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The economist who noticed humans were not rational
Richard Thaler spent forty years arguing that real people do not behave like the calculating agents of economic theory — and his field eventually awarded him the Nobel Prize for saying so.
When Richard Thaler started noticing that people behaved oddly around money in the 1970s, his colleagues were mostly unimpressed. Misbehaving, published in 2015, is his memoir of building the field of behavioural economics — which is, at its core, the project of replacing the economics textbook's 'rational agent' with something closer to the actual humans economists were supposedly studying.
One of his earliest findings was mental accounting: the fact that people treat money differently depending on its source or intended purpose. A windfall is spent more freely than earned income. A refund feels different from a wage. Logically, money is fungible — a pound is a pound regardless of where it came from — but psychologically, people sort it into mental pots and apply different rules to each pot. This irrationality, Thaler showed, was systematic and predictable.
He also documented the endowment effect: the tendency to value things more highly once we own them. In a famous experiment, participants given a coffee mug demanded substantially more to sell it than others were willing to pay to buy it. This violated standard economic theory, which predicts no gap. The endowment effect matters practically: it distorts negotiations, makes change harder to implement, and contributes to investment mistakes.
Thaler's most publicly influential work came later, in the design of 'nudges' — small changes to the architecture of choices that reliably alter behaviour without restricting freedom. Automatically enrolling employees in pension schemes (while allowing easy opt-out) dramatically increased participation rates, producing better retirement savings at no cost to individual freedom. The idea that good choice architecture can harness human irrationality rather than fight it became a policy tool in governments from the US to the UK.
The book is part memoir, part intellectual history, and part manifesto. Thaler writes with dry wit and is honest about which of his ideas met resistance and why. The result is a portrait of how a paradigm shifts — slowly, through the accumulation of small embarrassments for the existing theory.
Based on the work of
Richard H. Thaler
Professor of Behavioural Science at Chicago Booth, Nobel Laureate in Economics 2017
Misbehaving: The Making of Behavioral Economics · 2015
Thaler writes as a participant in the story he is telling, which gives the intellectual history an unusual immediacy and honesty about resistance and setback.
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Thaler's 'nudge' approach has been criticised by some researchers for producing smaller real-world effects than lab studies suggest; the pension auto-enrolment evidence is stronger than many other nudge interventions.
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