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Misbehaving: The Making of Behavioral…
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Misbehaving: The Making of Behavioral Economics (edition 2015)

by Richard H. Thaler

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1,0131820,254 (4.05)6
Richard Thaler is one of the founders of behavioral economics, and he gives us a clear, enlightening, and entertaining account of its origins, principles, and findings.

Traditional economics operates on the theory of the rational economic person--homo economicus, or as Thaler shortens it for convenience, Econs. For the purposes of economic theory, Econs are assumed to always make rational and fully informed choices, for maximum economic benefit. The problems should be obvious; we are rarely fully rational in our decision-making, and almost never have complete, and completely accurate, information. The more important our decisions are--career choice, marriage, retirement planning, the less likely we are to have enough information to make "correct" economic choices.

Over a period of forty years, Thaler and others, recognizing, sometimes dimly, sometimes clearly, that humans don't make purely rational decisions, often not even when we do have "enough" information, began to tease this out. They needed to prove not only that humans make economic decisions based on incomplete information, emotion, impulse, and what economists consider irrelevant factors, but that it matters. If the collective effect of all our individual decisions adds up to the same result as if we had made those decisions rationally, it wouldn't matter, and rational economic theory, "efficient market theory," would still be fully sufficient for economic analysis.

The book is lively, filled with stories and anecdotes, but also clear explanations of the basic principles. It's clear, and in some ways more rational than traditional economic theory that assumes human economic behavior can be accurately predicted based on a model of human behavior that resembles no human being who has ever lived. As an example of the divergence between Econs and humans, Thaler offers the example of a bowl of cashews on the coffee table before dinner. You may like cashews. You may enjoy having cashews before dinner--but you probably don't want to eat so many that you spoil your dinner. What's the sensible thing to do?

The Econ, homo economicus, who always makes completely rational decisions, just stops eating the cashews when he decides he's had enough. The ordinary, real, human being who really wants to stop eating before eating enough to spoil dinner, is more likely to take that cashew bowl and put it away, so that it's not sitting there as a temptation.

And, once you allow for the fact of real human beings rather than Econs, that's a completely rational decision. It's also one that the Econ would never understand. Either you prefer to stop eating cashews, so you do, or you prefer to keep eating cashews, so you do. No need to move the bowl!

More directly economic matters are the cab driver who works each day until he's hit his target income for the day, and then ends his work day. This means he works more hours when earning is low, and fewer hours on the days when earning is good. From the point of view of homo economicus, this is insane. It's just not worth working that many hours when pay is bad, but on the days when pay is good, he could boost his total income by working more hours! From the viewpoint of income maximization, this is completely rational, and Thaler agrees. It's a mistake not to take advantage of the high-pay days, and knock off early when the pay is bad. I'm not sure income maximization is the only consideration here, but it's quite reasonable for an economist to think it should be.

More interesting are strange anomalies in the part of the economy that, it would seem, should be most rational, the stock market. Surely most of the money in the stock market is invested or managed by professionals able to master all available information and make rational decisions, right?

Turns out, not so much. Even the professionals can succumb to irrational exuberance, over- or under-estimate value and risk, and find themselves unable to properly exploit market inefficiencies (which are not supposed to exist), even when they recognize them.

It's a fascinating, enlightening, entertaining book, well worth your time. Recommended.

I bought this audiobook. ( )
  LisCarey | Sep 19, 2018 |
Showing 18 of 18
I first became interested in behavioural economics a few years ago. It’s a branch of economics that combines some psychology elements, asking the question – what if humans don’t behave rationally? What if they do things that benefit them and not others? What if they act stupidly? It’s quite a departure the basis of traditional economics – even radical. Richard Thaler is one of the pioneers of this field and this is the story of how it all happened.

The story starts with Thaler as a young economist, noting that his professors didn’t think he would amount to much. He starts working with psychologists on the fringe of what’s expected in economics, pushing the envelope on disproving the basis theories of economics that you would have learned in high school. But humans don’t behave like ‘Econs’, those rational, selfless beings. They can be lazy (something Thaler calls himself several times) and they make mistakes. They will travel extra to save $10 on a $500 purchase, but not on a $30 purchase (which is just bad maths). They have biases and are more willing to take risks if they are losing to even the stakes (which makes no sense). It’s an insight into how we all behave at various times – inconsistently and with varying fairness. Thaler follows this through with multiple examples and experiments as the book travels through his career. It starts with everyday issues and continues into the world of finance, looking at the stock market and other areas. (This wasn’t my favourite area of the book, maybe because I don’t work in the area but it did raise a lot of points about value and investment). There is a relatively small part about nudge economics in the UK to gently direct people into making correct choices (you can read more in the book Nudge). However, I really enjoyed the stories about the university faculty choosing their new offices and the draft for American football. All totally relatable and apply to other sports with drafts too.

Thaler writes with a hefty dose of humour. I took this book to the hairdresser and didn’t expect to be laughing so much. It’s easy to understand and read, with multiple diagrams to highlight certain experiments as well as references should you want to look anything up in more detail. It’s probably not the book to start with if you have no economics background at all, but if you know a bit about traditional economics you’ll love how Thaler pokes fun at it.

http://samstillreading.wordpress.com ( )
  birdsam0610 | Feb 24, 2024 |
Нобелевку часто дают за открытия, совершенные в прошлом. Свежеиспеченный лауреат по экономике Ричард Талер свои отмеченные премией исследования по поведенческой экономике продолжает по сей день, что неудивительно: обычные люди ведут себя и думают совсем не так, как предписывается научными моделями, и нестыковки на каждом шагу. В этом году на русском вышло сразу две книги Талера. Это, по сути, автобиография американского исследователя и история развития того направления, у истоков которого он стоял и за которое ему, собственно, и дали заветный приз. Невероятно интересно читать о том, как досужий интерес и неортодоксальный взгляд на вещи пробивают себе дорогу ко всеобщему признанию.

Дорога эта не была устлана розами, и Талер честно признает, что по части экономики его учителя больших надежд на него не возлагали. Тем не менее знакомство с двумя другими «белыми воронами» экономики Амосом Тверски и Даниелом Канеманом (последнему тоже дадут Нобелевскую) помогло увидеть, что их новый взгляд, похоже, является предвестником сдвига парадигмы во всей науке. Будущие лауреаты и блестящие умы в книге повсюду: во взаимодействии с ними создавалось новое направление. Помните, эксперимент с детьми и печеньем на силу воли? Его создатель тоже был среди повитух. Но не только на студентах-старшекурсниках обкатывались новые озарения — Талер опробовал свои догадки на реальных бизнесах, работая консультантом и решая конкретные проблемы вроде той, что лучше, ежедневные низкие цены или регулярные акции-скидки? Описанные с юмором кейсы из всех областей, где происходят финансовые транзакции и принимаются стратегические решения, — от правительств и спортивных команд до новых феноменов вроде Uber — показывают, почему поведенческую экономику недооценивать не стоит и почему за ней будущее.

Талер скромно признает, что ничего сверхнового они не изобрели, они просто раскрыли глаза и стали задавать правильные вопросы. Лучше всех экономическое поведение людей, как полагает автор, раскусили фермеры, выставляющие свои продукты у обочины с коробочкой для «честной оплаты». Нюанс в коробке, прибитой к столу, — деньги в нее положить можно, но обратно их не достать. Люди не склонны плутовать, но, если расслабишься, можешь недосчитаться монет.
  Den85 | Jan 3, 2024 |
A book about real economic agents in the real world of little information and less predictability, subject to all the mental and psychological fallacies and quirks of real human beings. The book, with all of 34 chapters (each of them mercifully brief), covers an astonishing range of economic decisions in the real day-to-day world, including investment in the share market and saving for retirement. It also reiterates the effectiveness of 'nudging', e.g. by timely reminders, by making the good option the default one (as in pension and savings schemes), health insurance, and so on. Not an afternoon's light read, but worth the effort. ( )
  Dilip-Kumar | Feb 27, 2023 |
Would highly recommend, it gives a great way to look at the decisions you make while also giving insight into the development of economics. It's also pretty easy to read considering the subject matter ( )
  martialalex92 | Dec 10, 2022 |
I found this book to be part autobiographical, part psychology, and part economics. I enjoyed Thaler's anecdotes and his experiences and battles in the academic world. I understood some of the examples that Thaler provided on how we make decisions, both rationally and irrationally. I particularly enjoyed his take on how teams should prepare for the NFL draft.

I am also familiar with various books and online lectures by Professor Robert Shiller of Yale University on behavior economics. I appreciate that economists try to write books that the general public might understand. Thaler does a pretty good job at this also.

If one is interested in the evolution of the idea of behavioral economics and the struggles to promote it, I recommend this book. ( )
  writemoves | Oct 26, 2021 |
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. ( )
  vhl219 | Jun 1, 2019 |
This is simultaneously an autobiography of Richard H. Thaler and a history of modern behavioral science. The author was one of the early adopters of the idea, so he can supply a great inside view. At the same time he remains an academic economist, thus he doesn’t bash aimlessly modern mainstream economics but shows where and when its assumptions about rationality may be wrong.
The story starts from early works by Kahneman-Tversky, moves through academia and finishes in practical implementation of behavioral insights in Britain. The list of studies and examples is largely known to readers of Nudge or Predictably Irrational, however it is more tightly interwoven into the single narrative.
Recommended read for anyone, especially non-economists, who are interested in why often people at seemingly irrationally.
( )
  Oleksandr_Zholud | Jan 9, 2019 |
A nice gentle reintroduction to Economics and in particular Behavioural Economics which was a nascent branch when I left the discipline.An excellent primer both for what behavioural economics offers and the limitations of rational economics. ( )
  malcrf | Oct 15, 2018 |
Richard Thaler is one of the founders of behavioral economics, and he gives us a clear, enlightening, and entertaining account of its origins, principles, and findings.

Traditional economics operates on the theory of the rational economic person--homo economicus, or as Thaler shortens it for convenience, Econs. For the purposes of economic theory, Econs are assumed to always make rational and fully informed choices, for maximum economic benefit. The problems should be obvious; we are rarely fully rational in our decision-making, and almost never have complete, and completely accurate, information. The more important our decisions are--career choice, marriage, retirement planning, the less likely we are to have enough information to make "correct" economic choices.

Over a period of forty years, Thaler and others, recognizing, sometimes dimly, sometimes clearly, that humans don't make purely rational decisions, often not even when we do have "enough" information, began to tease this out. They needed to prove not only that humans make economic decisions based on incomplete information, emotion, impulse, and what economists consider irrelevant factors, but that it matters. If the collective effect of all our individual decisions adds up to the same result as if we had made those decisions rationally, it wouldn't matter, and rational economic theory, "efficient market theory," would still be fully sufficient for economic analysis.

The book is lively, filled with stories and anecdotes, but also clear explanations of the basic principles. It's clear, and in some ways more rational than traditional economic theory that assumes human economic behavior can be accurately predicted based on a model of human behavior that resembles no human being who has ever lived. As an example of the divergence between Econs and humans, Thaler offers the example of a bowl of cashews on the coffee table before dinner. You may like cashews. You may enjoy having cashews before dinner--but you probably don't want to eat so many that you spoil your dinner. What's the sensible thing to do?

The Econ, homo economicus, who always makes completely rational decisions, just stops eating the cashews when he decides he's had enough. The ordinary, real, human being who really wants to stop eating before eating enough to spoil dinner, is more likely to take that cashew bowl and put it away, so that it's not sitting there as a temptation.

And, once you allow for the fact of real human beings rather than Econs, that's a completely rational decision. It's also one that the Econ would never understand. Either you prefer to stop eating cashews, so you do, or you prefer to keep eating cashews, so you do. No need to move the bowl!

More directly economic matters are the cab driver who works each day until he's hit his target income for the day, and then ends his work day. This means he works more hours when earning is low, and fewer hours on the days when earning is good. From the point of view of homo economicus, this is insane. It's just not worth working that many hours when pay is bad, but on the days when pay is good, he could boost his total income by working more hours! From the viewpoint of income maximization, this is completely rational, and Thaler agrees. It's a mistake not to take advantage of the high-pay days, and knock off early when the pay is bad. I'm not sure income maximization is the only consideration here, but it's quite reasonable for an economist to think it should be.

More interesting are strange anomalies in the part of the economy that, it would seem, should be most rational, the stock market. Surely most of the money in the stock market is invested or managed by professionals able to master all available information and make rational decisions, right?

Turns out, not so much. Even the professionals can succumb to irrational exuberance, over- or under-estimate value and risk, and find themselves unable to properly exploit market inefficiencies (which are not supposed to exist), even when they recognize them.

It's a fascinating, enlightening, entertaining book, well worth your time. Recommended.

I bought this audiobook. ( )
  LisCarey | Sep 19, 2018 |
Very good book - easy read and I enjoyed the stories and the points. Probably the only reasons it isn't 5 stars for me are that it is a little less rigorous (but with the trade-off of being more accessible, which is clearly its goal) and I've already heard basically all the research many times before by now based on my general interest in the topic and having read so many other related books first. ( )
  TravbudJ | Sep 15, 2018 |
If you are interested in behavioral economics at all...Read this book. If you are interested in psychology or economics, then I would suggest considering this book. ( )
  JustinKimball | Feb 14, 2018 |
Somewhat interesting account of how economics and finance were not predicting real world outcomes so that Mr. Thaler and others were pressed to re-think current theory and devise new theories and testing methods. ( )
  ShadowBarbara | Jan 27, 2017 |
Who knew behavioral economics were so incredibly interesting? Richard Thaler, obviously, Throughout this very readable book, he gives relatable examples and helps readers--even those of us who haven't taken an econ class in years--understand his argument. ( )
  evymac | Oct 20, 2016 |
Thaler is one of the founders of "behavioral economics", and this book describes the evolution of that approach with wit and verve. Behavioral economics, of course, is based on the observation that real people don't behave like the rational economic actors of mainstream economic theory. For a long time, these divergences, or anomalies as Thaler calls them, were dismissed as trivial "noise" that didn't challenge the underlying assumption. But as time passed, and Thaler and a growing cohort of like-minded economists found more and more anomalies, it got harder and harder to argue that they didn't matter. At present, behavioral economics hasn't taken over the field: the classical model is still taught, and still beloved in many quarters. That may be because behavioral economics has nothing like the coherent and even beautiful theoretical underpinning of the classical model; an understandable reason for sticking with the assumption of rationality, but not a good one.

So where does this leave us? It should leave economics a humbler but more helpful field of study. Basing theories on observed behavior rather than on axioms about behavior should provide a more accurate description of how economic actors work, and thus lead to sounder policy prescriptions. For individuals, knowing something about behavioral economics can be very, very helpful -- knowing that many people make the wrong financial choices can help one to avoid those choices. In that regard, Thaler's discussion of investor behavior could be used as the basis of a useful checklist on investment decisions -- I will not let loss aversion make me panic, I will not overtrade, etc. etc.

The book is fun to read, as well as very enlightening. I recommend it highly, especially to anyone involved in financial markets. ( )
  annbury | Jan 4, 2016 |
Richard H. Thaler is one of the foremost proponents of a field of inquiry now known as “Behavioral Economics.” He achieved a degree of fame with the general public after his best-selling book Nudge, which he co-authored with Cass Sunstein. His latest book, Misbehaving, is part memoire, part history of academic economics, and thoroughly enjoyable and stimulating.

In Thaler’s view, the field of economics took a wrong turn in the mid 20th century when its practitioners attempted to make it more “scientific” than other social sciences by subjecting its precepts to rigorous mathematical models. The problem is that although mathematics is perfectly consistent, actual people aren’t.

Modern economists erected a mathematically elegant and consistent edifice of economic theory based on the assumption that people would act rationally in the sense that they would always maximize their economic well-being. Thaler calls the automaton-like individuals described by such theory “Econs” (as opposed to "Humans"), because early in his career he noticed that real people often did not behave like these theoretical beings. He began to collect anecdotes of situations in which most or at least many people did not act as if they rationally calculate their maximum economic benefit.

Among the “anomalies” he cites are:

•The “Sunk Cost Fallacy”--During a snowstorm, we might not drive to a concert if we had been given the tickets for free, but we tend to risk life and limb to go if we had paid for the tickets. The risk on the roads is the same, and we don't get the money back either way.

•"Endowment Effect"--People consistently assign greater value to things they possess than they might think was a reasonable price before they owned the object.

•"Mental Accounting”--People tend to put money into mental compartments and treat the money in each compartment differently, whereas Econs would make no such distinctions; the compartments are only mental constructs and are not real, but they help many Humans manage their money.

Thaler acknowledges a debt to Daniel Kahneman, the only psychologist to win a Nobel Prize in economics, for many insights into seemingly irrational behavior. He also crosses swords with, and names names, among today’s eminent economists, most of whom are members of the faculty at the University of Chicago, and with whom he has disagreed over the years. In particular, he contrasts his views with those of two Nobel laureates, Merton Miller and Eugene Fama, the high priests of efficient markets.

Misbehaving is a good introduction to behavioral economics because of Thaler’s lively wit and easy conversational style. A lay person is unlikely to get lost in the technical distinctions between Thaler’s theories and the “Chicago School” of economics. Ironically, Thaler also teaches at the University of Chicago. Persons interested in pursuing these ideas further should also read Nudge, mentioned above, and Kahneman’s Thinking, Fast and Slow.

(JAB) ( )
  nbmars | Oct 11, 2015 |
Very insightful, very cleverly written. This book is a nice follow- up to NUDGE and to "Thinking-Fast-and-Slow" by his colleagues/mentors. Very enjoyable reading for the 'layman' social scientist! . ( )
  JosephKing6602 | Sep 14, 2015 |
Didn’t finish. Nice ideas but boring too academic delivery. ( )
  stickersthatmatter | May 29, 2023 |
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