"Misbehaving: The Making of Behavioral Economics" is an important work by Richard Thaler that delves into the formation of behavioral economics and its challenges to traditional economics. The book is sprinkled with interesting stories of Thaler's intense confrontations with traditional economic thought, exploring the deep-seated weaknesses of human beings in a unique way. When economics meets psychology, the sparks that fly will have profound and enlightening effects on individuals, managers, and decision-makers.#
Here are the main contents and notes of the book:
"The foundation of political economy, or more broadly, the foundation of every social science, is clearly psychology. One day, we will surely be able to derive the laws of social science from the principles of psychology."
—Vilfredo Pareto, 1906
My interest in behavior and psychology began eight years ago (in 2012) when I read a book titled "The Happiness Advantage: The Seven Principles of Positive Psychology That Fuel Success and Performance at Work," which introduced the "20-Second Rule: Minimize the Barriers to Change." This concept still resonates with me, and I continually practice it in my life, benefiting greatly from it.
Since then, I have been adding more books on psychology and behavioral economics to my reading list, feeling a sense of regret for not discovering them sooner. Recently, I fluidly finished reading "Misbehaving: The Making of Behavioral Economics," which deepened my thoughts about changing careers.
The author uses 400 pages to narrate the emergence, development, and future of behavioral economics, combining various real-life cases with scientific experiments to refute traditional economic theories such as the "rational economic man" and the "efficient market hypothesis," proving the scientific nature and practical significance of behavioral economics. The logical reasoning and experimental processes discussed are both accessible and beneficial for enhancing thinking and cognition.
The author has made significant contributions to consumer choice, self-control, saving behavior, and finance by applying interdisciplinary knowledge from game theory, finance, labor economics, and psychology. In the book, the author eloquently discusses his research on the endowment effect, intertemporal choice, mental accounting, saving theory, sunk costs, and behavioral finance theory, providing detailed introductions and analyses of various theoretical anomalies, experimental processes, and real-world applications, which hold strong practical guidance for "ordinary people."
In 2017, Richard Thaler was awarded the Nobel Prize in Economics for his contributions to behavioral economics. "Misbehaving: The Making of Behavioral Economics," as one of his trilogy, serves as both an introduction to the history of behavioral economics and the author's academic autobiography, making it an excellent introductory book on the subject.
Additionally, the book cites and introduces a wealth of academic papers, blending academic rigor with engaging narratives, even sparking a slight interest in research...
Misbehaving: The Making of Behavioral Economics#
0.1.1 Author: Michelle Pimentel#
Author: Richard H. Thaler
Reviewer: Michelle Pimentel, AFC®
Richard H. Thaler, a professor at the University of Chicago and a behavioral economist, reflects on his lifelong efforts to establish and legitimize behavioral economics in his latest work, "Misbehaving." Thaler defines "misbehavior" as "behavior that is inconsistent with the ideal behavioral patterns in economic theory," which does not exist in traditional economic models and can have harmful effects. In this book, Thaler elaborates on the many differences between "human" behavior and the completely rational behavior of the "economic man" (the participant used in most economic models), and how incorporating more realistic assumptions into these models can bring tangible benefits to people.
The author mainly clarifies his points through anecdotes and research, making this 400-page economics book both quick and enjoyable to read. Students of economics and finance may find his disruptive views on traditional economic and financial theories both interesting and frustrating, as he reports on many colleagues. Since 1970, he has seized numerous opportunities throughout his career to highlight the flaws of these long-held models and recounts many of his "struggles" with traditionalists throughout the book.
As a social science widely used to influence public policy, Thaler believes that economics should be a force for good and proposes several ways that government and corporate policies can leverage predictable human "misbehavior" to "nudge" people toward better choices. One well-known example he provides is suggesting that employers design their retirement plans so that employees "opt out" rather than "opt in," allowing employees to start participating in retirement plans with minimal action required. He also advocates for a strategy called "Save More Tomorrow," where the percentage of contributions to employer-sponsored retirement accounts automatically increases when employees receive raises.
A key component of behavioral economics is the focus on "humans" (rather than "economic men") and the rationally irrelevant factors (which he calls "supposedly irrelevant factors," or SIFs). Sunk costs are one such SIF. For example, he gives an example where he and his friends would drive under unsafe conditions to see a basketball game if they had paid a high price for tickets; however, if the tickets were a gift, they would wisely choose to stay home. He asserts that most of us believe that if we do not gain anything, it is a waste of money, even though the money is spent regardless of whether we watch the game. Rational thinking suggests that the sunk cost of the ticket is irrelevant to the safety of the road conditions, and thus our decisions should be the same in either case.
Another SIF is sensitivity to changes rather than absolute wealth or value. According to Thaler, most people tend to perceive discounted items as better deals because the discounted price represents a reduction in the amount we have to pay compared to the manufacturer's suggested retail price (MSRP) and other main costs. Therefore, normally priced items are often less attractive than similar items when discounted at the same price. As a result, we may miss out on "transaction utility," or the feeling of having just scored a great deal. Rational actors would not have a preference if the price and quality of the items are the same, but "misbehaving" consumers would prefer discounted items.
Another interesting financial topic discussed in the book is the principle of rational economics, which states that money is fungible or freely exchangeable, meaning it should flow to the most profitable or most needed categories. People tend to treat money as having different values based on the categories it is allocated to. For example, Thaler cites a study that attributes the success of tax-advantaged retirement savings accounts (IRAs, 401(k)s, etc.) to savers treating separate designated accounts as taboo, while moderate increases in savings rates are attributed solely to actual tax benefits.
A key point that financial advisors can leverage is to suggest small but effective measures based on known "misbehaviors" to increase the likelihood of success, such as automatic savings strategies. This can also serve as a useful perspective for examining our own financial habits to identify areas for improvement. Thaler believes that inertia favors the status quo, and carefully examining our own behaviors may help us change our perceptions of money and consumption habits, thereby promoting positive change.
"Misbehaving" is definitely worth a read. The book is humorous, engaging, thought-provoking, and insightful. It provides excellent explanations of complex theories, and although the author often praises behavioral economics over traditional methodologies, the book seems to offer a fair analysis of this latest branch of economics.
Michelle Pimentel is a recipient of the FINRA Military Spouse Scholarship and has been an AFC® since 2010. She has been working in personal finance since 2007 and has passed the CFP® exam, making her a candidate for CFP® certification. She is currently a personal finance advisor at Zeiders Enterprises, Inc., serving U.S. Air Force members in Okinawa, Japan.