Misbehaving-Richard Thaler
Science
Misbehaving: The
Making of Behavioural Economics
Richard H. Thaler
Two young Israeli psychologists Amos Tversky and Daniel Kahneman in
1974 published an article titled ‘Judgement Under Uncertainty: Heuristics and Biases’
in the Science journal. This article unleashed a ceaseless upheaval in the
world of economics that gradually led to the birth of Behavioural Economics.
Richard Thaler, an academician, was shaken irrecoverably when he read this
article. ‘As I read (the article), my heart started pounding the way it might
during the final minutes of a close game. The paper took me thirty minutes to
read from start to finish, but my life had changed for ever,’ he writes.
Classical economics has Optimisation and Equilibrium principles at its core.
According to these human beings rationally choose best goods and services they
can afford in the market. In an open and competitive market, prices fluctuate
in such a way that supply equals demand. But Thaler had noticed that humans
often do not choose rationally. They are not ‘econs’, the rational beings, but
the irrational humans. In terms of classical economics, they misbehave. In his
room in the university Thaler put up a list of such alleged anomalies of human
behaviour which made no sense in light of classical economics. Heuristics are
the rules of thumb that human mind follows in judging a situation and
formulating a judgement. Human mind is not trained to intuitively arrive at
judgements that require application of various statistical tools. But even in
these situations with uncertain outcomes, mind uses its innate heuristics to
arrive at a prediction. Such decisions are thus riddled with predictable biases
of human mind. Thaler noticed that he could explain much of erroneous human
behaviour in his list through Tversky’s & Kahneman’s revelations in the
Science article. He became an ardent disciple and later their collaborator. In next
three decades his dogged efforts spawned the birth and growth of Behavioural
Economics. This book is the story of this journey of Richard Thaler and the new
science that he and his colleagues discovered. Its told in an endearingly
irreverent and funny tone.
Thaler mingles discussion of various interesting aspects of
behavioural economics with anecdotal account of his experience in the field. Some
of the topics he discusses are; heuristics and biases of human mind, how people
think about money, the self-control problem that people face i.e. the distinction
between what people want and what they choose, how people decide fair and
unfair practices as they shop for goods, role of behavioural economics in
finance market. These are just a few of the wide range of subjects he takes up
in this fairly big book. In the last section he discusses few applications of
Behavioural Economics in the framing of public policies. For example, he explains
how subtle biases of our mind can be exploited to encourage people to save more
for their old age. In the last chapter he writes about his experience of
working with British Government when it decided to incorporate relevant
principles of Behavioural Economics in the planning of public policies and thus
nudge public towards more rewarding choices in life. Nudge is a book
Richard Thaler wrote with Cass Sunstein on this theme and I intend to take it
up soon.
This is an interesting book. It’s written in a breezy manner and is
replete with simple examples and easy to follow psychological experiments.
These make the book an effortless read. Explanation of some aspects of
Behavioural Economics are a bit difficult to follow. I kept remembering Daniel
Kahneman’s superbly written book Thinking Fast and Slow, its easy and
stunningly simple prose, as I read Thaler’s account of similar topics.
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