The rise in what we spend on gas is not nearly as extreme as our increases in categories like electricity and telephone. So why does the amount we spend on gasoline feel so enormous? I think it is because of the way we buy gas.

People anchor to specific prices or amounts and make small adjustments from these anchors as their predictions. This anchor bias impacts everything from lawsuit awards to online auction bids to analsyst forecasts...and to how you feel about your own investments.

Humans see the world in terms of categories. We group a chair, a table, a couch together under the category "furniture," which helps when we're confronted with unfamiliar objects. We have a similar tendency to categorize other humans. But whereas furniture doesn’t mind being stereotyped, people often do.

Don't put all your eggs in one basket. The wisdom of diversification has been touted for decades. Why do investors concentrate their portfolios rather than diversify?

Yesterday’s New York Times ran an article titled “Poll Shows Racial Division on Obama’s Candidacy.” The story included several examples of divergence between White and Black Americans’ perceptions of the presidential campaign; for example, more than 80% of Black respondents reported a positive impression of Barack Obama, compared to closer to 30% of Whites. Some of the most interesting findings, however, have nothing to do with presidential politics, but rather speak to the persistent divide in how Americans think about race, a divide that too frequently is only discussed by behavioral researchers.

The behavior and emotions of investors during a price bubble can be extreme. Consider the cycle of investor emotions spurred by a bubble and shown in the figure. These emotions can cause investors to "buy high" during the thrilling and euphoric stages of a bubble, and "sell low" at the panic and capitulation stages. Warren Buffet recommends that you be "fearful when others are greedy and greedy when others are fearful."

To gain perspective on human financial decisions, one may ask, what would monkeys do?

What is the value of money over time? Although financial theory has specific time value of money relationships, people often think very differently from these relationships. One determinant may be whether you think intuitively or analytically.

What if companies could manipulate your feelings about them? One example is a name change. Does a change to a dotcom change your feelings about the firm?

One of the principles of Prospect Theory is that people do not have a constant risk aversion. In other words, people may avoid risk in some instances and seek risk in others. We buy lottery tickets (risk seeking) and car insurance (risk avoidance). How does an analytical or intuitive thinking mode impact situational risk aversion?

Before 2001, employees invested too much of their 401(k) plan money in their company's stock.  Then we heard all about the dilemma of Enron employees who lost their jobs and most of their retirement funds. Did the rest of us learn from their mistakes?

There are many decision-making activities in which it may be better to be an intuitive thinker. Other situations favor analytical thinkers. This posting reports the answers to the PART I CRT quiz questions. Are you an analytical or intuitive thinker?

People who use a primarily analystical thinking mode seem to make different decisions than intuitive people when faced with decisions under risk and uncertainty. To determine your thinking mode, take his Cognitive Reflection Test (CRT).

What psychology experiment would you love to carry out if neither ethics nor practical reality stood in your way? For the August issue of Psychology Today, I asked several PT bloggers this question and printed four responses. Here's a more complete roundup of their insights.

One of the foundational financial theories is that expected return and risk are positively correlated. In other words, high risk goes with high expected return. But people tend to believe the opposite, that risk and expected return are negatively correlated. They believe that the stocks they like will earn high expected return with low risk!

What was your portfolio return last calendar year? Most investors don't know the answer to this question. But their belief in their performance is quite flattering to themselves! If you don't know that you are doing poorly as an investor, you won't learn from your mistakes!

Welcome to the Science of Small Talk, an exploration of social thought and behavior. Specifically, the mission of this blog is to apply principles and theories of behavioral science to the examination of everyday interactions. Because even the most mundane aspects of our social universe are amenable to scientific analysis, from dinner party conversations to job interview strategies, from TV game shows to fast-food drive-thrus...

Ever find yourself frittering away the day responding to email after email? Ever think that if you'd just spent 8 hours working on that project, you'd be done and still have time to answer those emails in front of the TV later that night? Sure, we all have. Help is on the way.

Good decision makers often wind up with the best things available. But how do they do they do it? Finding the best thing involves searching, but it also involves knowing when to stop searching. How good a searcher are you? Do you search too much, or just the right amount? Play this little game and find out.

Reid Hastie and Robyn M. Dawes, in their classic Rational Choice in an Uncertain World (pp. 232-234), outline some "major choice strategies," stemming from several schools including the Heuristics and Biases, Adaptive Decision Maker, and Fast and Frugal research programs.