Misbehaving

Thaler tells the story of a field: how economists slowly came to accept that real people are not the Econs of the textbooks, starting from what he called supposedly irrelevant factors, things that should not change behavior under rational-agent theory but plainly do.

He writes as a participant. He is a University of Chicago Booth professor, co-author of Nudge with Cass Sunstein, a principal of the asset manager Fuller & Thaler, and a close collaborator of Daniel Kahneman and Amos Tversky. The finance section holds the most for market readers, including his overreaction study with Werner De Bondt, the closed-end fund puzzle and the equity premium puzzle.

It is livelier than most histories of economics. Jonathan Knee in The New York Times called it a sly, somewhat subversive history of the profession, and it was shortlisted for the 2015 FT and McKinsey Business Book of the Year. In the Wall Street Journal, Carol Tavris found it highly enjoyable and dense with examples. Adam Oliver in the LSE Review of Books found it more personal history than history of the field. He called it US-centric, with little on European pioneers such as Maurice Allais and Robert Sugden, and thin on the ethics of nudging.

Read it before or with Kahneman's Thinking, Fast and Slow. It suits analysts, portfolio managers and anyone who designs products or policies for real customers.

1. Prices can stay plainly wrong. When Palm traded at a value that implied the rest of 3Com was worth less than nothing, short-sale limits kept arbitrageurs from closing the gap. Limits to arbitrage are real.
2. Extreme losers tend to rebound. De Bondt and Thaler found that portfolios of past losers outperformed past winners over the following years. That result is one of the behavioral foundations of value investing.
3. Money is not fungible in people's heads. Investors treat gains as house money, chase losses to break even and segment wealth into accounts. All of this distorts risk-taking, including by professionals.
4. Checking too often makes stocks feel riskier. Myopic loss aversion explains why investors who look at results frequently demand a large equity premium and hold too little in equities.
5. Defaults beat education. Automatic enrollment and Save More Tomorrow's pre-committed escalation lifted retirement saving far more than exhortation did. The lesson applies to product design and client onboarding.

The book runs in eight chronological parts, each dated to a stage of Thaler's career, followed by a short conclusion on where the field should go.

1. Beginnings, 1970-78. Supposedly irrelevant factors, the endowment effect and Thaler's list of anomalies. A year at Stanford with Kahneman and Tversky gives him a framework.
2. Mental accounting, 1979-85, and self-control, 1975-88. Bargains and rip-offs, sunk costs, budget buckets, house-money behavior at the poker table, and the planner-doer model of self-control he built with Hersh Shefrin.
3. Working with Danny, 1984-85. Fairness experiments and the mugs studies that pinned down the endowment effect.
4. Engaging the profession, 1986-94. His Anomalies column in the Journal of Economic Perspectives, building a research network, and the debate with rational-choice economists.
5. Finance, 1983-2003. Keynes's beauty contest, whether the stock market overreacts, Robert Shiller's excess volatility, the battle over closed-end funds, and negative stock prices from the Palm carve-out.
6. Chicago and policy, 1995 onward. Behavioral analysis of NFL draft picks, game shows and his Chicago colleagues' office choices, then Save More Tomorrow, automatic enrollment and the UK government's nudge unit.

Winner of the Nobel Prize in Economics Get ready to change the way you think about economics. Nobel laureate Richard H. Thaler has spent his career studying the radical notion that the central agents in the economy are humans—predictable, error-prone individuals. Misbehaving is his arresting, frequently hilarious account of the struggle to bring an academic discipline back down to earth—and change the way we think about economics, ourselves, and our world. Traditional economics assumes rational actors. Early in his research, Thaler realized these Spock-like automatons were nothing like real people. Whether buying a clock radio, selling basketball tickets, or applying for a mortgage, we all succumb to biases and make decisions that deviate from the standards of rationality assumed by economists. In other words, we misbehave. More importantly, our misbehavior has serious consequences. Dismissed at first by economists as an amusing sideshow, the study of human miscalculations and their effects on markets now drives efforts to make better decisions in our lives, our businesses, and our governments. Coupling recent discoveries in human psychology with a practical understanding of incentives and market behavior, Thaler enlightens readers about how to make smarter decisions in an increasingly mystifying world. He reveals how behavioral economic analysis opens up new ways to look at everything from household finance to assigning faculty offices in a new building, to TV game shows, the NFL draft, and businesses like Uber. Laced with antic stories of Thaler’s spirited battles with the bastions of traditional economic thinking, Misbehaving is a singular look into profound human foibles. When economics meets psychology, the implications for individuals, managers, and policy makers are both profound and entertaining. Shortlisted for the Financial Times & McKinsey Business Book of the Year Award