Wednesday, November 04, 2015

Misbehaving: the making of behavioral economics

by Richard Thaler

I consider myself a pretty intelligent guy, but understanding economics has long been a struggle for me. A major sticking point is theory versus reality, which, in a nutshell, is where behavioral economics comes in. When people appear not to be acting as the perfectly rational agents (surprise) presumed by classical economic theories — for example, when they don't save for retirement even though they know they should, or make a rash gamble on a gameshow instead of going for the sure money — behavioral economics tries to find out why they don't. (And, as explained more thoroughly in the author's other book, Nudge, its insights can be used to craft government policies and business practices that make it easier and more likely that people will do the right thing.) People aren't always rational, so emotion needs to be taken into account, and people aren't all awesome at math (particularly statistics), so our false intuitions and misleading biases affect our behavior too.

Very unexpectedly, I laughed aloud while reading this book. I guffawed over the theory, devised by a Nobel Prize-winning economist, that young people will (naturally, instinctively, rationally) calculate their lifetime wealth and earnings and make judgements about how much to spend, and when to spend or save, so that they won't run out of money and might even be able to make bequests!

This book doesn't have any practical advice per se, but you could garner some strategies for recognizing and maybe correcting your own financial and economic misbehaviors. It's also not a deep study or even a catalog of the findings of behavioral economists. The author spends a fair amount of time talking about the people who are the scientists and economists, and about his own personal journey and career, which I suppose is meant to increase the appeal to the lay reader. For some readers it will; for me, I kinda wish I'd read a long (but much shorter than this book) article in a magazine such as Harper's or Atlantic Monthly.

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