Behavioral Economics

Book Review: Misbehaving

/ J.K. / Leave a comment

Misbehaving: The Making of Behavioral Economics

My Rating: Put it on your list

Level: Moderate to difficult, depending on your base knowledge of Economics and Psychology. Moderate in length, but reads quickly

Summary
Part Thaler autobiography, part time line of the development of the field, with plenty of humorous anecdotes and academic ‘anomalies’, this book does not read like a history of an academic discipline. The book is broken into eight broad chapter based around years in which Thaler worked through differing parts of the development of the field. The chronology starts with him as a graduate student, where he is just starting to look into ideas that would become the discipline, and proceeds up to the present, where he seems poised to hand over the reins to the next generation. Along the way are his stories of getting the discipline recognized by academic journals, struggles with the establishment, and gaining allies (across other disciplines, as well) and students that will become the next generation.

My Thoughts
This book, like the somewhat related book (Thinking, Fast & Slow) by his fellow collaborator, Daniel Kahneman, kind of annoyed me in how well it is written. Thaler has had a nearly five decade career as researcher and writer, so he should write well, but that is not what I mean. His book is funny and reads quickly like a narrative. As I said above, it it part autobiography, and lends itself tremendously to humorous narrative that leaves you interested in reading more. As a pretend internet researcher and writer, I am envious that someone with actual credentials writes so well.

All that being said, I think I missed the subtitle of this book when I first heard about it a few years ago. I heard Thaler on a interview, and knew he was related to behavioral economics, but didn’t quite realize this was book he was promoting. I must have searched his name on amazon and bought the first book I saw, without noticing the reference to ‘Nudge’ on the cover. Nudge was really the book I was looking for, which is more about the research out of Behavioral Economics as it relates to topics like money and health. ‘The Making of Behavioral Economics’ should have clued me in to this book being more of a history. Luckily, I enjoy history and biographies, and as I said above, he is a very talented writer.

One of the first things that stuck out to me was how long he as been in the field. His book starts in 1970, with him as a grad student. I wouldn’t be born for another decade and a half, and I don’t consider myself very young. I’ve heard that Millennials will have between seven and 17 careers over their lifetimes, so it amazes me to read of someone’s history in a field that is longer than my lifetime.

Reading history is always fascinating, because you, with the addition of hindsight, can read and say, ‘how did these people miss this?’ I couldn’t believe some of the resistance he and others would face as the argued against the efficient market hypothesis. I was in high school during pets.com (look it up kids) and the tech bubble and finished grad school a few months before the housing bubble popped, so I struggle to believe in any way the the market is efficient and that people are well informed. Thinking back to my undergrad economics courses, I believe I was taught the distinction between theory of economics (people who Thaler calls Econs) and actual behavior (called Humans). In grad school, the distinction was called that of theory and practice. So, it is interesting to see that a few decades before, saying things like this, which to me are clearly true, would get you laughed out of conferences and barred from academic journals.

This history was interesting, and the debates with other academics were amusing and insightful, but the book really shines with the anecdotes. I won’t go through all of them here, but the include an economist who refuses to sell his wine (for a gain) at the market price while also stating he would never buy it at the price and companies whose stock prices are lower than their subsidiaries (even when purchasing the larger company stock means getting the smaller companies stock included; this means the larger company is valued in negative dollars relative to market cap).

These types of stories are what I enjoy reading. They are amusing on their own, but also challenge your assumptions about certain areas, but even more, make you really question whether you actually know what you are doing. You may think you do everything rationally, but you probably don’t, and that is illustrated time and again in this book. If you are looking for just stories and research results, you are probably better off with Nudge or Thinking, Fast and Slow. However, if you are interesting in Behavioral Economics in general, this is definitely a book to put on your list.

Book Review – Thinking, Fast and Slow

/ J.K. / Leave a comment

Thinking, Fast and Slow – Daniel Kahneman

My Rating – Put it on your list

Level – moderate to difficult read, it is well written but some of the concept are tough, fairly long, but ready a little quicker then the 400+ pages

Summary
Broadly speaking, this book is about thinking. More specifically, the two systems (fast and slow), basically how you suck at thinking, and finally ‘the two selves.’ Technically, the book is broken up into five parts – two systems, heuristics & biases, overconfidence, choices, and finally the two selves.

Page 20 starts off his quick definitions of the two systems. System 1 is automatic and works quickly with little to no effort. System 2 ‘allocates attention to the effortful mental activities that demand it’ and this usually requires concentration and can be interrupted and disrupted.

The middle three sections could possibly be rearranged but essentially include research biases, design, and problems (fallacies, sample size issues, etc.). This part of the book will blow your mind. It is unbelievable some of the things that affect research, especially anchoring. It should make you terrified to ever go before a judge.

Finally, the two selves. This is basically the self that exists (or existed, experienced something) and the ‘remembering’ self, not necessarily what happened, but what you remember happening. The implications of these two differing selves have far reaching affects. As an example, researchers had two groups of people that underwent a procedure. One group experienced the procedure and long with a high peak of pain, and then slowly fading out. The other group had a shorter experience, but didn’t fade as much, but also didn’t peak as much.

The participants rated pain levels during the event. Later, researchers asked the participants about their experience. Whom had the worse experience? Well, plot twist, it was the shorter one with the lower peak pain. Why? Because all anyone remembered was the end. The ones in pain at the end, rating their procedure as worse than those whom had the longer more painful one. Those participants rated their experience as not that bad, as all they remember is the end, which was just some amount of discomfort, instead of pain.

My Thoughts
This book is crazy. There are so many mind bending things that you will reread some sections over and over again. Some thing you just will not believe. It confirms our worst fears, we really aren’t as smart as we think. We are incredibly susceptible to leading. Subliminal messages and marketing have a much, much greater impact than we think.

Even while reading it, I wanted to think of myself as smarter. Especially the sections about coin tosses and chance. As an experienced gambler, I knew most of these things, especially if you are familiar with probably and things like ‘pot odds’. However, I’m not, as clearly showed in later examples. It is unbelievable how open to suggestion your mind is. We like to all think we are special, unique, and different, however we all fall for the same thing.

If you are looking for a book to challenge your way of thinking, put this on your list. You’ll find yourself arguing with the author, even as he argues with himself, and even as you see the clear evidence. You can learn a great from this book, especially as it related to major life decisions. Additionally, Kahneman is a great writer. I found myself jealous at various points as his summaries of complex research can read almost as easy as a novel. He is also a Nobel Laureate and if you know anything about Richard Thalor (whom makes an appearance) or behavioral economics, this book is for you.