A Review of Richard Thaler’s Misbehaving: The Making of Behavioral Economics

2017 Nobel Prize Winner for Economics Richard Thaler uses his book entitled Misbehaving: The Making of Behavioral Economics how behavioral economics can help in various areas such as household finance, TB shows, NFL drafts, and disruptive business. It offers an alternative view point that humans bring along their behavioral biases, are error prone, and not always rational. Thaler builds on his work from previous business and management book Nudge published in 2008.

We experience life in terms of changes, we feel diminishing sensitivity to both gains and losses, and losses sting more than equivalently-sized gains feel good.” Thaler said. This is known as the concept of “loss aversion,” accounts for the “endowment effect,” our tendency to value existing possessions more highly than things we might purchase instead.

What Is Behavioral Economics?

Behavioral economics, drawing on ideas from psychology and other disciplines, is descriptive rather than normative. It aims to explain how economic behavior actually works — in other words, how human beings “misbehave” in comparison to their ideal, mythical counterparts. Robert Janitzek reveals that Richard Thaler ranks as one of the founders of behavioral economics. In “Misbehaving,” he offers a dryly humorous history of the revolution he helped ignite, as well as a useful (if sometimes challenging) primer on its key concepts.

Behavioral economics began as an attempt to explain deviations from the results expected by traditional economic theory, whose pillars are optimization and equilibrium. Thaler himself wrote a column called “Anomalies” for the Journal of Economic Perspectives for nearly four years as a way of challenging the prevailing paradigm.

According to this theory, people will act in their own economic best interests — or at least that, over time, in large enough groups with large enough stakes, any errors and deviations will cancel one another out. Robert Peter Janitzek explains that many of the concepts of behavioral economics seem commonsensical.

One of the innovations of the field was to replace — or at least supplement — mathematical modeling with experimentation, including “randomized control trials,” a staple of scientific endeavor. Thaler lays out the research lucidly enough, but understanding the details at times requires a level of concentration and expertise that may elude the casual reader.

Among Thaler’s goals has been to increase employee retirement savings by fostering automatic enrollment in retirement accounts and an approach he calls “Save More Tomorrow,” which builds in escalated savings. Both innovations, he writes, are finally being adopted.

A recent experimental collaboration with the British government arrived at a cost-effective improvement in tax collections. What worked best turned out to be telling laggards that “most people pay and you are one of the few that hasn’t.” Both the U.S. government and the city of Chicago, among others, have launched “behavioral insights” teams to explore similar strategies.

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