Book Review: Misbehaving- The Making of Behavioral Economics

This book is written by Richard Thaler, the economist who helped develop Behavioural Economics. In it, he lays out the initial thoughts and ideas that led him to exploring the psychological aspects of economics, particularly in terms of consumer behaviour that could make it more suitable for 'Humans'. The book begins with the basic premise that there is a difference in the way someone with sound knowledge of economics thinks and how a normal human being thinks while making decisions. He differentiates between the two by calling them Econs and Humans and proposes that economic models make a lot of bad predictions because they are primarily designed for Econs. He He calls for an "enriched approach to doing economic research, one that acknowledges the existence and relevance of Humans". This thought is elaborated with a number of examples throughout the book. For instance, a company may not always consider losses to be an important factor while making business decisions (given their ability to absorb short-term losses for long-term gains) but to a normal human being, loss hits more than an equivalent gain, so they make decisions accordingly and thus their actions need to be predicted by keeping this affinity in mind. He argues that, when the observed behaviour is inconsistent with the idealised model of behaviour, people are said to be “misbehaving” and according to him, humans misbehave a lot. Thus, theories based on the assumption that everyone is an Econ need to be looked at from a fresh perspective (though "should not be discarded").

This book is a must-read for researchers, as it explains the process behind turning thought into theory. It is also a good read for anyone with a curious mind to understand the importance of deviant thoughts, as these, according to him, are nothing but the genesis of ideas that could turn into new knowledge someday. Throughout the book, he draws on various experiences from his life that inspired him to think in the direction of behavioural economics. The examples he gives are as common as playing poker, game shows, office room allotments, wine consumption and lottery tickets. It makes you wonder. There’s actually theory behind almost everything, if we really observe. An important lesson in this context is that the goodwill of 'chance' in life will only work when you're willing to add structure (theory) to your plan.

After discussing the genesis of theory, Thaler dives into the application of behavioural economics. He reinforces the role of observation in economics and the importance of data for evidence-based policymaking. According to him, observation is important because, while Econs can be expected to be rational, humans are emotional, and their actions may not always be justified by the traditional economic wisdom of bounded rationality. From this point onward, a few chapters of the books can be slightly technical for a non-finance person, but they make a strong case for the use of behavioural patterns to make data-driven decisions. Towards the end, he lays out five crucial aspects of his journey towards the making of behavioural economics that are useful for almost anyone trying to do something new in life. These are — collaborating with the right people, being confident about one’s idea, having resilience to pursue it, evolving one’s own thought with new insights, and finally, the role of chance.

The book winds up with Thaler talking about the process behind publishing his other book, Nudge, which primarily deals with real-life applications of the concepts discussed in this book. So, in a way, it is a good idea to pick up Misbehaving before reading Nudge, to get a better understanding of how behavioural economics can be seen in the context of policy implementation.