The academic economics predominantly taught and practiced today is based on the premise that economic outcomes are determined by mathematical calculations. Sadly, higher education clings to that premise, despite that it has proven worthless in successfully predicting economic outcome. Even the notorious Allan “asset bubble” Greenspan admits that the Ph.D. academic economists at the Federal Reserve didn’t predict better because they can’t. But I digress.
Professor Richard Thaler’s engrossing Misbehaving: The Making of Behavioral Economics proposes that economic outcomes are determined by human behavior, not mathematical calculations. Through engaging stories, Thaler illustrates that people are not the “optimizers” that academic economics proposes. The irrational and idiosyncratic biases that drive people’s economic decisions, such as why we’ll drive 15 minutes to save $10 on a $30 item, but not drive 15 minutes to save $10 on a $500 item, violate the intellectual rationalist rules in academic economics. Therefore, people misbehave.
Thaler illustrates examples of human economic misbehaving with stories, like the story of Stanley. “Stanley mows his lawn every weekend and it gives him terrible hay fever. I ask Stan why he doesn’t hire a kid to mow his lawn. Stan says he doesn’t want to pay the $10. I ask Stan whether he would mow his neighbor’s lawn for $20 and Stan says no, of course not.”
Then there is the “endowment effect”, illustrated by a study in which participants were given a mug, then given the chance to trade it or sell it for an equally valued alternative of pens. The study found that the price amount participants demanded for the mug once their ownership of the mug had been established (“willingness to accept”) was approximately twice as high as the amount they were willing to pay to acquire the mug (“willingness to pay”).
Thaler’s Misbehaving: The Making of Behavioral Economics is the perfect compliment to Robert Ciladini’s Influence: The Psychology of Persuasion.