Book Review
Page 12
The human puzzle |
constructing models to predict and explain
behavior and, as Thaler writes, “economists
are really good at inventing rational
explanations for behavior, no matter how
dumb that behavior appears to be.”
Economists run into trouble when “they
make a highly specific prediction that
depends explicitly on everyone being
economically sophisticated.”
Thaler reassures us that we don’t have to
stop this kind of modeling — the kind that
describes “Econs” - but it’s not helping
very much to assume that these are
accurate predictions of behavior and, more
importantly, basing major public policies on
them.
The problem is that, “As (John Maynard)
Keynes notes, following the conventional
wisdom keeps you from getting fired.” So,
interspersed with detailed but not overly
complex descriptions of experiments he ran
in his classes, Thaler also describes how
much of a misguided apostate he was
assumed to be in his own field. His
conversational, amusingly self-deprecating
tone and light-hearted anecdotes help keep
the lay reader engaged; it would likely help
to have a basic understanding of economics,
at least to get through some of Thaler’s
material with more enthusiasm.
But even the reader with only a cursory
understanding of economics will find
Thaler’s anomalies fascinating: “Roughly
speaking, losses hurt twice as much as
gains make you feel good” (could this be
why we generally remember insults more
than compliments?). “Those who start out
with some object will tend to keep it, while
those who don’t have such an object won’t
be that keen to buy one” (could this be why
we struggle to muster up the political and
social will to alleviate poverty?). “Self
control is, centrally, about conflict. And, like
tango, it takes (at least) two to have a
conflict” (could this be part of what’s
BY MEGAN WILHOOD
CONTRIBUTING COLUMNIST
MISBEHAVINé
Richard H. Thaler
Botl-ttHing coauthor ol Nudge
Ita
“Misbehaving: The
Making of
Behavioral
Economics,” by
Richard H. Thaler
^T^he book is not the sort you
might expect an economics
JL professor to write. It is neither a
treatise nor a polemic,” Richard Thaler said
of his narrative-meets-argument,
“Misbehaving.”
It is the story of the birth of the field of
behavioral economics, which is so common
now as to sound redundant. How would one
even study economics without studying the
behavior of the entities who participate in
economies? These entities are “humans,”
as opposed to “Econs,” creatures Thaler
argues most of economic theory was based
on until the creation of the behavioral
branch.
“Economics is distinguished from other
social sciences,” Thaler writes, “by the
belief that most behavior can be explained
by assuming that agents have stable, well-
defined preferences and make rational
choices consistent with these preferences
in markets that (eventually) clear. An
empirical result is anomalous if it is difficult
to ‘rationalize,’ or if implausible
assumptions are necessary to explain it
within the paradigm.”
In a world of Econs, gifts are foreign
concepts; prices are always naturally set at
the right level by the “invisible hand” of
supply and demand; and buying,, saving and
investing choices are all easily predictable.
But Thaler started to notice some
outliers, people not making the predicted
choice, people who were “misbehaving.*
The core principle of economic theory is
that people make unbiased choices to
optimize gain. But Thaler points out that it
takes a lot of training to be economically
knowledgeable enough to make truly
optimal choices. And what kind of training
would suffice to eliminate all biases?
Economics is in the business of
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Street Roots • May 13-19, 2016
Professor tells us why economics can’t
be separated from human behavior
behind the expression “part of me feels X
but part of me feels Y?). “There is clear
evidence that people dislike unfair offers
and are willing to take a financial hit to
punish those who make them. It is less
clear that people feel morally obliged to
make fair offers” (whatever happened to
the Golden Rule?).
Thaler, not surprisingly, takes a strictly
economic view on poverty, it seems. Even
with a behavioral-
"Economists are really good
economics view,
at inventing rational explana
though, one can
misrepresent the
tions for behavior, no matter
factors and causes of
how dumb that behavior ap
poverty, on the global
pears to be." Economists run
or micro level. But
into trouble when "they make a
what behavioral
highly specific prediction that
economics does have
to say on the topic is
depends explicitly on everyone
more useful than
being economically sophisti
current public policy
cated."
suggests. For
instance, Thaler
writes, “The idea is
that a certain amount of money can seem
small or large depending on context”
Applying this concept to poverty alleviation
results in localizing policies and solutions to
poverty rather than one-size-fits-all
legislation or action.
Thaler’s main argument is, “Humans do
not have the brains of Einstein, nor do they
have the self-control of an ascetic Buddhist
monk. Rather, they have passions, faulty
telescopes (pleasure is hard to defer), treat
various pots of wealth quite differently and
can be influenced by short-run returns in
the stock market. We need a model of these
kinds of Humans.” This is why, even if
you’re not interested in economics, Thaler
has a lot to say to those who are interested
in humans.
Reprinted from Street Roots’ sister paper
Real Change News in Seattle.