Misbehaving
by Richard Thaler
Standard economics models a creature that optimises perfectly and never regrets; real people depart from it in systematic, predictable ways, and Thaler's career shows those departures are stable enough to rebuild the theory around.
What it teaches
Written as an intellectual memoir, this is the account of behavioural economics winning a long argument. Thaler began by keeping a list of behaviour his training said was impossible — refusing to sell a bottle of wine for far more than one would pay to buy it, driving across town to save a small sum on a small purchase but not the same sum on a large one, treating a windfall differently from earned income. Each entry on the list became a documented effect. He shows that people value what they already hold more than an identical thing they do not, that money is kept in mental compartments rather than treated as interchangeable, and that we discount the near future far more steeply than the far future — which is why the planner in us keeps losing to the doer. His defence against the standard rebuttal, that markets punish irrationality away, is that the deviations are correlated across people and so do not cancel. Read it for the case that these are not random errors but a second, testable theory of choice — and for an unusually candid picture of how a discipline changes its mind.
The ideas this book explains
Read the idea in two minutes, then read the book behind it.
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