Misbehaving

Almost six years ago, I wrote about my interest in the behavioral sciences, especially behavioral economics and finance.  I further mentioned books I'd read on the topic, notably a book titled Thinking, Fast and Slow by Nobel prize winner Daniel Kahneman.

Since then, I've read many other books related to behavior, including three by former poker player Annie Duke (Thinking In Bets, How To Decide, and Quit), and another by a journalist who became a poker player for a year, Maria Konnikova (The Biggest Bluff).  On the more data driven / less fuzzy side were books by Robert Cialdini (Influence) and another co-authored by Kahneman (Noise).

Now I've just finished a book on this topic that I've enjoyed probably only less than Thinking, Fast and Slow.  It's not a particularly new book (2015) by another Nobel prize winner, Richard Thaler, titled Misbehaving.

Thaler was an early collaborator with Kahneman and his longtime research partner, Amos Tversky.  Misbehaving reviews the early, largely ignored stages of behavioral science, and how it eventually grew to become accepted by all but the most hardcore intellectuals.  

Thaler is more widely known now for a later book he co-authored with Cass Sunstein, called Nudge.  While I also enjoyed reading Nudge (to the point I gifted it to clients), Misbehaving provides many more examples of how people will respond differently to a given set of facts, depending on how those facts are phrased.  This was a prime writing / teaching method of Thinking, Fast and Slow.

Here's one example:

600 people are sick from a disease, and a choice has to be made between two policies:

Would you rather take

A) policy will save 200 people for sure

B) policy will offer a 1/3 chance at saving everyone, but a 2/3 chance of killing everyone

Alternatively, would you rather take

C) policy where 400 people will die for sure

D) policy where there's a 1/3 chance of killing no one but a 2/3 chance of killing everyone

Logic demands that we take either A and C, or B and D, because they are effectively the same thing. But in group tests of this, we don't always do that, because we are not always rational beings.  We also care about things like what seems right, instead of just the logical.

The book reviews the decades-long conflict between the data-only 'econs' and the non-conforming behaviorist 'humans'.  Knowing about this conflict, and the sometimes illogical 'misbehavior' that humans follow, can be a very important advantage to those in a particular field.

Misbehaving has a large section on how this applies within the investing world, so if you're interested in that sort of thing (like me), read it!  Or as I said six years ago, don't read it, and I'll use it to my advantage.

Thinking, Fast And Slow

For the past month or so, I've been concentrating on reading books and articles broadly related to behavioral science.  More specifically, I'm interested in how and why people make the decisions they do, with a concentration on macro-economics and finance.

This is a field I've been interested in for some time.  Over the years, I can think of several books I've read that are generally related to behavioral science.  These include the Freakonomics trilogy of books:  Freakonomics, Superfreakonomics, and Think Like A Freak, by economists Steven Levitt and Stephen Dubner.  (In the past year I've also become a regular listener to the Freakonomics podcast, which has kept me interested during thousands of miles of travel.)

I'd also include the books The Tipping Point and Blink by Malcolm Gladwell in that list.  Those books are more about social science, but they provide real insight about way people behave the way they do.

The most recent book I've read is called Thinking, Fast And Slow by Daniel Kahneman, who previously won a Nobel Prize in Economics.  I thought the book would be good, but it was better than good.  It was a tour-de-force about how our brain works, and the many biases that affect it.

How the brain works is basically a matter of two 'systems' that Kahneman called System 1 (instinctive and emotional) and System 2 (deliberative and logical).  But after a few chapters about the science of that, the rest of the book focuses on psychological aspects of thinking -- the cognitive biases.  These include terms / effects like loss aversion, framing, anchoring, overconfidence, and sunk-cost theory.

Once you read about what these biases are and how they affect thinking, it becomes clear how economic / financial decisions (or are they gambles?) are made and why.  This is a good thing to know for me, both personally and professionally.

Thinking, Fast And Slow by Daniel Kahneman.  Read it.  Or don't, then I'll use it to my advantage.