Every Wednesday, London Strategy Unit's Matt Boffey reads one of the most influential books from the world of innovation, marketing or creativity so you don't have to. In today's Booknote, he reviews Misbehaving: The Making of Behavioural Economics by Richard H. Thaler.
Why have we chosen this book?
Because Thaler’s unique approach that blends theory and behavioural psychology is kickstarting the field of behavioural economics. Drawing on case studies from ski centres in New York to episodes of Deal or No Deal, this is an in-depth exploration of what drives our financial decisions.
What’s the original thought or argument?
That there are two types of people when it comes to any financial decision: ‘econs’ and ‘normal’ humans. Unlike econs, most people aren’t economically rational – they often make decisions that are inconsistent, mathematically incorrect or downright disadvantageous. Thaler argues that humans are predictably irrational and that understanding a set of ‘supposedly irrelevant factors’ can help us to model human financial behaviour with more accuracy than ever before.
If you want to look smart, just read
Section four on the concept of financial fairness. Thaler explores why removing a discount is nowhere near as objectionable as adding a surcharge, despite them being essentially equivalent actions. Unless you’re advertising to economics students, how you communicate pricing has a huge influence over how people respond to it.
You might want to skip
Section six, which deals with macroeconomic trends such as house prices and stock markets. Thaler finds that economic irrationally applies to stockbrokers, who often make decisions based on irrelevant ‘noise’ that has no impact on the price of stocks. While this is interesting – and worrying – it’s merely confirmation that (as we suspected) stockbrokers are as capable of making mistakes as anyone.
Why trust this author?
Thaler is currently professor of behavioral science and economics at the University of Chicago where he leads the field in theorising behavioural economics. He is most well known as the co-author of Nudge, one of the bestselling business books of the last decade.
Once you’ve read this you don’t need to read
Any textbook style primers on behavioural economics. Misbehaving is packed with case studies and brought to life with Thaler’s personal experiences so it’s never a chore to read.
Why should this stay on your bookshelf?
Because the field of behavioural economics is already influencing real-world decision-making bodies. Thaler was instrumental in setting up the UK government’s Behavioural Insights Team – the so called ‘Nudge Unit.’ In Misbehaving, Thaler sheds light on how they’ve put their insights to use. For example, the most effective way to get overdue taxes paid isn’t to threaten legal action; it’s to remind offenders that they’re no longer part of the 90 per cent of society that pay on time.
What’s the one thing you should do differently after reading this book?
Start designing for human irrationality. Thaler gives the example of a ski resort allowing skiers to buy packs of ten day passes at a 40 per cent discount. They found that people only redeemed on average 60 per cent of their passes (while thinking they’d got a great deal), meaning the resort benefited from receiving all their fees up-front without experiencing any increased customer numbers.
Best quote in the whole book?
“A deeper understanding of human behaviour is every bit as important to running a successful business as is an understanding of financial statements and operations management. After all, humans run companies, and their employees and customers are also humans.”
Matt Boffey is the founder of London Strategy Unit, which you can follow on Twitter @LSUsocial