Misbehaving

Economics is about choices. Most of us with limited incomes try and exercise prudent choices to Optimise our budgets. In free markets, prices move up and down till supply and demand meet, reaching Equilibrium. Voila! We have a perfect equation on hand: Optimization + Equilibrium = Economics. 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!

Interested in Behavioural Economics (BE)? Then read this book from the Richard Thaler ,about the story behind the birth of the exciting new economics. Thaler is one of the pioneer in this field and this book not entirely about the principles of BE its the story behind how BE was born. Overall a good read.Recommended for behavioural enthusiasts.

An Incredible book - a study BIBLE Richard Thaler won the Nobel Prize for Economics in 2017, and for excellent reasons! I'd like you to please read this book to understand why. A fantastic collection of facts, stories, case studies and experiments, this is NOT to be misunderstood as a book on "Economics". Nope. It's a book about how all of us - Humans behave in the real world. While innumerable examples will 'wow' you, my FAVORITE part is Why Stock Prices trade at Premiums to Risky Free Debt in EXCESS of what they should :) It's a CLASS insight:) Get, Read, Mug up (memorise), Repeat, Implement!

I had read Daniel Kahneman's book "Thinking, Fast & Slow" earlier and found the current book to be, in some ways, a sequel. The author Richard Thaler talks about his friendship with Daniel Kahneman and Amos Tversky and how the interactions between the three of them shaped the field of behavioral economics. The author's journey from an outsider, who questioned the dogma of rationality that underpins most mathematical models used in economics, to one who advised state governments on public policies is inspirational. I hope that more policy makers, especially in the developing world, take note of author's work in conjunction with the works of Robert Cialdini, Daniel Kahneman, and Dan Ariely to guide public policies in education and healthcare.

Money spending, how we spend, how we misbehave in real life. How to make financial decisions, or infact how we do make our financial decisions. How can we improve our money spending. It's all in there. There are no such tactics like we should do this or that... There are behavior reasons that why we make financial misbehavings. Good for the ones who are working on any startup idea 💡, as they can get the idea about human behavior. You should have read enough to make things clear about the behavioural economics, if one is a new to economics or business or behaviour science, should skip and come back after a bit of sloches. Enjoy reading and rereading. Thaler explains to much about whom he met who was he what did what he doing ..sometiem it's a bit annoying!

I found this to be a very interesting read and it gave me a different way of looking at economics.

All the examples are time tested and very result oriented, every CEO , evey business man , comman man looking for financial knowledge should read it .

The book you need to read if you want to start your journey into Behavioral Economics or like me were just curious what everyone was talking about. It's dense, yes, it's long, and it might take a while to finish. But you'll come out on the other side with a sharper perspective and a new dimension unlocked. Highly recommend.

A wonderful biography of an academic theory, written with love by its founder. Just as Mr Thaler has made this science more Human, so he also writes for Humans, making something so complex and sophisticated seem simple, relevant, and easy to understand - even for beginners like me. Thank you!

Davvero splendido libro, Thaler riesce a spiegare concetti complessi con metafore semplicissime! Ottima lettura per chiunque, non eccessivamente matematico ma allo stesso tempo approfondito nei punti giusti. Splendida lettura, dovrebbe essere inserito in qualsiasi corso universitario di economia.

Un libro bastante diferente en su enfoque lo recomiendo para ver otro punto de vista

He's taken his time and he's waited his turn, but Richard Thaler has delivered the definitive book on Behavioral Economics, the one you can't afford to miss. It's a summary of the main findings, a history of how they came about and a preview of coming attractions, with due care taken to pay tribute to those who came before Thaler and apportion credit to those who worked with him. The field is not as new as Thaler would have you think. There's bias in this account and it is a bias against those among his predecessors who tried to explain human behavior in a way that was consistent with mainstream economic theory. I'm thinking Gary Becker here (who tried to explain long lines outside empty clubs and packed cheap restaurants alike using an "upward sloping demand curve" and famously sat down to write a paper on suicide when his wife took her own life); I'm thinking the very same Robert Barro that Thaler makes fun of when he describes him as the smartest man ever, but who nonetheless made me understand in his book "Getting it Right" why superstars could get paid so much in a zero-sum game and got confirmation to his theory when Maradona was paid more than the rest of his team, Napoli, put together, and justifiably so because he not only took them to the Campionato, but also thwarted much more fancied teams from winning it. Thaler's predecessors operated in a world where most Economics books had to start with a chapter explaining why Economics is a science. Of course they had to stick to the utility-maximizing / profit-maximizing orthodoxy! Besides, orthodox economic theory was not all that shabby when it came to predicting human behavior. By the time Thaler was entering his prime, Economics no longer had to apologize to anybody and was much more open to heresy, of course. It was in a position to withstand additional questioning. Armed with a nice piece of math invented by Tversky and Kahneman it was ready to be taken to the next level. Thaler takes you through the whole thing in the space of the shortest 358 pages you will ever read. As he promises at the start, he tells it through a bunch of stories, mostly the stories of his collaborations and his epic fights with Economic Orthodoxy. The book is worth reading for the humor alone. The jokes range from pure slapstick (example p. 128: "we were trying to learn what ordinary citizens, albeit Canadians, think is fair") to the esoteric inside joke, like when he mentions Vishny is a common co-author of Shleifer (to the best of my knowledge he's never written a paper without Shleifer). If you're not laughing the whole time, basically, there are squadrons of jokes flying over your head. My favorite type of humor, relentless repetition, is also very well represented. I lost count of the number of times I read the expression "invisible handwave." The man is irrepressible, basically. You can't keep him down. There's a sadness that goes with this too, and it's that this is a bit of a category killer. "Misbehaving" Pareto-dominates all behavioral economics books that precede it in terms of readability, context, scope, you name it. I don't know what I would do with myself if I was Dan Ariely or if I was Steven Levitt (Roe v. Wade findings notwithstanding), to say nothing of Tim Hartford. They now have to accept that there's a book out there that beats their entire life's work on all fronts. The long problem set masquerading as a re-interpretation of behavioral economics that is Kahneman's "Thinking Fast and Slow" is the only true exception to the rule, it continues to stand alone, but relative to "Misbehaving" it's a cop-out. As he told Michael Lewis in the interview that preceded that book, Kahnemann did not want to write the history of the field, he did not want the book to have the feel of one's last book. So the door was left wide open to Kahneman's self-admittedly "lazy" student to jump into the breach. This he has done with gusto. Prospect Theory (how we are risk averse when we're winning and risk loving when we're losing) is taught straight from Tversky and Kahneman's 1976 graph and is used to explain: (i) transaction utility, including Costco's business model (ii) sunk costs (i.e. why you will carry on wearing an uncomfortable pair of shoes you paid 300 dollars for) (iii) the endowment effect (including later in the book how it undermines the Coase theorem) and (iv) "gambling with the house's money" at the casino, versus the fact that outsiders get overpriced toward the end of the day at the racetrack. Bucketing of budgets gets thrown in for free. Next comes a tutorial on Self-Control. Thaler explains that many humans discount future pleasure (or pain) on a scale that is totally unrelated to how we present-value bond cashflows and mainly operates on three levels: Now (intense), Later (much less intense) and Much Later (only slightly less intense than Later). This leads to preferences that are intertemporally inconsistent, a nightmare to Economic Orthodoxy, but very often true in real life. Heady stuff, and I promise, he makes it clear. He does not use graphs or charts or math. He explains it all with one picture: the famous cover of New Yorker magazine where everything this side of the Hudson is rendered in great detail, New Jersey through to California takes up as much space as West Manhattan and Asia is visible behind. You get that chart, you get how we humans really think about delayed gratification. Genius. A chapter follows which is a summary of "Thinking Fast and Slow" but without trying to shoehorn the rest of Behavioral Economics into that model. The next couple chapters deal with Fairness (the Ultimatum Game, the Dictator Game, the Punishment Game, cooperation games such as the Prisoner's Dilemma) and a revisit of the Endowment Effect as exemplified by the trading of Mugs with capital M. Then Thaler attacks Finance and the Efficient Market Hypothesis in Particular. Not that anybody sane thinks markets are efficient, but you could tear out the rest of the book and keep pages 203 to 253 as a quick guide to why markets are inefficient. Thaler starts with Keynes' "beauty contest" analogy for stock picking (we pick the girl we think most other people will like, not the one we really fancy). Next he explains why a stock ought to be worth the net present value of its dividends and takes the reader through Shiller's discovery that stocks move around tons more than dividends do (or can be reasonably expected to do), which proves they wander around tons relative to what they will ever pay out. He offers additional proof by going through closed-end funds' variation from their NPV and gets some serious kicks from pointing out that stocks on occasion sell for less than the market value of their listed subsidiaries. He's a bit of a showman, Thaler, he calls this "negative stock prices." From there he goes for the kill and notes that Royal Dutch Shell shares have a different price in New York versus Europe, and never more so than they did during the blow-up of LTCM, providing a real-life example of Shleifer and Vishny's mathematical formalization of Keynes' old aphorism that "the market can stay irrational for longer than you can stay solvent." At some point, Chicago had to follow Al Pacino's view that "you keep your friends close and your enemies closer" and put him on the faculty. From his angle, it was time to storm the citadel, and this is what Thaler chronicles next. He had been ready for them from day one. The book actually starts with "The Gauntlet," which is the series of challenges orthodox economists lay out for the behavioral crowd: 1. The "As If" challenge states that even if nobody is an expert in everything, society operates as if we all were, because through division of labor we all end up doing things we understand. 2. The "Incentives" challenge states that people respond to incentives once the stakes are large enough. All the wishy washy behavioral stuff washes away once we're talking real money. 3. The "Learning" challenge states that even if we get it wrong in "one-shot" games, in real life most games are "repeated" and behavior thus converges to what Orthodox Economics would suggest. 4. The "Invisible Hand" argument states that if we all go about doing what's best for us we nevertheless end up doing what's right for everyone else as well. Won't spoil it for you and take you through Thaler's answers to the above. It's after all what the book is really all about. But forgive me one indulgence, I've GOT to tell you about the bit where he demolishes Robert Barro: The Rational Expectations Hypothesis has a number of implications, chief amongst them the prediction that fiscal stimulus does not work. If the government writes you a check, the story goes, you know you'll be taxed for it in the future, so you save it rather than spend it. And the stimulus ends up being a damp squib. Thaler proves the circularity of this argument by suggesting a similarly circular counter-argument: what if the rational agents that compose this economy believed in Keynes' multiplier? What if they thought the stimulus will work and the economy will fly and their taxes will actually go down? Should they spend TWICE the check they were sent? From Chicago he goes on to a couple (well-earned) victory laps. He applies Behavioral Economics to Americal Football, where he advised three separate teams on how to conduct their affairs during the annual draft, to game shows he was allowed to set up with Endemol, where he proved that his theories can withstand some pretty high stakes and from there onto "nudging" people to contribute more to their pension and pay their taxes on time. He ends the book with a wish that one day there will be one Economics again, with the Orthodox Economics of utility maximization and profit maximization as a quaint special case. We're probably already there.