Thaler: Misbehaving and Nudge

Trader's Library #56 · Risk, chance and decisions. A Nobel laureate on how we really make financial decisions.

Author: Richard H. Thaler (Nudge with Cass Sunstein) · Original: Misbehaving; Nudge · Year: 2015 · Usefulness for traders: ★★★★☆

What it's about

“Misbehaving” is the story of the birth of behavioural economics, told by the Nobel laureate who helped create it. “Nudge” describes how choice architecture affects decisions.

What it gives a trader

Thaler describes mental accounting (treating money differently depending on its “account”), the endowment effect and the house money effect, among others. These are exactly the mechanisms that make a trader treat today's session profit as “free money”.

Lessons for traders

• money is fungible, but the brain keeps it in separate drawers (mental accounting, Atlas of biases #44)
• treating profit as free money increases risk (the house money effect, Atlas of biases #37)
• design your environment so good decisions are easy

What to watch out for

“Nudge” is more about public policy than markets.

Discussion

The discussion takes place in Hetman Capital Club (in Polish). Join the discussion in the Club →

Navigation

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Educational content, not investment advice. The book description is my own summary and assessment, not quotations. Edition details were checked in catalogues and bookshops, and where there was doubt I said so plainly.