Richard Thaler began his career keeping a list on his office blackboard of things people did that economic theory said they shouldn’t. Colleagues found the list amusing and irrelevant. Thaler found it the most interesting thing in economics, and spent the next four decades turning it into a discipline. Misbehaving is part memoir, part intellectual history and part primer: it explains the findings of behavioural economics while telling the story of the arguments, seminars and hostile referee reports through which those findings were forced into the mainstream. It ends with a Nobel Prize, awarded to Thaler in 2017, the year after this edition appeared.
The core argument
Standard economic theory models people as what Thaler calls Econs: agents who optimise consistently, hold unbiased beliefs, have unlimited willpower and treat all money as interchangeable. Humans are not like this, and — crucially — the ways they differ are systematic rather than random. That systematic quality is the whole argument. If deviations from rationality were noise, they would cancel out in aggregate and the models would survive. Because the deviations are predictable, they aggregate, and models built on Econs will be predictably wrong in predictable directions.
Thaler’s contribution was to show that these effects survive contact with real money, real markets and real stakes — in stock prices, in taxi drivers’ hours, in game show contestants, in how the NFL draft is run. The defence that markets discipline irrationality turns out to hold much less often than economists assumed, because arbitrage is limited and because the biases affect professionals too.
Key ideas
- The endowment effect. People demand far more to give up something they own than they would have paid to acquire it. Ownership itself changes valuation, which contradicts the assumption that willingness to pay and willingness to accept are equivalent.
- Mental accounting. Money is not fungible in practice. People keep separate psychological pots — holiday fund, rainy day savings, “house money” from a windfall — and spend from them by different rules.
- Sunk costs and transaction utility. We keep going to a concert in a blizzard because the ticket was expensive, and we get pleasure from a bargain that is separate from the pleasure of the item itself.
- Self-control as a two-system problem. The planner wants to save and exercise; the doer wants dessert now. Commitment devices exist because people know this about themselves — the insight behind Save More Tomorrow, the pension scheme Thaler co-designed that raised savings rates by scheduling increases against future pay rises.
- Fairness constrains markets. Consumers punish price rises they perceive as exploitative even when supply and demand justify them, which is why firms do not always clear markets on price.
- Supposedly irrelevant factors. Thaler’s umbrella term, and his methodological weapon: things theory says shouldn’t matter, that reliably do.
Who it’s for
The best single introduction to behavioural economics for someone who wants the ideas embedded in the story of how they were won, rather than served as a list of biases. Thaler is a funny, self-deprecating and slightly score-settling narrator, and the academic politics — his sparring with Merton Miller, Eugene Fama and the Chicago old guard — is genuinely entertaining. Two fair warnings. First, if you have read Kahneman’s Thinking, Fast and Slow, a good deal of the psychology will be familiar, though the economics and the history are new. Second, the field’s replication record has been bruised since publication; several nudge results, and the effect sizes claimed for behavioural policy generally, have proved shakier than the confident tone here suggests. The core findings on the endowment effect and mental accounting have held up considerably better than the marginal ones.