE-
AL Copyright 2013 © Neil Bendle and Philip Chen. All rights reserved.

MICS
Published by FehrAdvice & Partners AG, Bergstrasse 114, CH 8032 Zürich

-
www.fehradvice.com

D S B E
RAL
O M I C S
B E -
IDS
ORAL
O M I C S
N
37
T h a n k
you!
Behavioral Economics
for Kids by
&
Neil Bendlheen
Philip C

ISBN 978-3-033-04315-2