June 10, 2016

Book Reflection: Misbehaving by Richard Thaler

I finished reading Misbehaving: The Making of Behavioral Economics by Richard Thaler two weekends ago. It was a relatively easy read considering that many casual readers will be put off by the fact that it is a book about economics. I consider myself firmly in the casual reader camp even if I did survive majoring in Economics many years ago.

Misbehaving by Richard Thaler
The book is written in such a way that Mr Thaler is able to narrate his work (along with the work of other key colleagues and collaborators) in developing the field of behavioral economics without actually getting into the overly technical details. He uses his keen eye for observation and curiosity to identify how humans can behave in ways that go against conventional and widely accepted thinking.

Some of my key takeaways:

Don’t be afraid to challenge conventional wisdom. 

It won’t be easy and many people will get in your way, but if you have the data to back up your theory then go for it. For someone who claims to be lazy (he says so in his book), Mr Thaler went out of his way to probably take the toughest path to the top of his field. Instead of towing the line and sticking to traditional economic models, he helped build an entirely different school of thought, one centered on human behavior.

Humans can act irrationally.

The whole behavioral economics movement was built on exposing how humans can act in ways that seem to defy reason. For example, we tend to overvalue the present and will overpay to get something today instead of tomorrow. 

This was illustrated in the chapter in the book that talked about the NFL Draft. Mr Thaler took a look at the data and made an estimation of the value of each pick. One conclusion made is that it is not worth trading up to grab a particular player if the team has to give up multiple picks. Another conclusion made is that it is better to trade away a pick today for a better and/or multiple picks next year. Despite having this knowledge, the manager of the team still decided to do things the “usual way” come draft day.

The field of behavioral economics can and has had real applications in society. 

Even if we’re not scientists, academics or even expert economists, we can apply the framework developed and discussed in the book. The way that Mr Thaler looks at things with a critical eye while using quick experimentation and then adjusting and reacting to the results is a framework that many of today’s top companies use. Companies (and everyone individually in my opinion) must keep an open mind while remaining flexible and agile. Learning and growing should never stop.

Have you read this book? Happy to hear what you think about it in the comments section.