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Nobel laureate Richard H. Thaler has spent his career studying the radical notion that the central agents in the economy are humans—predictable, error-prone individuals. Misbehaving is his arresting, frequently hilarious account of the struggle to bring an academic discipline back down to earth—and change the way we think about economics, ourselves, and our world. Tradition Nobel laureate Richard H. Thaler has spent his career studying the radical notion that the central agents in the economy are humans—predictable, error-prone individuals. Misbehaving is his arresting, frequently hilarious account of the struggle to bring an academic discipline back down to earth—and change the way we think about economics, ourselves, and our world. Traditional economics assumes rational actors. Early in his research, Thaler realized these Spock-like automatons were nothing like real people. Whether buying a clock radio, selling basketball tickets, or applying for a mortgage, we all succumb to biases and make decisions that deviate from the standards of rationality assumed by economists. In other words, we misbehave. More importantly, our misbehavior has serious consequences. Dismissed at first by economists as an amusing sideshow, the study of human miscalculations and their effects on markets now drives efforts to make better decisions in our lives, our businesses, and our governments. Coupling recent discoveries in human psychology with a practical understanding of incentives and market behavior, Thaler enlightens readers about how to make smarter decisions in an increasingly mystifying world. He reveals how behavioral economic analysis opens up new ways to look at everything from household finance to assigning faculty offices in a new building, to TV game shows, the NFL draft, and businesses like Uber. Laced with antic stories of Thaler’s spirited battles with the bastions of traditional economic thinking, Misbehaving is a singular look into profound human foibles. When economics meets psychology, the implications for individuals, managers, and policy makers are both profound and entertaining.


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Nobel laureate Richard H. Thaler has spent his career studying the radical notion that the central agents in the economy are humans—predictable, error-prone individuals. Misbehaving is his arresting, frequently hilarious account of the struggle to bring an academic discipline back down to earth—and change the way we think about economics, ourselves, and our world. Tradition Nobel laureate Richard H. Thaler has spent his career studying the radical notion that the central agents in the economy are humans—predictable, error-prone individuals. Misbehaving is his arresting, frequently hilarious account of the struggle to bring an academic discipline back down to earth—and change the way we think about economics, ourselves, and our world. Traditional economics assumes rational actors. Early in his research, Thaler realized these Spock-like automatons were nothing like real people. Whether buying a clock radio, selling basketball tickets, or applying for a mortgage, we all succumb to biases and make decisions that deviate from the standards of rationality assumed by economists. In other words, we misbehave. More importantly, our misbehavior has serious consequences. Dismissed at first by economists as an amusing sideshow, the study of human miscalculations and their effects on markets now drives efforts to make better decisions in our lives, our businesses, and our governments. Coupling recent discoveries in human psychology with a practical understanding of incentives and market behavior, Thaler enlightens readers about how to make smarter decisions in an increasingly mystifying world. He reveals how behavioral economic analysis opens up new ways to look at everything from household finance to assigning faculty offices in a new building, to TV game shows, the NFL draft, and businesses like Uber. Laced with antic stories of Thaler’s spirited battles with the bastions of traditional economic thinking, Misbehaving is a singular look into profound human foibles. When economics meets psychology, the implications for individuals, managers, and policy makers are both profound and entertaining.

30 review for Misbehaving: The Making of Behavioral Economics

  1. 5 out of 5

    Athan Tolis

    He’s taken his time and he’s waited his turn, but Richard Thaler has delivered the definitive book on Behavioral Economics, the one you can’t afford to miss. It’s a summary of the main findings, a history of how they came about and a preview of coming attractions, with due care taken to pay tribute to those who came before Thaler and apportion credit to those who worked with him. The field is not as new as Thaler would have you think. There’s bias in this account and it is a bias against those am He’s taken his time and he’s waited his turn, but Richard Thaler has delivered the definitive book on Behavioral Economics, the one you can’t afford to miss. It’s a summary of the main findings, a history of how they came about and a preview of coming attractions, with due care taken to pay tribute to those who came before Thaler and apportion credit to those who worked with him. The field is not as new as Thaler would have you think. There’s bias in this account and it is a bias against those among his predecessors who tried to explain human behavior in a way that was consistent with mainstream economic theory. I’m thinking Gary Becker here (who tried to explain long lines outside empty clubs and packed cheap restaurants alike using an “upward sloping demand curve” and famously sat down to write a paper on suicide when his wife took her own life); I’m thinking the very same Robert Barro that Thaler makes fun of when he describes him as the smartest man ever, but who nonetheless made me understand in his book “Getting it Right” why superstars could get paid so much in a zero-sum game and got confirmation to his theory when Maradona got paid more than the rest of his team, Napoli, put together, and justifiably so because he not only took them to the Campionato, but also deprived much more fancied teams from winning it. Thaler’s predecessors operated in a world where most Economics books had to start with a chapter explaining why Economics is a science. Of course they had to stick to the utility-maximizing / profit-maximizing orthodoxy! Besides, orthodox economic theory was not all that shabby when it came to predicting human behavior. By the time Thaler was entering his prime, Economics no longer had to apologize to anybody and was much more open to heresy, of course. It was in a position to withstand additional questioning. Armed with a nice piece of math invented by Tversky and Kahneman it was ready to be taken to the next level. Thaler takes you through the whole thing in the space of the shortest 358 pages you will ever read. As he promises at the start, he tells it through a bunch of stories, mostly the stories of his collaborations and his epic fights with Economic Orthodoxy. The book is worth reading for the humor alone. The jokes range from pure slapstick (example p. 128: “we were trying to learn what ordinary citizens, albeit Canadians, think is fair”) to the esoteric inside joke, like when he mentions Vishny is a common co-author of Shleifer (to the best of my knowledge he’s never written a paper without Shleifer). If you’re not laughing the whole time, basically, there are squadrons of jokes flying over your head. My favorite type of humor, relentless repetition, is also very well represented. I lost count of the number of times I read the expression “invisible handwave.” The man is irrepressible, basically. You can’t keep him down. There’s a sadness that goes with this too, and it’s that this is a bit of a category killer. “Misbehaving” Pareto-dominates all behavioral economics books that precede it in terms of readability, context, scope, you name it. I don’t know what I would do with myself if I was Dan Ariely or if I was Steven Levitt (Roe v. Wade findings notwithstanding), to say nothing of Tim Hartford. They now have to accept that there’s a book out there that beats their entire life’s work on all fronts. The long problem set masquerading as a re-interpretation of behavioral economics that is Kahneman’s “Thinking Fast and Slow” is the only true exception to the rule, it continues to stand alone, but relative to “Misbehaving” it’s a cop-out. As he told Michael Lewis in the interview that preceded that book, Kahnemann did not want to write the history of the field, he did not want the book to have the feel of one’s last book. So the door was left wide open to Kahneman’s self-admittedly “lazy” student to jump into the breach. This he has done with gusto. Prospect Theory (how we are risk averse when we’re winning and risk loving when we’re losing) is taught straight from Tversky and Kahneman’s 1976 graph and is used to explain: (i) transaction utility, including Costco’s business model (ii) sunk costs (i.e. why you will carry on wearing an uncomfortable pair of shoes you paid 300 dollars for) (iii) the endowment effect (including later in the book how it undermines the Coase theorem) and (iv) “gambling with the house’s money” at the casino, versus the fact that outsiders get overpriced toward the end of the day at the racetrack. Bucketing of budgets gets thrown in for free. Next comes a tutorial on Self-Control. Thaler explains that many humans discount future pleasure (or pain) on a scale that is totally unrelated to how we present-value bond cashflows and mainly operates on three levels: Now (intense), Later (much less intense) and Much Later (only slightly less intense than Later). This leads to preferences that are intertemporally inconsistent, a nightmare to Economic Orthodoxy, but very often true in real life. Heady stuff, and I promise, he makes it clear. He does not use graphs or charts or math. He explains it all with one picture: the famous cover of New Yorker magazine where everything this side of the Hudson is rendered in great detail, New Jersey through to California takes up as much space as West Manhattan and Asia is visible behind. You get that chart, you get how we humans really think about delayed gratification. Genius. A chapter follows which is a summary of “Thinking Fast and Slow” but without trying to shoehorn the rest of Behavioral Economics into that model. The next couple chapters deal with Fairness (the Ultimatum Game, the Dictator Game, the Punishment Game, cooperation games such as the Prisoner’s Dilemma) and a revisit of the Endowment Effect as exemplified by the trading of Mugs with capital M. Then Thaler attacks Finance and the Efficient Market Hypothesis in Particular. Not that anybody sane thinks markets are efficient, but you could tear out the rest of the book and keep pages 203 to 253 as a quick guide to why markets are inefficient. Thaler starts with Keynes’ “beauty contest” analogy for stock picking (we pick the girl we think most other people will like, not the one we really fancy). Next he explains why a stock ought to be worth the net present value of its dividends and takes the reader through Shiller’s discovery that stocks move around tons more than dividends do (or can be reasonably expected to do), which proves they wander around tons relative to what they will ever pay out. He offers additional proof by going through closed-end funds’ variation from their NPV and gets some serious kicks from pointing out that stocks on occasion sell for less than the market value of their listed subsidiaries. He’s a bit of a showman, Thaler, he calls this “negative stock prices.” From there he goes for the kill and notes that Royal Dutch Shell shares have a different price in New York versus Europe, and never more so than they did during the blow-up of LTCM, providing a real-life example of Shleifer and Vishny’s mathematical formalization of Keynes’ old aphorism that “the market can stay irrational for longer than you can stay solvent.” At some point, Chicago had to follow Al Pacino’s view that “you keep your friends close and your enemies closer” and put him on the faculty. From his angle, it was time to storm the citadel, and this is what Thaler chronicles next. He had been ready for them from day one. The book actually starts with “The Gauntlet,” which is the series of challenges orthodox economists lay out for the behavioral crowd: 1. The “As If” challenge states that even if nobody is an expert in everything, society operates as if we all were, because through division of labor we all end up doing things we understand. 2. The “Incentives” challenge states that people respond to incentives once the stakes are large enough. All the wishy washy behavioral stuff washes away once we’re talking real money. 3. The “Learning” challenge states that even if we get it wrong in “one-shot” games, in real life most games are “repeated” and behavior thus converges to what Orthodox Economics would suggest. 4. The “Invisible Hand” argument states that if we all go about doing what’s best for us we nevertheless end up doing what’s right for everyone else as well. Won’t spoil it for you and take you through Thaler’s answers to the above. It’s after all what the book is really all about. But forgive me one indulgence, I’ve GOT to tell you about the bit where he demolishes Robert Barro: The Rational Expectations Hypothesis has a number of implications, chief amongst them the prediction that fiscal stimulus does not work. If the government writes you a check, the story goes, you know you’ll be taxed for it in the future, so you save it rather than spend it. And the stimulus ends up being a damp squib. Thaler proves the circularity of this argument by suggesting a similarly circular counter-argument: what if the rational agents that compose this economy believed in Keynes’ multiplier? What if they thought the stimulus will work and the economy will fly and their taxes will actually go down? Should they spend TWICE the check they were sent? From Chicago he goes on to a couple (well-earned) victory laps. He applies Behavioral Economics to Americal Football, where he advised three separate teams on how to conduct their affairs during the annual draft, to game shows he was allowed to set up with Endemol, where he proved that his theories can withstand some pretty high stakes and from there onto “nudging” people to contribute more to their pension and pay their taxes on time. He ends the book with a wish that one day there will be one Economics again, with the Orthodox Economics of utility maximization and profit maximization as a quaint special case. We’re probably already there.

  2. 4 out of 5

    Muriel

    What is the value of 'Misbehaving' after 'Nudge' and 'Thinking Fast and Slow'? After all, 'Thinking' told us the discovery process by behavior science demigod. 'Nudge' explained how to apply behavior science to practical policy-making. 'Misbehaving' has its value independent from 'Nudge' and 'Thinking'. Unique in 'Misbehaving' is a candid account of the struggle getting recognized when your opinions are different from the establishment, a humble understanding on the fortunate events that helped What is the value of 'Misbehaving' after 'Nudge' and 'Thinking Fast and Slow'? After all, 'Thinking' told us the discovery process by behavior science demigod. 'Nudge' explained how to apply behavior science to practical policy-making. 'Misbehaving' has its value independent from 'Nudge' and 'Thinking'. Unique in 'Misbehaving' is a candid account of the struggle getting recognized when your opinions are different from the establishment, a humble understanding on the fortunate events that helped a young investigator to start - and stand in the field. 'Misbehaving' tells the reader many 'insider baseball' stories -- how Thaler got skinned at conferences / journal submissions (but the tone wasn't vengeful), and how he got back to his feet and respond with empirical evidence (rather than ideological tautology). 'Nudge' and 'Thinking' read like champions writing home from the finishing line or the celebratory after-party, while 'Misbehaving' is Thaler's account of 'life as a professional renegade'. This is part of the appeal: don't we all like a good underdog story? Most of us are, at best, underdogs in our fields, Thaler's humble 'renegade-getting-recognized' story is fuzzily encouraging. In this way, 'Misbehaving' reads like a grand-parent writes to the grand-children: sharing the stories of life, and perhaps planting a vague idea that 'fight-on' could be fun. 'Misbehaving' writing reminds me of Richard Feynman's books in being funny, irreverent, and honest. In the Conclusion chapter, Thaler likened his now mainstream status to 'The lunatics are running the asylum!' -- You won't find exclamations like this in either 'Nudge' or 'Thinking'. It reminds me of Feynman on his safe-cracking, or thoughts of 'cargo cult science'. Thaler comments on a general practice in academia: "As usual after such meetings ... both sides were confident that they had won." Thaler saved some directness for his intellectual opponents -- there is no sugar-coating on what he thought of them ("least scientific"). Yes, it is a little easier to be direct and unapologetic after you have turned mainstream and your collaborators have won the Nobel -- but the book is direct and honest about himself too. Like this: Thaler recounts how his thesis advisor assessed him: 'We did not expect much of him'. Enjoy!

  3. 4 out of 5

    Caroline

    Thaler was one of the people who brought behavioural economics into being - and this book covers the story of his journey. He says that classic economics describes man as a logical creature, and bases its theories upon this idealised figure. In behavioural economics on the other hand, humans do a lot of misbehaving. Herewith some odd nuggets and asides I picked from the book. (view spoiler)[ *Economics is considered the most intellectually powerful of the social sciences, this is because it has a Thaler was one of the people who brought behavioural economics into being - and this book covers the story of his journey. He says that classic economics describes man as a logical creature, and bases its theories upon this idealised figure. In behavioural economics on the other hand, humans do a lot of misbehaving. Herewith some odd nuggets and asides I picked from the book. (view spoiler)[ *Economics is considered the most intellectually powerful of the social sciences, this is because it has a unified core theory from which nearly everything else follows. In fact economists often compare their field to physics. *Losses of what we already have hurt us substantially more than new gains satisfy us. It gives us some pleasure to gain something, but it distresses us far more to lose something. *Changes are the way that human beings experience life; eg if you move from your office to a meeting room and the temperature is the same - you won't give the issue of temperature a second thought. You will only notice if the meeting room is unusually hot or cold in relation to the rest of the building. When we have adapted to our environment we tend to ignore it. Instead we notice changes. They can be changes from the status quo, or changes from what was expected...but whatever form they take, it's changes that make us happy or miserable. * We learn via frequent practice and immediate feedback. We are therefore much more likely to learn in relation to the trivia in our lives (eg what sort of type of bread we like), than in relation to the really big stuff (eg what sort of house to buy, or wife to choose.) Learning takes practice, and often we don't get practice with the big stuff. *Human beings love a bargain. Shops that have tried to do away with coupons, or round up prices to a more realistic figure (eg $4.00 rather than $3.99), or do away with fake 'special offers', have often had to change back to these practices . The customers want the bargains, or at least an impression of bargains..... or sales plummet. *The one alternative to the above are retailers like Walmart and Costco, where the retailers successfully operate under an everyday low pricing strategy. They have convinced customers that their entire shopping experience is an orgy of bargain hunting. *Sunk costs This is when an amount of money has been spent and the money cannot be retrieved. eg Joyce bought three dresses for her six year old daughter Cindy to wear to school, but Cindy decided she wouldn't go to school if forced to wear dresses. In this instance Joyce has to let go of the money she spent on the dresses, but she finds it very difficult to do this. We all do. Phrases like "Don't cry over spilt milk" or "Cut your losses and move on" are another way of taking advice to ignore sunk costs. Many believe that the US continued its futile war in Vietnam because they had invested too much to quit. *Lotteries are a very good way of getting people to take part in something. eg if you want people to take part in a survey offer the prize of a nice bottle of wine or whatever. *People hate it when a company appears to be acting greedily. eg Uber practices "surge pricing", whereby prices fluctuate depending upon levels of demand. Sometimes there is a big difference between low and peak demand, as much as ten times the regular price. There have been a lot of complaints from clients about this practice. *Experimental games have also shown that people put much more money into a game if they are able to punish freeloaders. We are quite obsessed with fairness, in all aspects of life. *We like keeping the status quo. We often find change difficult. * Collaboration.... Although there are a handful of psychologists who have formed successful collaborations with economists over the years, behavioural economics has turned out to be primarily a field in which economists read the work of psychologists and then go about the business doing research independently. In neuroscience there is slightly more collaboration. Not all interdisciplinary meetings are a waste of time, but in the author's experience they have been disappointing. *Managers are often risk averse. This is because in most companies, creating a large gain for the company will lead to modest rewards...while creating an equal-sized loss will get you fired. Companies need to create environments that are more benign, so that managers will feel more comfortable taking risks. (hide spoiler)] Unlike most people I found this book a so-so read, I wasn't all that gripped. I skipped the section on stocks and shares...

  4. 5 out of 5

    Melora

    First book I've returned to Audible (and Audible makes that astonishingly easy. not that I expect to need to do it often, but, my gosh, just a click and they send me back my money. impressive). As my three star rating indicates, this is not a Bad book at all. I listened to it for a little less than three hours, I think, and the bits about behavioral economics were really fun. I enjoyed Thaler's stories about the irrational financial choices people make, which he presents in contrast with the ide First book I've returned to Audible (and Audible makes that astonishingly easy. not that I expect to need to do it often, but, my gosh, just a click and they send me back my money. impressive). As my three star rating indicates, this is not a Bad book at all. I listened to it for a little less than three hours, I think, and the bits about behavioral economics were really fun. I enjoyed Thaler's stories about the irrational financial choices people make, which he presents in contrast with the ideal, logical choices which traditional economists assume people will act on. Unfortunately, the book is not about behavioral economics but, rather, as the title clearly indicates, about the Making of the field. The author was evidently a central figure in the development of this branch of economics, and the greater part of the book, as far as I got in it, is about his career and efforts to bring other economists to see things from his point of view. He spends a lot of time talking about other economists and their specialties and interests, giving credit to those who contributed to his developing ideas. He talks about how he got jobs at various universities, who he worked with, the papers they wrote, the walks they took, etc. Which might possibly be of interest to me if I knew enough about economics to recognize (and be impressed by) all the significant figures he mentions. But I don't. So. Not bad, just too specialized or outside my areas of interest.

  5. 5 out of 5

    David

    This book is by Richard Thaler, one of the founders of the field of behavioral economics. When he first started getting into this field, he faced mountainous obstacles, mostly from his fellow economists. For many years, he collaborated with Daniel Kahneman and Amos Tversky, who are famous for the book Thinking, Fast and Slow. In 2017, Thaler received the Nobel Prize in economics, for his work in understanding the realities of economic decision making. This book is enjoyable and engaging, and is p This book is by Richard Thaler, one of the founders of the field of behavioral economics. When he first started getting into this field, he faced mountainous obstacles, mostly from his fellow economists. For many years, he collaborated with Daniel Kahneman and Amos Tversky, who are famous for the book Thinking, Fast and Slow. In 2017, Thaler received the Nobel Prize in economics, for his work in understanding the realities of economic decision making. This book is enjoyable and engaging, and is packed with interesting anecdotes. Perhaps he goes a little overboard, in describing his personal story and his interactions with Kahneman and Tversky; there is a little bit too much of this, and it almost feels like name-dropping. The book is mostly about the development and history of behavioral economics, rather than the subject of behavioral economics itself. On the other hand, I also very much enjoyed reading one of his previous books, Nudge: Improving Decisions About Health, Wealth, and Happiness.

  6. 5 out of 5

    Huyen Chip

    For someone without any background in economics before, this book is an eye-opener. It gives me many tools that I'm sure I can effectively use to argue with my friends in the future. It's also an easy read. Richard has many interesting stories to tell, each with many lessons to learn from.

  7. 5 out of 5

    Vincent Li

    I have mixed feelings about this book. I wrote a brief article about how college doesn't teach you anything, and to my horror I realized that I already learned most of what this book has to say. For someone without any background in behavioral economics, I recommend reading this in conjunction with Thinking Fast and Slow, the two books will pretty much teach you everything you need to know. Having studied most of the points mentioned in the book (as well as reading several of the papers summariz I have mixed feelings about this book. I wrote a brief article about how college doesn't teach you anything, and to my horror I realized that I already learned most of what this book has to say. For someone without any background in behavioral economics, I recommend reading this in conjunction with Thinking Fast and Slow, the two books will pretty much teach you everything you need to know. Having studied most of the points mentioned in the book (as well as reading several of the papers summarized) I enjoyed the book mainly for the anecdotes and fun tidbits (for example that the exponential discount function was first posited by the great Samuelson). The book was interesting to me in that it also served as a memoir for Thaler, discussing the various phases of his academic life and his work. I was pleasantly surprised to confirm that Thaler's collection of anomalies was a nod to Kuhn's theory of scientific revolutions. I also heavily agreed with Thaler's emphasis on randomized trials and use of experimental evidence over a priori axioms. Now for the critique. Thaler seems like a bit of a braggart. He never seems to cease name dropping, and some of his claims seem overreaching. He makes it seem almost like he single-handedly set up behavioral economics. Additionally, the characterization of economists of the more rational mold seem unfair to me. Posner and Miller are reduced to stubborn silly one dimensional characters when both are accomplished and nuanced. Thaler sets up certain classical problems such as the dividend puzzle, the equity premium puzzle and close ended funds and proclaims them solved by behavioral economics. I read the dividend puzzle paper, and while the "solution" seems reasonable, it has little to no empirical work (ironic, given Thaler's admonishment that "mainstream" economics doesn't look at evidence enough). Thaler claims to have solved the equity premium puzzle by looking at loss aversion rather than risk aversion, and argues that additionally the equity premium puzzle cannot be a risk premium because he looked at the betas of the equity and it didn't explain the equity premium. However, especially after Fama's work, there's widespread agreement that beta does not completely capture risk (it's hard to get a beta of the "market"). Thaler himself recognizes this when he discusses the Fama-French factors and the failure of CAPM. It seems disingenuous to try to refute a possible objection using a risk metric that he knows is not accurate. Lastly, Thaler criticizes Miller for dismissing his work on finding a correlation between close ended funds and small cap equity. It seems like Miller is correct, in that just because Thaler found a correlation, he shouldn't be able to attribute that correlation to investor sentiment. In other words, Thaler presents as fact what is still very controversial in the field. Even during my studies I always found myself annoyed by Thaler's idea of mental accounting. For the record, I find the concept of mental accounting totally reasonable, and perhaps even true. However, scientifically speaking, it does not seem falsifiable. Any result that does not jive, seems to be able to be explained away, and it seems like mental accounting has little to no predictive power. At least to me, Thaler needs to propose some empirical tests that can differentiate between behavioral explanation and other explanations. Otherwise, his explanations are as axiomatic as the "mainstream" economics he criticizes.

  8. 4 out of 5

    Charles Berteau

    It was once a cliche that economics theory dealt only with completely rational human beings, under the principle that this was the only way to develop workable models. Even though classical economists, from Smith to Keynes, had acknowledged that human behavior often deviated from the rational, the models persisted in this foundation. I guess the theory was that deviations from the rationale would be okay, because human behavior would vary in random ways, and the rational "average" would still ho It was once a cliche that economics theory dealt only with completely rational human beings, under the principle that this was the only way to develop workable models. Even though classical economists, from Smith to Keynes, had acknowledged that human behavior often deviated from the rational, the models persisted in this foundation. I guess the theory was that deviations from the rationale would be okay, because human behavior would vary in random ways, and the rational "average" would still hold. That this ridiculous assumption has been largely set aside is due to the work of a few remarkable people, such as Daniel Kahnemann (see Thinking, Fast and Slow), Robert Shiller (of Case-Shiller Home Price Index fame), Amos Tversky, and others ... including Richard Thaler, author of this book (and, previously, Nudge). These economists and psychologists bridged the wide gap between these disciplines, and created behavioral economics - demonstrating that, in the real world, humans tend to exhibit the same, non-rational, behavior over and over again. The assumpion that Humans behave like "Econs" is, simply, wrong - and demonstrably so, in real experimentation. Thaler provides a history of behavioral economics, his role, and that of the other giants. It's a fascinating walk through the creation of a discipline, and a peek into the world of academia, which can be incredibly vain and petty. Throughout Thaler blends fascinating - if now familiar - stories about human irrationalities, the "Supposedly Irrelevant Factors" across finance, fairness, and many other topics. I especially enjoyed the case study of how the Chicago School of Economics allocated new offices - even though the faculty of this school are all strong rationalists, who would (rationally) auction off kidneys to the highest bidder, they didn't allocate their offices that way at all, but rather by seniority and lottery. What is good for the goose, is not always good for the gander. If the topic interests you at all, it's a great, great read. Thaler is an engaging, funny author, and he makes difficult topics easy to read. Check it out!

  9. 5 out of 5

    Steve

    Yup - this is now (officially) the memoir/autobiography of the 2017 Nobel Prize Winner..... This was a lot of fun, but it is what it is. It's a career academic writing about his professional journey - basically the story of the evolution of his successful, productive, and (arguably) paradigm shifting lifetime of research - for a popular audience in the context of the intersection of economics and, well, everything related to behavior, which, of course, includes a healthy dose of psychology. T Yup - this is now (officially) the memoir/autobiography of the 2017 Nobel Prize Winner..... This was a lot of fun, but it is what it is. It's a career academic writing about his professional journey - basically the story of the evolution of his successful, productive, and (arguably) paradigm shifting lifetime of research - for a popular audience in the context of the intersection of economics and, well, everything related to behavior, which, of course, includes a healthy dose of psychology. The book holds together nicely, but what makes the book a joy are the examples, anecdotes, and results from empirical research. The topics run the gamut - from retirement savings to household insulation to corporate leadership to the NFL draft to taxation to the bowls of nuts on the table to, for me, the most entertaining, the selection of faculty offices in an elite graduate school. If you haven't studied or read or thought much about economics, I have no idea how accessible this would be, but it wouldn't surprise me if it would be interesting and thought-provoking for anyone willing to read and question their preconceived notions and ... think. There's a lot of life inside the ivory tower stuff that I'm guessing plenty of readers will find lies somewhere between inside baseball and too much information and geeks tell all drama, but - at least for me - I found it hugely entertaining. It was fun reading this soon after enjoying Rodrik's Economics Rules, and I'm guessing anyone that enjoys one will enjoy the other. Side note: I haven't yet read Nudge, Thaler's well known collaboration with Cass Sunstein, but I'll probably go back and read it at some point. At least based on my experience, this book stands up just fine on its own.

  10. 4 out of 5

    Don-E Merson

    This was a really fun read. It gives kind of a behind the scenes look at how the field came about from one of the most prominent creators of the field.

  11. 4 out of 5

    Pavlo Illiashenko

    This is a book about behavioral economics/finance as well about people doing it. Good overview of the field evolution from the inside.

  12. 5 out of 5

    Ryan

    I now understand why Richard Thaler sounds triumphant in the film adaptation of The Big Short. Thaler's career was long dedicated to showing that economists grossly overstate human rationality in their optimization charts and graphs. They had for decades dismissed or challenged his work on faulty pretences, often just waving away his research (with an "invisible hand") as inconsequential because, paraphrasing, "when the stakes are high people will be incentivized to evaluate every decision in co I now understand why Richard Thaler sounds triumphant in the film adaptation of The Big Short. Thaler's career was long dedicated to showing that economists grossly overstate human rationality in their optimization charts and graphs. They had for decades dismissed or challenged his work on faulty pretences, often just waving away his research (with an "invisible hand") as inconsequential because, paraphrasing, "when the stakes are high people will be incentivized to evaluate every decision in complex equations." Well, they were wrong. In Misbehaving: The Making of Behavioral Economics, Richard Thaler tells the story of his career, paper by paper. Many of Thaler's experiments are fun games and thought experiments. If you buy a bottle of wine for $20 and it increases in value as it ages, isn't it wrong to think of the wine as being worth $20? Economists say it is wrong, but they don't seem to live out that analysis. I envy Thaler's ability to imagine these games, not to mention his ability to make a career of twigging people's noses so productively (I say "productively" to distinguish him from trolls). His work changed economics and his work (with Cass Sunstein) on libertarian paternalism, AKA a "nudge," does seem to produce better policy outcomes. We now use opt-out systems to increase retirement savings and we nudge people when they get their driver's license to sign up for organ donation. These policies work because people are, as Ariely might say, predictably irrational. I wonder if many of us feel the risk of playing games with our culture comes with too high a price. Perhaps we should find ways to create these games--I could not help but recall Juska's Round-Heeled Woman. In her memoir, Juska puts an ad in a literary magazine declaring that she would like to have lots of sex before she turns 66. For the most part, this experiment pays off for Juska, and maybe it shows that we are too risk averse--or at least that we too easily comply with social norms. By the end of his career, Thaler arrives at the University of Chicago, the neoliberal economics stronghold. He attributes his success to observing, gathering evidence, and speaking up. But I think the book suggests other strategies. First, collaborate well. Thaler works with Cass Sunstein, Daniel Kahneman, and Amos Tversky--you can't do much better than that outside of the Manhattan Project. Second, seek strategies for amplification. Thaler often relies on humor to ask questions; if economics says X, why do we see Y? Third, maybe we should default to forming our arguments as questions given to experimentation. I see that as a skill that's not easy to replicate, however. A final note. My favorite chapter detailed what happened when the Chicago economists moved into a new building and therefore had to pick their offices. The griping and whining is hilarious, and the only focus for these rational minds seemed to be status as they fought to get corner offices or offices with a nice view. If anyone prioritized privacy and quiet (my first choice would be in a windowless basement next to a janitorial station) to do their serious work, their voice was not included. But I suspect that we would do well to mostly think of scholars as squabbling status monsters. And that goes for Thaler as well. There is an underdog quality to much of this memoir, and Thaler gets the last laugh after toiling away in an obscure academic hideout known to the backwater locals as Cornell University. I say this last sentence to emphasize that while I understand Thaler's "last laugh" tone (he would go on to win the "Nobel Prize" in Economics in 2017, btw), I sometimes found it a bit much to pity this poor professor who spent much of his career at Cornell. Although I mostly admire this book, I was able to finish several other more engaging works while reading it.

  13. 4 out of 5

    John Gurney

    I enjoyed Thaler's ironic writing style in Misbehaving, his autobiographical history of the field of behavioral economics. Full disclosure: I didn't have a class with Thaler, but I attended the same University of Chicago Graduate School of Business, n/k/a Booth. I knew of him by reputation and it is a treat to read some of my other professors' names in print, e.g. Anil Kashap and Doug Diamond, and others known by reputation such as Thaler's friend and, at times, ideological opponent, Gene Fama. I enjoyed Thaler's ironic writing style in Misbehaving, his autobiographical history of the field of behavioral economics. Full disclosure: I didn't have a class with Thaler, but I attended the same University of Chicago Graduate School of Business, n/k/a Booth. I knew of him by reputation and it is a treat to read some of my other professors' names in print, e.g. Anil Kashap and Doug Diamond, and others known by reputation such as Thaler's friend and, at times, ideological opponent, Gene Fama. The inter-Chicago rivalry between the 'rational' school and 'behavioral' school was an important theme in the book. At times, Thaler gets snarky in this tome, but his insights tended to be correct and anything that challenges the status quo may be met with resistance. It may take an iconoclastic personality like Thaler's to so go against the flow. To his credit, he is truly kind towards many and modest about his contribution to behavioral economics, with much acclaim to the pair of Amos Tversky and Nobel Prize-winner Danny Kanneman. Also, Thaler is clear about what his "nudge" recommendations are attempting to do. A valid criticism of behavioral economics is the "so what?" that comes from pointing out people often don't act in their logical self-interest because that doesn't necessarily suggest a solution. Some argue it is a bit nihilistic. Thaler and University of Chicago law professor Cass Sunstein attempted to address this with the policy proposals in their "libertarian paternalism" book Nudge. Thaler is no communist nor socialist, but rather, attempting to marry real world behavior with economic goals. He is well aware government agents are just as susceptible to irrational behavioral heuristics as private sector players are. But, behavioral economics helpfully takes us away from theoretical "Econs", the perfectly rational, yet non-existent, folks of much economic theory. Given the amusing narrative in Misbehaving, it is a great place for the non-economist to learn what behavioral economics is all about.

  14. 5 out of 5

    Andre Simonsen

    After starting my dive in economic theory via Ha-Joon Chang's "Economics: The User Guide" - wich gives a broad stroke on the subject - this was the book I chose to learn more about the type of economic theory wich should - and as everything indicates shall - permeate all other economic theories. The author does a great job of explaining how he and other economists (and people from other social sciences!) came up with the theory and how it should be used (Basically, the Golden Rule is "Nudges shou After starting my dive in economic theory via Ha-Joon Chang's "Economics: The User Guide" - wich gives a broad stroke on the subject - this was the book I chose to learn more about the type of economic theory wich should - and as everything indicates shall - permeate all other economic theories. The author does a great job of explaining how he and other economists (and people from other social sciences!) came up with the theory and how it should be used (Basically, the Golden Rule is "Nudges should be transparent and used only to assist the person being nudged into choosing the best possible choice for her*." The Secondary Rules are 1) If you want to make someone do something Make it Easy! and 2) We can't do evidence-based policy without evidence!). He also illustrates the story with various cool anedoctes and sheds some light in how to replicate his programs in other places (It's definetely worth your time to check out the work of the UK Behavioral Insights Team!) I highly recommend this book and the premises it advocates (especially regarding the correct use of data, RCTs, evidence-based policies and regarding humans as.. Well... Humans!). * Yes, the author does say that this is subject to interpretation and bias (and misuse by companies or bad governments). But I'd like to recall one of the examples he uses throughout the book regarding helping people to save money for their pensions. I really can't see a reason why making a nudge in this direction would be bad for anyone. Also, the nudge is only a push in the "right direction", no one is -and I hope they"ll never be - forcing any options

  15. 4 out of 5

    Gaufre

    A lot of books in my kindle collection were free downloads from a while back, which would cost anywhere from 0.99$ to 3.99$ if I were to buy them now. I also bought a few books for 0.99$. I recently went through my collection and books that no longer interest me, some of which I have never read. I realized that I deleted only books that I downloaded for free and none of the ones purchased. That is what Thaler calls misbehaving. The value of a book is how much it would cost to replace is now - no A lot of books in my kindle collection were free downloads from a while back, which would cost anywhere from 0.99$ to 3.99$ if I were to buy them now. I also bought a few books for 0.99$. I recently went through my collection and books that no longer interest me, some of which I have never read. I realized that I deleted only books that I downloaded for free and none of the ones purchased. That is what Thaler calls misbehaving. The value of a book is how much it would cost to replace is now - not how much I paid for it back then. To sink the idea in, think about the following scenario: what if Amazon mistakenly deleted some books from your account. How much would you want as compensation? The amount it takes to replace those books? Or what you paid when you purchased them? This book feels like an evening drinking wine with Thaler recounting his career. He is a great story teller and full of fun anecdotes. I learned a little bit of behavioral economics but I wanted more. The beginning and his list of anomalies - things people do that are contrary to good economics rationale - was fascinating. But the book is more of a history of the development of field than a discussion of the concepts. There is a lot of name dropping of people and conferences who shaped the field. I guess I will have to go read Nudge now.

  16. 5 out of 5

    Karlyne Landrum

    I had to take this book back to the library today, so I don't have any of the funny stories from it to relate here (what? I should've taken notes?), but there were quite a few. Mr. Thaler might be lazy, but he's also a pretty good story-teller. However, what I really got out of this book was a sense of wonder. I was amazed at the world of professional economics, a field I knew nothing about; I'm not sure I've ever even met an economist. And what surprised, shocked and amazed me was that until the I had to take this book back to the library today, so I don't have any of the funny stories from it to relate here (what? I should've taken notes?), but there were quite a few. Mr. Thaler might be lazy, but he's also a pretty good story-teller. However, what I really got out of this book was a sense of wonder. I was amazed at the world of professional economics, a field I knew nothing about; I'm not sure I've ever even met an economist. And what surprised, shocked and amazed me was that until the author and his colleagues came onto the scene just a few decades ago, human behavior had never entered into the field. It has always been, apparently, a science of laws and mathematical formulae, a hard and fast discipline which had not taken into account human vagaries. A field of study which projected the future of human wealth without taking into account how humans (and not perfect economists) behave? Who knew?! I have one minor quibble: for a hard-back expensive book there were too many typos (one would be too many, but multiples are annoying). Maybe they won't bother economists, but they certainly bothered me!

  17. 5 out of 5

    Rapeepat Ingkasit

    The most recommended and must-not-missed book for people who interested in behavioral economics. The way professor Thaler unfold the theory is like his personal career journal. His writing style is super easy to read (except some part about finance and fund investment). I am very exciting to read tge argument between neo-classical economists e.g. Eugene Fama v.s. these young (and stubborn) economicst who believe brand new stream of economics. I am greatly encourage you to read this book. It's not The most recommended and must-not-missed book for people who interested in behavioral economics. The way professor Thaler unfold the theory is like his personal career journal. His writing style is super easy to read (except some part about finance and fund investment). I am very exciting to read tge argument between neo-classical economists e.g. Eugene Fama v.s. these young (and stubborn) economicst who believe brand new stream of economics. I am greatly encourage you to read this book. It's not the geeky economic theory but mainly focus on the Human like us.

  18. 5 out of 5

    ScienceOfSuccess

    There are many books written about behavioral economics, and quite a few of them were quoted here. This one is the strong nr.2 on this topic, right after Thinking Fast and Slow by Daniel Kahneman. I found here many great life examples, and the author let you decide, yes you have time to vote as many people did, where is the border for every decision. This book is also way better than Nudge by the same author, probably just for this reason.

  19. 4 out of 5

    Filipa

    I really liked this book (as I was expecting!). Thaler's writing is funny, simple and entertaining. I do like authors that while they're sharing knowledge, they are also making us laugh. I really liked to see this side of behavioural economics. And... even though I already wanted to read Nudge, now I want it even more.

  20. 4 out of 5

    Claudio Cesar Sanches

    Fund to read. Excelente for beginners Richard Thaler gives a historic overview of the Behavior Economics development going from the beginning with Kahneman through the most recent developments.

  21. 4 out of 5

    t.

    Misbehaving is the story of how behavioral economics, a new and seemingly radical branch of economics, came to be. For those not too well-versed in economic theory, suffice it to say that one of its foundations is the assumption that we, humans, are rational creatures - and not just rational, but completely rational: at all times and under any and all circumstances. Quite the wild assumption, huh? Well, behavioral economics puts economic's main assumption to the test and proposes that, surprise Misbehaving is the story of how behavioral economics, a new and seemingly radical branch of economics, came to be. For those not too well-versed in economic theory, suffice it to say that one of its foundations is the assumption that we, humans, are rational creatures - and not just rational, but completely rational: at all times and under any and all circumstances. Quite the wild assumption, huh? Well, behavioral economics puts economic's main assumption to the test and proposes that, surprise surprise, we're not really that rational. “The purely economic man is indeed close to being a social moron. Economic theory has been much preoccupied with this rational fool.” When I was studying economics, this assumption was quickly drilled into my brain in every class. The way I took it was: "surely we’re not completely rational, and surely we all know that much, but this is a simplification - the models are all supposed to be a simplification of life so we first learn the basics and then keep on adding on." So imagine my surprise when Thaler, one of the pioneers of behavioral economics, told of his (rather fancy and intellectual) battles against some of the most conservative economists who refused to even entertain the idea of us, mere mortals, not being as rational as the theory has been stating for ages. Little had I imagined that something that for me was crystal clear (although I didn’t know about behavioral economics by then), was considered heresy by so many big names in the field. And I’m not saying I am enlightened or anything of the sort - God knows how much I struggled - but I guess once you’re a hard-core theorist, seeing the world through a different lens can be close to impossible. Plus, there was no way I could believe myself or those around me to be that rational, to be honest. I mean, have you seen the state of the world? “What makes the bias particularly pernicious is that we all recognize this bias in others but not in ourselves.” Surely by now (if not by the first sentence already) I’ve lost the interest of many of you, and I get it. Economics isn’t the most thrilling of topics on any given day, and a book about how some of the theory came to be while a big chunk of what has been taught over decades had to be revised isn’t exactly a page-turner. But, believe it or not, behavioral economics can be way more interesting than your run-of-the-mill economics. Combining economics with psychology, it shows that we’re not nearly as rational as we want to believe. Ever since I read Emotional Intelligence and then Thinking, Fast and Slow, I’ve been fascinated by cognitive errors and the role that psychology, emotion, culture and social factors play when we’re making day-to-day decisions. Unlike Thinking, Fast and Slow, Misbehaving isn’t a collection of studies, hypotheses, results and analysis. It is, as I said, an account of how behavioral economics came to be, although it does mention more than a couple of important studies or discoveries to make a point whenever necessary. To be completely honest, I picked this book up for the first time over two year ago and, since I was expecting it to be closer to Thinking, Fast and Slow than it is, I put it aside. Knowing better what to expect this time, I went in with a more open mind and ended up enjoying it immensely. Bonus points: 1) Thaler inserts a bit of humor every now and then that I wasn’t really expecting. It’s not a laugh out loud kind of humor but this is a book about economics so you shouldn’t be expecting so much and 2) you really don’t need to be an economist (or knowing all that much about economic theory for that matter) to understand and enjoy this book (although I’m pretty sure it helps). If you enjoyed Kahneman’s Thinking, Fast and Slow, or are simply curious as to why we so often make silly decisions, then the chances of your liking this one are looking good.

  22. 4 out of 5

    Esteban del Mal

    This is mostly a memoir wherein the author charts his charmed life in the manner of a humble braggart, but the first 1/3 of the book presents some interesting ideas and theories that leave me wanting to sound more like a behavioral economist when dealing with the hoi polloi that plague me in my day-to-day life (which, to be fair, simply makes me the contrarian acolyte of a humble braggart). Constrained optimization: the process of optimizing an objective function with respect to some variables in This is mostly a memoir wherein the author charts his charmed life in the manner of a humble braggart, but the first 1/3 of the book presents some interesting ideas and theories that leave me wanting to sound more like a behavioral economist when dealing with the hoi polloi that plague me in my day-to-day life (which, to be fair, simply makes me the contrarian acolyte of a humble braggart). Constrained optimization: the process of optimizing an objective function with respect to some variables in the presence of constraints on those variables. Sunk cost: a cost that has already been incurred and cannot be recovered. Bounded rationality: the idea that rationality is limited when individuals make decisions (by the tractability of the decision problem, the cognitive limitations of the mind, and the time available to make the decision). Hindsight bias (aka the "knew-it-all-along phenomenon" and/or "creeping determinism"): the tendency for people to perceive events that have already occurred as having been more predictable than they actually were before the events took place. Descriptive statistic: a summary statistic that quantitatively describes or summarizes features of a collection of information. (It helps describe, show, or summarize data in a meaningful way such that, for example, patterns might emerge from the data.) Proscpect theory: theory in cognitive psychology that describes the way people choose between probabilistic alternatives that involve risk, where the probabilities of outcomes are uncertain. The theory states that people make decisions based on the potential value of losses and gains rather than the final outcome and that people evaluate these losses and gains using heuristics. Heuristic: any approach to problem-solving or self-discovery that employs a practical method, not guaranteed to be optimal, perfect, logical, or rational, but instead sufficient for reaching an immediate goal (i.e., a rule of thumb). Where finding an optimal solution is impossible or impractical, heuristic methods can be used to speed up the process of finding a satisfactory solution. Loss aversion: people's tendency to prefer avoiding losses to acquiring equivalent gains (i.e., it's better to find $5 than lose $5). Mental accounting: the process by which people code, categorize, and evaluate economic outcomes, the purpose of which is to keep track of our money-related decisions so as to give us a model with which to evaluate future financial decisions. Normativity: an evaluative phenomenon by which societies designate some actions or outcomes as good or desirable and other actions as bad or undesirable (i.e., what is normally done, or what most others are expected to do in practice). Opportunity cost: when an option is chosen from two (or more) mutually exclusive alternatives, the opportunity cost is what is incurred by not enjoying the benefit associated with an alternative choice. Fungible: Mutually interchangable (an example is currency). Null hypothesis: a general statement or default position that there is no relationship between two measured phenomena or no association among groups (i.e., all phenomena take place in a vacuum). It is generally assumed to be true until evidence indicates otherwise. Status quo bias: a preference for the current state of affairs (an emotional bias). Mean reversion: the assumption that a stock's price will tend to move to the average price over time. (Strikes me as a corollary of the hedonic treadmill, the tendency of humans to return to a relatively stable level of happiness despite major positive or negative life events or changes).

  23. 5 out of 5

    Breakingviews

    By Edward Chancellor The economics profession has been in the doldrums of late – its leading practitioners failed to anticipate the financial tsunami that crashed over the global economy a few years back. Economists were out of touch - lost in their complex mathematical models that were built on highly unrealistic underlying assumptions. Repeated bouts of market turbulence, however, have been a boon to one relatively new branch of the discipline. Behavioural economics, in the words of Richard Thal By Edward Chancellor The economics profession has been in the doldrums of late – its leading practitioners failed to anticipate the financial tsunami that crashed over the global economy a few years back. Economists were out of touch - lost in their complex mathematical models that were built on highly unrealistic underlying assumptions. Repeated bouts of market turbulence, however, have been a boon to one relatively new branch of the discipline. Behavioural economics, in the words of Richard Thaler, one of its founding members, is “economics done with strong injections of good psychology”. Conventional economics is peopled with agents who act consistently to maximise gains and minimise losses. The humans who inhabit the real world are rather different specimens: their preferences are inconsistent and unstable, their reasoning faulty and their actions motivated by matters other than utility maximization. Damn it all – they have feelings! The behaviouralists have uncovered a number of “anomalies” which don’t chime with the assumptions of mainstream economics. Our attitudes to money are quirky – one dollar turns out not be quite like another. We dislike losses more than we enjoy gains; we save more out of windfalls than from ordinary income, and yet are reckless when it comes to spending lottery-like gains; we are liable to reject a guaranteed profit if we feel the transaction is unfair; and we discount future income at an excessively high rate. A bird in the hand really is worth two in the bush. To cap it all, the accuracy of our forecasts is marred by a tendency to jump to conclusions based on the limited amount of evidence at hand. Humans are overconfident – most people believe their driving skills are above average. “Misbehaving,” the catchy title of Thaler’s latest book, has been tested in the economists’ labs. A famous experiment involved handing out mugs to some of the students in Thaler’s class. The students who received the mugs turned out to value them more highly than those who didn’t. This finding has been called the “endowment effect”. Other well-known misbehaviours include “myopic loss aversion”, “narrow framing”, “anchoring”, “quasi-hyperbolic discounting”, and “mental accounting”. Behavioural economics is now taught at universities and business schools around the world. Thinking about finance has been particularly affected by its findings. Before Thaler and his ilk arrived on the scene, academic economists argued that financial markets were efficient. An extreme version of this view held that stock market prices were always correct. Speculative bubbles were the stuff of fantasy – like unicorns. The dot-com bubble showed the exponents of market efficiency to be wrongheaded. Robert Shiller, a leading behavioural economist at Yale, published his book “Irrational Exuberance” in early 2000 just as the Nasdaq technology index was peaking. A few years later, Shiller was back again warning that U.S. homeowners held unrealistic expectations of future house-price rises. Ever since Shiller’s bearish predictions were vindicated, market practitioners have paid more attention to behavioural finance. Even in academia, where ideas are notoriously slow to change, almost no one believes anymore in the extreme version of the efficient market theory. Behavioural economics has become established both in academia and in the public mind in a relatively short period of time. Shiller and his fellow behaviouralist Daniel Kahneman have been awarded Nobel prizes. Part of the appeal comes from substituting lively anecdotes for dry theory. In this book, Thaler draws on TV game shows and NFL player recruitment to illustrate his points. Such anecdotes make for entertaining books, including “Nudge,” a bestseller co-authored by Thaler. In the current volume, Thaler describes his attempts to establish behavioural economics within the ivory tower: persuading academic journals to publish “heretical” findings, organizing workshops and summer schools, and participating in debates. By his own account, Thaler relished playing the role of a pit bull terrier when taking on the economics establishment at his own employer, the University of Chicago, a citadel of market fundamentalism. Behavioural economics has been embraced by policymakers. Thaler helped create a “Behavioural Insights Team” for the UK government and has influenced pension legislation on both sides of the Atlantic – it turns out that the level of pension contributions is influenced by how the default option is presented to workers. When people are behaving irrationally, Thaler recommends what he calls “prompted choice”, a fancy name for a nudge. Thaler concludes his book asking where behavioural economics might go in the years ahead. The best guess is that it goes nowhere. This is because behavioural economics amounts to nothing more than a collection of “cognitive quirks” - a derogatory but apt term struck by the legal scholar Richard Posner. Behavioural finance lacks a coherent theory. Nor are its findings particularly original – marketing people have long known how to exploit the inconsistencies and petty irrationalism of consumers. Investors have been aware of the “madness of crowds” from the time of the Dutch tulip mania in the early 17th century. As Thaler admits, behaviouralists have made no contributions to the field of macroeconomics. Nor were they any better than their rationalist colleagues at anticipating the financial crisis – despite Shiller’s observations that U.S. house prices had diverged from their long-term trend. Behavioural economics has no insights into the errors of monetary policy. Nor can we ascribe the global financial crisis to human irrationality alone. Much of the “misbehaviour” on Wall Street was perfectly rational from the bankers’ perspective: it earned them large bonuses. Thaler cites Thomas Kuhn’s well-known work on scientific revolutions. He argues that dominant paradigms are toppled when researchers find so many faults (anomalies) that existing theory is fatally weakened. Behavioural economics, Thaler seems to believe, can bring about such a revolution in economics. Yet Kuhn also observed that flawed paradigms can endure for a while with minor patches. Behavioural economics has made useful contributions to the field of decision-making. But lacking theoretical heft, it can be nothing more than a colourful patch on the sickly corpus of modern economics.

  24. 5 out of 5

    James

    An interesting look at the development of behavioral economics and finance. The book is a little long and the examples are simplified (i. e. presented with extremely little to no mathematics) but easily understood. My thesis advisor in grad school was an early experimental economist, so this book brought back some of the discussions we used to have, specifically around the usefulness of economic theory that ignored reality. Thaler talks about this in terms of “Econs,” or those mostly fictional b An interesting look at the development of behavioral economics and finance. The book is a little long and the examples are simplified (i. e. presented with extremely little to no mathematics) but easily understood. My thesis advisor in grad school was an early experimental economist, so this book brought back some of the discussions we used to have, specifically around the usefulness of economic theory that ignored reality. Thaler talks about this in terms of “Econs,” or those mostly fictional beings who inhabit economists’ theoretical worlds, and “Humans,” no explanation needed, one hopes. (You might also think of “Econs” as Vulcans.) [A bit of a digression: I remember sitting in a particularly tedious monetary theory lecture one time when I either dozed off or had a mystical experience, a vision of a long line of Kliban-esque characters in top hats and tails, all economists, each poking the bottom of the economist in front of them and looking enlightened.] While I’m not a fan of most of the books written by economists for the popular market (for a variety of reasons), this book is more of a memoir than an attempt to restate complicated issues in simple terms (unlike Thaler’s and Sunstein’s NUDGE, which I thought was mostly unnecessary).

  25. 5 out of 5

    Michael

    Misbehaving is a quickie intellectual history of behavioral economics, told by one of its founders, Richard Thaler. He’s a gleeful contrarian: loves economics, but loathes classical economic models and their assumptions of rationality. His career has been devoted to producing both lab-based and empirical studies documenting the irrationality of what he calls Humans (as opposed to Econs). As an intro to his work, he describes his early years teaching undergraduate economics, and his students’ fru Misbehaving is a quickie intellectual history of behavioral economics, told by one of its founders, Richard Thaler. He’s a gleeful contrarian: loves economics, but loathes classical economic models and their assumptions of rationality. His career has been devoted to producing both lab-based and empirical studies documenting the irrationality of what he calls Humans (as opposed to Econs). As an intro to his work, he describes his early years teaching undergraduate economics, and his students’ frustrations with his too-hard midterms and finals. Even after explaining that he graded on a strict curve, thus a 67% was not a failing grade when it was around the median, students remained upset. So he made the midterm and final out of 137 points, and like magic his students were happy, although their percentage correct was the same, as was the grade distribution. Having a score around 100 made students happy. This is an example of what he calls the influence of supposedly irrelevant factors (SIF’s): things that shouldn’t matter (to Econ’s), making a big difference in practice. Some other tidbits I particularly enjoyed: He characterizes objections by traditionalists as mainly forming two contradictory arguments, one the “learning” argument, the other the “incentives” argument. The former posits, in response to a paper showing irrational behavior in one-off decisions, such as buying a house or saving for retirement, that such behavior would change if only people were repeat players. Then, when a paper shows irrational behavior in frequent transactions, such as grocery store purchases, other traditionalists discount the findings because the stakes are too small: such behavior would change if the incentives were higher. As Thaler frames it, the rationality view becomes a theory that’s not falsifiable. This isn’t just an academic debate: how economists and their models predict people will react to government actions (e.g., monetary policy, tax cuts, increased government spending) shapes which policies we enact. It’s important to empirically test the assumptions upon which these models are based, and adjust them accordingly. Prospect theory, based on the endowment effect (basically, getting used to whatever you have) and resulting loss-aversion, making people on average experience twice as much disutility from losses as utility from corresponding gains. The importance of fairness to humans, which explains seemingly irrational behavior (e.g., punishing people who are selfish, even at a cost to oneself). A related concept is what Thaler calls “transaction utility” in contrast to “acquisition utility,” the latter of which is the only thing an Econ would care about (am I getting more utility from whatever I’m buying than I would from the money I’m spending?); the former is the perceived fairness of the price: it’s why people can be tricked into buying several of something that they wouldn’t even buy one of, if the items are sufficiently discounted (90% off? Might as well!). He reframes a widely-used economic (and legal) concept: that of the principal/agent problem. In discussing misalignment of incentives, he refers to it as the “dumb principal” problem: instead of blaming the e.g. risk-averse middle managers, his phrase puts the burden on the e.g. CEO to ensure a properly ex-ante analysis of risky decisions, e.g., new products/experimenting with different ways of doing things. This is a short, fun book to read: it’s the tale of a changing of the guard in economics, told by one of the leaders of the winning side.

  26. 4 out of 5

    Sepideh

    This was one of the best books on economics that I have read in a long time. It discusses the creation of evidence-based economics that work in a world of Humans as opposed to a world of Econs, humans that behave optimally ignoring numerous supposedly irrelevant factors. In this book, Thaler talks about how he started applying knowledge from psychology to economics to have a better understanding of how actual humans behave as opposed to how Econs behave. He said nice things about Cialdini, the au This was one of the best books on economics that I have read in a long time. It discusses the creation of evidence-based economics that work in a world of Humans as opposed to a world of Econs, humans that behave optimally ignoring numerous supposedly irrelevant factors. In this book, Thaler talks about how he started applying knowledge from psychology to economics to have a better understanding of how actual humans behave as opposed to how Econs behave. He said nice things about Cialdini, the author of Influence. Influence is a book on sales and marketing written by Cialdini who is a psychologist. That book has been around a long time and is very popular among people who are in business and need to sell things. Thaler writes about how people treat money as their own money or as someone else's money. He writes about how business owners may want to take risks. However, the incentives exist for the managers under those owners not to take risks because the managers do not want to be fired for taking risks and losing money. This book talks about the Chicago School of economics a lot. Some of the key players in this book were people who helped President Obama set his economic agenda. The book was interesting because it mentioned some of the personal characteristics of those people. Maya Shankar was one of the interesting economists mentioned in this book that I, a person who does not follow economics that closely, had never heard of before.

  27. 5 out of 5

    Yuekun Liu

    This is definite a book that I would reread later. Get interested in this book after watching his video: https://www.aeaweb.org/webcasts/2016/... Thaler develops a story of how behavioural economic grows up and he summarizes a host of findings. This book breaks many my year-long confusing mattered I learned in class. “Economists get in trouble when they make a highly specific prediction that depends explicitly on everyone being economically sophisticated.” I am so eager to see the birth of a new This is definite a book that I would reread later. Get interested in this book after watching his video: https://www.aeaweb.org/webcasts/2016/... Thaler develops a story of how behavioural economic grows up and he summarizes a host of findings. This book breaks many my year-long confusing mattered I learned in class. “Economists get in trouble when they make a highly specific prediction that depends explicitly on everyone being economically sophisticated.” I am so eager to see the birth of a new theory that could both describe and predict human behaviour well. I love the his discussion on ”Anomalies” most (Thaler is such an entertaining writer!). And happy to know that there was a column on Anomalies in the Journal of Economic Perspectives. Strongly recommend this book to those who are interested in economics, not necessarily in behavioural economics. Read “Thinking, fast and slow” first would be better.

  28. 5 out of 5

    Lance Cahill

    A quite remarkable and entertaining read. I would say the focus of the book is on interesting stories and anecdotes from behavioral economics and less on underlying theory or empirics (notably as Thaler glosses over certain methodological disputes). The book could have served to be much shorter (it is 358 pages before notes, index, etc), hence the rating of four stars. Some of the chapters seemed odd, especially the one about the NFL (relating to draft strategy), as ones which could have been ax A quite remarkable and entertaining read. I would say the focus of the book is on interesting stories and anecdotes from behavioral economics and less on underlying theory or empirics (notably as Thaler glosses over certain methodological disputes). The book could have served to be much shorter (it is 358 pages before notes, index, etc), hence the rating of four stars. Some of the chapters seemed odd, especially the one about the NFL (relating to draft strategy), as ones which could have been axed or combined with other chapters. I will note that Thaler misses several empirical/theoretical explanations for the question of why firms pay dividends in his discussion of this question that do not rely upon prospect theory. The empirical literature is pretty rich in this area and does make one question Thaler's fair-dealing of other empirical controversies, or anomalies to optimizing models. However, a recommended read.

  29. 4 out of 5

    Emil Petersen

    Of all the books in behavioral economics, this is probably not the one you should read. Unless you are specifically interested in the author Richard Thaler, go ahead and read 'Nudge' instead. As the subtitle says, this book describes how behavioral economics came about and what merit it has - usually in contrast to the 'econs', by which is meant the homo economicus, or rational actors. This is to me very, very interesting (albeit I give the book two stars) and the development is given here from Of all the books in behavioral economics, this is probably not the one you should read. Unless you are specifically interested in the author Richard Thaler, go ahead and read 'Nudge' instead. As the subtitle says, this book describes how behavioral economics came about and what merit it has - usually in contrast to the 'econs', by which is meant the homo economicus, or rational actors. This is to me very, very interesting (albeit I give the book two stars) and the development is given here from a, more or less, personal point of view by one of its central actors. That being said, there are no real insights to get from this book that cannot be had from some of the better ones out there already.

  30. 4 out of 5

    Fayla

    I was terrible at econ, so I don't know why I keep reading books on the subject. Guess I must find them really fascinating! There were a lot of interesting points in Richard Thaler's journey to basically create behavioral economics. Mainly that people in the real world don't make decisions the way economists' models say they should. While reading many of the scenarios, I knew what real people (called "Humans" in the book) would choose and what the right decision should be. So that was fun. The bo I was terrible at econ, so I don't know why I keep reading books on the subject. Guess I must find them really fascinating! There were a lot of interesting points in Richard Thaler's journey to basically create behavioral economics. Mainly that people in the real world don't make decisions the way economists' models say they should. While reading many of the scenarios, I knew what real people (called "Humans" in the book) would choose and what the right decision should be. So that was fun. The book covers five primary scenarios where Humans defy economists' logic and I was captivated by them all. The most boring aspect were the explanations of who Thaler's collegues were and what contributions they made to moving behavioral economics along. I recommend this book to anyone who has an interest in human behavior, economics, or the history of academia.

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