Misbehaving - Richard Thaler

Misbehaving - Richard Thaler

Understand that you do not act rationally in your decisions, especially when purchasing, and how it impacts the economy.

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If you don't make the best decisions with your money and believe that you are acting irrationally towards your savings, the book "Misbehaving", by author Richard Thaler, was made for you.

He seeks to explain why some people make rational choices, while others suffer from more subjective actions when making a decision.

Are you curious? Then continue reading this PocketBook and discover the concepts of economic theory that analyzes how your way of thinking influences decision making with your money!

About the book "Misbehaving"

The book "Misbehaving" (2015), written by Richard Thaler, provides an analysis of how subjective factors influence decision making in matters related to the economy and personal finances.

The author discusses the content of 447 pages with very good humor and personal and didactic examples that make the reading quite dynamic understandable.

To illustrate the differences, the author always makes a comparison between a person at risk of failure and irrationality, that is, Homo Sapiens, and a fictitious person who makes decisions solely and exclusively rational, called by him Homo Economicus, or Econ.

The didactic examples are, in the majority, realized from the comparison between the actions of a Sapiens and those of an Econ, in similar situations.

About the author Richard Thaler

Richard H. Thaler has written 5 more books besides this type. One of them, "Nudge" (2008), co-written with Cass R. Sunstein, became a global bestseller for dealing with behavioral economics practices used to combat some of the social problems.

In the year 2015 Richard was president of the American Economic Association.

In 2017 he won the Nobel Prize for Economics, an achievement that glorified his studies of Behavioral Economy, that is, how psychology influences economics.

To whom is this book indicated?

Reading "Misbehaving" is recommended for those who want to understand how psychology influences decision making with money and the economy, that is, for those who want to understand about behavioral economics.

In addition, the book is intended for those who wish to eliminate the gap that exists between theories of traditional economics and practice.

Main ideas of the book "Misbehaving"

In this summary, we will address 3 topics that are extremely important for understanding and clarifying the theory of behavioral economy. They are:

  1. The difference of the behavioral economy to the traditional one;
  2. The different behaviors in the same situations;
  3. How a push makes the difference.

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[Book Summary] Misbehaving - Richard H. Thaler

Overview: The difference of Behavioral Economy to the Traditional one

The author Richard Thaler claims that the economy is the most influential social science because its theories impact on people's lives and are far-reaching. These traditional theories say that:

  • Individuals always make good buying decisions within their budget constraints;
  • Individuals behave rationally and make the best possible choices at all times;
  • Free markets tend to balance, that is, the supply of a good or service is equal to their demand.

But, according to Richard in the book "Misbehaving", these assumptions are flawed. For him, it is impossible for ordinary people to always make ideal decisions. And he exemplifies:

"Consider the act of shopping in a supermarket. With the numerous available assets, how can individuals always make the best choices?"

The author states that to analyze economic models, economists developed a fictitious creature called Homo economicus or "Econ", who would be a perfectly rational decision-maker.

But in Thaler's view, such predictions based on the behavior of Econs (exclusively rational beings) are often wrong because, according to his theory, true human decision-making is based on the (mis) behavior of the sapiens and not on rationality.

Again, to illustrate, the author exemplifies the fact that few economists predicted the financial crisis of 2008, since most were based on the behavior of Econs (which for Richard Thaler do not exist).

Despite the economic models in which all behave as an Econ still have value, better explanations and new models are emerging that are based in the Behavioral Economy (Theory developed by Thaler), that takes into account the influence that the psychology and other social sciences exert in the economy.

Behavioral Economy states:

"Real humans act in a predictably irrational way."

Why does this occur? Because people are always discovering something new, and this influences their judgments, leading to errors and prejudices that impact decision making.

Overview: The different behaviors in the same situations

You, probably, have already experienced a situation in which the price of an item varied according to the form of payment. This is because, depending on the form of payment, there are fees to be paid by the seller.

First example

Now, pay attention to the two possible statements of a seller:

  • "This shirt costs $ 100.00. But if you want to pay in the credit card, the value goes to $ 110.00";
  • "This shirt costs $ 110. If the payment is in cash, the value drops to $ 100.00".

According to the author Richard Thaler in his book "Misbehaving", the likelihood you feel more comfortable is in the second option because people value more of what they already have than anything they could add to it.

This is one of the differences between traditional and behavioral economics.

For an Econ, as the amount to be paid is the same, there is therefore no difference in how the seller informs the prices (whether it is a surcharge or a discount) because the two pricing policies are identical.

But that influences a large part of the population, as people tend to perceive a surcharge as an extra expense, which they do not like. On the other hand, giving up a discount is just an opportunity cost.

Second example

Have you ever been through a situation that, after accomplishing something, came the feeling that you always knew what the outcome would be? The author Richard Thaler uses a psychologist Baruch Fischhoff's thesis on this.

Did you know that this feeling can hurt a company? Imagine if an Executive Director decides to dismiss talented employees who participated in an unsuccessful project, only because he believed that the failure was predictable and he always knew that the project would fail.

Do you think I've lost focus and I'm talking about something else? No! This example is to demonstrate that people react and have different judgments according to a result. That is, the result or value of something can affect the judgment of a person, especially at the time of purchase decision.

In addition, this same Fischhoff worked at the Hebrew University in Israel with two other scholars, Daniel Kahneman and Amos Tversky, who published an article entitled "Judgment under Uncertainty: Heuristics and Perspectives" and developed the "Prospective Theory".

The "Uncertainty Judgment" states that people have limited time and intelligence to make good judgments. So they try to come to decisions using basic rules, or discoveries. This implies, in the analysis of the author of "Misbehaving", in the unpredictability and irrationality in the decisions of purchase.

"Prospective Theory" states that flow and wealth variation affect people more than their own absolute levels of wealth. What does that mean?

This means that people show more anguish at losing $ 100, than happiness at gaining the same value.

Again, this example demonstrates failure in Traditional Theory based on Econs. For them, anguish and happiness would be of the same intensity, because they are of the same value.

Third example

According to the philosopher Adam Smith, the actions make the market work for the benefit of society, independent of buyers and sellers. In his conception, there is an "invisible force" that discourages irrational decision-making, harmful to society.

Thus, markets, in a way, discipline people who behave badly.

But in Richard's design, no logical argument supports the notion that markets transform people into perfectly rational agents, ie Econs, as traditional theories of the economy seek to assert.

Fourth Example

How would you react to the irreparable loss of $ 1, 000, 000?

For traditional theories, the Econs, having aware that it is impossible to get back, would react in a natural way, the logical "do not cry for spilled milk".

On the other hand, Richard Thaler states that the Sapiens, who are susceptible to influence, even though they are aware that it is impossible to get the money back, are slow to understand and recognize assimilating such loss, although this is the most rational way.

This behavior emphasizes his theory that people do not act rationally in economics, the heart of the "Misbehaving" book.

Fifth example

In the face of both situations, do you consider some unfair?

  • A business increases its prices to increase profits;
  • A company increases its prices to cover rising costs.

Know that most people would consider the first option unfair. Thaler argues that traditional theories or "Econs" do not take these peculiarities into account, but that this greatly influences sales for the Sapiens.

Sixth example

Other evidence that the "created" beings by economists are very different from humans, occurred in a game of justice called "the game of public goods".

It worked as follows:

  1. The researchers gave each player 10 notes of $ 1.00 and said they could contribute anonymously with any amount (or none) for a public good;
  2. In the second moment, the researchers doubled their donations and distributed the profits equally to all players.

How would the Econs react? They would not make any contribution, because if you donated $ 1.00, you would receive only 20 cents, apart from not acknowledging your generosity and making available to everyone an extra 20 cents.

What happened in practice? As explained by author Richard Thaler in the book "Misbehaving", players typically contributed half the stakes, on average, to the public good.

In this way, the results consistently show that some people choose to cooperate, even when such behavior is contrary to their own financial interests. This practice, of course, would not be carried out by the Econs.

Seventh example

Have you ever visualized some events, in isolation, without trying to understand the environment? Did you know that this can lead to "aversion to the loss of myopia", as Richard Thaler's book puts it.

To demonstrate what is this aversion, an experiment was conducted and the result showed that:

  • Investors who observed their results more often invested with greater caution. This was because they had a greater chance of seeing losses;
  • Those who saw their results eight times a year put 41% of their investment in riskier stocks;
  • Those who saw results once a year put up 70% in stocks, which is much riskier.

This demonstration reignited debates over stock pricing and market efficiency.

Overview: How A Push Makes a Difference

Have you ever needed a "push" to do something? Yes, sometimes this is necessary for us to make decisions. But did you know that this may be more frequent in your life than you realize?

The author Richard Thaler brings in the book "Misbehaving" again the concept of "Nudge", presented in his bestselling coauthor.

For the Econs, these actions to motivate or induce them to something would not be sufficient, because they would be purely rational beings. However, as shown in the whole book, this does not exist.

Knowing this, some companies perform some practices to induce their employees.

Example: when companies want their employees to adhere to retirement plans, they already sign up for them, but give them the freedom to choose the continuity or not. Have you been through this? But did you know this is a technique based on Thaler's studies?

That's right! According to him, it is much easier for a person to agree to continue in something already determined than if he/she had to choose to enter or not.

In the case above, the probability of the employee continuing in the retirement plan if he is already enrolled is much greater if he had to decide to participate or not. And by doing so, the company achieves its goal.

Another action was in the UK, where the government sent letters asking for defaulting citizens to pay their taxes.

The most effective approach was the one that cited the fact that most people pay their taxes on time. In this way, the person would understand that being negligent is to be part of the minority, which people do not want.

For Econs, such approaches would make no difference.

This field of study, after the publication of Thaler, is growing more and more. In this way, new public policies can arise to optimize and improve the society's quality of life.

Have you noticed how you are being influenced all the time, even without realizing it? Now that you are within the concepts of Richard Thaler, it is possible to be more aware of the practices that have been practiced!

What do other authors say about it?

In the book "Buyology", Martin Lindstrom seeks to bring an innovative vision on marketing. In addition, he addresses several findings about human behavior studies at times of purchasing decisions, explaining the concept of neuromarketing.

In "Enrichment Factor", author Paulo Vieira explains that true wealth is matched by "Being, Do and Have". In order to help you, the book has questionnaires, questions and examples, so that you learn how to use your money.

Finally, in the book "Thinking Fast and Slow", Daniel Kahneman, who also won the Nobel Prize in Economics, provides information on how the brain works at the time of decision. He approaches that there are two ways to decide something. The quick and emotional way and the slow and rational way.

Okay, but how can I apply this to my life?

After reading this PocketBook, it is important to note that you should:

  • Be aware that you are influenced all the time;
  • Understand that you act impulsively and irrationally at times of buying decisions;
  • Draw control strategies so you can analyze in advance what you need or what you don't need;
  • Analyze the market approach and how you can behave in front of them, so you are not so easily influenced.

Did you like this summary of the book "Misbehaving"?

We hope you enjoyed our summary and are able to apply the teachings of the author, Richard Thaler, to your life. Leave your opinion in the comments, your feedback is very important to us!

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Book “Misbehaving”