Finance
by Richard Thaler
What if people aren't rational?
Economics built its models on the Econ, a calculating creature who never makes a mistake. Richard Thaler spent his career pointing out that real people, whom he calls Humans, behave differently. Misbehaving is his account of how economists came, slowly and grudgingly, to take that seriously.
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To an Econ, things like how a price is framed or what you paid last year shouldn't matter. Thaler calls them supposedly irrelevant factors, or SIFs. As a young economist he kept a list of them. They change what Humans do all the time, and the models ignored them.
To explain self-control, Thaler and Hersh Shefrin pictured each person as two selves. A far-sighted planner wants to save and stay healthy. A short-sighted doer lives for today. Rules like pension money taken before you ever see it are the planner's way of managing the doer.
Economists said share prices were always right. Thaler and Werner De Bondt tested that by comparing the stocks that had done worst over several years with those that had done best. Over the following years the losers beat the winners. Investors had overreacted, and prices had been wrong.
Thaler's ideas reached government. Britain's Behavioural Insights Team, which he advised, sent late taxpayers letters saying that most people in their area had already paid. That one line brought in more tax on time, for almost no cost. How a choice is presented can move millions.
Irrelevant factors
Economists ignore what Thaler calls supposedly irrelevant factors, like how a price is framed. Yet they change what people do.
Ownership
People value a thing more once it's theirs, even a mug they were handed a minute ago.
Sunk costs
Having paid for a ticket, people will drive through a snowstorm to use it.
Mental jars
We sort money into mental jars, treating a casino win differently from a pay cheque.
Self-control
Knowing our willpower is weak, we do better when we remove the temptation, like taking away the bowl of cashews.
A story from the book
Thaler once put out a bowl of cashews before dinner for some guests, economists all. They kept eating and spoiling their appetites, so he took the bowl into the kitchen, and everyone thanked him. An Econ would never be glad to lose a choice. Humans often are.
One thing to try
Find one temptation you keep giving in to, like a biscuit tin on the counter or a shopping app on your home screen. Move it out of reach this week. Thaler's guests were grateful when the cashews disappeared into the kitchen.
Knotd has the key ideas from 250+ non-fiction books, each in a few minutes, in plain words. Misbehaving comes with a Name That Idea round and a Your Move story to make it stick.
Get the whole book on KnotdOpen in the appWhat if people aren't rational? Economics built its models on the Econ, a calculating creature who never makes a mistake. Richard Thaler spent his career pointing out that real people, whom he calls Humans, behave differently. Misbehaving is his account of how economists came, slowly and grudgingly, to take that seriously.
Supposedly irrelevant factors; A planner and a doer; Markets overreact; Nudging the taxpayer.
Find one temptation you keep giving in to, like a biscuit tin on the counter or a shopping app on your home screen. Move it out of reach this week. Thaler's guests were grateful when the cashews disappeared into the kitchen.
Yes. Knotd has the key ideas from Misbehaving in a few minutes, in plain words, plus a Name That Idea round and a Your Move story to test them. It's one of 250+ non-fiction books in the app.
