Book Review: Misbehaving
Published:
Richard Thalerâs legendary Misbehaving is personal biography, academic journey, and field survey wrapped into one. He recounts his struggles as a fledging researcher, his partnerships with other great minds, and their projects throughout the years. Itâs an insiderâs view of world of behavioral economics that you canât find anywhere else.
Hereâs the paperback and audiobook.
Utility: âââââ (5/5)
Writing: âââââ (5/5)
Thaler has a innate playfulness and sense of humor that animates the book. Every chapter (of the book and his career) is driven by a genuine curiosity and tendency to misbehave. I love his writing and his content. Compared to Kahnemanâs Thinking Fast and Slow, Thalerâs book reveals much more about the actual making of economics research and tends to use specific experiments and examples as focal points for ideas.
If youâre at all interested in psychology or economics, I think youâll love the book. Itâs a must read!
Notes
This time, Iâm writing these notes after reading the book. My theory is that having the entire book as context will let me focus on the important parts, and hence decrease the amount that I need to write. Iâll section them off by topic and omit the first-person narration.
The Endowment Effect
Humans value their own stuff more highlyâitâs called the endowment effect. Someone willing to drink an old bottle of wine may not be willing to purchase the wine at market price. Similarly, customers would much rather be told that cash customers get a discount than that credit card users pay a fee. Paying âout of pocketâ imposes an additional disutility that isnât rational.
Accounting Shenanigans
Humans experience transaction utility. Marked up prices make us feel robbed, while sales make us delighted. Itâs why retailers are constantly on sale or offering us to save a penny ($9.99 instead of $10!).
We also feel sunk costs. If I already paid for a year-long gym membership, Iâll keep using the gym, even when Iâm sore or have better things to do with my time. Itâs also why, when Iâve started writing a post, I refuse to delete it, keeping it instead in my âdraftsâ folder.
In addition, humans bucket their cash. Objectively, money is worth the same whether in the form of cash, assets, or savings accounts; but, weâre much more reluctant to touch our savings than we are to spend our cash. An example is the house money effect, where people are much more willing to make risky gambles with money theyâve already won, since they donât perceive it as âtheirâ money.
Intertemporal Utility
People experience discounting, so that each yeah utility is delayed, it shrinks by a constant factor. But they also place an additional premium on present utility, resulting in time inconsistent preferences. These ideasâincluding the beta-delta modelâare expressed mathematically in my Econ 101A notes.
Fairness
Unlike Econs, Humans get pissed off when firms take advantage of emergency-induced demand (like hiking the price of shovels during a blizzard, or jacking up the price of COVID-18 vaccines). Theyâre also susceptible to framing: taking away a discount hurts a lot less than raising the price. Itâs why wages are stickyâpeople really dislike lower wages, so employers fire workers instead. Unsurprisingly, they also arenât great at accounting for inflation.
In games with real money, research subjects demand equal splits. Theyâll even spend their own money to rectify inequality. In variations of the prisonerâs dilemma, subjects are surprisingly willing to cooperate. They practice conditional cooperation, starting out nice but becoming mean when others fail to reciprocate.
Inefficient Markets
People donât like risk and volatility, and it canât be explained by loss aversion. Practically, it means people underinvest in high-risk, high-return assets like stocks, favoring safer bonds instead.
The efficient market hypothesis is compromised of 1) the âprice is rightâ and will reflect intrinsic value, and 2) the âno free lunch principleââthereâs no way to beat the market. The following posed challenges:
- Stocks with high price/earning ratios were overvalued, such that âLosersââstocks with poor P/E ratiosâoutperformed âWinnersâ in the long term.
- Prices are too volatile to actually reflect changes in intrinsic value, especially during events like Black Monday.
- Closed-end funds sell equities are different functional prices than the market, challenging the âone-priceâ assumption. Owners of these funds offered a greater discount when small company stocks differed in returns from large company stocks.
- Splits between existing companies and company-held shares provide examples of companies with ânegative valuations.â
Applications
Some real world examples of the above phenomena include:
Selling services in bigger bundles at steeper discounts attracts consumers, even when they are unlikely to use the entire bundle.
- Car buyers will take a loan over a rebate even when it has lower utility because it seems to immediately subsidize a greater proportion of the carâs price.
- When a bank tried to encourage ATM use by charging a fee to use a teller, they faced immense public backlash and retracted the program.
- Uberâs pricing algorithm hiked their prices when a blizzard struck New York. The state eventually reached an agreement with Uber, capping the prices.
- The famous mugs experimentâonce people actually have a mug, they value it disproportionately high.
- In law, the Coase theoremâwhich states that parties will reach an optimum settlement through tradesâis used to claim that the same state will result regardless of who is forced to pay. The mug example disproves it.
- When competing to claim offices, faculty will give too much weight to the info they haveâlike square footageâwhile ignoring less obvious factorsâlike exposure.
- In football, earlier draft picks are way overpriced, since individual coaches prefer to have the best players now.
- Game shows provide evidence for the âbig peanutsâ phenomenon. If contestants were really eyeing a $1M prize pool, then theyâll care a lot less about a decision with $5,000 stake.
- âSave More Tomorrowâ boosted retirement savings must more than any change to the âafter-tax financial return on savings.â Instead of directly hiking the savings rate, the plan stashed away pay raises into the new savings rate, decreasing psychological barriers to saving.
- The Behavioral Insights Team or ânudge unitâ have leveraged behavioral science to increase tax filings and improve insulation.