Tuesday, 13 February 2018

Book Review: Misbehaving

I have been looking forward to reading "Misbehaving: The Making of Behavioral Economics", by the 2017 Nobel Prize winner Richard Thaler, for some time. It's been marketed as "As readable as Freakonomics; as provocative as Thinking Fast and Slow" (neither of which I have reviewed as I read both before I started blogging). And for once I think the marketing hype wasn't overplayed and I certainly wasn't disappointed in reading it.

Thaler writes in a very readable style, including many amusing anecdotes to present the story of his research career and how behavioural economics has developed over that time period. There is a lot to learn from the book, even for someone familiar with the key developments in behavioural economics. For instance, I came away with a full page of notes that I will use later this year in my ECONS102 class (where I introduce behavioural economics concepts in the first week). Mental accounting is given a thorough treatment (as you might expect, given that it was one of the early insights that Thaler developed), as well as problems of self-control (ditto) and fairness (based on work with fellow Nobel laureate Daniel Kahneman). On fairness, Thaler questions the fairness (not the economic efficiency) of Uber surge pricing (I have previously discussed Uber's surge pricing here and here).

I was surprised to learn of the depth and breadth of Thaler's contributions to behavioural finance (a field with which I am not familiar at all, so perhaps shouldn't have been surprised) and sports economics (including his consulting for multiple NFL teams). He has even written papers on decision-making in game shows (including Golden Balls, which I blogged about here, interestingly using exactly the same example as Thaler). In reading the book though, I got a very real sense of why Thaler won the Nobel Prize. The book contains a veritable Who's Who of big names in economics, who Thaler has collaborated with or interacted with over many years. Of course, it isn't the calibre of the company you keep that puts you in line for a Nobel Prize, but when the big names are willing to keep you around, this is surely a strong signal of your quality as a researcher.

As you might expect from a book that covers the development of a field over a long period, Thaler ends by looking forward to the future of economics. He notes that:
If I were to pick the field of economics I am most anxious to see adopt behaviorally realistic approaches, it would, alas, be the field where behavioral approaches have had the least impact so far: macroeconomics.
There is good reason that economists mostly failed to anticipate the Global Financial Crisis, and unrealistic macroeconomic models have been rightly criticised for their unrealistic assumptions about human behaviour. Unfortunately, Thaler notes that there has been a lack of success in past efforts towards behavioural macroeconomics, including a short-lived annual meeting organised by George Akerlof and Robert Shiller. On a more positive note, Thaler sees the rise of randomised controlled trials as good news for economics, especially as this type of research is increasingly being published in top economics journals.

There is a lot of depth to this book, but the anecdotes and Thaler's additional thoughts around them were a real highlight for me. I especially liked this bit about Kenneth Arrow at a conference in 1985:
Arrow began by dumping on the idea that rationality is necessary... Arrow noted that there could be many rigorous, formal theories based on behavior that economists would not be willing to call rational... Yet, he noted, one could easily build a theory based on habits. When prices change, the consumer choose the affordable bundle that is closest to what she was consuming before. Arrow could have gone even further. For example, we could have rigorous theories as bizarre as "choose the bundle with brand names in order to maximise the occurrences of the letter K." In other words, formal models need not be rational; they don't even have to be sensible. So we should not defend the rationality assumption on the basis that there are no alternatives.
Another anecdote, from the Preface, stuck with me throughout the book:
[In a phone call with a New York Times Magazine reporter] ...I heard Danny [Kahneman] say: "Oh, the best thing about Thaler, what really makes him special, is that he is lazy."...
To this day, Danny insists that it was a high compliment. My laziness, he claims, means I only work on questions that are intriguing enough to overcome this default tendency of avoiding work.
I, for one, am glad that Thaler was not too lazy to complete this book. It was an excellent read, and I recommend it for anyone interested in how behavioural economics has developed into one of the most interesting fields within economics.

1 comment:

  1. I remember watching an interview with Thaler and Fama. Thaler came out seriously 2nd best.

    Speaking of the fairness of the Uber, I well remember having to walk across the centre of Washington DC because I could not find a cab. I was not going to the airport so the cab drivers would not even stop much less slowdown all that much to dismiss my fare.

    Is not this a typical failing of behavioural economics? A strawman comparing with what, Uber with the current taxis with their entry barriers or with a Nirvana when no one has to pay for anything?