Note: This review is by my husband Jim.
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.
Published by W. W. Norton & Company, 2015