The Big Short: Behavioral Economics Goes Mainstream at the Movies

You hear about it in the classroom, often in conjunction with classical economics. Behavioral Economics (BE) is discussed in psychology courses and has even finagled its way into finance classes. BE principles motivate or prod people to change their behavior for all kinds of outcomes. It could be to make better health-related decisions or improve productivity at work or even to step up how we’re managing our money.

Researchers have shown how BE affects our lives through published, controlled studies. Dan Ariely appeals to consumers’ decision-making process with his book Predictably Irrational. Daniel Kahneman authored Thinking, Fast and Slow which illustrates how we think and make choices. Thaler’s and Sunstein’s book Nudge shows how behavioral economics moves us to adopt new habits. These best-selling books are great for those of us who have the time, interest and motivation to read and study this topic.

For the rest of us, let’s go to the movies. In The Big Short, there are a number of difficult terms and concepts that need explaining to the general population. The story is based on the 2008 collapse of the housing market. To describe synthetic collateralized debt obligations (CDOs), director Adam McKay enlists the help of behavioral economics professor Richard Thaler and singer Selena Gomez who speak directly to the viewers. Without going into detail, these secondary CDOs took off because of the “hot hand fallacy,” a BE theory that says: when people are on a winning streak, it’s easy to get in on the action and start betting. From there, side-bets get made and then there are bets on those bets and so on. In the end, hot streaks inevitably turn cold, whether it’s on the basketball court, at the blackjack table or in this case, as it pertains to mortgage defaults.

The way McKay weaves in an expert in behavioral economics to define this phenomenon brings the concept and the movie to life. McKay explains, “Economics is actually fascinating. It’s the language of power…”. In this review of the burst of the housing bubble, behavioral economics plays a leading role.