Misbehaving
Richard H Thaler
Allen Lane
Pp415
Rs 999
MISBEHAVING IS quite an interesting autobiography of Richard H Thaler, who has established his credentials in the field of behavioural economics. In fact, it has become fairly popular for economists to gravitate towards the behavioural aspect of the subject and move away from the conventional assumption of ‘rationality’ in the textbook.
Human beings behave in a seemingly irrational manner, which helps others get them do what they want. Thaler starts with a rudimentary example of how students argued when they scored 72 out of 100, but were happy with a score of 96 out of 137, which shows that we are not always rational. Similarly, we are eager to contribute to the medical expenses of a six-year-old girl with brown hair, but will not bother about contributing to the foundation of a cancer hospital. We prefer an identified life to a statistical one.
Here are some of the seemingly irrational things explained in the book: when we have free tickets, we might feel convinced to go for the show even in a snowstorm just to realise the value of the tickets. Or we might not buy something expensive for ourselves, but if the spouse buys it from the same household budget, we are thrilled. Hence, our behaviour generally seems to be quite warped. Therefore, the title of Misbehaving.
Thaler also introduces the concept of ‘sunk costs’, which means we should ignore and not brood over an expense once incurred. This holds for club membership, which when paid for and rarely used is not a concern, as it is a sunk cost.
Quite interestingly, Thaler points out that the concept of behavioural economics had its genesis in the works of Adam Smith. In his book, The Theory of Moral Sentiments, Smith spoke of the struggle between our passions and what he called the ‘impartial spectator’. This is why we treasure the present more than the future and can be allured quite easily by market spaces. This is a blow to the concept of rationality, which is expounded in almost all economic theories. It was also implicit in the theories of John Keynes when he spoke of the concept of marginal propensity to consume, Franco Modigliani’s concept of lifecycle hypothesis and Milton Friedman’s permanent income hypothesis.
The most fascinating part of the book is where the author talks about the efficient markets hypothesis, which assumes that the market price is the right price if it takes in all the information that the market has to offer. The two assumptions made—‘prices are rational’ and ‘we cannot beat the market’—are tackled well. Thaler argues that if this were so then no one should be logically gaining, as the intrinsic value of the stock is imbibed in the price. This holds for mutual funds too, when the market price differs from the net asset value.
Thaler also goes beyond economics and gets into areas like education. How do we improve student performance? One way is to reward inputs rather than output. So the homework done by students should be rewarded more than, say, their exam results. Another way is to provide bonuses to teachers based on some performance indicators. Automatically, there is an incentive to do well.
Misbehaving holds in all fields where human beings are involved, as we all tend to behave in a way different from what textbooks describe. Being in the realm of behavioural economics, this book will be exciting for students, as the names of Daniel Kahneman, Robert Shiller and Jean Tirole will resonate often—the author has colluded or collided with their views on several occasions. This is definitely a book worth keeping on the shelf.
Richard H Thaler
Allen Lane
Pp415
Rs 999
MISBEHAVING IS quite an interesting autobiography of Richard H Thaler, who has established his credentials in the field of behavioural economics. In fact, it has become fairly popular for economists to gravitate towards the behavioural aspect of the subject and move away from the conventional assumption of ‘rationality’ in the textbook.
Human beings behave in a seemingly irrational manner, which helps others get them do what they want. Thaler starts with a rudimentary example of how students argued when they scored 72 out of 100, but were happy with a score of 96 out of 137, which shows that we are not always rational. Similarly, we are eager to contribute to the medical expenses of a six-year-old girl with brown hair, but will not bother about contributing to the foundation of a cancer hospital. We prefer an identified life to a statistical one.
Here are some of the seemingly irrational things explained in the book: when we have free tickets, we might feel convinced to go for the show even in a snowstorm just to realise the value of the tickets. Or we might not buy something expensive for ourselves, but if the spouse buys it from the same household budget, we are thrilled. Hence, our behaviour generally seems to be quite warped. Therefore, the title of Misbehaving.
Thaler also introduces the concept of ‘sunk costs’, which means we should ignore and not brood over an expense once incurred. This holds for club membership, which when paid for and rarely used is not a concern, as it is a sunk cost.
Quite interestingly, Thaler points out that the concept of behavioural economics had its genesis in the works of Adam Smith. In his book, The Theory of Moral Sentiments, Smith spoke of the struggle between our passions and what he called the ‘impartial spectator’. This is why we treasure the present more than the future and can be allured quite easily by market spaces. This is a blow to the concept of rationality, which is expounded in almost all economic theories. It was also implicit in the theories of John Keynes when he spoke of the concept of marginal propensity to consume, Franco Modigliani’s concept of lifecycle hypothesis and Milton Friedman’s permanent income hypothesis.
The most fascinating part of the book is where the author talks about the efficient markets hypothesis, which assumes that the market price is the right price if it takes in all the information that the market has to offer. The two assumptions made—‘prices are rational’ and ‘we cannot beat the market’—are tackled well. Thaler argues that if this were so then no one should be logically gaining, as the intrinsic value of the stock is imbibed in the price. This holds for mutual funds too, when the market price differs from the net asset value.
Thaler also goes beyond economics and gets into areas like education. How do we improve student performance? One way is to reward inputs rather than output. So the homework done by students should be rewarded more than, say, their exam results. Another way is to provide bonuses to teachers based on some performance indicators. Automatically, there is an incentive to do well.
Misbehaving holds in all fields where human beings are involved, as we all tend to behave in a way different from what textbooks describe. Being in the realm of behavioural economics, this book will be exciting for students, as the names of Daniel Kahneman, Robert Shiller and Jean Tirole will resonate often—the author has colluded or collided with their views on several occasions. This is definitely a book worth keeping on the shelf.
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