Many years ago I listened to the advice of Barack Obama which is – “Read the book of Nobel laureates.” In other words, books about economics, physics, and also literature.
Richard Thaler won the Nobel Prize for his research in the field of economics. His book is entitled “Misbehaving”. Richard Thaler is one of the founders of Behavioral Economics research field and a professor at Business School of the University of Chicago. In my opinion, the last several Nobel laureates in economics are geniuses of simplicity and originality. They no longer look at the economy in terms of capital or GDP, they are above that. Thaler’s work shows that assuming that people are predictably irrational is the most rational approach to studying their behavior.
Here is my attempt to overview a book of Thaler in several paragraphs.
Because of the large data about how people behave in real life Thaler denies the idea of Homo economicus. It means that he denies the idea that there are rational reasons of human behavior. Richard went further and used research of psychologists, sociologists. He showed that humanity suffers from emotions and irrationality that affects their decision-making on everything, from pension savings, health policy, to professional sport. Here, please, do not be confused with Taleb and his swans and fragility – Thaler is much cooler. Taleb is like Madonna’s music or Jay Luo’s against Taller, like Pink Floyd or Metallica music. Though Taleb in his time was a cool dude, but after 2008 he was no longer able to make money on his theory.
Thaler does not claim that people are accidentally irrational. More importantly, he noticed that people are predictably irrational. Some of Taler’s most interesting works explore potentially irrational effects of ownership, trust and a sense of justice. Please note that the idea of justice once elaborated only by Marx.
– Ownership: according to the classical economic theory, the value of a product should not depend on ownership. In one of his the most famous experiments (which he created in pair with Daniel Kaneman, Nobel prize in psychology – I strongly recommend to read his work as well – he was another genius of social psychology) he prowed this thesis wrong. The experiment itself: Thaler presented cups to half of the students in the classroom and offered students to evaluate them. Students who had received these cups as a present thought they were more valuable than those who had not. People place greater value on what they already possess – the “gift effect”. Therefore, the phrase “we appreciate only when we lose” – in fact, does not work very well.
– Confidence: additional information should lead to better decision-making – an idea of every book we read. But in his study of the National Football League, Thaler found that professional teams put too much emphasis on early player selections, largely because smart breeders believe that they can predict the next superstar. “The more information the team gets about the players, the more convincing they will feel and will be more assertive in the ability to make assumptions.” This case shows disadvantages of the Moneyball strategy (if you are lazy to read a book, then watch a movie) and expanded analytics. Football teams believe that they can predict future.
– Justice: The Taler study has shown that people have solid standards of justice. Since most consumers do not know the real value, they determine it with the idea of just price. Let’s say $ 5 per umbrella is fair, but what if the price would be raised by $ 1 during the rain? Then consumer can’t make a decision about just price and we can control his behavior. During recession employers are eager to give workers bonus payings, rather than reduce their salary. That is how people feel themselves appreciated.
If the irrational behavior of people can be predictable, then we can push them to act as we want them to. Thaler introduced the term “pushing” to describe simple interventions that change the decision-making process of people. This term can be used, both for serious and trivial cases, from making employees invest their savings into retirement funds to a sticker inside male toilet to “improve the hit”.
When The New York Times asked how he would spend his prize money, Thaler replied: “I will try to spend this money as irrationally as possible.”