November 14, 2016 § 1 Comment
Not very long ago, I blogged about Bronislaw Malinowski’s Magic, Science and Religion, where he strove to convince his readers that the Stone Age people of Papua New Guinea were as rational and logical as the modern man of science: it is just the modern world has equipped us with so much more pre-digested knowledge. We couldn’t have figured out by ourselves a lot of the stuff that we ‘know’ to be elementary; a lot of the stuff the Trobrianders accepted as obvious appear ridiculous to us. We forget that large parts of our cutting edge science, too, would appear indistinguishable from mythology and superstition to aliens capable of inter-galactic travel.
One of the sciences where our current knowledge might be on wobblier ground than we realize is economics. The trouble with economics, as Thaler points out, is that it comes up with laws about the rational decisions that people ought to make in economic matters; then it performs a quick sleight of hand and assumes that everyone does make rational decisions in economic matters.
As Thaler points out in every chapter in this book, this is not quite accurate, even on a broad, average basis. As a rule, people do not always behave in a way that economists would describe as rational – while gambling, investing, spending frivolously, suing, earning or giving away. The way people think about money changes depending on whether they already have it and can lose it, don’t have it and can win it, have already spent it on something they haven’t used, or are paying for something they’ve already used. Conventional economics tells us that these things shouldn’t make a difference, and more, that these things do not make a difference to people. But they make all the difference.
A girl splurges on some dresses that she now doesn’t like; her mother, furious, insists that she wear the dresses she bought. An economist would call it a sunk cost: whether the girl wears the clothes or not makes no material difference as long as she doesn’t buy any more. And yet there is a perfectly sound logic to this, one that parents around the world would understand. The girl’s punishment would teach her a lesson she would remember the next time she felt like going against her mother’s advice. This may not be an economic goal but at times, it is certainly a well-defined parenting one. People do not think with only their wallets all the time. Either we do not maximize our utility all the time (as economists say we do), or we try but fail to do so (because we are of inferior intellect than those economists), or the economists’ notion of utility is too simplistic to cover all our aspirations, fears and things in between.
So what Thaler (and some of the others he mentions, notably Danny Kahnemann and Amos Tversky) wanted to do was study the economic decisions that people actually make, and to try and understand the rules underlying those. Misbehaving is the story, not just of those quirky decisions, but of Thaler & co’s struggles to gain academic respectability for their theories and methods from “the establishment”. For long they were dismissed as an irrelevant side-show, and derided for cozying up to psychologists instead of to mathematicians. The people who misbehave in this book are the old-school economists who didn’t see behavioral economics as a worthy occupation. Besides, if your theory predicts that people will act in a certain way, and most of them don’t, it is your theory that is misbehaving, not the subjects of your predictions.
Oddly, Thaler’s story has a parallel with Bronislaw Malinowski’s. Until Malinowski’s generation, primitive tribes were studied almost like zoological phenomena by anthropologists: they were not thought capable of human intelligence. Malinowski stayed among the tribes, studied the way they behave without preconceived notions; he thought that’s what anthropology should be all about. Until Thaler, Kahneman and Tversky, people were studied as if they were logical automatons: they were not thought capable of human passions and emotions. Thaler thought he would study the way they behave without the baggage of economic theory about how they OUGHT to behave: he thought that’s what economics should be all about.
Misbehaving is a hefty book, funny, rambling in parts, bristling with ideas and stories, very different in form and substance from the slim, austere volume of essays that Malinowski published, but I got the same moral out of both: that ultimately, people are people. In order to understand them, you need to observe them, walk around in their shoes, collect the data. And before you do any of that, you ought to forget all the theoretical models and frameworks they taught you in college.