Ain't misbehaving

Leonard Nimoy (above) as Mr Spock in the Star Trek series. How accurate and certain can economists be when they assume that people behave like the cold Mr Spock, asks Richard Thaler.
Leonard Nimoy (above) as Mr Spock in the Star Trek series. How accurate and certain can economists be when they assume that people behave like the cold Mr Spock, asks Richard Thaler.PHOTO: PARAMOUNT

For 30 years, American economist Richard Thaler was pooh-poohed by his peers for being a crank because he argued that people should be at the heart of economic policy, he writes in a new book

BEHAVOURIAL ECONOMICS

MISBEHAVING: THE MAKING OF BEHAVIOURAL ECONOMICS

By Richard Thaler

Penguin Allen Lane hardback/ 415 pages/$32.64 with GST from Books Kinokuniya or on loan from the National Library Board under the call number English 330.019 THA-[BIZ]


  • FIVE QUESTIONS THIS BOOK ANSWERS

  • 1. Why do most people change only after a crisis hits them?

    2. Why is it so hard for economists to foretell financial freefalls?

    3. Why is it wise for businesses to charge people less, not more, during peak periods?

    4. What is most effective in encouraging people to take risks?

    5. How should you spend money if you want a better future for all?

Last Monday, China's stock market nosedived again, dragging the rest of the world's bourses with it. Most punters were befuddled as to how US$1 trillion (S$1.4 trillion) in share values worldwide could be wiped out within a week.

  • Just a minute

  • The good

    1. American behavioural economist Richard Thaler has written the story of his professional life in pin-sharp prose heightened by wicked wit and lots of heart. Who would have thought that a critique of the discipline of economics could be this fun and funny? It is a shoo-in for the list of the best economics books ever.

    2. He makes light of his achievements and dwells a great deal on his failings. That is a sure way to gain readers' trust - and Thaler is more than deserving of it. He is so keen to help readers wend their way through the thorny thickets of the barbed logic that is economics that he has made even the most complex ideas easy to grasp. Reading him, you will feel that he has experienced deeply every point he makes in the book.

    3. Thaler, a long-time teacher, knows only too well that few would find even the most engaging economic ideas their cup of tea. So he presents slices of his story in digestible chapters that even cursory readers could get through in under 30 minutes. The result is a book you can dip into now and again, and to which you will likely return, probably for Thaler's rib-tickling asides.

    4. This book is also a wealth of insight about the piranha pond that is academia. For example, you will wonder, with bated breath, when he will get his papers published as, without publication, he risks losing his job.

    5. The field he founded, behavioural economics, is only about 30 years old and still not quite accepted by the majority of economists, who consider human beings as predictable automatons programmed to aim for equilibrium and uniformity. Thaler has staked his career on marrying psychology with economics

    so policies that affect everyone's money are more a reflection of human foibles. Allowing for all this, he has balanced well the perspectives of his supporters and that of his naysayers, giving each side fair mention and comment throughout.

    The bad

    1. There is really very little in this book to rile even casual readers. But as Thaler is unapologetic about whizzing back and forth across time on his hefty subject, those with a passing interest in it might just lose the plot from time to time, such as when he drills deep into mental accounting.

    The iffy

    1. Thaler skirts hypocrisy when he states that he admires greatly Milton Friedman, the late economist who preferred accuracy to reality. Friedman banked on markets as the final arbiter of benefits to all, but his critics have since pointed out that, among other things, as markets are amoral, it follows that they often yield less than decent outcomes.

As Reuters Breakingviews' Europe editor and long-time China watcher John Foley told the BBC World Service last Wednesday, the rash of freefalls was curious because Chinese stocks are for Chinese buyers only, and so most foreigners are not even exposed to China's stock market.

  • Misbehave on Sept 30

  • When ordered to zig, people tend to zag.

    To most economists, this is "misbehaving", or not acting consistently and rationally as they assume human beings would.

    That, in a nutshell, is the argument that American economist Richard Thaler makes in his new book, Misbehaving.

    Join The Straits Times senior writer Cheong Suk-Wai at The Big Read Meet from 6.30pm on Sept 30 to discuss whether his idea helps or hinders everyone's understanding of why people spend their hard-earned money in ways that are hard to predict.

    The Meet will be in the Central Public Library at B1 National Library Board headquarters in 100 Victoria Street. Sign up for it at the e-Kiosk in any of the National Libraries or go to www.nlb.gov.sg/go

    library, look for The Big Read Meet and follow the steps there to register.

    If you cannot make the Meet but want to comment on Thaler's book, e-mail your views in no more than 100 words to suk@sph.com.sg.

    We will publish the best contributions on The Big Read page.

He added that what sent share prices crashing last week was a simple case of people panicking amid China's slowing economy and its 2014 debt burden that is 280 per cent of its gross domestic product of about US$11.2 billion.

"Lots of people will now tell you how clever they were because they knew the (China) stock market was an unsustainable bubble that was going to pop," he said.

"You could look at this from a number of angles and say that there was no reason shares were at these kinds of values and people weren't behaving rationally."

American behavioural economist Richard Thaler says that, in the eyes of most economists, such punters were "misbehaving", or not being logical, consistent and acting in ways that got them the best bang for their buck.

Expecting people to be cold, clear-eyed spenders who always choose what would benefit them most economically, Thaler argues, is the start of all the world's problems with economics.

As he points out, economists traditionally treat human beings as emotionless, passionless and predictable, sort of like Mr Spock, the Vulcan in Star Trek.

The thing is, does anyone you know behave like that every time, all the time?

As Thaler quips in his very wise and witty book, even economics graduate students are Econs, which is he what he calls the

Mr Spock-like persona that economists consider a human being to be for their theories.

As an economics graduate himself in the 1970s, he once threw them a dinner party at his place.

Before they sat down to the meal, he brought them a big bowl of cashew nuts. Big mistake. His guests began gorging on the nuts, which would ruin their appetite for dinner. So he grabbed the bowl and hid it in a hurry.

Being bright young economists, he and his guests were soon debating how a good time had turned into a bad idea. After all, they reasoned, economists always believed that having more was a good thing. But in practice, eating too many nuts before dinner was unwise.

That nutty anomaly had Thaler rushing to his office blackboard to draw up a long list of other scenarios that made sound economic sense that did not suit the real world.

For example, a married couple he knew treated everything they earned as joint income. When the husband refused to buy an expensive sweater he fancied, his wife bought it for him as a gift. He was delighted at the gift, but would still not have bought the sweater himself. His behaviour would baffle most economists since the price of the sweater stayed the same and the money his wife spent was, well, his own too. So that is human perception for you.

So why did classic economic theories insist that human beings were Econs?

For 30 years, Thaler laboured in relative obscurity to answer this question, trying for years to get his big ideas published as papers with such titles as The Value Of A Life. This prompted his thesis adviser, Professor Sherwin Rosen, to say: "We did not expect much of him."

Today, Thaler's peers atle ways to influence people to behave in their best interests,nd mentors all tip him to win the Nobel economics prize soon. With his writing partner Cass Sunstein, he has boosted his profile a great deal with their book Nudge, in which they suggest sub like consuming less, exercising more and looking out for one another.

In another sign that economists are warming to his call that the marriage of economics and psychology will produce smarter economic policies than relying on pristine mathematical models, Thaler is currently the president of the American Economic Association.

His successor next year, Robert Shiller, also believes in such a marriage, prompting Thaler to quip in his book: "The lunatics are now running the asylum!"

This book is a memoir of his struggle for economists to place people at the heart of all their equations. It is still a hopeful and uphill task at best, he muses in the book's last chapter, with the emphasis on "hopeful".

It is, in essence, the backstory to Nudge and an inspirational treatise, joke book and cautionary tale about a very flawed discipline all rolled into one. To read him is like having an impish yet patient teacher guiding you through the maze of what makes people tick and why they usually sabotage their own potential.

If you are still wondering how myopic economic theories can be, just know that those who cobbled these together do not rely on data from people in the street to do so. As Thaler writes in the book: "To this day, the phrase 'survey evidence' is rarely heard in economic circles without the necessary adjective 'mere', which rhymes with 'sneer'."

The upshot of economists insisting on certainty and accuracy and ignoring human biases, blind spots and lack of willpower will make your blood run cold.

Here are a few points that Thaler made in the book:

• Economic incentives actually discourage entrepreneurship: Governments are wont to give people tax breaks to encourage them to set up their own businesses. But, Thaler says, "losses loom larger than gains" in people's minds and so a better motivator would be ways to cushion the setbacks and failures of fledgling entrepreneurs. With such assurances, entrepreneurs would not fear to try again;

• Timing is everything: Teachers should be rewarded with bonuses, but instead of awarding them at year's end, Thaler says teachers should enjoy them the moment they overcome a challenge or achieve a difficult goal.

• Think long term: If you charge your customers the earth to take advantage of their anxiety during holidays and other peak periods, they will not return to you. Aim for loyalty, which is more rewarding in the long run, by selling what they want at fair prices.

If all of the above is misbehaving, Thaler's brand of anarchy may just be the ticket out of market blitzes.

A version of this article appeared in the print edition of The Sunday Times on August 30, 2015, with the headline 'Ain't misbehaving'. Print Edition | Subscribe