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02 Jun The importance of misbehaving

Econs and Humans

For decades, Richard Thaler has been on a mission to return economics to its traditional roots in psychology and what Adam Smith, the discipline’s founding father, called “moral sentiments.” As he describes in his intellectual memoir Misbehaving, the field he entered as a graduate student in the 1970s was founded on a number of strong idealizations: Economic actors apply unbounded computational abilities to all available information in order to make optimal decisions based on stable sets of preferences; considerations of fairness do not come into play in economic decisions; and inertia and short-term distractions never compromise the pursuit of long-term goals. In the vernacular, the idealized actors of classical economics are characterized by unbounded rationality, self-interest, and self-control. They have more in common with Star Trek’s perfectly rational Mr. Spock than with actual humans.

They have more in common with Star Trek’s perfectly rational Mr. Spock than with actual humans

Early on, Thaler maintained a list of departures from perfect economic rationality that can be observed in everyday life—cases of ordinary human behavior that are considered “misbehaving” as judged by the norms of classical economics. He initially assumed it would be impossible to publish these observations, assuming that no respectable economics journal would accept a paper called “Dumb stuff people do.” But a fortunate tip led Thaler to a paper by the young psychologists Daniel Kahneman and Amos Tversky. Kahneman and Tversky provided evidence that people’s departures from economic rationality are not just random “dumb stuff people do”, but the result of systematic—and therefore predictable—features of human psychology. Thaler recounts that as he read the Kahneman-Tversky paper, his “heart started pounding the way it might during the final minutes of a close game. The paper took me thirty minutes to read from start to finish, but my life had changed forever.”

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Below you can download the interview with Richard Thaler.

A conversation with Richard Thaler

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