If you are curious about why people behave in a certain way when it comes to financial decisions, Richard H. Thaler’s book “Misbehaving” may be of interest to you. But this isn’t your typical behavioral economics book. There are plenty of funny stories and jokes for entertainment.
For example, there’s a story about a man who purchased several bottles of wine for $10 many years ago. The wine is now worth over $100 per bottle. Although he is willing to drink the wine, he says that he would never actually spend $100 on a bottle of wine. This irrational behavior is defined as opportunity cost. Richard Thaler explains that giving up the opportunity to sell an item would be less painful than taking out your hard-earned cash to pay for it.
It is all about what a person is willing to give up in order to do something else.
This is followed by another tricky concept that Mr. Thaler calls the “endowment effect.” People tend to value things they already own more than those not yet owned.
Have a favorite old shirt you’re not willing to give up for anything? You may be experiencing the endowment effect.
I thought the chapter on budgeting was brilliant. When it comes to allocating income, many people seem to have an aversion to the fact that money is fungible. There is no label on money that would restrict where it can be spent. Yet, in many situations, if money is saved in one category, many will not spend the extra funds in a different category. It is basically like saving money on gas but not using the extra funds to buy food. There are even cases when people have money in a low return savings account but owe money on a high-interest credit card.
This is “Misbehaving” in the eyes of an economist.
There is also a discussion on self-control and delay of gratification. Would you rather have one cookie now or three cookies in 15 minutes? It comes down to psychology and internal conflict. In these situations, we can limit our options or remove the cues that would cause temptation. In other words, don’t mention the single cookie; just bring the three cookies in 15 minutes.
Of course, there are anomalies that are inconsistent with the economic paradigm. One of the best quotes in the book is that “discovery commences with the awareness of anomaly.” We must always remember human nature and that it may not always fit into the box of a typical economic example.
This book was a great demonstration of economics but an even better demonstration of human behavior. It’s pretty fascinating.
I would love to hear what others think about the subject, so drop a line below. Thanks so much for stopping by today!