Many traditional economic theories assume that individuals, who look to maximise their own benefits or utility, are rational. Yet human beings – as a result of human psychology and heuristics – are not always rational and are error-prone, and therefore do not act in accordance with economic theories or models. In other words, they misbehave, with serious ramifications that are not consistent with the “fictional creatures that populate economic models”. Building on the co-authored “Nudge”, which introduced the concepts of choice architecture and that of “libertarian paternalism” (both of which are highlighted in this book), and through which changes to seemingly small details can bring about big behavioural changes, Richard Thaler’s “Misbehaving: The Making of Behavioural Economics” is a primer on behavioural economics, and how such analyses of the psychological factors of individuals (previously dismissed as “supposedly irrelevant factors”, or SIFs) have and can improve decision-making for the collective.
Across the eight chapters and the 33 sections, the latest recipient of the Nobel Memorial Prize in Economic Sciences in 2017 topically and chronologically detailed the evolution of behavioural economics and how his personal career evolved through the decades. Also frequently referenced is Daniel Kahneman’s “Thinking, Fast and Slow”, which explained the study of judgement heuristics and the difficulties of statistical thinking. Thaler’s book, however, is especially enjoyable, because of the real-world and public-policy implications which are constantly fleshed out. This is the “so what?” question: How good human psychology, the social sciences, and behavioural economics may be used to solve actual problems. From gambling at poker tables to draft picks in American football, the diverse range of applications should prompt the reader to think about the extent to which these seemingly academic concepts may actually be used. And furthermore to think of policies for misbehaving “Humans”, not just “Econs”.
As such too, in spite of some academic concepts or technical explanations, “Misbehaving” is an accessible read. An overview of how researchers used the two approaches of randomised control trial experiments and naturally occurring experiments proved instructive. In particular, the chapter on the television game shows “Deal or No Deal” and “Golden Balls” chronicled how he obtained research data to show financial misbehaviour, though the exposition on the sub-field of behavioural finance – “[empirically] finding and documenting anomalies, both in individual and firm behaviour and in market prices”, while developing theory” was a little more dense. Still, the practicality of the book is underscored at the end, with strategies to overcome the common behavioural obstacles of inertia, loss aversion, and self-control: To observe (so as to make it easy to encourage someone to do something), to collect data (and evidence), to learn how to learn, and to speak up.