IDEAS home Printed from https://ideas.repec.org/a/sae/ratsoc/v1y1989i1p101-122.html
   My bibliography  Save this article

Should Social Scientists Care about Choice Anomalies?

Author

Listed:
  • BRUNO S. FREY

    (University of Zurich)

  • REINER EICHENBERGER

    (University of Zurich)

Abstract

The behavioral anomalies found by experimental psychologists (Tversky, Kahneman, and others) relate to the individual level. They are often considered to be irrelevant by economists because competitive markets are assumed to eliminate them at the aggregate level. However, markets are only able to perform this role under very limited conditions that often do not obtain even in the near-perfect stock market. Moreover, democratic, bureaucratic, and bargaining processes may under different identifiable conditions weaken or strengthen the anomalies. At the aggregate level, institutions such as conventions and laws may arise to counteract anomalies.

Suggested Citation

  • Bruno S. Frey & Reiner Eichenberger, 1989. "Should Social Scientists Care about Choice Anomalies?," Rationality and Society, , vol. 1(1), pages 101-122, July.
    • Handle: RePEc:sae:ratsoc:v:1:y:1989:i:1:p:101-122
    DOI: 10.1177/1043463189001001007
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/1043463189001001007
    Download Restriction: no
    File URL: https://libkey.io/10.1177/1043463189001001007?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Pommerehne, Werner W & Schneider, Friedrich & Zweifel, Peter, 1982. "Economic Theory of Choice and the Preference Reversal Phenomenon: A Reexamination," American Economic Review, American Economic Association, vol. 72(3), pages 569-574, June.
    2. Forsythe, Robert & Palfrey, Thomas R & Plott, Charles R, 1984. "Futures Markets and Informational Efficiency: A Laboratory Examination," Journal of Finance, American Finance Association, vol. 39(4), pages 955-981, September.
    3. Haltiwanger, John & Waldman, Michael, 1985. "Rational Expectations and the Limits of Rationality: An Analysis of Heterogeneity," American Economic Review, American Economic Association, vol. 75(3), pages 326-340, June.
    4. Frey, Bruno S. & Foppa, Klaus, 1986. "Human behavior: possibilities explain action," Journal of Economic Psychology, Elsevier, vol. 7(2), pages 137-160, June.
    5. Jack L. Knetsch & J. A. Sinden, 1984. "Willingness to Pay and Compensation Demanded: Experimental Evidence of an Unexpected Disparity in Measures of Value," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 99(3), pages 507-521.
    6. Frey, Bruno S., 1988. "Ipsative and objective limits to human behavior," Journal of Behavioral Economics, Elsevier, vol. 17(4), pages 229-248.
    7. West, Kenneth D, 1988. "Dividend Innovations and Stock Price Volatility," Econometrica, Econometric Society, vol. 56(1), pages 37-61, January.
    8. Machina, Mark J, 1982. ""Expected Utility" Analysis without the Independence Axiom," Econometrica, Econometric Society, vol. 50(2), pages 277-323, March.
    9. Shiller, Robert J, 1986. "The Marsh-Merton Model of Managers' Smoothing of Dividends," American Economic Review, American Economic Association, vol. 76(3), pages 499-503, June.
    10. Joerding, Wayne, 1988. "Are stock prices excessively sensitive to current information?," Journal of Economic Behavior & Organization, Elsevier, vol. 9(1), pages 71-85, January.
    11. Tibor Scitovsky, 1981. "The Desire For Excitement In Modern Society," Kyklos, Wiley Blackwell, vol. 34(1), pages 3-13, February.
    12. Einhorn, Hj & Hogarth, Rm, 1981. "Behavioral Decision-Theory - Processes Of Judgment And Choice," Journal of Accounting Research, Wiley Blackwell, vol. 19(1), pages 1-31.
    13. Akerlof, George A & Dickens, William T, 1982. "The Economic Consequences of Cognitive Dissonance," American Economic Review, American Economic Association, vol. 72(3), pages 307-319, June.
    14. Robert J. Shiller, 1984. "Stock Prices and Social Dynamics," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 15(2), pages 457-510.
    15. Thaler, Richard H & Shefrin, H M, 1981. "An Economic Theory of Self-Control," Journal of Political Economy, University of Chicago Press, vol. 89(2), pages 392-406, April.
    16. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    17. De Bondt, Werner F M & Thaler, Richard, 1985. "Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
    18. Samuelson, William & Zeckhauser, Richard, 1988. "Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
    19. Melvin Hinich & Peter Ordeshook, 1971. "Social welfare and electoral competition in democratic societies," Public Choice, Springer, vol. 11(1), pages 73-87, September.
    20. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
    21. Akerlof, George A & Yellen, Janet L, 1987. "Rational Models of Irrational Behavior," American Economic Review, American Economic Association, vol. 77(2), pages 137-142, May.
    22. Marsh, Terry A & Merton, Robert C, 1986. "Dividend Variability and Variance Bounds Tests for the Rationality ofStock Market Prices," American Economic Review, American Economic Association, vol. 76(3), pages 483-498, June.
    23. Akerlof, George A & Yellen, Janet L, 1985. "Can Small Deviations from Rationality Make Significant Differences to Economic Equilibria?," American Economic Review, American Economic Association, vol. 75(4), pages 708-720, September.
    24. John W. Pratt & David A. Wise & Richard Zeckhauser, 1979. "Price Differences in almost Competitive Markets," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 93(2), pages 189-211.
    25. Kunreuther, Howard & Slovic, Paul, 1978. "Economics, Psychology, and Protective Behavior," American Economic Review, American Economic Association, vol. 68(2), pages 64-69, May.
    26. Loomes, Graham & Sugden, Robert, 1982. "Regret Theory: An Alternative Theory of Rational Choice under Uncertainty," Economic Journal, Royal Economic Society, vol. 92(368), pages 805-824, December.
    27. Grether, David M & Plott, Charles R, 1979. "Economic Theory of Choice and the Preference Reversal Phenomenon," American Economic Review, American Economic Association, vol. 69(4), pages 623-638, September.
    28. Segal, Uzi, 1988. "Does the Preference Reversal Phenomenon Necessarily Contradict the Independence Axiom?," American Economic Review, American Economic Association, vol. 78(1), pages 233-236, March.
    29. Richard H. Thaler, 2008. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 27(1), pages 15-25, 01-02.
    30. Basu, S, 1977. "Investment Performance of Common Stocks in Relation to Their Price-Earnings Ratios: A Test of the Efficient Market Hypothesis," Journal of Finance, American Finance Association, vol. 32(3), pages 663-682, June.
    31. Russell, Thomas & Thaler, Richard, 1985. "The Relevance of Quasi Rationality in Competitive Markets," American Economic Review, American Economic Association, vol. 75(5), pages 1071-1082, December.
    32. Bachrach, Benjamin & Galai, Dan, 1979. "The Risk-Return Relationship and Stock Prices," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 14(2), pages 421-441, June.
    33. Arrow, Kenneth J, 1982. "Risk Perception in Psychology and Economics," Economic Inquiry, Western Economic Association International, vol. 20(1), pages 1-9, January.
    34. Jones, Stephen R G & Stock, James H, 1987. "Demand Disturbances and Aggregate Fluctuations: The Implications of Near Rationality," Economic Journal, Royal Economic Society, vol. 97(385), pages 49-64, March.
    35. David M. Grether, 1980. "Bayes Rule as a Descriptive Model: The Representativeness Heuristic," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 95(3), pages 537-557.
    36. Lea,Stephen E. G. & Tarpy,Roger M. & Webley,Paul M., 1987. "The Individual in the Economy," Cambridge Books, Cambridge University Press, number 9780521317016.
    37. Marshall, James D. & Knetsch, Jack L. & Sinden, J. A., 1986. "Agents' evaluations and the disparity in measures of economic loss," Journal of Economic Behavior & Organization, Elsevier, vol. 7(2), pages 115-127, June.
    38. Machina, Mark J, 1987. "Choice under Uncertainty: Problems Solved and Unsolved," Journal of Economic Perspectives, American Economic Association, vol. 1(1), pages 121-154, Summer.
    39. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, vol. 71(3), pages 421-436, June.
    40. Camerer, Colin F, 1987. "Do Biases in Probability Judgment Matter in Markets? Experimental Evidence," American Economic Review, American Economic Association, vol. 77(5), pages 981-997, December.
    41. Don L. Coursey & John L. Hovis & William D. Schulze, 1987. "The Disparity Between Willingness to Accept and Willingness to Pay Measures of Value," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(3), pages 679-690.
    42. Brookshire, David S & Coursey, Don L, 1987. "Measuring the Value of a Public Good: An Empirical Comparison of Elicitation Procedures," American Economic Review, American Economic Association, vol. 77(4), pages 554-566, September.
    43. Reilly, Robert J, 1982. "Preference Reversal: Further Evidence and Some Suggested Modifications in Experimental Design," American Economic Review, American Economic Association, vol. 72(3), pages 576-584, June.
    44. Jack L. Knetsch & J. A. Sinden, 1987. "The Persistence of Evaluation Disparities," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(3), pages 691-695.
    45. James G. March, 1978. "Bounded Rationality, Ambiguity, and the Engineering of Choice," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 587-608, Autumn.
    46. Thaler, Richard H & Ziemba, William T, 1988. "Parimutuel Betting Markets: Racetracks and Lotteries," Journal of Economic Perspectives, American Economic Association, vol. 2(2), pages 161-174, Spring.
    47. Kleidon, Allan W, 1986. "Variance Bounds Tests and Stock Price Valuation Models," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 953-1001, October.
    48. Sandmo, Agnar, 1976. "Optimal taxation : An introduction to the literature," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 37-54.
    49. Encarnacion, J., 1987. "Preference paradoxes and lexicographic choice," Journal of Economic Behavior & Organization, Elsevier, vol. 8(2), pages 231-248, June.
    50. Schoemaker, Paul J H, 1982. "The Expected Utility Model: Its Variants, Purposes, Evidence and Limitations," Journal of Economic Literature, American Economic Association, vol. 20(2), pages 529-563, June.
    51. Gilad, Benjamin & Kaish, Stanley & Loeb, Peter D., 1987. "Cognitive dissonance and utility maximization : A general framework," Journal of Economic Behavior & Organization, Elsevier, vol. 8(1), pages 61-73, March.
    52. Holt, Charles A, 1986. "Preference Reversals and the Independence Axiom," American Economic Review, American Economic Association, vol. 76(3), pages 508-515, June.
    53. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March.
    54. Stigler, George J & Becker, Gary S, 1977. "De Gustibus Non Est Disputandum," American Economic Review, American Economic Association, vol. 67(2), pages 76-90, March.
    55. Loomes, Graham & Sugden, Robert, 1987. "Some implications of a more general form of regret theory," Journal of Economic Theory, Elsevier, vol. 41(2), pages 270-287, April.
    56. Smith, Vernon L, 1976. "Experimental Economics: Induced Value Theory," American Economic Review, American Economic Association, vol. 66(2), pages 274-279, May.
    57. De Bondt, Werner F M & Thaler, Richard H, 1987. "Further Evidence on Investor Overreaction and Stock Market Seasonalit y," Journal of Finance, American Finance Association, vol. 42(3), pages 557-581, July.
    58. Daniel Ellsberg, 1961. "Risk, Ambiguity, and the Savage Axioms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 75(4), pages 643-669.
    59. Chan, K C, 1988. "On the Contrarian Investment Strategy," The Journal of Business, University of Chicago Press, vol. 61(2), pages 147-163, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Frey Bruno S., 1990. "L’Effet De Transfert De Motivation," Journal des Economistes et des Etudes Humaines, De Gruyter, vol. 1(3), pages 1-28, October.
    2. Bruno S Frey, 2023. "Camouflage: A dominant reaction to worsening conditions," Rationality and Society, , vol. 35(3), pages 366-384, August.
    3. Bruno S. Frey & Simon Luechinger, 2005. "Measuring terrorism," Chapters, in: Alain Marciano & Jean-Michel Josselin (ed.), Law and the State, chapter 6, Edward Elgar Publishing.
    4. Bruno S. Frey & Stephan Meier, "undated". "Two Concerns about Rational Choice: Indoctrination and Imperialism," IEW - Working Papers 104, Institute for Empirical Research in Economics - University of Zurich.
    5. Thomas Wagner, 1998. "Reciprocity And Efficiency," Rationality and Society, , vol. 10(3), pages 347-375, August.
    6. Pommerehne, Werner W. & Frey, Bruno S., 1992. "The effects of tax administration on tax morale," Discussion Papers, Series II 191, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    7. Randall Collins, 1993. "Emotional Energy as the Common Denominator of Rational Action," Rationality and Society, , vol. 5(2), pages 203-230, April.
    8. Peregrine Schwartz-Shea & Randy T. Simmons, 1991. "Egoism, Parochialism, and Universalism," Rationality and Society, , vol. 3(1), pages 106-132, January.
    9. Bruno S. Frey, 1991. "Demand for, and Supply of, Institutions," Rationality and Society, , vol. 3(2), pages 258-260, April.
    10. Scharpf, Fritz W., 1990. "Games Real Actors Could Play: The Problem of Connectedness," MPIfG Discussion Paper 90/8, Max Planck Institute for the Study of Societies.
    11. Scharpf, Fritz W., 1991. "Koordination durch Verhandlungssysteme: Analytische Konzepte und institutionelle Lösungen am Beispiel der Zusammenarbeit zwischen zwei Bundesländern," MPIfG Discussion Paper 91/4, Max Planck Institute for the Study of Societies.
    12. Bruno S. Frey & Reiner Eichenberger, 1996. "Marriage Paradoxes," Rationality and Society, , vol. 8(2), pages 187-206, May.
    13. Karl-Dieter Opp, 1999. "Contending Conceptions of the Theory of Rational Action," Journal of Theoretical Politics, , vol. 11(2), pages 171-202, April.
    14. Christian Lüdemann, 1998. "Framing And Choice Of Transportation Mode:," Rationality and Society, , vol. 10(2), pages 253-270, May.
    15. Ashworth, John & Heyndels, Bruno & Smolders, Carine, 2003. "Psychological taxing in Flemish municipalities," Journal of Economic Psychology, Elsevier, vol. 24(6), pages 741-762, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Marc Willinger, 1990. "La rénovation des fondements de l'utilité et du risque," Revue Économique, Programme National Persée, vol. 41(1), pages 5-48.
    2. Committee, Nobel Prize, 2017. "Richard H. Thaler: Integrating Economics with Psychology," Nobel Prize in Economics documents 2017-1, Nobel Prize Committee.
    3. Adrian Bruhin & Maha Manai & Luís Santos-Pinto, 2022. "Risk and rationality: The relative importance of probability weighting and choice set dependence," Journal of Risk and Uncertainty, Springer, vol. 65(2), pages 139-184, October.
    4. David Hirshleifer, 2001. "Investor Psychology and Asset Pricing," Journal of Finance, American Finance Association, vol. 56(4), pages 1533-1597, August.
    5. Eduard Marinov, 2017. "The 2017 Nobel Prize in Economics," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 117-159.
    6. Committee, Nobel Prize, 2013. "Understanding Asset Prices," Nobel Prize in Economics documents 2013-1, Nobel Prize Committee.
    7. Werner F. M. De Bondt & Richard H. Thaler, 1994. "Financial Decision-Making in Markets and Firms: A Behavioral Perspective," NBER Working Papers 4777, National Bureau of Economic Research, Inc.
    8. Etchart-Vincent, Nathalie, 2007. "Expérimentation de laboratoire et économie : contre quelques idées reçues et faux problèmes," L'Actualité Economique, Société Canadienne de Science Economique, vol. 83(1), pages 91-116, mars.
    9. John Y. Campbell, 2000. "Asset Pricing at the Millennium," Journal of Finance, American Finance Association, vol. 55(4), pages 1515-1567, August.
    10. Fernando Rubio, 2005. "Eficiencia De Mercado, Administracion De Carteras De Fondos Y Behavioural Finance," Finance 0503028, University Library of Munich, Germany, revised 23 Jul 2005.
    11. William S. Neilson, 1993. "An Expected Utility-User's Guide to Nonexpected Utility Experiments," Eastern Economic Journal, Eastern Economic Association, vol. 19(3), pages 257-274, Summer.
    12. Gregory B. Pollock & Keith A. Lewis, 1993. "Gambling in a Malthusian Universe," Rationality and Society, , vol. 5(1), pages 85-106, January.
    13. Adrian Bruhin & Maha Manai & Luis Santos-Pinto, 2018. "Risk and Rationality:The Relative Importance of Probability Weighting and Choice Set Dependence," Cahiers de Recherches Economiques du Département d'économie 18.04, Université de Lausanne, Faculté des HEC, Département d’économie.
    14. Baur, Robert Frederick, 1992. "Overreaction in futures markets," ISU General Staff Papers 1992010108000010973, Iowa State University, Department of Economics.
    15. Adrian Bruhin & Maha Manai & Luis Santos-Pinto, 2019. "Risk and Rationality:The Relative Importance of Probability Weighting and Choice Set Dependence," Cahiers de Recherches Economiques du Département d'économie 19.01new, Université de Lausanne, Faculté des HEC, Département d’économie.
    16. Thomas A. Rietz, 1991. "Arbitrage," Discussion Papers 958, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    17. Ulrich Schmidt & Stefan Traub, 2009. "An Experimental Investigation of the Disparity Between WTA and WTP for Lotteries," Theory and Decision, Springer, vol. 66(3), pages 229-262, March.
    18. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, September.
    19. Schwert, G. William, 2003. "Anomalies and market efficiency," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 15, pages 939-974, Elsevier.
    20. Terrance Odean., 1996. "Volume, Volatility, Price and Profit When All Trader Are Above Average," Research Program in Finance Working Papers RPF-266, University of California at Berkeley.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sae:ratsoc:v:1:y:1989:i:1:p:101-122. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.