Misbehaving

The Making of Behavioral Economics

By: Richard H. Thaler

Narrated by: L. J. Ganser

Get ready to change the way you think about economics.

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 listeners 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.

Download the accompanying reference guide.©2015 Richard H. Thaler (P)2015 Audible, Inc.

General law, or examples?

Behavioral economics had a rough ride in economics. It is accused of the one greatest sin of economic theory: to make up its assumptions on the fly, as a function of the facts to explain, and a parsimonious over-arching theory.

Richard Thaler is a well-known contributor and advocate of behavioral economics. In his work, he carefully presents the evidence and offers a masterly explanation of the various theories, going to beginner's material to advanced topic that would be relevant to a graduate level course, such as:

a. loss aversion: people evaluate a loss relative to their current welfare rather than evaluating utility in absolute terms.

b. transactional utility: people get an extra utility boost (loss) if the purchase is a good deal (ripoffs).

c. hyperbolic discounting: people do not weight the utility of their future self in the present, as their future self will in the future, that is, Ulysses ties himself to a pole because he knows his future self will certainly go take a closer look at the sirens..

..among many other examples..

Thaler's book is clearly inspired from Kahneman's excellent piece "Thinking, Fast and Slow,"
but falls short from where Kahneman shines: that is, to provide a simple general principle to organize a vast body of behavioral research. Instead, Thaler's treatment is via anomalies, describing a cohort of facts that falsify orthodox rational choice. One falsification, it may be argued, is not enough to give up on a good theory. However, being a good reader of Kuhn's theory of scientific revolution, Thaler argues that we have reached a breaking point. In his opinion, many ad-hoc fixes to these anomalies (sometimes, referred to as rationalizations) no longer cut it as persuasive.

I will hold on on the many examples, which can be found in the book and are truly delightful; but I will give one to give the idea of what he does.

Fact: we see that people do not always make the right choices, in the lab or in the field.
Fix: people learn, they will make the right choice with experience.
Thaler: how much repeated experience do we get of big choices (house, spouse, etc.)?

A critique will note that behavioral economics still has it easy, because its many degrees of freedom give it an unfair fit against more orthodox rational theory, where an agent maximizes a terminal consumption payoff with a certain functional form on the utility function. Even the well-established loss aversion theory has many ways to define the reference point and deviations from that reference. So, the debate between rational and behavioral economics is this: how do we evaluate truth when comparing between more versus less parsimonious theories?

This is where Thaler's book fails to respond to the most obvious critique of the behavioral research agenda. Most of the examples he gives reflect, self-admittedly, very small effects and he is extremely vague on the accomplishments of his consulting activities. For example, he claims success from suggesting to use automatic enrollment into pension plans as the default option - a theme he explored in his earlier book Nudge. This is very nice and is certainly not predicted by rational choice theory; however, it uses almost nothing of the volumes of behavioral research published in economics journals. What it uses is the smallest idea of all behavioral sciences, that is, people make mistakes.

In summary, everyone should read the facts given in Thaler's great work. These facts lay out the problems that will need to be resolved and Thaler is right to note the current potential for a leap forward. It also lays out the proper philosophy that science is backed by facts, not by dogma. That is, that individuals are rational decision-makers should not be accepted as self-evidence truth; it is only to be accepted if it is useful to explain the facts and make predictions. His position is a lot more controversial when he presents behavioral as a 'theory,' rather than a set of disjoint models. Unless it becomes a theory, rational decision theory may be, right or wrong, the only universal theory that we have.

Thinking Fast and slows sequel

If you love thinking fast and slow this is the next book to get. I would also recommend Black Swan.

Great concept, could be a shorter book

This books covers important concepts in Behavioral economics and its history, but as with most pop psychology books, they are too drawn out to give the illusion of greater depth and importance.

Some gems in here

Gets better as it progresses. Every sports team owner and politician should consume this. The art and science of "the nudge" is fascinating.

Very interesting and informative, great performance

I really enjoyed this book. The author pulled together the material in an organized, humorous and relevant way. The downfall was no access to PDFs, which were also difficult to imagine when Listening while driving. I’d recommend this book to anyone who wants to broaden their knowledge of this area of study. I’m encouraged to learn more applications of this research direction after listening to this book.

very insightful

this book was easy to follow and a very interesting topic. makes me almost brave enough to retake my microeconomics class.

Fascinating Insights about Human Misbehaviour

Really enjoyed the book. Anyone looking to get an overview of Behavioral economics should read it.

Behavioral Economics

Excellent discussion of the growth and relevance of Behavioral Economics and Richard Thaler’s participation therein.

Complex economic concepts translated with simple words!!

It is admirable how the author translates almost 40 years of researches in Behavioral economics with simple words.
The only reason why I didn’t 5 starred the book is because is some sections, too much emphasis was given on the personal relationship between author and some of his fellows.
Anyway - it’s worth reading it!

Lots of great data

Well narrated and very insightful review of empirical/pragmatic economics. I ended up buying the book in hard copy so I could more easily review the tables and graphs referenced throughout. However this was not necessary as the points made very understandable without visual references.