The case for 'misbehavior'
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University of Chicago economist Richard H. Thaler, probably the most important founder of “behavioral economics,” is a fantastic storyteller. In his latest book, Misbehaving, he tells, roughly chronologically, of his initial doubts about the standard economist’s “rational actor” model and how those doubts led him to set his research agenda for the next 40 years. In chapter after chapter, he tells of anomalies—bits of evidence that are inconsistent, sometimes wildly so—with the various economic models and of his debates with the proponents of those models. In Thaler’s telling, he always won the debates. One would expect him to say that, but as someone who did not start out on his side of the debates, I think he often did win. One disclosure: In 1975, about the time he was coming up with his list of doubts, I became an assistant professor of economics at the University of Rochester’s business school, where Thaler was also an assistant professor. We overlapped for my first three years at Rochester, until he moved on to Cornell. That disclosure probably does not matter, except for the fact that I saw closeup how he developed his ideas in the face of a fair amount of hostility from some of his colleagues. I was skeptical, but not hostile. In a review of this length, it’s impossible to cover all of the topics Thaler discusses. So I’ll focus on five: the endowment effect, his quest for other scholars who were interested in the same ideas, financial economists’ efficient market hypothesis (EMH), various methods employers use to affect their employees’ saving for retirement, and the question of whether mistakes get small when the stakes get large.