Misbehaving: The Making of Behavioral Economics by Richard H. Thaler Page B
Authors: Richard H. Thaler
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that it can be hard to find a true expert who does not have a conflict of interest. It is illogical to think that someone who is not sophisticated enough to choose a good portfolio for her retirement saving will somehow be sophisticated about searching for a financial advisor, mortgage broker, or real estate agent. Many people have made money selling magic potions and Ponzi schemes, but few have gotten rich selling the advice, “Don’t buy that stuff.”
A different version of the argument is that the forces of competition inexorably drive business firms to be maximizers, even if they are managed by Humans, including some who did not distinguish themselves as students. Of course there is some merit to this argument, but I think it is vastly overrated. In my lifetime, I cannot remember any time when experts thought General Motors was a well-run company. But GM stumbled along as a badly-run company for decades. For most of this period they were also the largest car company in the world. Perhaps they would have disappeared from the global economy in 2009 after the financial crisis, but with the aid of a government bailout, they are now the second largest automobile company in the world, a bit behind Toyota and just ahead of Volkswagen. Competitive forces apparently are slow-acting.
To be fair to Jensen, there is a more coherent version of his argument. Instead of arguing that markets force people to be rational, one can argue that market prices will still be rational, even if many individuals are decidedly Human. This argument is certainly plausible, perhaps even compelling. It just happens to be wrong. But how and why it is wrong is a long story that we will take up in Section VI.
For the field of behavioral economics to succeed, we needed answers to these questions. And in some quarters, we still do. But now, instead of snappy one-liners, it is possible to point to studies of real people interacting at high stakes in markets—even financial markets, where the invisible handwave would be expected to be most likely to be valid.
I t was with the Gauntlet in my mind that I arrived at Cornell, in rural Ithaca, New York, in the fall of 1978. Ithaca is a small town with long, snowy winters, and not much to do. It was a good place to work.
While in California I had managed to finish two papers. One expounded on the List, and the other was called “An Economic Theory of Self-Control.” Writing the papers was the easy part; getting them published was another story. The first paper, mentioned earlier, “Toward a Positive Theory of Consumer Choice,” was rejected by six or seven major journals; I have repressed the exact count. In hindsight, I am not surprised. The paper had plenty of ideas, but little hard evidence to support them. Each rejection came with a set of referee reports, with often scathing comments that I would try to incorporate in the next revision. Still, I did not seem to be making any progress.
At some point I had to get this paper published, if for no other reason than that I needed to move on. Luckily, two open-minded economists were starting a new journal called the Journal of Economic Behavior and Organization . I guessed that they were anxious to get submissions, so I sent the paper to them and they published it in the inaugural issue. I had my first behavioral economics publication, albeit in a journal no one had ever heard of.
If I were going to stay in academia and get tenure at a research-focused university like Cornell, I would have to start publishing regularly in top journals. I had returned from California with two ideas at the top of my list of topics to explore. The first was to understand the psychology of spending, saving, and other household financial behavior, what has now become known as mental accounting. The second was self-control and, more generally, choosing between now and later. The next two sections of the book take up those topics.
________________
* They favored this
A different version of the argument is that the forces of competition inexorably drive business firms to be maximizers, even if they are managed by Humans, including some who did not distinguish themselves as students. Of course there is some merit to this argument, but I think it is vastly overrated. In my lifetime, I cannot remember any time when experts thought General Motors was a well-run company. But GM stumbled along as a badly-run company for decades. For most of this period they were also the largest car company in the world. Perhaps they would have disappeared from the global economy in 2009 after the financial crisis, but with the aid of a government bailout, they are now the second largest automobile company in the world, a bit behind Toyota and just ahead of Volkswagen. Competitive forces apparently are slow-acting.
To be fair to Jensen, there is a more coherent version of his argument. Instead of arguing that markets force people to be rational, one can argue that market prices will still be rational, even if many individuals are decidedly Human. This argument is certainly plausible, perhaps even compelling. It just happens to be wrong. But how and why it is wrong is a long story that we will take up in Section VI.
For the field of behavioral economics to succeed, we needed answers to these questions. And in some quarters, we still do. But now, instead of snappy one-liners, it is possible to point to studies of real people interacting at high stakes in markets—even financial markets, where the invisible handwave would be expected to be most likely to be valid.
I t was with the Gauntlet in my mind that I arrived at Cornell, in rural Ithaca, New York, in the fall of 1978. Ithaca is a small town with long, snowy winters, and not much to do. It was a good place to work.
While in California I had managed to finish two papers. One expounded on the List, and the other was called “An Economic Theory of Self-Control.” Writing the papers was the easy part; getting them published was another story. The first paper, mentioned earlier, “Toward a Positive Theory of Consumer Choice,” was rejected by six or seven major journals; I have repressed the exact count. In hindsight, I am not surprised. The paper had plenty of ideas, but little hard evidence to support them. Each rejection came with a set of referee reports, with often scathing comments that I would try to incorporate in the next revision. Still, I did not seem to be making any progress.
At some point I had to get this paper published, if for no other reason than that I needed to move on. Luckily, two open-minded economists were starting a new journal called the Journal of Economic Behavior and Organization . I guessed that they were anxious to get submissions, so I sent the paper to them and they published it in the inaugural issue. I had my first behavioral economics publication, albeit in a journal no one had ever heard of.
If I were going to stay in academia and get tenure at a research-focused university like Cornell, I would have to start publishing regularly in top journals. I had returned from California with two ideas at the top of my list of topics to explore. The first was to understand the psychology of spending, saving, and other household financial behavior, what has now become known as mental accounting. The second was self-control and, more generally, choosing between now and later. The next two sections of the book take up those topics.
________________
* They favored this
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