When economics met psychology

Traditionally, economic theory expects “humans” to behave in remarkable ways: overflowing in judgment and self-control, with exceeding expertise in math and never too generous. Not quite how Richard Thaler believes real people behave.

A professor of economics and behavioural science at the University of Chicago, Thaler spent 40 years studying human bias and temptation before being awarded the Nobel Prize in Economics in 2017. He was recognized for presenting human behaviour in a new light – unpredictable, error-prone, and often-irrational – this approach came across as a more realistic perspective.

Thaler’s Nudge Theory, which we originally wrote about in 2017 – A Little Nudge in the Right Direction1 – proposes that it is possible to steer people towards better decisions by presenting choices in different, and more encouraging ways.

Expanding on the matter, Thaler wrote Misbehaving2, his lucid, anecdotal and frequently hilarious account of the struggle to bring an often-starchy academic discipline back down to earth. In his view, it doesn’t matter whether you’re buying a clock radio or applying for a mortgage, we all yield to biases and make decisions that deviate from the standards of rationality assumed by traditional economists. In other words, we misbehave.

A ragtag band of economists

The story goes that a ragtag band of economists, social scientists and psychologists started exchanging ideas and, bit by bit, began to undermine some of the basic tenets of economic theory. In a way, they were a bunch of intellectual hooligans, skeptical of the status quo and unafraid to challenge received opinion.

Thaler recounts a dispute he had at an academic conference with the orthodox economist Robert J. Barro3, the Paul M. Warburg Professor of Economics at Harvard University. As Thaler puts it: “I said that the difference between our models was that he assumed that the agents in his model were as smart as he was, and I assumed they were as dumb as I am. Barro agreed.”

Making smarter decisions in an increasingly mystifying world

Recognizing human miscalculations and their effects has been increasingly regarded as a legitimate way to lead people’s behaviour in a given direction. For instance, in the UK, it has been standard practice for some time to automatically enrol everyone on to a workplace pension. Naturally, they have the choice to opt-out, but this would require some paperwork. The result? Most people stick with the default, and millions more Britons are saving for retirement.

On a more peculiar case, the Schiphol Airport in Amsterdam started etching images of houseflies directly above the drains of the bathroom urinals. After this, the characteristically erratic aim of most men would improve and spillage on the bathroom floor would be reduced by 80% – an example of nudge theory in action.

Punctuated with irreverent stories about confrontations with the bastions of traditional economic thinking, Misbehaving offers – fundamentally – a penetrating and laser-like look to the way human foibles affect personal behaviour. If you haven’t read it, consider doing so.

What’s more, it presents people’s underlying personal pathologies – including bias, vulnerability to social pressure and cognitive inertia – as traits that can be harnessed to amend habits.

We believe, understanding our own psychology can be a powerful tool to direct the different areas of our lives towards our desired outcomes. This can apply to everything, from setting a pre-authorised contribution to your RSP or your TFSA, to filling your kitchen cabinets with healthy food to discourage yourself from eating junk food. Consider the way you could change your life-defaults to modify your own behaviour freely. We encourage you to give yourself a little nudge.


1https://twmgroup.ca/a-little-nudge-in-the-right-direction/
2https://www.goodreads.com/book/show/26530355-misbehaving
3https://scholar.harvard.edu/barro/biocv

Learn with
TWM Group

Invest with TWM Group

Our clients and their families typically have a net worth of $2M or more. If you have an amount under the minimum, we still invite you to get in touch with us to discuss your options.