Richard H. Thaler: Misbehaving

Given the contribution of Richard Thaler’s work in researching our strategy at Camomille, the enthusiasm for his new book, Misbehaving was exceeded only by the opportunity to attend an interview with the man himself at The Royal Society of Medicine.

Thaler began by recalling some stories that laid the framework in his mind for questioning classic economic theory, in particular the assumptions around human decision-making.  Initially he made a list of apparently erroneous behaviour, without a clear idea of what it meant, or what to do with it.  It wasn’t until he came across Daniel Kahneman and Amos Tversky that he realised much of the work they were doing at that time on Prospect Theory explained his ‘list’ of behavioural anomalies.  Biases such as loss aversion, mental accounting and framing appeared to fill in his gaps.  A long collaboration followed that would provide the foundations for a huge rise in the reach and popularity of Behavioural Economics, establishing a legitimate, coherent challenge to the  assumptions that had been the foundation of economic models to date.

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Central to Thaler’s narrative is his antipathy for ‘Econs’ as he calls them; fictitious individuals that exist in economic models, but not in the real world.  Behavioural Economics would serve to replace ‘Econs’ with actual people.  The primary difference between ‘Econs’ and ‘us’ is  that whilst we are subject to emotions that warp some of our behaviour leading to conventionally irrational decision-making, ‘Econs’ do not suffer in this way.  They are unemotional, perfectly rational and able to assess with total precision the utility to be gained from any given decision or choice they make.

The discussion progressed from economic theory to the broader, practical successes that have emerged from a more accurate understanding of how individuals actually perceive choice and how they make decisions.  His greatest achievement has been the overhaul of pensions in the US, where automatic enrolment and the prompted option to sign up to automatic future contribution increases has led to more effective savings behaviour; individuals are far more prudent when it comes to future decisions than they are with decisions today, much like starting a diet next week, or giving up smoking next year, both of which are far easier than committing at present.

He was also keen to clarify that he is not a supporter of automatic organ donor enrolment, contrary to popular belief, instead promoting the virtues of prompted choice.  He highlighted the issue with the former, in that the family still needs to be consulted after death, and they would now have no idea whether the donor in question actually wanted to be a donor at all, or was just automatically enrolled.  Making such decisions at such a traumatic time is suboptimal to say the least.

He also discussed the human propensity to overweight small outcomes.  A trait insurance companies capitalise on to the tune of $27bn a year in the US via extended warranties.  His advice was simply: “Don’t buy extended warranties!”

More recently Thaler has been involved with the Behavioural Insights Team which has been assisting the UK government since 2010, further evidence that the relevance of Behavioural Economics reaches far beyond finance, and will become a critical tool to policy makers in addressing issues ranging from healthcare and financial stability all the way to social inequality

For further information on Camomille’s study of Behavioural Economics or the implications of the field on our investment approach, please email