Educating Myself on Economics

Oh, boy.  I just finished reading this here book and, boy, was it painful!  So much so that there were several times I almost marked the book DNF; Did Not Finish, for those of you unfamiliar with the terminology.  Pure will power kept me going.  That and a refusal to let a book I was really struggling to understand defeat me.

Pride.  It cometh before the fall, yes?

Misbehaving: The Making of Behavioral Economics

Misbehaving: The Making of Behavioral Economics by Richard H. Thaler was recommended to me by an economics professor here at the university where I work.  It was one of many titles, actually, that he provided when I sent him a note in the middle of 2016 presidential election asking for books a newbie like myself would be able to grasp.  I explained to him that despite two degrees I had somehow managed to avoid taking a single economics course and had decided it was well past time for me to get a basic understanding of some general principles.  He sent back this list:


  •  how economics as a discipline analyzes how people make choices and how markets work/fail: How Markets Fail by John Cassidy (he writes for the New Yorker); 
  • Misbehaving by Richard Thaler (about behavioral economics, which argues that people are not as good at making choices as economists have traditionally assumed)
  • capitalism as an economic system: Capitalism by David Coates
  • summaries of what famous economists have said and why we still care: The Worldly Philosophers by Robert Heilbroner

After a moment's consideration, I made a hasty purchase.  I picked Misbehaving because I find psychology so much more compelling than economics and that book seemed to promise a bit of psychology with its economics messaging.  That assumption wasn't far off.  The author began his pioneering career in behavioral economics by working with members of psychology departments across the academic landscape.

I will admit there were bits and pieces in the book that made me smile.  Perhaps knowing this subject is not an easy one to digest, the author does inject some self-deprecating humor along the way.  It helps.  Some.  Unfortunately, there were only a few sections of the book that really managed to break through to me.

In the section on American football, I actually found some of his observations to be of interest only because my husband is an avid fan of the sport and I thought he might find some of these studies of interest.  What I remember:

  • The teams don't make smart draft decisions because they're more interested in immediate payoff than long-term team composition.  This can be seen when they'll make poor trades to get a big name player that may or may not pan out when the smarter move would have been to let the big name player go and get more for their money in future drafts.  There was some math involved; I couldn't explain it if I tried. 
  • Statistically, not enough teams go for the fourth down.  Too many punts. 
The section on game shows gave him an opportunity to study risk assessment when big money was on the line.  He used a game similar to Deal or No Deal as his case study.  What I learned there was that people are not good at assessing loss and gains as pure math.  They use their gut instincts, which usually results in loss. Again, more math I can't explain. 

It wasn't until the end of the book that he hit on a couple of topics that I found of great interest: government and education.  I cannot summarize as well as he can state, so allow me a few quotes. 

Government andTaxes:

"One important macroeconomic policy begging for a behavioral analysis is how to fashion a tax cut aimed at stimulating the economy. Behavioral analysis would help, regardless of whether the motive for the tax cut is Keynesian—to increase demand for goods—or supply side—aimed at getting “job creators” to create even more jobs. There are critical behavioral details in the way a tax cut is administered, details that would be considered SIFs in any rational framework. If Keynesian thinking motivates the tax cut, then policy-makers will want the tax cut to stimulate as much spending behavior as possible." 

"The same questions apply to a supply-side tax cut. Suppose we are contemplating offering a tax holiday to firms that bring money home to the U.S. instead of keeping it stashed in foreign subsidiaries to avoid taxation. To design and evaluate this policy we need an evidence-based model that will tell us what firms will do with the repatriated money. Will they invest it, return it to shareholders, or hoard it, as many U.S. firms have been doing since the financial crisis? This makes it hard to predict what firms would do if they found themselves with a greater share of that cash held domestically. More generally, until we better understand how real firms behave, meaning those run by Humans, we cannot do a good job of evaluating the impact of key public policy measures."

Education

"This intervention involved sending texts to half the parents in some school in advance of a major math test to let them know that their child had a test coming up in five days, then in three days, then in one day. The researchers call this approach “pre-informing.” The other half of parents did not receive the texts. The pre-informing texts increased student performance on the math test by the equivalent of one additional month of schooling, and students in the bottom quartile benefited most. These children gained the equivalent of two additional months of schooling, relative to the control group." 

"Considering that schools are one of the oldest of society’s institutions, it is telling that we have not figured out how to teach our children well. We need to run experiments to figure out how to improve, and have only just started doing so. What should that tell us about creations much newer than schools, such as modern corporations? Is there any reason to think we know the best way to run them? It is time for everyone—from economists to bureaucrats to teachers to corporate leaders—to recognize that they live in a world of Humans and to adopt the same data-driven approach to their jobs and lives that good scientists use.."

Perhaps the most interesting and salient quote of the book, though, is rather short and simple: " we agree about the facts, we just disagree about the interpretation."  This truism appeared continually through the book as the author and his various co-authors went up against more traditionally-minded economists in both print and in person. 

Rating this book on Goodreads is difficult for me because I don't think I can give the content a fair assessment.  I can only rate it based on my emotional reaction to the text.  This seems unfair because I think had I understood more of it better, my rating would improve.  Therefore, with this in mind, I've given this a slight bump to a three star rating.