Introduction to Behavioral Economics and Anomalies
Richard Thaler, a Nobel laureate in Economics, along with Alex O. Holmes, recently released a revised edition of their book, “The Winner’s Curse: Behavioral Economics Anomalies, Then and Now.” The book delves into the evolution of behavioral economics to understand the presence of what they call “anomalies” – real-life behaviors that deviate from the assumed rationality of traditional economic models.
Thaler has long documented various behavioral economics phenomena contradicting the supposed rationality of decisions, such as:
- The “winner’s curse”
- “Endowment effect”
- Mental accounting
- “Loss aversion”
- “Present bias”
The authors acknowledge that many classic anomalies remain relevant beyond laboratory experiments and can be verified in real-world settings, like financial markets or public policies.
Applying Behavioral Economics Insights to Mexico
These conclusions can be applied to relevant issues in Mexico. In various sectors, numerous bidding and concession processes (e.g., energy, telecommunications, or infrastructure) involve strong competitive pressures and imperfect information for participants. In these cases, Thaler’s “winner’s curse” phenomenon applies since the winner often makes overly optimistic estimates or fails to account for “gifts” to secure victory, resulting in overpaying and lower-than-expected returns.
To prevent this, mechanisms such as auctions that encourage more objective valuations can be established. For example, independent reference value estimates could help avoid cases of bid rigging or concession failures due to inadequate profitability assessments, particularly in infrastructure projects.
Policy-making and Behavioral Economics
The authors implicitly suggest that policymakers should anticipate that participants may not always form decisions based on perfect and rational expectations.
Addressing Mexico’s Pension System Challenges
Another possible application for Mexico pertains to the challenges of the pension system and low voluntary savings rates. The book highlights certain behavioral anomalies explaining why people don’t save enough or make suboptimal retirement decisions.
In predictably irrational decision-making environments, default choice models can guide more appropriate decisions. For instance, experiences in the U.S. show that default enrollment in moderate voluntary contribution plans (e.g., 50 to 100 basis points of income) would clearly benefit pension savings.
Presenting Decisions and Implications
It’s crucial to present decisions (and their implications) considering real-life economic behavior. Instead of showing an expected return, it’s more effective to demonstrate what a person stands to lose if they don’t start saving today, appealing to loss aversion.
- Example: “If you don’t contribute an additional 1% of your salary today, you’ll miss out on accumulating X pesos for your future pension.”
- Personalized annual reports generated with AI can show expected pension without additional contributions and what it would look like with a small increase.
Evidence from experiments suggests that comparisons and information can encourage better decision-making.
Automated Contributions in Mexico
Mexico’s information asymmetries, weak incentives, and frequent institutional unclarity make policy intervention challenging. However, measures informed by an understanding of real-life economic behavior can help improve living conditions.
AFORs (Administrators of Individual Retirement Savings Accounts) could offer clear formats automating contributions for specific events like Christmas bonuses or profit distribution, perceived as future benefits rather than immediate consumption.
