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A review by lynch626
Misbehaving: The Making of Behavioral Economics by Richard H. Thaler
4.0
This is a great book in which Thaler recounts the journey of his life work to discover and make popular the discipline of behavioral economics. I have studied many of the concepts before, but I do like hearing them again with research examples, and Thaler does a great job of relating to the average person. A few concepts and ideas that stood out to me:
-Value of a life: humans place a much higher value on life when people are called out individually (Jane Doe died in a tragic traffic accident last week) rather than with statistics (10,000 people in the state of NC die in traffic-related accidents each year)
-the Endowment effect: leads individuals to systematically value things they already own much more than the identical item in someone else’s hands
-Hindsight bias: past events seem to be more prominent than they appeared while they were occurring. Can lead individuals to believe an event was more predictable than it actually was, resulting in an oversimplification in cause and effect.
-overvaluing early NFL draft picks - Thaler works with several NFL teams to try to show them how they are giving up too much to get earlier picks in the NFL draft.
-company equity evaluation - the stock of one unit/division of a company should never be valued at more than the entire company combined.
One concept that I struggled with was Thaler's attempt to explain how people are more willing to gamble when it comes to losses than gains. (ie-risk/loss aversion & expected returns) He presents the following scenario in various ways throughout the book,
• Scenario 1. Give someone $400. Then offer them a choice of gaining $100, no risk, or a 50/50 chance of gaining $90/$110. People nearly always take the $100.
• Scenario 2. Give someone $600. Then tell them they have a choice between losing $100 or a 50/50 chance of losing $90/$110. People nearly always take the risk.
and argues that since the odds are exactly the same, people's reaction to the 2 scenarios SHOULD be the same. I disagree though- I think it's completely rational to want to gamble instead of taking a sure loss... after a while, I came to the realization that this is exactly what Thaler was attempting to prove though. Not all money is treated equally. I still don't quite understand that Econs think it so weird though. Money is just a placeholder for opportunity, and definitely we do not value all opportunity the same.
Anyway, this book definitely kept me thinking and I like that. Thaler also notes that a great place to go for new articles on behavioral economics is the Journal of Economic Perspectives. I will have to start skimming this periodically. https://www.aeaweb.org/jep/
Link to accompanying PDF: http://download.audible.com/product_related_docs/BK_ADBL_022796.pdf
-Value of a life: humans place a much higher value on life when people are called out individually (Jane Doe died in a tragic traffic accident last week) rather than with statistics (10,000 people in the state of NC die in traffic-related accidents each year)
-the Endowment effect: leads individuals to systematically value things they already own much more than the identical item in someone else’s hands
-Hindsight bias: past events seem to be more prominent than they appeared while they were occurring. Can lead individuals to believe an event was more predictable than it actually was, resulting in an oversimplification in cause and effect.
-overvaluing early NFL draft picks - Thaler works with several NFL teams to try to show them how they are giving up too much to get earlier picks in the NFL draft.
-company equity evaluation - the stock of one unit/division of a company should never be valued at more than the entire company combined.
One concept that I struggled with was Thaler's attempt to explain how people are more willing to gamble when it comes to losses than gains. (ie-risk/loss aversion & expected returns) He presents the following scenario in various ways throughout the book,
• Scenario 1. Give someone $400. Then offer them a choice of gaining $100, no risk, or a 50/50 chance of gaining $90/$110. People nearly always take the $100.
• Scenario 2. Give someone $600. Then tell them they have a choice between losing $100 or a 50/50 chance of losing $90/$110. People nearly always take the risk.
and argues that since the odds are exactly the same, people's reaction to the 2 scenarios SHOULD be the same. I disagree though- I think it's completely rational to want to gamble instead of taking a sure loss... after a while, I came to the realization that this is exactly what Thaler was attempting to prove though. Not all money is treated equally. I still don't quite understand that Econs think it so weird though. Money is just a placeholder for opportunity, and definitely we do not value all opportunity the same.
Anyway, this book definitely kept me thinking and I like that. Thaler also notes that a great place to go for new articles on behavioral economics is the Journal of Economic Perspectives. I will have to start skimming this periodically. https://www.aeaweb.org/jep/
Link to accompanying PDF: http://download.audible.com/product_related_docs/BK_ADBL_022796.pdf