Misbehaving: The Making of Behavioral Economics
Richard Thaler
W. W. Norton & Company, $27.95 (Cloth)

In its early days, behavioral economics was focused on documenting human deviance from rational action. It began as a challenge to the mainstream neoclassical economics model, which assumes people are rational, utility-maximizing decision-makers with consistent preferences, correct expectations, and unbiased beliefs; in economic parlance, everyone is homo economicus, “economic human.” Behavioral economics, on the other hand, takes into account the “bounded rationality, bounded willpower, and bounded self-interest” of real humans­­—the propensity to be affected by perceptions, psychological factors, and other influences supposedly irrelevant to the neoclassical economic actor. In Misbehaving: The Making of Behavioral Economics, Richard Thaler, one of the field’s founders, traces the development of behavioral economics, mixing discussion of economic theory and research with personal anecdotes and everyday examples of behavioral deviations.

As it grew, behavioral economics sought to systematize its understanding of these irregularities, to develop formal economic models based on actual behavior. An “enriched version of economic theory,” according to Thaler, would take into account deviations from rational behavior as well as instances in which considerations irrelevant for the economic human factor into real human decision-making. These include things such as default options—what happens if an individual takes no action—for instance whether a retirement savings plan involves automatic or voluntary enrollment; the sense that “a loss hurts more than an equivalent gain”; and mental accounting patterns—people and firms use labels and differentiated budgets to create various “pots” of money that act as if money is not fungible. All these patterns involve factors extraneous to an economic human, but behavioral economics show that they matter for a real person.

In the twenty-first century, behavioral economics seeks to intervene in government and public policy.  In the United States, it influenced tax cuts in the 2009 stimulus package, retirement savings policy, the individual mandate in health care reform, aspects of the Dodd-Frank financial reform bill, and more. Thaler consulted on the founding of the United Kingdom’s Behavioral Insights Team and in 2013 the United States organized a working group based on the UK model. Governments in Brazil, France, Australia, and New Zealand have incorporated behavioral research. Much like its predecessor, Thaler and Cass R. Sunstein’s 2008 bestseller Nudge: Improving Decisions About Health, Wealth, and Happiness, Misbehaving aspires to influence public discourse and public policy at the same time as it provides an overview of behavioral research. But the two works also share a myopic worldview that does not get outside the hegemony and fundamental legitimacy of the market. Thaler’s book, in this sense, is a microcosm of behavioral economics in general. In highlighting deviations from the rational model of neoclassical economics yet excluding the possibility of critiquing the economic structures and logics that flow from it, Thaler reproduces the central flaw of behavioral economics.

Nearly everything, from behavioral economics’ standpoint, becomes a qualitatively similar choice. Choosing a mortgage belongs to the same category as choosing a spouse. Body weight is represented as a problem to be solved in the same way one might encourage people to save more for retirement. The “most blatant violation” of market efficiency Thaler describes involves the college player draft in the National Football League. In setting up a continuum based on frequency of purchase in order to illustrate how little economic “learning” takes place for high-stakes decisions, Thaler situates regular purchases—buying lunch, groceries, and clothing—on the same list as high-stakes, infrequently occurring acquisitions, such as “cars, homes, careers choices, and spouses.” There is a revealing slip in this last example: Thaler describes this spectrum as “a list of products” arranged by purchase frequency, then ends the list with choosing a spouse. Surely, even in the most marketized dystopia, a spouse is not a product to be purchased?

To some extent, one might chalk up Thaler’s flattening to the need to tell a compelling and accessible narrative for a book published by a popular press. The book is filled with entertaining illustrations of behaviors unnecessary or irrational under the aegis of traditional economic rationality, including a running motif of what to do with a bowl of cashews at a dinner party. These hypotheticals belie, however, the limited framework available to behavioral economists. Economic rubrics strip away the salient qualitative differences between choices, rendering heterogeneous realms of life into nothing but a series of economic decisions.

In behavioral economics, choosing a mortgage belongs to the same category as choosing a spouse. 

Indeed, behavioral economics denies the possibility of feeling, thinking, acting, deciding, socializing, forming relationships, caring for the self, and so on outside of economic logics and economic terms. Quotidian acts such as gifting or eating and socializing with friends, in their deviations from economic rationality, should be understood as behaviors that don’t have to be economized and evaluated in terms of market logics. The same should be said for “larger stake” behaviors as well: forming long-term romantic relationships might just merit entirely different modes of thought than that of buying a car, entering a career, or saving for retirement.

There is nothing inherently economic to eating at a party with friends or building a relationship. Such activities, subjected to an economic frame by Thaler, are qualitatively different than shopping for groceries or buying a home insofar as their ends—joy, partnership, compassion, relaxation, and so on—are not the same as economic utility-maximization. They might even be read as attempts to gain respite from the ever-pressing market logic of the neoliberal world. By distilling everything to an economic decision, Thaler stays safely within the confines of neoclassical economics. Subsuming all behavior in a single rubric is not a benign analytical move but an appropriation on behalf of neoliberalism. One can imagine behavioral models and formulae that would attempt to account for non-economic objectives and feelings in their frameworks, but this would further entrench neoliberal dominance over all aspects of life. 

In its reduction of all human actions to equivalent choices, behavioral economics reinforces market hegemony. Flattening all activities onto the same economic plane is a hallmark of the neoliberal project. Neoliberalism can be broadly understood as the construction of rule by and for the market, as critical economic geographer Jamie Peck understands it in Constructions of Neoliberal Reason. In his analysis of American neoliberalism, Michel Foucault claims in The Birth of Biopolitics that one of the more “radical” aspects of neoliberalism is the “generalization of the economic form of the market . . . throughout the social body”; “social relationships and individual behavior” are subsumed under an economic rubric, and people reduced to mere economic actors, doing nothing but making economic choices in all facets of their lives. Even as it tinkers with the theorization of that actor, behavioral economics bolsters this framework. Considering Thaler’s reproduction of market dominance in this way, it is unsurprising that the word “neoliberalism” appears nowhere in Misbehaving.

Opponents of behavioral economics from the neoclassical standpoint claim that markets can discipline people who misbehave and bring their behaviors into line with economic rationality. This is the “most important counter-argument” against behavioral economics, according to Thaler. If people are punished financially for poor decisions, or if the stakes are high, this position maintains that people will seek information or expertise to make the proper decision, and that competition drives aggregate economic activity and the behavior of firms to more or less rational behavior. If correct, this assertion about market discipline would render behavioral economics as a whole irrelevant, for it would reduce the field’s findings to interesting quirks with no significant consequences on a larger-scale.

There is a revealing irony in the way that Thaler addresses this argument. The problem, he ruefully observes, is that resorting to arguments about the disciplinary power of the market often amounts to nothing but an “invisible handwave.” “There is no logical way to arrive at a conclusion that markets transform people into rational agents,” he asserts. Moreover, thanks to behavioral economics, Thaler argues, more mainstream economists “have had to take seriously … the limits of handwaving.” While Thaler acknowledges the limits of the market in this regard, he cannot, or will not, examine the limits of a market-based, capitalist framework.

Behavioral economics does exhibit a kernel of potential for fundamentally reevaluating economic frameworks, processes, and policy proposals. Yet in each, behavioral economics forecloses the more far-ranging implications of its own research. In the book’s conclusion, Thaler asserts that behavioral economics has had a greater impact in financial economics than in any other field. One will not find, however, much in the way of prescriptions or regulations to rein in financial market excess, only caution that given the implausibility of market efficiency and the possibility of bubbles, “it can make sense for policy-makers to lean against the wind in some way” with “relatively minor steps.” Thaler spends an entire section of the book discussing the behavioral critique of the efficient market hypothesis that defines mainstream financial economics. The critique challenges the belief of the rationality of asset prices—the most important component for many of the questions of financial economists—and has documented overreaction and overconfidence in investor behavior. Even though the irrationality of prices means that “the misallocation of resources can be quite big,” there is no questioning in Misbehaving of finance’s role in the economy or its contributions to drastic income inequality.

Other research discussed by Thaler is also stripped of its potentially critical implications. Behavioral findings indicate that firms paying higher wages are “rewarded with higher effort,” but Thaler exhibits no interest in labor conditions. People are poor at saving for retirement according to behavioral research, but the answer for Thaler is not to strengthen Social Security or defined-benefit pension programs, but to get more people involved in defined-contribution investment-based retirement plans. 

The implications of behavioral research are constantly constrained so that they actually buttress foundational assumptions about markets. Why? Thaler disavows the role of the “moral philosopher,” refusing to “render judgment about what ‘is’ or ‘should be’ fair”, because economics is supposed to be a “purely descriptive exercise”—and thereby preempts interrogation of the fairness of the market itself.

With this attitude, behavior economics can never become a tool for envisioning more equal or democratic futures.

With this attitude, behavior economics can never become a tool for envisioning more equal or democratic futures, such as demands for shorter work hours (as articulated by political theorist Kathi Weeks in her 2011 book The Problem With Work), universal basic income (like the Basic Income Earth Network), or economic democracy projects (worker cooperatives or participatory budgeting). Behavioral economics lingers within the standpoint of a contemporary market consensus, unable to offer a truly incisive critique or envisage real alternatives. That Thaler underscores the British Conservative—Liberal Democrat regime, the one that has cut social services and social programs in the name of austerity, as the government most informed by behavioral research is telling in this regard.  In the context of his initial meeting with the British Conservative Party to discuss implementing behavioral reforms in government, Thaler quips that “there has never been an occasion during my lifetime in which I have been described as conservative.” Rather than conservative, Thaler insists that “radical” or “troublemaker” make up the more “commonly used adjectives” about him. Within the economics profession, this is surely the case. Yet as soon as one adopts a critical position, it is clear Thaler remains within the horizon of neoclassical economics.

Reviewing Simpler: The Future of Government by Cass R. Sunstein—a frequent collaborator of Thaler’s—William H. Simon argues in Boston Review that in the course of recounting his time implementing behavioral-driven changes in the Obama Administration, Sunstein “exaggerates the practical value” of behavioral economics tools, implying “an oddly constrained conception” of its role its governance, much like a “doctor with a cheerful face saying there’s little he can do.” That is, the impact of behavioral economics is not, in Simon’s read, nearly as impressive nor revisionary as its self-conception. A similar critique applies to Thaler. By staying within much of the same market frameworks of neoclassical economics, behavioral economics itself reproduces the omissions and foreclosures of the field that one must step outside neoliberal economics to apprehend. In doing so, Thaler engages in the same kind of “theory-induced blindness” that he accuses mainstream economics of, hewing so closely to preferred models and assumptions that alternatives are erased. After all, behavioral economics “is still economics” according to Thaler, and it consequently carries with it economics’ ideological tendencies.

Thaler insists that “it is time to stop making excuses” on behalf of mainstream economics for behavioral economics’ findings. The book lays down this particular challenge effectively; at its end, it is quite clear that economists cannot keep excusing the irrationalities of human actions while upholding the model of homo economicus. And yet, the problem remains that Thaler’s book as well as behavioral economics more broadly end up doing the bidding of neoclassical economics and its contemporary instantiations as neoliberalism, and do so tacitly. Markets and other basic structures are left unexamined and the rubric remains—judged in terms of market logics—the better optimization of behavior and choice.

Behavioral economics, when translated into government, public policy, and business, is best described as “choice architecture,” writes Thaler near the end of the book. The term speaks to the belief of Thaler—and, ultimately, of the field more broadly—that through the study of how people systematically act in ways inconsistent with economic rationales, behavioral economics can alter the environment of individual’s decision-making, enabling them to make ‘better’ choices without stronger, more obvious forms of coercion. What he calls architecture, though, might be more realistically portrayed as interior design, rearranging the furniture in one room to provide a superficial cosmetic change as it leaves the overall structure and design of the building untouched.

Reading Thaler’s book, I was left with a question about its title: what kinds of misbehaving does behavioral economics license, and what kinds does it foreclose? Behavioral economics may indeed track limited kinds of economic behavior to foster ‘better’ choices within a framework in which the basic status and fairness of the market is left untouched. But this is the extent of the permitted misbehaving. At its worst, behavioral economics mitigates economic and sociopolitical misbehavior that could disturb the status quo by more seamlessly incorporating individuals into market processes. Posing a truly radical challenge would require problematizing market society itself and imagining real alternatives. While seeking to highlight human misbehaving that deviates from the normative, hyper-rationalist models of mainstream economics, it forecloses any misbehaving that might critically interrogate markets, their hegemony, or their legitimacy.

In her 2015 book, Undoing the Demos: Neoliberalism’s Stealth Revolution, political theorist Wendy Brown argues that neoliberalism “is quietly undoing basic elements of democracy,” including its “vocabularies, principles of justice, practices of rule, and above all democratic imaginaries.” In her account, democratic projects—liberal or radical—that “might contest the forces otherwise claiming” our present and future require “the language and frame” that “the people, rather than something else, will decide the fundamentals and coordinates of their common existence.” Neoliberalism, in its economization of life and subjectivity, degenerates these potentials. Such democratic imaginaries or actions are neither imaginable nor possible so long as misbehaving is limited to the behavioral economic kind. The field’s own cosmetic redesigns leave no room for broader, more radical renovations of society and economy.