Written by Richard H. Thaler

Reviewed by Michelle Pimentel, AFC®

Richard Thaler, a professor at the University of Chicago and behavioral economist, recaps his career-long endeavor to establish and legitimize behavioral economics in his latest book, Misbehaving. Thaler argues that “misbehavior,” which he defines as “behavior inconsistent with the idealized model of behavior in economic theory,” is absent from traditional economic models, with harmful effects. Over the course of the book, Thaler lays out the many ways “Human” behavior differs from the perfectly rational behavior of “Econs,” the actors used in most economic models, and how incorporating more realistic assumptions into these models can benefit people in tangible ways.

The author largely makes his point through the use of anecdotes and studies, making this 400-page book on economics a quick and pleasant read. Students of economics and finance may find his subversive take on traditional economic and finance theory entertaining or irritating, as he reports of many of his colleagues. He takes many opportunities to highlight the flaws in these long-held models over the course of his career, starting in 1970, and recounts many of his “battles” with traditionalists throughout the book.

As a social science used widely to influence public policy, Thaler argues that economics should be a force for good and proposes several ways government and corporate policies can capitalize on predictable human “misbehaviors” and “nudge” them toward making better choices. One of the well-known examples he provides is suggesting that employers structure their retirement plans so that employees “opt-out” instead of “opt-in,” requiring little action on the employees’ part to begin participating in retirement programs. He also advocates a strategy called “Save More Tomorrow,” in which percentage increases in contributions to an employer sponsored retirement account are automatically triggered when an employee receives a pay raise.

A key component of behavioral economics is that “Humans” (as opposed to “Econs”) pay attention to factors which are rationally irrelevant (he calls these “Supposedly Irrelevant Factors,” or SIFs). Sunk costs represent one such SIF. For example, he cites a situation in which he and his friend will brave unsafe driving conditions to see a basketball game if they purchased the expensive tickets; however, if the tickets were a gift, they would wisely choose to stay home. He asserts that most of us consider it a waste of money if we don’t reap the benefit, though the money is spent whether a game is watched or not. Rational thinking dictates that the sunk cost of the tickets has no bearing on the safety of the road conditions and thus our decision should be the same in either situation.

Another SIF is sensitivity to change versus absolute wealth or value. According to Thaler, most people tend to perceive sales as a better buy because, relative to an anchor cost, such as the manufacturer suggested retail price (MSRP), the sale price represents a reduction in the amount we have to pay. An item regularly priced is often not as attractive as a similar item when it is on sale for the same price. Because of this, we may miss out on the “transaction utility,” or the enjoyment of feeling we have just taken advantage of a good deal. The price and quality of the items being identical, a rational actor would have no preference, but “misbehaving” consumers will prefer the item on sale.

Another interesting financial topic addressed in the book is the rational economic principle that money is fungible, or freely interchangeable, meaning it should flow to the most profitable or needed category. People tend to treat money as having different values depending on what category it has been assigned. For example, a study Thaler cites attributes the great majority of the success of tax-advantaged retirement savings accounts (IRAs, 401(k)s, etc.) to savers treating a separate, named account as off-limits, and only modest increases in savings rates to the actual tax benefits.

A key takeaway message financial counselors can use to benefit clients is to suggest small but effective measures to increase the likelihood for success based on known “misbehaviors,” such as strategies for automatic savings. This can also be a helpful lens to examine our own financial habits for areas to improve. Thaler argues that inertia favors the status quo, and a close look at our own behaviors may help us change the way we think about our money and consumption habits, spurring positive change.

Misbehaving is well worth the read. It is humorous, engaging, thought-provoking, and insightful. Complex theories are well explained and, though the author often champions behavioral economics over traditional methodology, it seems to offer a fair analysis of the newest branch of economics.


Michelle Pimentel is a recipient of the FINRA Military Spouse Fellowship and has been an AFC® since 2010. She has worked in the personal finance field since 2007 and is a candidate for CFP®certification having passed the CFP® exam. She is currently a Personal Financial Counselor with Zeiders Enterprises, Inc., serving members of the Air Force in Okinawa, Japan.

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