Misbehaving: The Making of Behavioural Economics by Richard H. Thaler Download (read online) free eBook .pdf.epub.kindle

Misbehaving: The Making of Behavioural Economics

ECONOMIST, FINANCIAL TIMES and EVENING STANDARD BOOKS OF THE YEAR 2015

Shortlisted for the Financial Times and McKinsey Business Book of the Year Award

From the renowned and entertaining behavioural economist and co-author of the seminal work Nudge, Misbehaving is an irreverent and enlightening look into human foibles. Traditional economics assumes that rational forces shape

From the renowned and entertaining behavioural economist and co-author of the seminal work Nudge, Misbehaving is an irreverent and enlightening look into human foibles. Traditional economics assumes that rational forces shape everything. Behavioural economics knows better. Richard Thaler has spent his career studying the notion that humans are central to the economy – and that we’re error-prone individuals, not Spock-like automatons. Now behavioural economics is hugely influential, changing the way we think not just about money, but about ourselves, our world and all kinds of everyday decisions.

Whether buying an alarm clock, selling football tickets, or applying for a mortgage, we all succumb to biases and make decisions that deviate from the standards of rationality assumed by economists. In other words, we misbehave. Dismissed at first by economists as an amusing sideshow, the study of human miscalculations and their effects on markets now drives efforts to make better decisions in our lives, our businesses, and our governments.

Coupling recent discoveries in human psychology with a practical understanding of incentives and market behaviour, Thaler enlightens readers about how to make smarter decisions in an increasingly mystifying world. He reveals how behavioural economic analysis opens up new ways to look at everything from household finance to assigning faculty offices in a new building, to TV quiz shows, sports transfer seasons, and businesses like Uber.

When economics meets psychology, the implications for individuals, managers and policy makers are both profound and entertaining.
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    Athan Tolis

    He’s taken his time and he’s waited his turn, but Richard Thaler has delivered the definitive book on Behavioral Economics, the one you can’t afford to miss. It’s a summary of the main findings, a history of how they came about and a preview of coming attractions, with due care taken to pay tribute to those who came before Thaler and apportion credit to those who worked with him.

    The field is not as new as Thaler would have you think. There’s bias in this account and it is a bias against those am

    The field is not as new as Thaler would have you think. There’s bias in this account and it is a bias against those among his predecessors who tried to explain human behavior in a way that was consistent with mainstream economic theory. I’m thinking Gary Becker here (who tried to explain long lines outside empty clubs and packed cheap restaurants alike using an “upward sloping demand curve” and famously sat down to write a paper on suicide when his wife took her own life); I’m thinking the very same Robert Barro that Thaler makes fun of when he describes him as the smartest man ever, but who nonetheless made me understand in his book “Getting it Right” why superstars could get paid so much in a zero-sum game and got confirmation to his theory when Maradona got paid more than the rest of his team, Napoli, put together, and justifiably so because he not only took them to the Campionato, but also deprived much more fancied teams from winning it.

    Thaler’s predecessors operated in a world where most Economics books had to start with a chapter explaining why Economics is a science. Of course they had to stick to the utility-maximizing / profit-maximizing orthodoxy! Besides, orthodox economic theory was not all that shabby when it came to predicting human behavior.

    By the time Thaler was entering his prime, Economics no longer had to apologize to anybody and was much more open to heresy, of course. It was in a position to withstand additional questioning. Armed with a nice piece of math invented by Tversky and Kahneman it was ready to be taken to the next level.

    Thaler takes you through the whole thing in the space of the shortest 358 pages you will ever read. As he promises at the start, he tells it through a bunch of stories, mostly the stories of his collaborations and his epic fights with Economic Orthodoxy.

    The book is worth reading for the humor alone. The jokes range from pure slapstick (example p. 128: “we were trying to learn what ordinary citizens, albeit Canadians, think is fair”) to the esoteric inside joke, like when he mentions Vishny is a common co-author of Shleifer (to the best of my knowledge he’s never written a paper without Shleifer). If you’re not laughing the whole time, basically, there are squadrons of jokes flying over your head. My favorite type of humor, relentless repetition, is also very well represented. I lost count of the number of times I read the expression “invisible handwave.” The man is irrepressible, basically. You can’t keep him down.

    There’s a sadness that goes with this too, and it’s that this is a bit of a category killer. “Misbehaving” Pareto-dominates all behavioral economics books that precede it in terms of readability, context, scope, you name it. I don’t know what I would do with myself if I was Dan Ariely or if I was Steven Levitt (Roe v. Wade findings notwithstanding), to say nothing of Tim Hartford. They now have to accept that there’s a book out there that beats their entire life’s work on all fronts.

    The long problem set masquerading as a re-interpretation of behavioral economics that is Kahneman’s “Thinking Fast and Slow” is the only true exception to the rule, it continues to stand alone, but relative to “Misbehaving” it’s a cop-out. As he told Michael Lewis in the interview that preceded that book, Kahnemann did not want to write the history of the field, he did not want the book to have the feel of one’s last book. So the door was left wide open to Kahneman’s self-admittedly “lazy” student to jump into the breach.

    This he has done with gusto.

    Prospect Theory (how we are risk averse when we’re winning and risk loving when we’re losing) is taught straight from Tversky and Kahneman’s 1976 graph and is used to explain: (i) transaction utility, including Costco’s business model (ii) sunk costs (i.e. why you will carry on wearing an uncomfortable pair of shoes you paid 300 dollars for) (iii) the endowment effect (including later in the book how it undermines the Coase theorem) and (iv) “gambling with the house’s money” at the casino, versus the fact that outsiders get overpriced toward the end of the day at the racetrack. Bucketing of budgets gets thrown in for free.

    Next comes a tutorial on Self-Control. Thaler explains that many humans discount future pleasure (or pain) on a scale that is totally unrelated to how we present-value bond cashflows and mainly operates on three levels: Now (intense), Later (much less intense) and Much Later (only slightly less intense than Later). This leads to preferences that are intertemporally inconsistent, a nightmare to Economic Orthodoxy, but very often true in real life. Heady stuff, and I promise, he makes it clear. He does not use graphs or charts or math. He explains it all with one picture: the famous cover of New Yorker magazine where everything this side of the Hudson is rendered in great detail, New Jersey through to California takes up as much space as West Manhattan and Asia is visible behind. You get that chart, you get how we humans really think about delayed gratification. Genius.

    A chapter follows which is a summary of “Thinking Fast and Slow” but without trying to shoehorn the rest of Behavioral Economics into that model.

    The next couple chapters deal with Fairness (the Ultimatum Game, the Dictator Game, the Punishment Game, cooperation games such as the Prisoner’s Dilemma) and a revisit of the Endowment Effect as exemplified by the trading of Mugs with capital M. Then Thaler attacks Finance and the Efficient Market Hypothesis in Particular.

    Not that anybody sane thinks markets are efficient, but you could tear out the rest of the book and keep pages 203 to 253 as a quick guide to why markets are inefficient. Thaler starts with Keynes’ “beauty contest” analogy for stock picking (we pick the girl we think most other people will like, not the one we really fancy). Next he explains why a stock ought to be worth the net present value of its dividends and takes the reader through Shiller’s discovery that stocks move around tons more than dividends do (or can be reasonably expected to do), which proves they wander around tons relative to what they will ever pay out. He offers additional proof by going through closed-end funds’ variation from their NPV and gets some serious kicks from pointing out that stocks on occasion sell for less than the market value of their listed subsidiaries. He’s a bit of a showman, Thaler, he calls this “negative stock prices.”

    From there he goes for the kill and notes that Royal Dutch Shell shares have a different price in New York versus Europe, and never more so than they did during the blow-up of LTCM, providing a real-life example of Shleifer and Vishny’s mathematical formalization of Keynes’ old aphorism that “the market can stay irrational for longer than you can stay solvent.”

    At some point, Chicago had to follow Al Pacino’s view that “you keep your friends close and your enemies closer” and put him on the faculty. From his angle, it was time to storm the citadel, and this is what Thaler chronicles next.

    He had been ready for them from day one. The book actually starts with “The Gauntlet,” which is the series of challenges orthodox economists lay out for the behavioral crowd:

    1. The “As If” challenge states that even if nobody is an expert in everything, society operates as if we all were, because through division of labor we all end up doing things we understand.
    2. The “Incentives” challenge states that people respond to incentives once the stakes are large enough. All the wishy washy behavioral stuff washes away once we’re talking real money.
    3. The “Learning” challenge states that even if we get it wrong in “one-shot” games, in real life most games are “repeated” and behavior thus converges to what Orthodox Economics would suggest.
    4. The “Invisible Hand” argument states that if we all go about doing what’s best for us we nevertheless end up doing what’s right for everyone else as well.

    Won’t spoil it for you and take you through Thaler’s answers to the above. It’s after all what the book is really all about. But forgive me one indulgence, I’ve GOT to tell you about the bit where he demolishes Robert Barro:

    The Rational Expectations Hypothesis has a number of implications, chief amongst them the prediction that fiscal stimulus does not work. If the government writes you a check, the story goes, you know you’ll be taxed for it in the future, so you save it rather than spend it. And the stimulus ends up being a damp squib. Thaler proves the circularity of this argument by suggesting a similarly circular counter-argument: what if the rational agents that compose this economy believed in Keynes’ multiplier? What if they thought the stimulus will work and the economy will fly and their taxes will actually go down? Should they spend TWICE the check they were sent?

    From Chicago he goes on to a couple (well-earned) victory laps. He applies Behavioral Economics to Americal Football, where he advised three separate teams on how to conduct their affairs during the annual draft, to game shows he was allowed to set up with Endemol, where he proved that his theories can withstand some pretty high stakes and from there onto “nudging” people to contribute more to their pension and pay their taxes on time.

    He ends the book with a wish that one day there will be one Economics again, with the Orthodox Economics of utility maximization and profit maximization as a quaint special case. We’re probably already there.
    …more

    Caroline

    Apr 09, 2016

    rated it
    it was ok

     · 
    review of another edition

    Recommended to Caroline by:
    Phan Tung
    Shelves:
    economics

    Thaler was one of the people who brought behavioural economics into being – and this book covers the story of his journey. He says that classic economics describes man as a logical creature, and bases its theories upon this idealised figure. In behavioural economics on the other hand, humans do a lot of misbehaving.

    Herewith some odd nuggets and asides I picked from the book. (view spoiler)

    *Economics is considered the most intellectually powerful of the social sciences, this is because it has a


    Herewith some odd nuggets and asides I picked from the book. (view spoiler)

    *Economics is considered the most intellectually powerful of the social sciences, this is because it has a unified core theory from which nearly everything else follows. In fact economists often compare their field to physics.

    *Losses of what we already have hurt us substantially more than new gains satisfy us. It gives us some pleasure to gain something, but it distresses us far more to lose something.

    *Changes are the way that human beings experience life; eg if you move from your office to a meeting room and the temperature is the same – you won’t give the issue of temperature a second thought. You will only notice if the meeting room is unusually hot or cold in relation to the rest of the building. When we have adapted to our environment we tend to ignore it. Instead we notice changes. They can be changes from the status quo, or changes from what was expected…but whatever form they take, it’s changes that make us happy or miserable.

    * We learn via frequent practice and immediate feedback. We are therefore much more likely to learn in relation to the trivia in our lives (eg what sort of type of bread we like), than in relation to the really big stuff (eg what sort of house to buy, or wife to choose.) Learning takes practice, and often we don’t get practice with the big stuff.

    *Human beings love a bargain. Shops that have tried to do away with coupons, or round up prices to a more realistic figure (eg $4.00 rather than $3.99), or do away with fake ‘special offers’, have often had to change back to these practices . The customers want the bargains, or at least an impression of bargains….. or sales plummet.

    *The one alternative to the above are retailers like Walmart and Costco, where the retailers successfully operate under an everyday low pricing strategy. They have convinced customers that their entire shopping experience is an orgy of bargain hunting.

    *Sunk costs

    This is when an amount of money has been spent and the money cannot be retrieved. eg Joyce bought three dresses for her six year old daughter Cindy to wear to school, but Cindy decided she wouldn’t go to school if forced to wear dresses. In this instance Joyce has to let go of the money she spent on the dresses, but she finds it very difficult to do this. We all do. Phrases like “Don’t cry over spilt milk” or “Cut your losses and move on” are another way of taking advice to ignore sunk costs. Many believe that the US continued its futile war in Vietnam because they had invested too much to quit.

    *Lotteries are a very good way of getting people to take part in something. eg if you want people to take part in a survey offer the prize of a nice bottle of wine or whatever.

    *People hate it when a company appears to be acting greedily. eg Uber practices “surge pricing”, whereby prices fluctuate depending upon levels of demand. Sometimes there is a big difference between low and peak demand, as much as ten times the regular price. There have been a lot of complaints from clients about this practice.

    *Experimental games have also shown that people put much more money into a game if they are able to punish freeloaders. We are quite obsessed with fairness, in all aspects of life.

    *We like keeping the status quo. We often find change difficult.

    * Collaboration….
    Although there are a handful of psychologists who have formed successful collaborations with economists over the years, behavioural economics has turned out to be primarily a field in which economists read the work of psychologists and then go about the business doing research independently. In neuroscience there is slightly more collaboration. Not all interdisciplinary meetings are a waste of time, but in the author’s experience they have been disappointing.

    *Managers are often risk averse. This is because in most companies, creating a large gain for the company will lead to modest rewards…while creating an equal-sized loss will get you fired. Companies need to create environments that are more benign, so that managers will feel more comfortable taking risks.

    (hide spoiler)]

    Unlike most people I found this book a so-so read, I wasn’t all that gripped. I skipped the section on stocks and shares…
    …more

    Muriel Fang

    Jul 10, 2015

    rated it
    it was amazing

     · 
    review of another edition

    What is the value of ‘Misbehaving’ after ‘Nudge’ and ‘Thinking Fast and Slow’? After all, ‘Thinking’ told us the discovery process by behavior science demigod. ‘Nudge’ explained how to apply behavior science to practical policy-making.

    ‘Misbehaving’ has its value independent from ‘Nudge’ and ‘Thinking’. Unique in ‘Misbehaving’ is a candid account of the struggle getting recognized when your opinions are different from the establishment, a humble understanding on the fortunate events that helped

    ‘Misbehaving’ has its value independent from ‘Nudge’ and ‘Thinking’. Unique in ‘Misbehaving’ is a candid account of the struggle getting recognized when your opinions are different from the establishment, a humble understanding on the fortunate events that helped a young investigator to start – and stand in the field. ‘Misbehaving’ tells the reader many ‘insider baseball’ stories — how Thaler got skinned at conferences / journal submissions (but the tone wasn’t vengeful), and how he got back to his feet and respond with empirical evidence (rather than ideological tautology).

    ‘Nudge’ and ‘Thinking’ read like champions writing home from the finishing line or the celebratory after-party, while ‘Misbehaving’ is Thaler’s account of ‘life as a professional renegade’. This is part of the appeal: don’t we all like a good underdog story? Most of us are, at best, underdogs in our fields, Thaler’s humble ‘renegade-getting-recognized’ story is fuzzily encouraging. In this way, ‘Misbehaving’ reads like a grand-parent writes to the grand-children: sharing the stories of life, and perhaps planting a vague idea that ‘fight-on’ could be fun.

    ‘Misbehaving’ writing reminds me of Richard Feynman’s books in being funny, irreverent, and honest. In the Conclusion chapter, Thaler likened his now mainstream status to ‘The lunatics are running the asylum!’ — You won’t find exclamations like this in either ‘Nudge’ or ‘Thinking’. It reminds me of Feynman on his safe-cracking, or thoughts of ‘cargo cult science’. Thaler comments on a general practice in academia: “As usual after such meetings … both sides were confident that they had won.” Thaler saved some directness for his intellectual opponents — there is no sugar-coating on what he thought of them (“least scientific”). Yes, it is a little easier to be direct and unapologetic after you have turned mainstream and your collaborators have won the Nobel — but the book is direct and honest about himself too. Like this: Thaler recounts how his thesis advisor assessed him: ‘We did not expect much of him’. Enjoy!
    …more