If the field of behavioral economics could be summed up in one glib phrase, it might be “the science of getting rich.” Then again, according to author and behavioral economist Richard Thaler, an even more accurate description might be “the study of why most people end up poor despite their best intentions.”
Human foibles in the arena of personal finance are the theme of Thaler’s new book Misbehaving. The book focuses on the development of the field of behavioral economics and thoroughly debunks the notion that economic actors can be assumed to be rational.
Learning about biases doesn’t stop them in most cases
Unfortunately, one of the key lessons from the work of Richard Thaler and fellow behavioral economists such as Daniel Kahneman (author of the Thinking Fast and Slow) is that humans typically can’t unlearn specific behavioral biases through an intellectual understanding of what is going on. In other words, all of the many thousands of words in Thaler’s book on the various cognitive biases and hiccups of humans are unlikely to make more than a very few of us any less stupid in our financial decision making.
“Even if my book sold as many as Danny’s, let’s just say I’m not worried that our field will disappear, because all of a sudden everyone is going to start being smart,” Thaler told MarketWatch in a recent interview. “Reading these books will make a difference at the margin, perhaps. Maybe you’ll be less overconfident, maybe you’ll crank up your 401(k) contribution so it gets socked away before you spend it, but reading a book isn’t going to give you great willpower all of a sudden.”
Richard Thaler advocates “libertarian paternalism”
Behavioral economics has pretty well proven that financial education does not work, and most people apparently can’t learn to be much smarter about money, Thaler advocates “libertarian paternalism,” that is, relatively minor changes in policy and that would nudge the hoi polloi onto a smarter financial path. He suggests, for example, automatic enrollment in 401(k)s, so it takes more effort to do the wrong thing and opt out and easier to do the the right thing and remain enrolled.
Richard Thaler also commented that most investors would get better returns in the market if they watched ESPN sports instead of financial news. “Obviously, you are not going to learn about financial markets on ESPN, but you also won’t be under the illusion that you are getting an investment edge from listening to stock pundits,” he notes. “If those guys actually could do that, they would be hedge-fund managers, not financial-news pundits.”