CLIFF'S BOOK NOTES

Richard Thaler

MISBEHAVING

The Making of Behavioral Economics

This is an easy to read and entertaining self-deprecatory semi-autobiography and history of the development of behavioral economics for which Richard Thaler won a Nobel Prize in 2015. 

A graduate of fairly undistinguished schools who was deemed lazy by his friends, who his Ph. D thesis reviewers said they “did not expect much from,” but who as the son of an actuary kept wondering why some things defied convention, Thaler was instrumental in disproving standard microeconomic theory that individuals and businesses generally make rational decisions to optimize their benefit. 

Thaler helped show that individuals frequently make non-rational decisions due to sunk cost, The Endowment Effect, loss aversion, status quo bias, mental budgeting, perceived bargains, lack of self-control, fairness, and other Supposedly Irrelevant Factors. [Similarly Ariely’s Predictably Irrational and Cialdini’s Presuasion.] 

Thaler says the biggest non-rational decision-making he has come across is the gross overrating of the value of high first round NFL draft picks compared to the value of higher second round draft picks. Regarding the stock market, Thaler believes if it were truly efficient and rational, there would be fewer fluctuations in prices, no bubbles, and far fewer stock trades, similar to how often we buy a house or a car. 

Thaler and his fellow behavioralists are generally credited with having effectively rebutted much of classical economic theory, including that espoused by my favorite economist, Milton Friedman. 

Not surprisingly, upon being awarded the prize money accompanying his Nobel Prize, Thaler said he planned to spend it irrationally.