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It is for the same reason that in a rare moment of collective awareness for our profession, Part Five of this book addresses the ultimate question “What Difference Can We Make?” If we are right in saying that the world is becoming more interconnected, that the potential for catastrophes is more widespread than ever before, and that the effects of any single person or group may be, like the proverbial flap of the butterfly’s wing, amplified across the world with potentially vast consequences, then an accurate appreciation of the science of decision making and of catastrophe risk management cannot remain within the ivory towers of universities and specialist institutes. Indeed, this knowledge must be shared—with industries, governments, nongovernmental organizations, philanthropic foundations, investors, the media, and, last but by no means least, all individuals who care to make the best-informed choices to safeguard themselves and their families in this fast-moving, ever-thrilling world that may challenge them with deep adversity and extreme events. This is the goal of The Irrational Economist.

As a way of ensuring that this knowledge is shared and used more broadly, we hope to see more and more behavioral scientists being asked to provide top decision makers with their views, or even to take on high-level positions in the public and private sectors. In doing so, they will assume this dual role of researchers/teachers and influential players in the power circles of business and public policy, as other great minds in economics have done before. But this time, not quite as purely rationally.

PART ONE

IRRATIONAL TIMES

IN THESE FIVE OPENING CHAPTERS, the authors contemplate a patchwork of situations where decisions can be viewed as irrational (i.e., deviating from what economic rationality would seem to dictate). Each chapter, each anecdote, each piece of evidence provides a touch of color representing an aspect of human behavior either in daily life or during extraordinary times. Together, they provide a mosaic of ideas, integral parts of a surprising painting, that will be discussed in detail in the rest of the book.

For example, why don’t many hotels have a thirteenth floor? Or planes a thirteenth row? Should our believing in supra-human forces (superstition and religion) be considered irrational? If so, how do economists study the ways in which it affects human behavior? A cast of remarkable characters—weather forecasters and beautiful people—unexpectedly help us better understand how (misaligned) incentives on Wall Street pushed us into financial chaos. This section will also consider how decisions can be made today about career choices for the next thirty years, given the increasing uncertainties that come with our rapidly changing world. Part One ends with an ounce of behavioral observation about our dangerous world. We ask how compassionate we really are when it comes to helping others in profound distress . . . and learn that caring does not increase proportionally with the number of victims, as economic rationality would suggest, but rather goes in the opposite direction. All the anecdotes and evidence highlighted in Part One give us a sense of how we really make decisions—a consideration that is all the more important to appreciate and acknowledge as we contemplate the extraordinary times that lie ahead. The new risk architecture that is now unfolding brings complex interdependencies among nations, companies, and individuals all over the world. How others behave should matter more to you today than ever: Directly or indirectly, you are linked to them, as they are to you.

1

Superstition

A Common Irrationality?

THOMAS SCHELLING

The night before the conference honoring Howard Kunreuther’s birthday I stayed in a Philadelphia Hotel. Riding up the elevator I noticed there was no thirteenth floor.

Walking up Madison Avenue in New York recently, for about twenty blocks, I counted more than twenty fortune tellers on one side of the street. I remember