We aren't (really) rational actors.
Many of the decisions we make defy traditional theories of economics.
I’m baaaaaaaaaaack! The last half of the month of August was singularly focused on one thing and one thing only: getting my daughter squared away at UT Austin. Done and done. She’s loving her new home. Mom and Dad are happy.
Misbehaving: The Making of Behavioral Economics
By Richard Thaler
Grade: 98
Fun—and true—fact: Were I a college student today, there is no doubt in my mind that I would choose behavioral economics, which combines economics and psychology, as a major. (I was a biophych major instead, focused on neuroscience.) The field combines two areas that interest me greatly, but also it represents an area of study that highlights how much of what we thought we knew about human decision-making was wrong.
Nobel laureate Richard Thaler, a pioneer in behavioral economics, delivers a master’s-level education with Misbehaving, a book that literally had me seated at my desk for hours upon hours. Thaler shares how he and other behavioral economists challenged the traditional view of economics, which assumed that people are rational actors.
He argues that people are actually "predictable, error-prone individuals" influenced by a variety of factors: emotions, social norms, and cognitive biases. Using humor and personal anecdotes to illustrate his points, he delivers hard-hitting insight and analysis into how behavioral economics can be applied to real-world problems, such as retirement savings and health insurance.
Mind-blowing thoughts & theories
The primary reasons the book had me mesmerized from beginning to end was its introduction and explanation of novel theories that help make sense of day to day life. For example, the endowment effect, explains how we attach value to things that we own. Sounds simple enough, but in action, it's amazing to see how the same item is valued less when we don't own it. That is, my laptop is worth $1,000, but I'm only willing to give you $800 for the same laptop. Totally irrational.
Or loss aversion, which explains how the pain we feel from losing at something eclipses the feelings of pleasure that comes from a win. (This helps explain how I mope for days when my NFL team loses the Super Bowl, but the feelings of bliss after a win appear fleeting.)
The book is divided into three parts. The first part, "The Misbehavior of Economic Man," describes the traditional view of economics and how it fails to account for human behavior. The second part, "The Rise of Behavioral Economics," tells the story of how Thaler and other behavioral economists developed a new way of thinking about economics that takes into account human biases and limitations. The third part, "The Future of Behavioral Economics," explores how behavioral economics can be used to improve our lives and make the world a better place.
A short list of best books
In some ways, each book I read is my favorite. But Misbehaving is by far one of the most illuminating books I’ve read in over a decade. Anyone interested in understanding how human behavior shapes the economy would thoroughly enjoy the book.