Reading Richard Thaler’s Misbehaving is worth it if only for one turn of phrase — October 2, 2016

Reading Richard Thaler’s Misbehaving is worth it if only for one turn of phrase

I’m in the middle of Misbehaving: The Making of Behavioral Economics, and I just happened upon his phrase “the invisible handwave”. This is the argument — which doesn’t withstand a moment of scrutiny — that the discipline of the market will purge irrationality from irrational actors. It is a lovely turn of phrase.

(You can make a plausible case that the market’s aggregate outcome — e.g., price levels — must be rational in some sense. What makes that more plausible is that people who act irrationally systematically leave the market, for instance because their businesses go bankrupt. But it’s not correct to believe that individual actors must themselves become rational.)

Here’s where I’m honor-bound to recommend that you read Thaler’s The Winner’s Curse. If memory serves, it’s largely a collection of his “Anomalies” columns from JEP. If you can’t commit to reading a whole book, try reading his delightful paper on the law of one price.