Tuesday, July 28, 2015

Misbehaving: The Making of Behavioral Economics

Misbehaving: The Making of Behavioral Economics by Richard Thaler, explores the author's role in the creation of Behavioral Economics, a field which challenges the assumptions of much of classical economics.

Economics is based on the assumption that people make rational decisions that optimize their decisions.  This assumption provides a handy set of axiomatic points to move from, creating all manner of theories of how people go about making choices.  It has the enhanced predictive power of other sciences which proceed from a unified theory to explain the varying phenomenon of nature.

Thaler details the problems with  rational theory.  He explores the early stages of his career as an economist, when he collected counter-instances to the theory of rational expectations.  This leads to the first tentative attempts to form other theories about people's choices and behavior which do not make assumptions about their complete rationality.  Theories like sunk costs and the fungible nature of money appear to be completely out of sync when tested against the reality of how people consider expenses and money. People make mistakes that are not in their best interests because they do not have complete information, or they act upon emotion rather than correct information.

This book shows the inherent bias in any scientific community. Researchers base their entire careers on looking at a field in a certain way, and are very reluctant to set that view aside. Reputation, position, and power can retard the progress of scientific inquiry. Thaler’s book shows that if enough effort is put behind gathering counter-instances in a field, eventually even the most ardent critic must take note. 

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