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"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"--Amazon.com.
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LibraryThing member JosephKing6602
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! .
LibraryThing member nbmars
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
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)
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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)
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LibraryThing member annbury
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
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.
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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.
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LibraryThing member evymac
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.
LibraryThing member ShadowBarbara
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.
LibraryThing member LisCarey
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
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.
Traditional economics operates on the theory of the rational economic person--homo economicus, or as Thaler shortens it for
Show More
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.
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LibraryThing member malcrf
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.
LibraryThing member writemoves
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
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.
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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.
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LibraryThing member martialalex92
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
LibraryThing member Dilip-Kumar
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
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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. Show Less
Language
ISBN
9780393246773
Awards
The Economist Best Books (2015.5)
Financial Times and Schroders Business Book of the Year (Longlist — 2015)
Los Angeles Public Library Best of the Year (Non-Fiction — 2015)