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This has been an unusual journey. Honoring someone who is quite special gave rise to a special book. We hope you agree. Remember, (ir)rationality is a matter of perspective.

Erwann Michel-Kerjan Philadelphia, Pennsylvania October 2009

NOTES

Introduction Michel-Kerjan and Slovic

1 H. Kunreuther and E. Michel-Kerjan, At War with the Weather: Managing Large-Scale Risks in a New Era of Catastrophes (Cambridge, MA: MIT Press, 2009).

2 P. Auerswald, L. Branscomb, T. LaPorte, and E. Michel-Kerjan, Seeds of Disaster, Roots of Response: How Private Action Can Reduce Public Vulnerability (New York: Cambridge University Press, 2006).

3 H. A. Simon and A. C. Stedry, “Psychology and Economics,” in G. Lindzey and E. Aronson, eds., The Handbook of Social Psychology, Vol. 5 (Reading, MA: Addison-Wesley, 1969), p. 272.

4 H. A. Simon, Models of Man: Social and Rational (New York: Wiley, 1957), p. 198.

5 S. Lichtenstein and P. Slovic, The Construction of Preference (New York: Cambridge University Press, 2006).

6 D. M. Grether and C. R. Plott, “Economic Theory of Choice and the Preference Reversal Phenomenon,” American Economic Review 69, no. 4 (1979): 623-638.

7 The work of University of Chicago Nobel Laureate Gary Becker constitutes perhaps the most original effort at importing standard economic models to the psychology domain, rather than exporting psychology into economics. In particular, he has applied the standard maximization utility model to a large range of social contexts (e.g., marriages, divorces, love). See G. Becker, The Economic Approach to Human Behavior (Chicago: Chicago University Press, 1976); and G. Becker, A Treatise of the Family (Cambridge, MA: Harvard University Press, 1981).

8 A. K. Sen, “Rational Fools: A Critique of the Behavioral Foundations of Economic Theory,” Philosophy and Public Affairs 6 (1977): 317-344.

9 This was apparent in his seminal book The Wealth of Nations, published in 1776. Unfortunately, many people forget that in his first and also very influential book, The Theory of Moral Sentiments (1759)—in which the image of the “invisible hand” is already employed—he also elaborated a morality centered on sympathy and benevolence to explain the source of mankind’s ability to form moral judgments—a critical element of decision making—in spite of man’s natural inclinations toward self-interest.

Chapter 2 Akerlof and Shiller: Berserk Weather Forecasters, Beauty Contests, and Delicious Apples on Wall Street

1 This chapter is excerpted from George A. Akerlof and Robert J. Shiller, Animal Spirits, Princeton University Press, 2009. Used with permission.

2 These computations use the Standard and Poor’s Composite Stock Price Index divided by the Consumer Price Index for All Urban Consumers, as computed by the U.S. Bureau of Labor Statistics; see http://www.robertshiller.com.

3 Paul A. Samuelson has said that the stock market is micro-efficient and macro-inefficient. We have found an element of truth in this statement (Jung and Shiller, 2005).

4 Shiller (2000, 2005).

5 Shiller (1981); Campbell and Shiller (1987).

6 Terry A. Marsh and Robert C. Merton, commenting on papers by LeRoy and Porter (1981) and Shiller (1981), once tried to give “inspiring evidence” that stock prices are indeed a present value of optimally forecasted dividends (Marsh and Merton, 1986). However, they failed in this attempt (Shiller, 1986). The reasons Marsh and Merton gave for thinking that any market inefficiencies will be “arbitraged away” by smart money have a number of limitations (Shleifer and Vishny, 1997; Barberis and Thaler, 2003).

7 These ads are displayed and discussed in Mullainathan and Shleifer (2005).

8 Allen et al. (2002).

9 Higgins (2005).

Chapter 3 Hogarth: Subways, Coconuts, and Foggy Minefields

1 Taleb (2007) refers to coconuts with large consequences as “black swans.”

2 For a related approach, see the interesting work by Winter, Cattani, and Dorsch (2007).

3 See, for example, Hogarth and Karelaia (2007).

Chapter 4 Slovic: The More Who Die, the Less We Care

1 Portions of this