in Store A buying a $300 phone. Five minutes away, at Store B, the same phone is $290. You again save $10 by

taking a five-minute walk. Do you do it?

Surprisingly, it is likely that you would not. Mainstream economists would say “$10 is $10” and that it would be

irrational to make a five minute walk for $10 in one case and not the other. However, behavioral economists have

pointed out that most of us evaluate outcomes relative to a reference point—here the cost of the product—and think

of gains and losses as percentages rather than using actual savings.

Which view is right? Both have their advantages, but behavioral economists have at least shed a light on trying to

describe and explain systematic behavior which some previously had dismissed as irrational. If most of us are

engaged in some “irrational behavior,” perhaps there are deeper underlying reasons for this behavior in the first

place.

Mechanisms to Reduce the Risk of Imperfect Information
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