Sept. 1, 2015 by Darius
The basic premise of economics is that people act in their own best interest. But in the real world, do they? That question underpins the field of behavioral economics. I recently read Misbehaving: The Making of Behavioral Economics by one of the founders of modern behavioral economics, Richard Thaler. The book is part Thaler’s memoir reconstructing his career and part an explanation of behavioral economics itself.
When Thaler was a student, economic orthodoxy was built around the Chicago School, best articulated by a group of professors at the University of Chicago (hence the name, obviously). The Chicago School holds that people always make “rational” decisions, those that result in the best outcomes for them over the long term. Thaler, with his characteristic understated humor, dubs the always-rational agents of economic models to be Econs, in contrast to us humans.
In doing his thesis, in which he attempted to quantify the functional value of a human life, Thaler began to notice what he dubbed “anomalies”: instances when standard economic theory failed to predict actual behavior. Misbehaving traces Thaler’s career as he goes from being a graduate student with some wacky ideas about economics to, in a supreme moment of irony, a professor at the University of Chicago. Along the way, it chronicles the work of Thaler and many others in attempting to study and understand these “anomalies.” Among them: loss aversion (the tendency that people would rather avoid a loss than realize a gain), playing with the house’s money (in which gamblers who are currently ahead take more risks because they feel like they are simply spending the money they won), and personal accounting (where most people maintain separate “pots” of money for various expenses, rather than treating all money as fungible).
The rise of behavioral economics (or, if you ask Thaler, the restoration) makes for a compelling and important story. Misbehaving pays homage to many of the great economists and thinkers of the 20th century, lending the book an at times wistful quality, and Thaler’s writing is crisp and concise throughout. Misbehaving is a must-read book for anyone interested in economics.
For Thaler’s talk about Misbehaving, see https://notwhatyoumightthink.wordpress.com/2015/05/29/thinking-aloud-misbehaving-the-making-of-behavioral-economics/.