Author: Richard H. Thaler
_Richard H. Thaler_
Reading time: 20 minutes
Synopsis
The Winner’s Curse (2025) looks again at important articles about how people make money decisions. These articles were first written many years ago. This book checks if those ideas about why people often don’t make logical money decisions are still true today. It shows that people often don’t act as traditional economic ideas say they should. They always make similar mistakes in many areas, like when they buy things, sell things, or deal with money every day.
What’s in it for me? Learn when economists get things wrong.
More than 30 years ago, Richard Thaler showed a problem in economic ideas. He worked with famous thinkers like Daniel Kahneman and Amos Tversky. Together, they wrote articles called Anomalies. In these articles, he showed that people are not just logical thinkers who always make the best choices, as economists had believed. Instead, we are often not logical. We are guided by our feelings, our personal leanings, and quick ways of thinking.
Now, Thaler is working with another economist, Alex Imas. They are looking at those important discoveries again and adding new ideas. This summary will tell you about some of these strange ways people act.
You will learn why we help each other even when it’s not logical for us to do so. You will also learn how we think things are worth different amounts, depending on how you ask the question. And you will see how owning something can change how we think about it. You will also find out how money markets – which should be the most logical places – often break their own basic rules.
Ready to rethink behavioral economics? Let’s get started.
Blink 1 – The winner’s curse
Next time you’re at a party, try this simple trick. Take a jar of coins. Sell it to the highest bidder among your friends after they’ve had a few drinks. You will see two different things happen at the same time. Most people will offer less than the jar is really worth, because they don’t want to pay too much. But the person who actually wins? They will almost surely pay more than the coins are actually worth.
This is what we call the winner’s curse. This idea is important for many situations, not just games.
The oil company Atlantic Richfield learned this lesson in a difficult way. It kept winning government sales for the right to dig for oil. But then, it found that its oil fields always had less oil than its skilled engineers expected. Something was wrong. The company was winning these sales, yes – but how much did it really cost them?
To understand why, think about what really happens when you offer money for something. You are not just guessing how much something is worth by itself. You are thinking about how much others will offer. When more people want to buy something and the competition gets stronger, most people want to offer more to make sure they win. But here is the surprising truth: that is exactly when you should stop offering more. More bidders mean a better chance that someone will guess the value is too high. And if you win then, you are probably the one who paid too much.
But we rarely see people change how they act like this. Book publishers often pay money upfront to authors, but they never earn that money back. Companies pay too much when buying other companies, which makes their owners unhappy. This happens again and again in many different businesses.
This creates a big problem for old economic ideas. These ideas say we are all logical people who make the best choices. But people don’t suddenly become logical just because an economist showed it should be that way. Most of us often use what is called k-level thinking. This means we believe we are one step ahead of everyone else in our thinking. We believe we are smart, but we make the same mistakes as others.
How people really make decisions is very different from the perfect ideas in economics books. We look for patterns, are too sure of ourselves, and often make the same mistakes. It is very important to understand this difference between ideas and what really happens.
So next time you are in a sale where many people are offering money – whether for a house, a business, or just that jar of coins – stop and look around. How many other people are offering money? Do they understand how money works? Are they not drunk? If many people are offering money, you should be more careful. Because sometimes, the real victory is knowing when not to win.
Blink 2 – Selfishness vs cooperation
Old economic ideas are based on two main ideas about people: we are logical thinkers, and we only care about ourselves. We only do what is best for us, trying to get as much as possible, every time. It’s a neat idea – but like many neat ideas, it often fails when you look at how people really act.
Think about things everyone can use: parks, clean air, and things for the whole community. These cost almost the same to make, whether one person uses them or many people use them. And it’s very hard to stop people from using them if they don’t help pay. Economic ideas make a clear guess here. If they can, almost everyone will free-ride. This means they will enjoy the good things without paying anything. Why pay for something you can get for free?
To test this, people who study these things made a game called the public goods game. Players get some money at the start. They choose how much money to put into a shared fund. That fund grows, and then the money is shared equally among all players. The logical, self-centered choice is very clear: put in nothing, let others pay, and keep both your starting money and your part of the shared fund.
But here’s what actually happens: people who don’t know each other often give between 40 and 60 percent of their money. Not sometimes. Always.
So why do people cooperate when theory says they shouldn’t?
One idea is called reciprocal altruism. This means helping others is really a hidden way of helping yourself. People know that not helping will be bad for them in the future, so they act kindly. It’s a helpful idea, but it doesn’t explain why people still help in games that only happen once and there’s no reward later.
Another idea – altruism – says that helping others simply makes us feel good. We are still being “selfish” in this view. But we are still doing what we want, and it’s more about feeling good than just getting money.
Maybe the most interesting thing is the power of communication. When groups can talk about their choices before they act, people help each other much more. This is especially true when people make promises to each other. Something about talking and promising things really changes how people act.
So, how should we think about things everyone can use, and the problem of people not paying? There’s a good example of some farmers near Cornell University. They once left fresh fruit and vegetables on tables by the road. They had a box for money, fixed with a chain. Nobody was watching. People were trusted to pay, with very little to stop them from stealing. And it seemed to work well.
This shows the real and complex situation. Yes, some people will free-ride. But many will also give money happily, even when they don’t have to. Instead of trying to make people’s actions fit into strict ideas, maybe we should accept that it’s not simple. People are not only logical or only selfish. We are more complicated and interesting. We can think logically, but we can also be kind. Often, we act in ways that are hard to guess or understand.
Blink 3 – The endowment effect
When Richard Thaler was at university studying for an advanced degree, one of his teachers showed him a strange problem. The teacher owned some bottles of Bordeaux wine he bought for less than $25. These bottles were now worth $200 at a sale. When asked if he would sell them, he said no – $200 was not enough for him to sell. But would he buy more bottles at that price? No way. Too much money.
Think about that for a moment. If the wine was not worth buying at $200, why was it not worth selling at that price? This problem – which even a money expert could not explain – is called the endowment effect. We think things are worth more simply because we own them. And it creates a big problem for old economic ideas. These ideas say that what someone will pay for something should be about the same as what they would sell it for.
Two mind reasons create this effect. The first is loss aversion. This is the feeling that losing something hurts more than gaining the same thing feels good. This imbalance appears in strange places. For example, professional golfers are more likely to miss shots that could get them a better score (birdie) than shots that could get them a normal score (par). This happens even though every hit of the ball is equally important for their total score. Why? Par is like a normal score that they compare to. So missing a par shot feels worse than how good it feels to make a birdie shot. Because of this, these top sports players try harder on par shots, even though it’s not logical.
The second reason is status quo bias. This is our wish to keep things the same unless someone makes us change them. It’s like how things don’t move until something pushes them. We stay where we are until something makes us change. Services you pay for every month know this well. That’s why they renew automatically, hoping we won’t bother to stop them.
Together, these leanings create the endowment effect. This has important results. Economic ideas need to be changed. What someone is willing to sell something for should be about twice as much as what they are willing to pay for it.
For the rest of us making choices every day, there’s a helpful question you can ask yourself: If I didn’t own this, would I buy it for its price today? If not, you’re probably holding on to it because you own it, not because of what it’s really worth. We are not the logical thinkers that economic ideas say we are. We are people who really like what we have, are afraid to lose things, and don’t want to change – even when changing makes perfect sense.
Blink 4 – Preference reversals
We’ve seen how economic ideas have problems guessing how people will act. But now we are going deeper – to times when logical thinking completely fails.
In economics, being logical means you must always be consistent. If you like bananas more than apples, you should not also like apples more than bananas. That would be a preference reversal – a basic problem with logic. But people often change their choices like this.
Economists first saw this in games where people bet money. Players had two choices: a high chance to win a little money, like $4, or a low chance to win a lot of money, like $40. When asked which they liked more, most chose the high bet – the safe, easy win. But then came the strange part. When asked to say how much each bet was worth in money, most players said the low bet was worth more. That’s a clear problem with logic. They liked one choice more, but thought the other was worth more money.
So what is happening? One idea is called stimulus-response compatibility. Think about your stove’s burners. Have you ever turned the wrong knob? That happens because the knobs are not placed in the same way as the burners. When they are both arranged in a square, it’s easy to use. In a similar way, people react more to details that are in the same form as the question being asked.
In the betting game, the results of the bets and the question about how much they were worth were both about money. So when players said how much things were worth in money, they thought a lot about the amount of money. They chose the bet that could pay more. But when they just said what they liked, the money amounts were less important, and the high chance of winning was more important.
How a question is asked changes what we choose. The difference between choosing something and actually using it also changes our choices. Think about music playlists. When making one, most people choose many different kinds of songs. They think it will make listening more fun. But when they actually sit down to listen, they don’t enjoy all the different songs as much as they thought. They start skipping songs that don’t fit the mood. This is called diversification bias – we usually choose more variety when we pick something, even if we don’t like it later.
It’s clear, then, that we don’t always make consistent choices. This makes it hard for economists who try to understand how people act. But knowing about this problem can help you. Next time you decide you like one choice more than another, stop and ask yourself: Would I also pay more money for that choice? If not, you might need to think again about what is truly important to you.
Blink 5 – The law of one price
Physics has gravity. Biology has natural selection. These basic rules help us understand how the world works. But what about economics? Surely a study that deals with trillions of dollars in buying and selling every day must also have very strong basic rules.
Let’s talk about the law of one price. This is perhaps the most basic rule in all of money and markets. It says that in markets where many people are buying and selling, and there are no problems or extra costs, two things that are exactly the same must sell for the same price. It sounds simple, smart, and like it can’t be broken. Money markets seem like the best place to test this. There is a lot of competition, money moves easily, and there are very few problems. If this rule works anywhere, it should work in money markets.
Now, if two identical things were sold at different prices, people with money could do something called arbitrage. This means buying something cheaply and selling it for more at almost the same time. This would make money with no risk. In money theory, this can’t last. Smart investors would keep using these price differences. They would buy cheap stocks or bonds and sell them right away for more money, again and again. The chance to make money should disappear very quickly.
Except it doesn’t always.
Think about American Depository Receipts, or ADRs. These are like shares in foreign companies. US money groups hold them, and they are traded on the New York Stock Exchange. They are almost the same as the original foreign shares. But they are easier for American investors to buy. In 2000, ADRs for Infosys, an Indian IT company, were selling in New York for an amazing 136 percent more. This was more than double the price of the same shares in India. It was very clear that the law of one price was broken. But this could be partly because of rules that made it hard for people to use the price difference.
Even more surprising is the example of Royal Dutch/Shell’s two kinds of shares. The company once had two types of shares: Royal Dutch shares were sold in Amsterdam, and Shell shares were sold in London. An agreement from 1907 said that all the money the company made would be split 60% for Royal Dutch and 40% for Shell. Math is clear here: Royal Dutch shares should always be worth exactly 1.5 times the Shell shares. It’s the same company, with a fixed split, so there should be no confusion.
Yet the ratio between their prices changed a lot over time. By the late 1990s, the two were selling for about the same price. This was not close to the 1.5-to-1 ratio they should have kept. And here’s the most surprising part: there were no rules stopping people from using the price difference to make money. Anyone could have used this difference to make a profit. But the wrong price lasted anyway.
So what does this tell us? If money markets can’t even handle simple cases like Royal Dutch/Shell correctly – very easy situations where math tells you the right price – what other things are they wrong about? The idea that stock prices show the true value of a company suddenly seems weak. These are clear breaks of what should be a very strong rule. And they are happening openly in the world’s most advanced markets.
Final summary
The main idea from this summary of The Winner’s Curse by Richard H. Thaler and Alex O. Imas is that the ideas of economics about people being logical often break down when we look at real life.
The winner’s curse shows how bidding against others makes us pay too much. Studies on public goods reveal that people help each other much more than if they only cared about themselves. The endowment effect shows that owning something changes how we see its value. It makes us hold onto things we would never buy for their actual price. Preference reversals show that how questions are asked deeply changes our choices, and we don’t even know it. And most surprisingly, when the law of one price is broken in money markets – even in easy cases like Royal Dutch/Shell shares – it shows that even the most advanced markets go against what economists expect.
Together, these strange facts show that people’s decisions are much more complicated, more emotional, and more interesting than old economic ideas say.
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