Talk to Misbehaving: The Making of Behavioral Economics like its author wrote you back.
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Misbehaving: The Making of Behavioral Economics, in detail
Richard Thaler is one of the founders of behavioral economics, the field that took the anomalies in standard economic theory seriously rather than dismissing them as noise. Misbehaving, published in 2015, is his memoir of that project — how he built a career studying the gaps between how economists assumed people would behave and how people actually behaved, and how that work eventually won him the Nobel Prize in Economics in 2017.
The book opens with the concept of the Econ — the fictional perfectly rational agent of economic theory, who knows all relevant information, processes it correctly, has stable preferences, and maximizes utility consistently. Thaler spent his career documenting that humans are not Econs. They overspend money already spent (sunk cost fallacy), value something more highly once they own it than before (endowment effect), treat equivalent amounts of money differently depending on where they come from (mental accounting), and care about fairness even at economic cost to themselves.
Mental accounting is one of Thaler's signature contributions. Money is fungible in economic theory — a dollar is a dollar, regardless of its source or intended use. In practice, people maintain separate mental accounts for different pots of money and treat them as distinct. Tax refund money gets spent differently than paycheck money. The house money effect in gambling comes from treating winnings as a separate, more expendable account. Understanding mental accounting allows designers of retirement plans, saving programs, and tax policy to work with rather than against these tendencies.
The second half of the book covers the policy application that Thaler co-developed with Cass Sunstein: libertarian paternalism, or nudge. If people make predictable errors, the question is whether defaults and choice architecture can be designed to produce better outcomes while preserving freedom of choice. Automatic enrollment in 401(k) plans is the canonical example: most people do not opt in when they have to act, but most people stay enrolled when they have to opt out. The outcome is dramatically better retirement savings without any mandate. Misbehaving is the most accessible and readable account of how behavioral economics developed and why it matters.
The big ideas
- 1.
The Econ is a fiction. Standard economic theory assumes rational agents who maximize utility consistently. Behavioral economics began by taking seriously the systematic deviations from this model.
- 2.
Mental accounting means people treat equivalent sums of money differently based on where they come from, how they were earned, or what account they are mentally placed in.
- 3.
The endowment effect: people value something more once they own it than before acquiring it, even when no objective change has occurred. This violates the standard assumption that willingness to accept equals willingness to pay.
