Kent Bottles: My Top Ten Books on Behavioral Economics
Several readers of the ICSI Health Care Blog have asked me about behavioral economics which has been mentioned in some posts (http://bit.ly/4uZNlH) and (http://bit.ly/49q4Uy). I am by no means an expert in this area, but I am happy to share with you an annotated bibliography of the books that have educated me on the topic.
- Choices, Values, and Frames by Daniel Kahneman and Amos Tversky. Although this is not where I started my exploration of the topic and it is not the easiest to understand introduction, Kahneman and Tversky were both veterans of the Israel Defense Forces and the Israeli academy and are truly the fathers of behavioral economics. When Kahneman was awarded the Nobel Prize in Economics he made it clear that the considered the award to be a joint prize with Tversky who had died of metastatic melanoma. Kahneman claims that he has never taken a single course in economics, but his Prospect Theory developed with Tversky formed the foundation for behavioral economics. This theory used cognitive psychological techniques to explain divergences of economic decisions from classic economic theory.
- Predictably Irrational by Dan Ariely. This is the book I would start with to begin to understand why we are designed to consistently overpay, underestimate, procrastinate, and overvalue what we already own. We make mistakes every day, and we keep making the same types of mistakes. This book will explain why headaches disappear after we take a 50-cent aspirin, but persist when we take a 1-cent aspirin. It also explains why Starbucks is successful selling $4.15 cups of coffee, when just a few years ago we paid less than a dollar a cup.
- Sway by Ori Brafman and Rom Brafman. For those who want a short, funny, well-written guide to behavioral economics the Brafman brothers have written the book for you. The business school professor who gets his students to pay $200 for a $20 bill, the consultant who knows interviews are a bad way to hire employees, the coach who knows about the curse of the NBA draft, and the football coach who wins by refusing to punt on fourth down all help explain the basics of behavioral economics.
- Freakonomics: A Rogue Economist Explores the Hidden Side of Everything by Steven Levitt and Stephen Dubner. This best seller is written in an easy to understand almost breezy style that explains why we accept explanations that do not reveal the true underlying causes. They examine the real reason for the decline in crime in America, why real estate agents do not always look out for their customers, and how to catch public school teachers who help their students cheat on standardized tests.
- Why Smart People Make Big Money Mistakes and How to Correct Them: Lessons from the New Science of Behavioral Economics by Gary Belsky and Thomas Gilovich. I like this book for its ability to explain heuristics, a basic concept in behavioral economics. People make decisions based on approximate rules of thumb rather than by rational analysis. A great example of this is our almost pathological desire to avoid losses that leads us to hang onto stocks for a lot longer than we should if what we are really trying to do is make money.
- How We Decide by Jonah Lehrer. I like this selection because of the way it explains the crucial role of emotions in making decisions. Airline pilots, NFL quarterbacks, poker players, and serial killers are all examined in a way that helps us understand how we make different kinds of decisions.
- Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism by George A. Akerlof and Robert Shiller. Akerlof won the Nobel Prize in Economics, and Shiller predicted the current economic meltdown. So when these folks write about behavioral economics, I read it carefully. They describe how emotions (overconfidence, unwarranted pessimism, fairness, and stigma effects) contribute to the boom and busts of capitalism.
- Human: The Science Behind What Makes Us Unique by Michael Gazzaniga. I am not sure this book belongs on this list, but I am including it because it is the best summary of cognitive neuroscience that I have read. And understanding cognitive neuroscience helps me keep behavioral economics in proper perspective.
- The Paradox of Choice: Why More Is Less by Barry Schwartz. I include this book for making me understand the difference between maximizers and satisfiers. I am so glad I am a satisficer who does not have to shop for the perfect sweater or suit.
- Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard Thaler and Cass Sunstein. The last book of the top 10 is clearly important because Richard Thaler supposedly taught Kahneman about economics and because Sunstein is in the Obama White House and using behavioral economic theories to change public policy.