Misbehaving by Richard H. Thaler


I’ve never thought I’d once read a book about economics that I’d have to violently pry from my own hands at 1:00 a.m to force myself to go to sleep, after promising myself three times that I’d definitely sleep after just one more chapter, and failing to keep this promise three times.

What’s more, I’ve never thought I’d ever willingly read about economics. I used to have this weird prejudice against economics and economists that economists are probably like one of my high school classmates who was preparing for a career in this field and who once borrowed a 500-page volume of poetry from the library (perhaps in an attempt to attain a rounded education) and read through it from beginning to end while I watched in horror. Anyway, based on this I thought that economics must be an awfully regular and cold and logical field of study, and those always make me want to break down and cry.

In hindsight, I think this classmate of mine must have been an Econ – a homo economicus, who – based on this book’s definition – is a human who behaves rationally in all circumstances, makes all the right choices based on knowledge and facts, knows what’s advantageous for him, and doesn’t suffer from issues with self-control and will-power, so he can always act according to what’s in his best interest. According to Thaler, though, Econs – even though for a long time they served as models for all kinds of theories in economics – don’t really exist. Instead of Econs, the world is mostly filled with Humans, who tend to make irrational decisions based on impulses; who prefer to eat one Oreo cookie now instead of eating three 15 minutes later; who sometimes go all the way across town to get something for a couple of dollars less while in other situations cheerfully ignore those same couple of dollars; who know in the depth of their hearts that they should finally start saving money for retirement but still tend to postpone dealing with this question because setting up a retirement fund or taking out a pension insurance is complicated and involves filling out various forms.

And what a relief to read about Humans, not Econs.

Because don’t get me wrong: Thaler doesn’t say that it’s the Humans’ fault that they don’t behave as if they were Econs. He says it’s economics to blame when it bases its theories and models on the impossibly predictable behavior of beings who don’t even exist. And Thaler spent his life trying to change this false belief economics had about Humans.

Richard Thaler is one of the founding fathers of behavioral economics. Right from the beginning of his career, he liked to misbehave a lot, he had a penchant for studying all kinds of anomalies (phenomena where Humans didn’t behave in the way they were supposed to behave based on the tenets of economics based on Econs), and he liked to team up with psychologists and social scientists during his work (which, again, didn’t endear him to the supposedly precise and data-driven bunch of economists).

The book is partly a professional autobiography, and partly the story of the birth and development of the field of behavioral economics – and it’s certainly an exciting story. There’s a whole lot of entertaining debates and fights here between professors of different elite universities, and it’s exhilarating to watch all these duels between old-school economists who hang on for dear life to the old economical models while the misbehaving economists of Thaler’s kind go on to demonstrate that the old models don’t work.

And then there’s a lot of down-to-earth and entertainingly presented examples of everyday economics: why we feel regret if we have a ticket to a concert but decide to stay at home on the big night because of a snowstorm; why we feel it’s grossly unfair if the hardware store sells snow shovels at twice their regular price on the day after the big snowstorm; why we tend to choose a small reward we can be sure about instead of taking risks but why we tend to take bigger risks in a losing situation; and how cleverly we convince ourselves that if we buy a bottle of expensive wine now, which we want to drink ten years later, then this is not really an expense but an investment, and ten years from now we can drink a bottle of special wine for free. (Of course, none of these forms of behavior conform to the way an Econ would behave.)

So all in all, this is a very educational and interesting book, and it’s very humanistic in its approach. And Thaler is a funny, ironic and self-ironic natural-born storyteller, someone who – believe me – can even talk about pension insurance in a way that you want to read one more chapter about it. And then one more. And then you feel like you want to take out an insurance policy first thing next morning.

Blink by Malcolm Gladwell


There’s this wonderful section in José Saramago’s All the Names (translated by me from the Hungarian, so it probably doesn’t have too much in common with the official English translation):

„The decision popped out of Senhor José’s mind two days later. We generally don’t say that a decision pops out of our mind, people guard their personality carefully no matter how plain it is, and their human poise, no matter how insignificant it is, so they’d rather tell us that they thought things over before taking the final step, considered the benefits and the drawbacks, pondered the chances and choices, and after intense mental work they finally decided. We must say, things never work this way.”

Blink illustrates in 300 (breathtakingly interesting and un-putdownable) pages the point Saramago makes in a single paragraph. Which just underlines the fact that (good) fiction understands the essence of things and the working of humans just as well as (popular) psychology, and it doesn’t even have to provide lengthy explanations. Anyway, like I say, Gladwell’s explanations and stories are fascinating so I don’t mind the length at all.

Blink is about how decisions pop out of us – about how in the blink of an eye, armed with only the most minimal information, without carefully considering the pros and cons we suddenly make a decision or evaluate a situation. Whether, for example, we find someone likeable of disagreeable; whether a work of art is genuine or fake; whether the person coming in our direction on the dark street is potentially dangerous or harmless; whether someone’s lying or not; whether a musician plays well or not; and so on.

According to Gladwell, our instant decisions and evaluations of situations are often more precise than the decisions we make after scrupulously investigating every facet of the matter. The reason for this is that our brain, without us being consciously aware of it, continuously senses and interprets millions of morsels of information, and is able to come up with a decision or answer in a matter of seconds. In other words, this is the famous gut feeling, which in fact doesn’t have a lot to do with feelings. These premonitions and unconscious decisions are also based on real information, already existing knowledge, details and patters observed unconsciously – and not on some whim or fancy.

Gut feelings are thus very useful, and according to Gladwell, it’s worth placing greater trust in them. Which is, of course, difficult. Partly because our premonitions and instant recognitions are inexplicable, and as we are humans, we like to explain everything away because it makes us feel safer. Therefore, we tend to trust those things more for which we can line up lots of supporting facts and hard data – things we can put into words, but turns out we sometimes do more harm than good with this attitude.

A good example for this is the phenomenon of “verbal overshadowing” mentioned in the book. This is the case when our attempt to verbalize something harms our ability to recognize it. Face recognition is an example of instant recognition: we don’t ponder consciously what makes someone’s face recognizable but when we see a familiar face, we recognize it immediately. According to certain studies, though, if, for example, we try to describe in words the face of a criminal whose crime we witnessed, this makes it less likely that we’ll recognize the face in a police line-up.

This is one difficulty. And then there’s the other one, namely, that our ability to make instant decisions is far from being infallible. Our instant decisions are strongly influenced by prejudices, by what we want to see into a situation, by extreme stress, or by the situations in which we have to make quick decisions too quickly. Even making instant decisions takes some time, and without sufficient time we will simply decide imprudently.

The good news is, though, that the ability to make instant decisions is by no means some kind of magical ability only possessed by a select few. It’s something almost everyone’s brain is capable of, something we automatically use every single day, and something that can grow strong on its own in our areas of expertise.

The first chapter of the book is about this exactly. The chapter deals with an antique sculpture in miraculously good condition that’s offered for sale to a museum by an antiques dealer. The museum carries out all the usual checks and examinations before committing to the purchase, and they decide that the sculpture is genuine. A little later, however, a couple of real experts take a look at the sculpture and they immediately, without any kind of examinations, see that it’s a fake. They can’t say why they think it’s a fake – all they have is a vague, instinctive reaction which comes down to the general feeling that something’s not okay. As it turns out later, the sculpture was really not okay.

This is not magic, though. It’s more like that anecdote I’ve read once somewhere, where someone asked a painter or an art historian how he knows whether a painting is good. He said: That’s easy. First you look at one million paintings, and then you’ll know.

I’ve long been fascinated by this anecdote, and Gladwell says it actually works this way. It really only takes this much for people who know their craft, people with a lot of experience, because their brain already contains all their previous knowledge and information necessary for making instant judgments. (And of course not even these people are infallible.)

I could go on and recount more stories from this book – Gladwell is an excellent, exhilarating story-teller. The review quoted on the front page, which says that Blink is great material for cocktail party conversations, is certainly true. I don’t really attend cocktail parties, but this book is also awesome for pub conversations. It’s entertaining-popular psychology at its best.