Thaler: Misbehaving
Summary: Richard Thaler’s account of the development of behavioral economics — the empirical attack on the rational-agent model through anomalies, mental accounting, loss aversion, and the endowment effect — and what it means to take Human psychology seriously in economic models.
Sources: Clippings/Thaler-Misbehaving.md
Source pages: Misbehaving: The Making of Behavioral Economics — Quotes
Quote pages: Q01, Q02, Q03, Q04, Q05, Q06, Q07, Q08, Q09, Q10, Q11, Q12, Q13, Q14, Q15, Q16, Q17, Q18, Q19
Last updated: 2026-05-07
The Econ vs. the Human
“The core premise of economic theory is that people choose by optimizing.” “We don’t have to stop inventing abstract models that describe the behavior of imaginary Econs. We do, however, have to stop assuming that those models are accurate descriptions of behavior, and stop basing policy decisions on such flawed analyses.”
Standard economics was built for Econs: rational, patient, self-interested optimizers. Humans are none of these things reliably. Behavioral economics doesn’t reject optimization as a useful fiction — it rejects the fiction that the model describes reality.
Discovery starts with anomalies
“discovery starts with anomalies.”
Thaler’s methodology: collect observations that don’t fit the model, take them seriously rather than rationalizing them away, and build theory to accommodate them. See dennett-intuition-pumps: Dennett’s chmess critique — noticing when you’re solving the wrong problem.
Loss aversion in practice
“Roughly speaking, losses hurt about twice as much as gains make you feel good.” “Giving up the opportunity to sell something does not hurt as much as taking the money out of your wallet to pay for it. Opportunity costs are vague and abstract when compared to handing over actual cash.”
Loss aversion explains: the endowment effect (people value things more once they own them); the status quo bias; why sellers and buyers systematically disagree on price. See kahneman-thinking-fast-and-slow for the underlying psychology.
Mental accounting
Money is supposed to be fungible — a dollar is a dollar regardless of where it came from:
“when people get a windfall… they tend to save a larger proportion from it than they do from regular income.”
People put money in mental accounts (“fun money,” “savings”) and spend from them according to different rules — violating the economist’s assumption of fungibility.
Inside view vs. outside view
“When the expert was thinking about the problem as a member of a project team, he was locked in the inside view — caught up in the optimism that comes with group endeavors — and did not bother thinking about what psychologists call ‘base rates.’”
The inside view asks “given everything I know about this project, how long will it take?” The outside view asks “how long do projects like this typically take?” The outside view is almost always more accurate. See kahneman-thinking-fast-and-slow for the planning fallacy.
The market rewards conventional failure
“Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”
A fund manager who loses money the same way as everyone else faces no career risk; one who bets differently and is wrong gets fired. This creates structural herding — the rational self-interested move is to follow the crowd, even when the crowd is wrong.
Incentives for inputs, not outputs
“rewarding students for inputs (such as doing their homework) rather than outputs (such as their grades) is effective… the students most in need do not know how to become better students.”
Where outputs depend on knowledge or skill the person doesn’t yet have, incentivizing outputs is ineffective. Compare dweck-mindset: praise effort, not achievement.