Misbehaving: The Making of Behavioral Economics

Misbehaving: The Making of Behavioral Economics

Richard H. Thaler

Language: English

Pages: 432

ISBN: 039335279X

Format: PDF / Kindle (mobi) / ePub


Get ready to change the way you think about economics.

Richard H. Thaler has spent his career studying the radical notion that the central agents in the economy are humans―predictable, error-prone individuals. Misbehaving is his arresting, frequently hilarious account of the struggle to bring an academic discipline back down to earth―and change the way we think about economics, ourselves, and our world.

Traditional economics assumes rational actors. Early in his research, Thaler realized these Spock-like automatons were nothing like real people. Whether buying a clock radio, selling basketball 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. More importantly, our misbehavior has serious consequences. 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 behavior, Thaler enlightens readers about how to make smarter decisions in an increasingly mystifying world. He reveals how behavioral economic analysis opens up new ways to look at everything from household finance to assigning faculty offices in a new building, to TV game shows, the NFL draft, and businesses like Uber.

Laced with antic stories of Thaler’s spirited battles with the bastions of traditional economic thinking, Misbehaving is a singular look into profound human foibles. When economics meets psychology, the implications for individuals, managers, and policy makers are both profound and entertaining.

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

 

 

 

 

 

 

 

 

 

 

 

the only thing stopping the Saints from winning a championship soon was the acquisition of one player, a running back named Ricky Williams. The Saints owned the number twelve pick, and Ditka was worried that Williams would be snapped up before their turn came, so he announced publicly that he would be willing to trade away all of his picks if he could get Williams (not the smartest negotiation strategy). When it was the Washington Redskins’ turn at the fifth pick and Ricky Williams was still

you subtract the compensation from the performance value, you obtain the “surplus value” to the team, that is, how much more (or less) performance value the team gets compared to how much it has to pay the player. You can think of it like the profit a team gets from the player over the length of his initial contract. FIGURE 21 The bottom line on this chart shows the surplus value. The thing to notice is that this curve is sloping upward throughout the first round. What this means is that the

doesn’t exist.” In addition, most organizations have an urgent need to learn how to learn, and then commit to this learning in order to accumulate knowledge over time. At the very least this means trying new things and keeping track of what happens. Even better would be to run actual experiments. If no one in your organization knows how to go about running a proper experiment, hire a local behavioral scientist. They are cheaper than lawyers or consultants. Speak up. Many organizational errors

rate of return. It turns out that in the conventional economics world, when the real (inflation-adjusted) interest rate on risk-free assets is low, the equity premium cannot be very large. And in the time period they studied, the real rate of return on Treasury bills was less than 1%. ‡   That might not look like a big difference, but it is huge. It takes seventy years for a portfolio to double if it’s growing at 1% per year, and fifty-two years if it’s growing at 1.35%, but only ten years if

in the final two comments both sides declared victory. I don’t know who won, but I do know that the unprecedented four-part pissing contest about our paper attracted a lot of attention. Thanks to Professor Miller, hundreds of financial economists were nudged to read our original paper, so by attacking us, Miller ended up doing us a big favor. Many readers of the Journal of Finance might otherwise not have noticed a paper about closed-end mutual funds. But nothing attracts attention more than a

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