Facts, however, are no trivialities, and no model that forsakes them can aspire to be based in reality. His philosophical system, Hegel explained, was just too compact and too definite to be unsettled by a triviality. Why? Enriched views: the case for behavioral economicsĪccording to a famous anecdote, when a student of German philosopher Georg Wilhelm Friedrich Hegel pointed out to him a fact that didn’t fit easily within Hegel’s comprehensive and highly organized system, the great philosopher didn’t waste too much time to ask his student to forget and even renounce the fact. Yet, not only do they exist, they happen all the time as well, and sometimes – as, for example, on Octowhen stock prices fell more than 20% all around the world – they seem to occur “in the absence of any substantive bad news.” Most importantly, even though virtually no economist has ever predicted a financial crisis with any certainty, we keep using the same predictive models in economics. If it was any different, after all, there would have never existed things such as bubbles and crashes. Humans consistently act in ways that are poles apart from the ones predicted by traditional economic models. Yet, we do so many things solely out of passion and nothing else.Īs far as traditional economists are concerned, we are all “cold-blooded optimizers ” in reality, however, we are anything but. Before writing “The Wealth of Nations,” Adam Smith wrote a book on human passions, but somehow “passion” is not a word you’ll find in many economic textbooks.
We regularly fail at making the optimal choice when it comes to life-defining decisions such as careers, mortgages, and spouses, and that in itself should have long ago cast doubt on the idea that we tend to choose the best item on the supermarket shelf! More importantly, our decisions are as rooted in our guts and instincts as they are in our brains and rational analyses – if not more. They may sound commonsensical, but that’s precisely their problem: humans, simply put, aren’t as logical as economic theory would want them to be. The problem with these two premises, says Thaler, is that both of them are deeply flawed. In other words, most traditional economists believe that the following two truths are self-evident: 1) of all the goods and services a person can buy, they would usually choose the best ones they can afford, and 2) in competitive markets, prices fluctuate in such a way that supply eventually equals demand. This is not only because of its far-reaching impact on public policies, but also because unlike, say, historiography or media studies – and similarly to physics and math – economics has “a unified, core theory from which everything else follows.” The two core premises of economic theory are constrained optimization and equilibrium. Part memoir, and three parts vitriolic attack on outmoded Chicago School-styled economists, Thaler’s brilliant book aims to explain what he and his colleagues learned along the way of revolutionizing the field of economics, “so that you can use those insights yourself to improve your understanding of your fellow humans.” So, get ready for a different kind of economic observations: valuable, thought-provoking, and, most importantly, fun! The faulty premises of traditional economicsĮconomics is usually considered the most influential and most powerful of the social sciences. In it, Thaler draws from his own experiences to convey a meandering history of the rise of behavioral economics, delicately braiding it with an in-depth overview of all the ways traditional economic models fail to describe real-world human behavior. That’s what “Misbehaving” is mostly about. A giant of modern thought, he has stood at the helm of this revolution in the dismal science from its very beginnings, a story of ups and downs he deems worth telling. Since 2017, Richard Thaler is, more than deservedly, one of them. Until very recently a laughing matter, behavioral economics is now the fastest growing branch of economics, and has already given us a few contemporary classics and no less than five Nobel Prize winners. Two decades into the 21st century, it is not an exaggeration to say that even the most pristine classical economists have recognized the bounds of rationality of economic agents and have accepted the necessity for more accurate – and, strangely, less mathematical – characterizations of human behavior. “A day may come when we shall be able to deduce the laws of social science from the principles of psychology.” It took economists some time to take note, but they finally did during the 1970s and 1980s. “The foundation of political economy and, in general, of every social science, is evidently psychology,” wrote Italian polymath Vilfredo Pareto in 1906.
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