Richard Thaler (2016), Misbehaving: The Making of Behavioral Economics, WW Norton & Company
Since
Adam Smith’s time, the ‘invisible hand’ has ruled the dynamics of markets and
equilibrium, at least in the academic corridors of economics. Real life
economics, the way people make decisions from choices presented to them
thinking about tradeoffs of their present selves with their future, of
potentials gains with risks of losing has played out differently. People are
not wholly rational- always knowing what is best for them, always knowing how
to achieve what is best for them. If that were so, we would have less collision
paths in the places we work, the people we marry and the investments we make.
We think and feel, we are not intelligent enough to make balanced assessments
of all options and so we make mistakes.
This
idea of the blundering, floundering regular person is at the heart of Richard
Thaler’s Misbehaving. When the stakes
are high, the problems are complex and people are not experts, we make
mistakes, we behave foolishly and we misbehave. The assumption of the pedantic
rational genius is a myth, but it is also a costly myth. It is not just the
accumulated mistakes of people that should worry us, but the assumptions that
are made of us and the policies that are taken on behalf of us in the real
world. Policy making is populated by experts who assume our rational boundaries
and design structures that can trip us and confuse us. Ever since, Harold Lasswell
called public policy the ‘policy sciences’ in the 1950s to the present day,
discounting our irrationality and randomness of events has cost us wealth
erosion, work place stress and general disharmony with the things around us.
Thaler’s
enchanting narrative retells the story of how a group of young and vibrant
minds began to question the neatness of the formulas and the elegance of the
solutions by counter posing them with the clumsiness of understanding and confusion
in vision. People behave through pattern recognition, swapping long and hard
logic for short heuristic jumps, riskier and profitable options to safe loss-averse
choices and making a penny’s worth by playing games that are not always moral
or legal. In a world besotted with mental accounting, misremembering and
biases, how can we still design public policies to make people obey traffic
signals and encourage them to save more through pension funds?
Peppered
with small and big milestones of understanding the real world through the eyes
of economists, psychologists and sociologists, this narrative of the birth of
applied behavioural science is both fun and deeply instructive. Questioning theoretical
insights with the practical edge of wisdom, abstract rational powers with short
sighted mistakes; it lays bare our incapacities to deal with the complex world.
Therefore, what is at the disposal of an expert is sound evidence and some
tricks to nudge and prod us into ways that might be good for us. In a world of
bounded rationality, will power and resources, saving us from ourselves might
be effective sometimes. A wonderful
read!
