Review of Richard Thaler’s Misbehaving: The Making of Behavioral Economics

The notion that human beings behave “rationally” in pursuit of objectives such as utility and profit has formed the bedrock of economic theory for well over a century.  For many economists, the rationality paradigm has been a convenient foundation for the development of economic ideas. For others it has become something more akin to a religion, an organizing principle through which the world can be understood.

The appeal of viewing human beings as rational maximizers is at least two-fold.  First, rationality lends itself neatly to the practice of economic model-building.  Within this tidy world of rational behavior, economists have developed countless thousands of models describing every imaginable facet of economic behavior, and in more recent decades, areas of behavior lying far outside the traditional realm of economics, in political, social, and even family life.   But a second appeal of the rationality paradigm is that it is a fortress easily defended: deviations from the rationality paradigm can be quickly labeled as foolish, an accusation perhaps extending to those who attach any significance to such deviations.

It is in this context that a generation ago behavioral economists began to challenge the rationality paradigm.  In Misbehaving: The Making of Behavioral Economics, Richard Thaler chronicles this challenge.  Misbehaving is a hybrid of personal memoir and intellectual discourse.  The challenges Thaler faced as the leading proponent of what we now call behavioral economics, challenges both academic and personal, are wrapped together in an engaging presentation of both stories and ideas that make it one of the top economics books of the last decade.

It is a pleasure to read literary work by economists who know how to write, and in this regard reading Thaler is a delight.  It is rare to find a book that is as simultaneously engaging and entertaining as it is intellectually stimulating.  (The original Freakonomics comes to mind.)  On one hand we sympathize with the self-deprecating protagonist Thaler struggling early in his academic career, his captivation with the work of early pioneers Amos Tversky and Daniel Kahneman, whom he eagerly followed to Stanford and British Colombia, the recount of his tortuous seminars at the University of Chicago (the epicenter of rational neo-classical thought) in front of unforgiving intellectual adversaries.

But for all its engaging and delightful narrative, Misbehaving also chronicles an intellectual paradigm shift of the first order.  As Thomas Kuhn articulated in his renowned Structure of Scientific Revolutions, major changes in scientific thinking begin with anomalies, observations that are inconsistent with the dominant paradigm.  Indeed Thaler’s career began with a list of anomalies, documented failures of people ignoring sunk costs (a particularly appalling heresy in the rationality paradigm), loss aversion (weepy sentimentality, certain to disappear in large stakes), and the potential benefit of choice constraints (purely nonsensical, of course).  Thaler’s list can’t help but recall the added complexity needed to cope with the anomalies observed with the Ptolemaic geo-centric universe.  As these observed anomalies later gave birth to the Copernican and Galilean helio-centric understanding of the solar system, so the anomalies noted by Thaler and other behavioral economists later began to generate experimental regularities that have challenged many aspects of the rational neo-classical paradigm.

Unlike the geo-centric universe, however, the rationality paradigm is not dead.  Instead it has been downgraded in the profession from “all-encompassing paradigm” to a “benchmark” from which it is useful to more clearly understand deviations and a fuller picture of human behavior.  But Thaler’s book also leaves us to ponder the future of behavioral economics: Can it create an alternative “all-encompassing” model of economic behavior, or will it be content to spend decades entrenched in a kind of guerrilla warfare, poking away at the soft underbelly of the rationality paradigm in areas such as finance, consumer choice, and development economics, yet simultaneously unable to offer its own comprehensive alternative.   While Misbehaving beautifully chronicles the rise of behavioral economics, it will be left to a later work to recount this final story.

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