Book Reviews

Book Reviews Finance & Development, September 2015, Vol. 52, No. 3

Being HumanRichard Thaler

Misbehaving: The Making of Behavioural Economics

W.W. Norton & Company Inc, New York, 2014, 432 pp., $27.95.

Behavioral economics sees the world as full of humans, not “econs,” in the language Richard Thaler and Cass Sunstein popularized in Nudge, their seminal work in this area. Now Thaler has a new book on the subject, but this time he describes his struggle for acceptance of behavioral approaches by the economics profession. The result is a very human book, starting with a moving tribute to Amos Tversky, whose work with Daniel Kahneman would surely have won him the Nobel Prize had he not died tragically at 59.

In the spirit of full disclosure, I worked with Thaler when the U.K. government was setting up the first major “nudge unit” to test behavioral concepts. I enjoy his company and his ideas: when I took him to the pub in London, we discussed whether the British habit of buying drinks in “rounds,” taking turns to pay for everyone, leads to drinking too much.

The book is highly readable but also a serious study of behavioral economics as an example of a paradigm shift, as suggested by Thomas Kuhn in The Structure of Scientific Revolutions. Debate inside the University of Chicago and beyond was clearly intense and sometimes personal. Thaler describes his own career as a struggle against the prevailing orthodox model of “rational choice.” The book lists “anomalies,” findings that appear to contradict the rational model, from fields as far apart as game shows and pension savings. These findings were clearly not received warmly by many economists. Thaler talks of “running the gauntlet” at seminars, where opponents said the evidence was irrelevant because it is still possible to assume people behave “as if” they were following the rational choice model. His stories suggest that many econs display the very human trait of confirmation bias, which is not surprising given the radical way behavioral insights challenge traditional theories.

Thaler’s anomalies compellingly demolish old approaches, but what should take their place? Presumably we need to base our models on assumptions consistent with how humans actually behave. The real success of behavioral economics is that it has led governments to change policies and the way they are implemented. Thanks to behavioral insights more people now donate organs in Brazil, pay taxes in Guatemala, hesitate to...