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Misbehaving: The Making of Behavioral Economics Paperback – June 14, 2016
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- Jonathan A. Knee, New York Times
“Highly enjoyable . . . dense with fascinating examples. . . . It is long past time to replace Econs with Humans, both in theory and in the practice of prediction.”
- Carol Tavris, Wall Street Journal
“A dryly humorous history of the revolution [Thaler] helped ignite, as well as a useful (if sometimes challenging) primer on its key concepts.”
- Julia M. Klein, Chicago Tribune
“[A] masterful, readable account of behavioral economics. Very well done.”
- David Wessel, Pulitzer Prize-winning journalist, author of Red Ink and Ben Bernanke’s War on the Great Panic
“Bound to become a classic. Now established as one of the great figures in the history of economic thought, Thaler has no predecessors. A rebel with a cause . . .[w]here he wins Olympic gold is in keen observation; his greatest insights come from actually looking.”
- Cass Sunstein, New Rambler
“Entertaining…. An excellent read on the shortcomings of classical economic and finance theory.”
- Ronald L. Moy, CFA Institute
“The creative genius who invented the field of behavioral economics is also a master storyteller and a very funny man. All these talents are on display in this wonderful book.”
- Daniel Kahneman, winner of the Nobel Prize in Economics and author of Thinking, Fast and Slow
“The story behind some of the most important insights in modern economics. If I had to be trapped in an elevator with any contemporary intellectual, I’d pick Richard Thaler.”
- Malcolm Gladwell
“Richard Thaler has been at the center of the most important revolution to happen in economics in the last thirty years. In this captivating book, he lays out the evidence for behavioral economics and explains why there was so much resistance to it. Read Misbehaving. There is no better guide to this new and exciting economics.”
- Robert J. Shiller, winner of the Nobel Prize in Economics and author of Finance and the Good Society
About the Author
- Item Weight : 12 ounces
- Paperback : 432 pages
- ISBN-10 : 039335279X
- ISBN-13 : 978-0393352795
- Dimensions : 5.5 x 1.1 x 8.3 inches
- Publisher : W. W. Norton & Company; 1st edition (June 14, 2016)
- Language: : English
- Best Sellers Rank: #13,903 in Books (See Top 100 in Books)
- Customer Reviews:
Top reviews from the United States
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I won't summarize the wealth of evidence presented (with clarity and grace) in the book. Rather, I will make five general points that will suffice, I think, to entice the undecided reader to take up this good book.
1. This is Kuhnian book. It tells a story of a paradigm shift in the field of economics, from the initial hostility to the reticent acceptance and later to the widespread celebration of behavioral economics (more than ten of its main exponents have been awarded with the Nobel prize).
2. Behavioral economics is already making a dent in public policy. In England and elsewhere, policy makers have embraced some of its prescriptions to tackle various social problems, ranging from obesity to tax evasion. There is a perverse side of behavioral economics though. There are good nudges and bad nudges. Thaler himself sometimes sounds as an expert and unrepentant manipulator (see chapter 13 for example).
3. Economists can no longer ignore the (empirical) relevance of a set of behavioral ideas: loss aversion, the endowment effect, mental accounting, hyperbolic discounting, fairness preferences and narrow framing. "Humans do not have the brains of Einstein (or Barro), nor do they have the self-control of an ascetic Buddhist monk. Rather, they have passions, faulty telescopes, treat various pots of wealth quite differently, and can be influenced by short-run returns in the stock market."
4. William Baumol's early critique of behavioral economics in the sense that it should move beyond the discovery of anomalies to a more constructive agenda is still relevant. Some parts of the book are just anomaly-mining followed by ex post theorizing.
5. While reading the book, I often remembered a famous dictum by novelist (and also Nobel laurate) Elias Canetti: "there aren't the most profound ideas which have often the greatest influence." This book shows that simple ideas can indeed be quite influential.
The book affords a close-up look (a firsthand account) at the exploration throughout the entire professional career of an illustrious economist. The subject is the role of human psychology in the decision making process. His experiments and observations bring into question some very basic assumptions and hypotheses in classic economics, such as rationality in consumer choices and efficient markets.
The detailed discussion of economic issues is sometimes rather academic/technical. It helps if the reader comes with a basic understanding of principles and methods in the study of economics (which I do not possess). In any case, the account of the tense academic debates surrounding the subject is quite fascinating to read. Towards the end of the book, the author also provides useful insights on the implications of behavioural considerations for public policy.
In all, this is a highly recommended book that should provide an engrossing read.
Top reviews from other countries
Specialists often get blinkered, or even blinded, by their own field's theories that they fail to see the real world. I recall a sign I once saw "That's all very well in practice but it will never work in theory!" We need to remain open to ideas that contradict our own comfortable world and be prepared to accept change. Thaler's book isn't just for economists - it's for anyone who needs to deal with real world behaviour and decision making.
What if this simple equation is not a perfect ‘Science’ and has ‘Anomalies’ that defy the rigid laws of science? The basis of such thought is that People, and not Science, are at the core of all human interactions including our decisions on personal life, or in balancing our budgets. Hence Economics in real life reflects our not so rational behavior which in turn is influenced by the vagaries of our Psychology. Just as the ‘Invisible Hand’ tries to discipline markets, our invisible minds individually and collectively at times does just the opposite. Hence Economics in practice means ‘Behavioral’ Economics, which is a combination of Economics and Psychology. This is my simple understanding of this complex field and this book is about the saga of integrating the two, in a fiercely guarded domain of pure Economic science.
The cases and concepts are rich and insightful.
It is well proven that in market economies, equities as a class of asset handsomely outperforms debt and bond markets and generate ‘premium’ returns. In fact, over any twenty-year period in the history of stock markets, equity returns have always been consistently higher. Yet, we allocate most of our retirement savings in ‘safe’ debt and bond funds, if at all. I understood this fallacy through a simple game illustrated in the book, that I am modifying slightly.
Consider the following choices:
Choice A: Flip a coin. If you get heads, you get $ 10; If you get tails, you lose nothing.
Choice B: Flip a coin. If you get heads, you get $ 100. If you get tails, you lose $ 50.
If the game must be played only ONCE, most of us would perhaps play choice A since there is a chance of winning a $ 10, while there is no risk of losing.
On the other hand, if the game is to be played a Hundred times and results added, it is a no-brainer to jump to Choice B. (This is like saying that Newton would perfectly predict, that an apple from the tree would certainly fall to the ground, but when it comes to a Hundred, he might bet on their journey in the opposite direction!). Hence, to me the key learning is to invest as much in equities, early, retire early and find time to read books like these!!
There is also a great example on how innovation can be nurtured in companies. If there are about 25 projects, each with equal chance of generating $ 10 million in revenues and losing $ 5 million, chances are that, these projects in individual corporate silos, managed by individual managers are bound to be shelved. On the other hand, if the corporate innovation culture aggregates all these projects with no punishment for failure, it would be a great success. Corporate Innovation Strategy for the CEO.
Our telescopic vision is myopic, and mental accounting is flawed argues Prof Thaler.
One Anomaly comes to my mind after reading this wonderful book. The author would be delighted to hear on ‘anomaly’ from a common man like me. It is this. Cultures vary vastly across countries, communities and continents. (Hofstede dimensions for example). Hence if the Cooperation game is played in two different countries with vast cultural differences, say India and Germany, would the results be same, or significantly different? If similar economic policies are adopted in these countries, it succeeds in one and fails miserably in another. (My reference to the books ‘Culture and Prosperity: Why Some Nations Are Rich but Most Remain Poor’ by John Kay, and ‘The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere’’ by Hernando De Soto). (I have published my reviews on Amazon.com.)
If so, can Culture be added as a Third dimension? Would this explain more of the Macro part of Economics? Pardon me if I am dead wrong. I am a Human and not an Econ.
Thank you, Prof Thaler for this outstanding book. This book took lots of time for me to read. It involves deep thought and gradual assimilation, and the risk of being branded lazy. Yet it pays, even to be a lazy common man!
Core premises of economic theory are that people choose by optimizing (rational choices) and that supply equals demand (price equilibrium). These premises assume that economic decisions are taken by a selfish and rational agent: the homo economicus, the 'Econ'. But, the models based on those premises can generate flawed results and a lot of bad predictions. Econs exist only in a fictional world, not in the real world inhabited by Humans.
The economists guild should earnestly reckon with human psychology and the social sciences. They should not exclude supposedly irrelevant factors (SIFs) in their analyses, like 'sunk costs' (money already spent) or 'loss aversion'. Other generally accepted axioms, like the precept that buying and selling prices should be about the same or that more choices are always preferred to fewer, belong to a virtual, not a real world. People have well-defined preferences and self-control problems, while professional economists are misled by theory-induced blindness.
R. H. Thaler tries to clarify the notion of 'smart' investor, and comes to the strange conclusion that a 'smart' investor is somebody who is trying to buy stocks, of which he thinks that other 'smart' investors will later decide that those stocks are worth more. He also mentions J. M. Keynes' remark that people are willing to make extreme forecasts based on flimsy data, on 'ephemeral and non-significant' day-to-day information.
The author attacks the 'efficient market hypothesis', with its two components: you can't beat the market and prices are right. But, prices are often wrong (the October 1987 crash, close-end funds) and value stocks beat the market (B. Graham). One should read this book for the overall evaluation of these hypotheses by the author.
Ultimately, the goal of the author is not to tell people what to do, but to help them achieve their own goals.
These trenchant comments ('wickonomics' - wicked for the economic profession - not 'wackonomics') are a must read for all those who don't want to live and work in the imaginary world of Econs.
N. B. Thomas Kuhn's vision on science (the consensus model and paradigm shifts) has been criticized by Karl Popper and his own vision (the conflict model and challenging hypotheses).