Just Finished Reading: Misbehaving – The Making of Behavioural Economics by Richard H Thaler (FP: 2015)

Despite the fact that I’m still pretty much scratching the surface of economics I’ve long held the opinion that the underlying theories are seriously flawed. This book helped confirm that idea although in ways I wasn’t fully expecting. When I read about the subject years ago (pre-Blog) I was confused by ideas like ‘perfect knowledge’, ‘maximising utility’ and the idea that economic units – that’s you and me and your next door neighbour – behave rationally at all times. Just that particular nugget should raise alarm bells. But all of that – that people have somehow developed perfect knowledge of price alternatives, that we can all gauge to the penny which career choice is better over an entire lifetime and that we always buy exactly what we need at the best possible price and that no other considerations come into the decision. In such a world there are no recessions, unemployment does not exist, and inflation is fleeting as the market naturally adjusts to changes in supply and demand. Likewise economic decisions are not influenced by the weather, fashion, fads or internet ‘influencers’. Economics is, indeed, the prefect representation of theories that have grown up over generations along with increased mathematical rigor to say nothing of prestige and, indeed, Nobel Prizes.

Unfortunately, despite the protestations of the world’s greatest living Economists it’s all bullshit built on nothing more that ivory tower wishful thinking. OK, the author isn’t *quite* that brutal but he does lean that way. Back in the 1970’s he started having heretical views. Views that led him to think that maybe, just maybe, economics would have greater and more predictive power if it took into account how people – real people – thought about money and actually spent it. Using experiments more akin to those used in Psychology labs the author and a few radical collaborators started finding disturbing evidence that classic economics simply failed to understand the real world it was supposed to be explaining. With the advent of computers and the growth of economic databases it became increasing clear that the emerging Behavioural Economics had something to say and something to contribute to the study of Economic activity (go figure!). Over the next 40 years, grudgingly at first, Behavioural Economics moved from the lunatic fringe and into the mainstream. What was simple heresy has, slowly, become obvious. It was a long hard road and it’s not over yet. 

Told with a great deal of humour – a lot of it self-deprecating – the author shows how the history of Behavioural Economics unfolded and grew from a few voices in the wilderness to being invited in by governments to create ‘nudge units’ to help move people in the right direction in subjects like paying their taxes to taking up vaccinations. Along the way there’s a lot of resistance from mainstream economists (allowing much debate about its many shortcomings) and a lot of going back to basics to show – with DATA – how Behavioural Economics can explain activity that classical could not (or even could not recognise as a legitimate problem worthy of study). Although a little dry in places, complete with diagrams and graphs, this is still a very good and very useful to a whole new branch of economics that has only really existed in any recognised state for a few decades. A definite must read for anyone interested in the subject. More to come.