‘I began to have deviant thoughts about economic theory while I was a graduate student.’ So begins Richard Thaler’s account of the making of behavioural economics, a discipline he in large part founded. You can judge the tone of the book from this one sentence: Thaler has a good sense of humour and a keen eye for the absurd.
Short of something by Michael Lewis, this is one of the most accessible books on economics or finance you can find. Well-chosen anecdotes and examples help to bring otherwise dry subjects to life, important for a book that touches on so many different areas of economics.
The book itself largely proceeds chronologically. As Thaler himself acknowledges, he was lucky to bump into two Israeli psychologists at the start of his career, Daniel Kahneman and Amos Tversky, whose work on describing the way people choose between probabilistic alternatives was important to jump-starting behavioural economics.
The first part of Misbehaving largely deals with the aspects of behavioural economics that you might already be familiar with. We encounter common human fallibilities like placing a higher value on something you already own or obsessing over sunk costs.
When you model human behaviour under traditional economic assumptions, you fall prey to a host of problems. Thaler argues that traditional economics overlooks what he calls ‘supposedly irrelevant factors (SIFs), all the things that influence our decision making, even if they are not relevant from a rational standpoint.
While the early part of Misbehaving presents behavioural economics as bit of a rebellion, we see the discipline becoming more established by the end of the book. As Thaler himself notes, by the time the book was published in the US, he was in the midst of a one-year term as the president of the American Economic Association.
Thaler is not precious about his field. He acknowledges that much of the success of behavioural economics has come from the insights of other fields like psychology. And while behavioural economics has made a significant contribution to areas like financial economics, there has been relatively little impact on macroeconomics, or the study of how economies behave. If a government wants to cut taxes to mitigate a recession, for example, how can it actually ensure people spend their tax windfall?
Behavioural economists still have plenty of work to do then. But if you want a summary or explanation of what they have achieved thus far, Misbehaving is an entertaining and informative guide.