In one sentence: Thaler’s memoir of behavioral economics tells how a list of behaviors standard theory could not explain became a discipline, arguing that the supposedly irrelevant factors economists ignore drive real decisions, and that a descriptive theory of Humans beats a normative theory of the optimizing creature he calls an Econ.
At a Glance
Author: Richard H. Thaler
First published: 2015 (W. W. Norton)
Category: Economics / Psychology
Length: about 432 pages, about 145,000 words (W. W. Norton hardcover)
ISBN-13: 978-0-393-08094-0 (W. W. Norton hardcover)
Summary reading time: about 12 minutes
Book reading time: about 9.5 hours
Notable adaptations: no film or series, though Thaler won the Nobel Memorial Prize in Economic Sciences in 2017, two years after publication, and the book is the sequel in spirit to Nudge, written with Cass Sunstein in 2008
Content note: this is a memoir of a discipline rather than an introduction to it, so the ideas arrive in the order Thaler developed them and the academic quarrels get as much space as the findings. Every figure predates 2015, and several of the effect sizes quoted have been revised downward by later work, which the analysis section sets out. The book’s opponents appear almost entirely through Thaler’s own recollection. All twenty-five figures are absent from the source edition used here, so this summary describes the results in words.
In the 1970s Thaler kept a blackboard list of behaviors theory said should not happen and people kept doing. The List became a research programme, the programme a field, and the field won him the Nobel Memorial Prize in 2017, two years after this book appeared. That history is the real subject: each idea arrives attached to the argument it was invented to win, from the journals that rejected his first paper to the colleagues who dismissed fairness as a children’s complaint.
Read it if you want behavioral economics from the man who built most of it, jokes and fights left in. Skip it if you want the evidence weighed neutrally, because the man keeping score here also won the game.
The Big Idea
Standard economics, on Thaler’s compressed reading, is optimization plus equilibrium. Its agent is homo economicus, whom he shortens to Econ: a cold-blooded optimizer with consistent preferences and unbiased beliefs. Humans are the rest of us. The opening story is his own midterm, where an average of 72 out of 100 produced uproar, so he raised the next exam’s total to 137 points. The same performance now averaged 96 and the complaints stopped. Nobody was fooled. They felt better anyway.
What moves Human decisions is often what Thaler calls supposedly irrelevant factors, SIFs for short: features of a situation that cannot matter under the standard model and reliably do, from how a price is labeled to whether a form asks you to opt in or out. His claim is not that people are stupid but that the deviations have a direction, which makes them predictable and part of the model.
The standard defense is that markets discipline away whatever psychology survives in individuals. Thaler calls this the invisible handwave and reports never finding it argued properly. Learning needs frequent practice and immediate feedback, which retirement saving does not supply, and raising the stakes does not reliably help: in Grether and Plott’s work real money made preference reversals worse. The two defenses also contradict each other, since the decisions that matter most are the ones we make least often.
Key Ideas
1. Econs, Humans and the List
The List was a blackboard of puzzles: the cashews he took away from his dinner guests and was thanked for removing, the willingness to drive across town to save ten dollars on a clock radio but not the same ten on a television. Tversky and Kahneman gave him the vocabulary. Bounded rationality had been dismissed as random error that cancels in aggregate, and what Thaler took from the psychologists is that an error with a direction does not cancel.
2. The endowment effect and loss aversion
He named the endowment effect, and the first case was a colleague’s wine cellar: Richard Rosett would neither sell a bottle bought for ten dollars at its market price of a hundred nor buy another at that price. The mugs experiment, one Cornell class of forty-four students, moved this to real trades: induced-value tokens changed hands as theory predicts, while mugs barely moved, median selling prices running near twice median buying prices. He reads that through loss aversion, losses hurting roughly twice as much as equivalent gains please.
3. Mental accounting
Mental accounting is his name for how people organize money. Transaction utility is the pleasure or pain of the deal rather than of the thing bought: executive MBAs would pay 7.25 dollars for a beer fetched from a resort hotel and 4.10 dollars for the same beer from a grocery store, drunk on the same beach. Budgets also fail to substitute freely, and when gasoline prices halved in 2008 Hastings and Shapiro found a shift toward premium grades fourteen times larger than fungibility allows.
4. The planner and the doer
Self-control gets modeled as two selves, a far-sighted planner and a series of short-lived doers who want things now. Textbook discounting is consistent, while real preferences reverse as the moment approaches, which is why Odysseus had himself tied to the mast and why Thaler’s answer to a plate of energy bars was to get them out of the house. Business monetizes the mechanism. A ski resort sold ten-packs of lift tickets at 40 percent off months ahead, and about 60 percent were redeemed by skiers already out of pocket and feeling the sunk cost push them uphill.
5. Fairness constrains profit seeking
With Kahneman and Jack Knetsch he ran telephone surveys on what the public will accept. Raising a snow shovel from 15 to 20 dollars after a blizzard was acceptable to 18 percent of respondents and 76 percent of MBA students. The games made the constraint costly: ultimatum offers of a fifth of the pot or less were typically rejected though rejection pays nothing, and most subjects took less money to deal with someone who had behaved fairly. Firms learn the same lesson expensively, as First Chicago did with a three-dollar teller fee.
6. The two meanings of market efficiency
Thaler separates two claims usually bundled together. The no-free-lunch version says public information is already in prices, so you cannot reliably beat the market. The price-is-right version says assets trade at intrinsic value, so bubbles cannot exist. He accepts the first and rejects the second. With Werner De Bondt he found the most extreme past losers on the NYSE beating the market by about 30 percent over five years while past winners trailed by about 10 percent, on lower betas, which blocks the risk-based rebuttal. In 2000 each 3Com share carried a claim on 1.5 Palm shares worth more than all of 3Com, a residual value near minus 23 billion dollars that no arbitrageur could correct, because Palm shares could not be borrowed.
7. The draft, and what the findings were for
The NFL draft study with Cade Massey is the best evidence in the book, and it works because the prices are public. Picks are tradable, with more than 400 trades in the sample, and teams price them off a widely used chart on which the first overall pick is worth about five times the thirty-third. Measured by games started, when two players at the same position go in consecutive picks, the earlier one proves better about 52 percent of the time overall and 56 percent in the first round, close to a coin toss. Set performance against rookie pay under the salary cap and surplus value, Thaler’s term for what a team gets above what it pays, rises through the first round. The cheap picks are the valuable ones, so trading the first pick for five early second-rounders buys five assets each worth more than the one given away. He calls this the most blatant violation of market efficiency he has seen, and trading a pick this year for a better one next year implies an annual discount rate around 136 percent. Jersey and ticket revenue do not explain the premium, and the mispricing survives because nobody can short a draft pick.
Inertia also works in the helpful direction, which is the point of the practical chapters. Save More Tomorrow, built with Shlomo Benartzi, commits employees in advance to raising their savings rate when their next raise lands, so it never registers as lost take-home pay. In the first firm to try it, saving went from about 3.5 percent to 13.6 percent in roughly three and a half years.
Context and Analysis
Several things here have held up hard. The draft study is a genuinely excellent natural experiment, with public prices, a large sample and a result that survives the obvious alternatives. Mental accounting is standard equipment because it predicts what fungibility cannot, the fairness work changed how economists model pricing, the Anomalies column was a brilliant way to make the profession pay attention, and the split between the two versions of market efficiency is the clearest writing on that subject for general readers. The psychology underneath is systematic in Thinking, Fast and Slow, where Kahneman, a character here as much as a source, explains the machinery Thaler carried into economics.
Soft spots show up mainly in the numbers. Loss aversion is presented as near-constant, losses about twice as painful as gains, on a handful of hypothetical gambles, and later work has found the ratio smaller, heavily context-dependent, and arguably not stable at all. The mugs result, one class of forty-four students, is asked to support both the endowment effect and that ratio, which are different claims. Much of the early evidence is hypothetical questions put to around a hundred respondents per cell, or to self-selected samples such as a wine newsletter’s readers, with response rates unreported. The marshmallow studies have shrunk under replication, the fruit-fly mispricings get stretched toward whole-market inefficiency, and he concedes the value-premium question is unresolved. The memoir is one-sided by construction too: Fama, Miller, Posner and Becker appear through anecdotes and quips rather than their own arguments.
The nudge material needs the sharpest reading. The serious objections to libertarian paternalism concern consent, manipulation and who picks the default, and Thaler answers mainly by redefining the term, taking paternalism to mean helping people reach their own goals. That assumes the goals can be read from outside, and it supplies no mechanism by which the nudged agree to be nudged. His best counterexample is his own: the three percent default savings rate that became an accidental standard lowered saving for people who would have chosen six. Save More Tomorrow’s numbers come from one firm with self-selected participants and, he admits, no randomized trial, and the British showcases are thin: twenty-eight attics insulated across three non-random neighborhoods, tax-letter gains measured at an administrative cutoff. His dumb principal reading of the draft results, that owners generate the win-now pressure they complain about, is asserted rather than tested. The descendant to read next is Thinking in Bets, where Annie Duke separates decision quality from outcome.
What It Teaches
Five habits follow from the research rather than from the memoir.
1. Treat sunk costs as gone. Money already spent is information about the past, not a reason to continue. 2. Watch the factors that should not be moving you, since labels, framing, defaults and ownership change decisions they have no business changing. 3. Distrust steep expert rankings, because when forecasters barely beat a coin the premium on first place is confidence. 4. Design the environment rather than the intention, since inertia defeats resolve. 5. Collect data that can prove you wrong, because overconfidence is not something you can introspect your way out of.
Memorable Lines
“Behavioral economics is more interesting and more fun than regular economics. It is the un-dismal science.” (Thaler)
“As cruel as the market may be, it cannot make you rational.” (Thaler)
“There’s no better way to build confidence in a theory than to believe it is not testable.” (Thaler)
“If there is a number, people will use it.” (Thaler)
“Ethical nudges must be both transparent and true.” (Thaler)
“A theory of the behavior of Econs cannot be empirically based, because Econs do not exist.” (Thaler)
Should You Read the Full Book?
Verdict: Recommended
This summary carries the vocabulary, the figures that matter and the places to be skeptical. What it cannot carry is the texture of the fight, or the comic timing that makes a long account of academic disputes enjoyable. Read it for the draft chapter and the two on market efficiency, and read the nudge chapters with a pencil, because that is where the author’s interest and the reader’s part company. The Misbehaving book page has the full details and where to get a copy.