Considered the founder of behavioral economics, Richard Thaler, professor of behavioral science and economics at the University of Chicago Booth School of Business, has spent much of his career exploring the radical notion that the central agents in the economy are fallible, error-prone humans — not the rational actors assumed in traditional economics.
Whether buying a clock radio, selling basketball tickets or applying for a mortgage, we all succumb to biases and make decisions that deviate from the standards of rationality assumed by economists. In other words, we misbehave.
In "Misbehaving" (W.W. Norton & Company, May 18, 2015) Thaler collects evidence about economic misbehaving from a wide variety of settings: from financial markets to the NFL draft to TV game shows to Uber's use of surge pricing — showing that humans determine which businesses thrive, make financial markets so volatile, and prevent trendy restaurants from auctioning off their best tables to the highest bidders. Consider these common scenarios:
- People will not buy a bottle of wine worth the same market price as the one that has appreciated in value in their cellar — but they'll gladly drink that bottle on a special occasion.
- A husband will be happy when his wife buys him an expensive sweater — one he would not want to buy for himself, because it was too pricey — even though they pool both of their salaries.
- We'll buy a king-size comforter when it is on sale, even though we have a double bed.
In "Misbehaving," Thaler examines the serious consequences of human miscalculations and their effects on the market. He combines recent discoveries in human psychology with a practical understanding of incentives and market behavior and enlightens readers about how to make smarter decisions. When economics meets psychology, the implications for individuals, managers, and policy makers are both profound and entertaining.
But behavioral economics is not just about explaining puzzles; it can also be used for good. In moving a once renegade field into the mainstream, Thaler and his colleagues have used their findings to suggest policies that will lead to better outcomes for society, policies that are now being adopted by a growing number of governments and businesses around the world.
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