Book Club Discussion - Misbehaving: The Making of Behavioral Economics

Richard Thaler, Ph.D. is a Nobel laureate and pioneer of Behavioral Economics. His writings include the 2008 New York Times best seller, Nudge, which was adopted by the Cameron administration in the U.K. to help guide policy. He is well known for his cameo in The Big Short in which he explained CDS and the "hot hand fallacy".

After decades of contrarian and often courageous research, Thaler along with his fellow behaviorists Robert Shiller, Amos Tversky and Daniel Kahneman (author of best seller, Thinking, Fast and Slow) turned traditional economics on its ear and with it the efficient market hypothesis. He demonstrated that we all succumb to biases and irrational behavior. In other words we misbehave. He and his colleagues illuminated the endowment effect, the sunk cost fallacy, prospect theory and loss aversion.

The Nobel Committee recognized that he did not simply argue that humans are irrational, but he also showed that they "misbehave" consistently, so their behavior can still be anticipated and modeled.

In addition to being laced with antic stories of Thaler's spirited battles with the bastions of traditional economic thinking, Misbehaving sets forth many entertaining examples we can apply in real life.

In this book club review, we will focus on Thaler's work on Behavioral Finance, an academic cousin, which delves into investor misbehaving including asset mispricing, under/ over reaction to information, herding, mental accounting, confirmation bias, framing and overconfidence.

Fuller & Thaler Asset Management in which he is a founding principal seeks to capitalize on this misbehavior. Our bottom line -- how does Thaler's work help us better understand clients and the markets? When Thaler was awarded the Nobel, he was asked how he would spend the $1.1 million prize. Professor Thaler replied, "This is quite a funny question." He added, "I will try to spend it as irrationally as possible."