Misbehaving: The Making of Behavioral Economics
by Richard H. Thaler
Once upon a time, many economists believed that people were rational creatures, at least when it comes to money. Their idealized consumers and investors based their choices on what to buy, what to sell, how much to spend, and how much to save, on objective data and sound reasoning, with the ultimate goal of personal financial gain. When it came to economics, they believed, people were best seen as selfish, money-maximizing algorithms.
Obviously, those economists had never spent much time around real people. But that’s what they thought, and they constructed economic models and public policy recommendations founded on that fundamentally flawed hypothesis. The results have been less than optimal for real people. Unfortunately, other than for stock bubbles, this book doesn’t address those in much detail.
In Misbehaving, behavioral economist Richard Thaler tells us how this paradigm came to be challenged over the last half century. In the 1970s, he was among a small, outsider group that proposed that since economics is a human activity, one must understand humans to properly understand economics. Not an easy task, for sure, but how people actually behave must be factored into the equation. Economics is as much psychology as math. This isn’t a new idea. One of the most influential economists of modern times, John Maynard Keynes, knew it well, but somehow over the years, it had either been forgotten or intentionally ignored. This book does not provide the history of how this came to be or, perhaps more interestingly, why.
Misbehaving provides a brief history of the emergence of behavioral economics as a recognized academic field. It introduces some of the key players, the basic ideas, and the flaws of the paradigm it seeks to displace. It’s presented as if behavioral economics is a new and revolutionary idea. It may be. I’m not an economics insider. The most surprising thing to me is that a revolution is needed. How could anyone have ever seriously considered an economic theory that ignored how people actually behave in the first place? How did they believe it might provide meaningful insights? Surely they must have known that humans are not inherently selfish, that their behavior is not predominately rational, and that they don’t assign value to things purely in terms of how much money they might be traded for. Assumptions to the contrary are not only wrong, they are blindly ignorant of what humans are.