Misbehaving: The Making of Behavioral Economics

"The foundation of political economy and, in general of every social science, is evidently psychology. A day may come when we shall be able to deduce the laws of social science from the principles of psychology." Vilfredo Pareto, 1906Misbehaving is a thoroughly enjoyable read, both comprehensive and replete with historical context, but "neither a treatise nor a polemic" as prefaced by Thaler. Instead, it is a memoir and a chronological history on the rise of behavioral economics as a legitimate discipline, making it an excellent introduction to the field. The book is lengthy, an un-lazy 358 pages, but an easy read because of Thaler's self-deprecating style and numerous examples that are both funny and informative (like oenophile mental accounting). My favorite illustrative anecdote, however, was the kerfuffle that ensued among the "efficient market" professors at the University of Chicago when it came time to hold a lottery on allocating offices in their new academic building - hilarious.I got hooked on behavioral economics almost 20 years ago at a conference held on the topic at Harvard's Kennedy School, featuring Richard Thaler, Richard Zeckhauser, Arnie Wood and others. The seeds planted from that fascinating seminar led me to be a lifelong student of this emerging, multi-disciplinary field and the importance of metacognition - quite literally, thinking about thinking. For an alcoholic, admitting you have a problem is the first step towards recovery. Analogously, it is impossible to temper evolutionarily prewired heuristics and biases unless you have studied them - and even then, it is too easy to 'fall off the wagon.' Anchoring, myopic loss aversion, overconfidence and hyperbolic discounting are all pervasive, but you have to understand the nature of these inherent biases to have any chance of counteracting them in your own behavior, both personally and professionally. As an institutional money manager overseeing billions of dollars in client assets, the lessons learned from behavioral finance have - unequivocally - been a key source of competitive advantage for me in an otherwise fairly efficient market.From a personal standpoint, the useful lessons are also manifold and overlap with research on happiness and the value of rich experiences over accumulating more 'stuff.' Specifically, understanding the siren song of transaction utility (i.e. bargains) vs. acquisition utility (the 'consumer surplus') offers great insight on how to spend money. As Thaler notes: "For those who are at least living comfortably, negative transaction utility can prevent our consuming special experiences that will provide a lifetime of happy memories, and the amount by which the item was overpriced will long be forgotten. Good deals, on the other hand, can lure all of us into making purchases of objects of little value." Learn this lesson and you will be more likely to scalp an expensive ticket to the 'last' Rolling Stones tour than buy a fancy new jacket that is enticingly on sale, but will eventually gather dust in the back of your closet (Note: this also dovetails nicely with Buddhist philosophy around impermanence and craving - see "Hooked! Buddhist Writings on Greed, Desire, and the Urge to Consume" by Shambhala).An excellent complementary read to Misbehaving, for those interested in the evolutionary drivers of behavioral biases, is "Kluge: The Haphazard Construction of the Human Mind" by Gary Marcus. Likewise, Nassim Taleb's brilliant "Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets" is also a highly relevant read. Finally, for anyone with an interest in the applied behavioral field of 'choice architecture,' Thaler's earlier book with Cass Sunstein, "Nudge: Improving Decisions About Health, Wealth, and Happiness" is also thought-provoking. As a registered libertarian, I can honestly say that I have no problem with Thaler's view towards 'nudging' people to better outcomes through choice architecture, despite predictable criticisms of 'libertarian paternalism' as Orwellian (see Robert Williams' letter in WSJ - 5/23/15). Thaler clarifies the nudge objective as trying to "influence choices in a way that will make the choosers better off, as judged by themselves."This is a very intimate book - reading Misbehaving, one is left with the wonderful feeling they've spent a long weekend with Thaler hearing about the history and rise of behavioral finance, over multiple bottles of wine, and all while being peppered with entertaining personal references and anecdotes.

My Rating: Put it on your listLevel: Moderate to difficult, depending on your base knowledge of Economics and Psychology. Moderate in length, but reads quicklySummaryPart Thaler autobiography, part time line of the development of the field, with plenty of humorous anecdotes and academic ‘anomalies’, this book does not read like a history of an academic discipline. The book is broken into eight broad chapter based around years in which Thaler worked through differing parts of the development of the field. The chronology starts with him as a graduate student, where he is just starting to look into ideas that would become the discipline, and proceeds up to the present, where he seems poised to hand over the reins to the next generation. Along the way are his stories of getting the discipline recognized by academic journals, struggles with the establishment, and gaining allies (across other disciplines, as well) and students that will become the next generation.My ThoughtsThis book, like the somewhat related book (Thinking, Fast & Slow) by his fellow collaborator, Daniel Kahneman, kind of annoyed me in how well it is written. Thaler has had a nearly five decade career as researcher and writer, so he should write well, but that is not what I mean. His book is funny and reads quickly like a narrative. As I said above, it it part autobiography, and lends itself tremendously to humorous narrative that leaves you interested in reading more. As a pretend internet researcher and writer, I am envious that someone with actual credentials writes so well.All that being said, I think I missed the subtitle of this book when I first heard about it a few years ago. I heard Thaler on a interview, and knew he was related to behavioral economics, but didn’t quite realize this was book he was promoting. I must have searched his name on amazon and bought the first book I saw, without noticing the reference to ‘Nudge’ on the cover. Nudge was really the book I was looking for, which is more about the research out of Behavioral Economics as it relates to topics like money and health. ‘The Making of Behavioral Economics’ should have clued me in to this book being more of a history. Luckily, I enjoy history and biographies, and as I said above, he is a very talented writer.One of the first things that stuck out to me was how long he as been in the field. His book starts in 1970, with him as a grad student. I wouldn’t be born for another decade and a half, and I don’t consider myself very young. I’ve heard that Millennials will have between seven and 17 careers over their lifetimes, so it amazes me to read of someone’s history in a field that is longer than my lifetime.Reading history is always fascinating, because you, with the addition of hindsight, can read and say, ‘how did these people miss this?’ I couldn’t believe some of the resistance he and others would face as the argued against the efficient market hypothesis. I was in high school during pets.com (look it up kids) and the tech bubble and finished grad school a few months before the housing bubble popped, so I struggle to believe in any way the the market is efficient and that people are well informed. Thinking back to my undergrad economics courses, I believe I was taught the distinction between theory of economics (people who Thaler calls Econs) and actual behavior (called Humans). In grad school, the distinction was called that of theory and practice. So, it is interesting to see that a few decades before, saying things like this, which to me are clearly true, would get you laughed out of conferences and barred from academic journals.This history was interesting, and the debates with other academics were amusing and insightful, but the book really shines with the anecdotes. I won’t go through all of them here, but the include an economist who refuses to sell his wine (for a gain) at the market price while also stating he would never buy it at the price and companies whose stock prices are lower than their subsidiaries (even when purchasing the larger company stock means getting the smaller companies stock included; this means the larger company is valued in negative dollars relative to market cap).These types of stories are what I enjoy reading. They are amusing on their own, but also challenge your assumptions about certain areas, but even more, make you really question whether you actually know what you are doing. You may think you do everything rationally, but you probably don’t, and that is illustrated time and again in this book. If you are looking for just stories and research results, you are probably better off with Nudge or Thinking, Fast and Slow. However, if you are interesting in Behavioral Economics in general, this is definitely a book to put on your list.More reviews at MondayMorningTheology.com