“Misbehaving” by Richard Thaler

A founder of the American school of behavioral economics, Thaler has written a solo follow-up to “Nudge”, his previous work with Cass Sunstein (later head of President Obama’s Office of Information and Regulatory Affairs). “Misbehaving” is ostensibly a memoir, but it reads as a history of the entire development of the field of behavioral economics, unsurprising as Thaler, as its founder, has been intimately involved with all its players and controversies over the years. The book details the field’s rise from obscure backwater at the University of Rochester, where fellow economists would openly laugh in Thaler’s face to the point where he could only get fair hearings from those outside his profession, such as from the psychologists Daniel Kahneman and Amos Tversky to its pinnacle when Thaler was able to influence real world policy at the uppermost echelons of government in both the Obama and Cameron administrations. 

At the heart of Thaler’s theory is that man does not behave like “homo economicus", the rational actor that most economists use in their models. He describes ways in which people behave irrationally from sunk-cost fallacy to loss aversion, time preference, endowment effects, framing, and hindsight bias. An example is that the same subjects consistently believe that more murders happen in a given year in Detroit than in Michigan (a logical impossibility, obviously) due to framing bias. Thaler’s main faults in this book are both in attacking a straw man, most economists use “homo economicus" as a fictional guide, not as a real world entity, and in too narrowly defining what is rationally in a man’s best interest. Thaler, for one, should realize that values are subjective and that there are things in life that people value more than narrow economic interests and that are not easily quantifiable or even able to be articulated. Nonetheless, government often has to give one default or another when framing options and Thaler’s work is a step in the direction of giving the least-bad option when a preliminary choice has to be made by bureaucrats rather than individuals.