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1-Page Summary of Misbehaving
Overview
Misbehaving is a book about how behavioral economics has been developed. It also explains the author’s role in this process.
The traditional economic theory of the 1970s presumed that people made rational decisions. In this vision, people know what they want and how much they value it.
Behavioral economics, however, argues that the world is populated not by Econs (economic actors), but by Humans. Humans are irrational and don’t always know what they want or how much they value things. From a traditional economic perspective, this makes them misbehave.
Economists used to think that Human misbehavior had little effect on important decisions, but now economists know that this is not true. In fact, the misbehavior of Humans has a huge impact on finance and government. For example, Human misbehavior was responsible for the housing bubble and 2008 financial crisis.
Behavioral economists have found that to understand and predict people’s misbehavior, they need to conduct experiments and surveys of real people. The data can then be used to help individuals make better choices. Behavioral economics is thus the key for better public policy, which has changed the world for the better.
Key Takeaways
Traditional economic theory says that people make rational decisions, but behavioral economics shows that this is not true. Behavioral economics also shows how the market will reward those who are rational and punish those who aren’t.
Economists should use survey data and experiments to study how people make economic choices. If you give someone a certain amount of money, then take it away from them, they will be more upset than if you had not given them the money in the first place. Therefore, economists can learn more about commerce by studying how people value goods or losses versus gains.
People have a hard time paying the right price for things. What people are willing to pay depends on their perception of what they should have to pay. The perceived fairness of a price can be more important than the actual cost itself.
People are risk averse. They make irrational decisions due to their fear of loss, so it’s ethical to help them make better choices.
Key Takeaway 1: Behavioral economics has caused, or has the potential to cause, a paradigm shift in economics.
Use Analysis
A philosopher named Thomas Kuhn argued that the way we think about science is wrong. Before his book was published, people thought that science made progress by discovering new facts and building on them to get a better picture of how the world works.
According to Kuhn, science does not progress in a linear fashion. Instead, scientists develop theories that organize facts and make sense of them. For example, the geocentric model was used as a basis for explaining many complexities of planetary motion. However, it became increasingly difficult to explain some anomalies with this theory and thus there was a paradigm shift from geocentrism to heliocentrism where the earth orbits around the sun instead of vice versa.
Behavioral economics is changing the way economists think about economic theory. Rather than focusing on what theoretical models say, behavioral economics encourages economists to study human behavior in order to reinterpret and adjust those theories. This could transform the understanding of economic action, allowing them to develop better policies for people’s benefit. For instance, behavioral economics could help prevent future financial bubbles by studying how traders make decisions when they buy and sell stocks.
