BEST BOOKS ON BEHAVIORAL ECONOMICS

REVIEWED BY BI ADVISORS | PUBLISHED ON NOV. 7, 2019 | 20 MIN READ

Best Books on Behavioral Economics

What are the best books on behavioral economics?

Behavioral economics deals with the psychological insights of human behavior to explain away the impact of their economic decision making. There are many books on behavioral economics and many books to choose from. The best books on behavioral economics list do not attempt to compile every book on the subject matter. The selection of these books is believed to give the reader a well-rounded foundation that pertains to behavioral economics.

Best Books on Behavioral Economics

THE LIST:

1. The Undoing Project
2. Irrational Exuberance
3. Phishing for Phools
4. Misbehaving
5. The Winner’s Curse
6. Thinking, Fast and Slow
7. Animal Spirits
8. Predictably Irrational
9. Nudge
10. Your Money and Your Brain
11. Minding the Markets
12. Behavioral Finance and Wealth Management
13. Beyond Greed and Fear
14. Behavioral Trading
15. Mean Markets and Lizard Brains
16. Inside the Investor’s Brain
17. Fooled by Randomness
18. Freakonomics

1 – The Undoing Project | By Michael Lewis

Acclaimed author Michael Lewis, who is responsible for other notable works including Liar’s Poker, Moneyball, and The Big Short, explores the captivating friendship between psychologists Amos Tversky and Daniel Kahneman in this intriguing book. In The Undoing Project: A Friendship That Changed Our Minds, Lewis uses Kahneman and Tversky’s longtime companionship to analyze the tortuous experiences of Jews during World War II and how Israel emerged during this time. Lewis regards the two psychologists to be some of the most brilliant minds on earth and writes that their friendship changed our minds. The book provides a comprehensive analysis of how Kahneman and Tversky shaped and revolutionized psychology through their ideas. 

Quotes from the book;

“Man is a deterministic device thrown into a probabilistic universe. In this match, surprises are expected.”

“The secret to doing good research is always to be a little underemployed. You waste years by not being able to waste hours”

“The world’s not just a stage. It’s a casino, and our lives are games of chance. And when people calculate the odds in any life situation, they are often making judgments about similarity—or (strange new word!) representativeness. ”

“The failure of decision-makers to grapple with the inner workings of their own minds, and their desire to indulge their gut feelings, made it “quite likely that the fate of entire societies may be sealed by a series of avoidable mistakes committed by their leaders.”

2 – Irrational Exuberance | By Robert Shiller

Shiller’s Irrational Exuberance is named after Allan Greenspan’s well-known “irrational exuberance” quote made during a 1996 briefing. The then Federal-Reserve chairman made the quote in reference to economic bubbles and as a warning of a possible overvaluation of the stock market. Greenspan’s warning came a little too early but Shiller’s warning turned out to be prophetic as the stock market crashed in 2000, one month after Irrational Exuberance was published. In the book, Shiller provides and analyzes the factors behind this investor enthusiasm, demystifies long-held investment ideologies, questions the credibility of financial reporting, and cautions against naivety and irrationality in investing. 

Quotes from the book;

“There are times when an audience is highly receptive to optimistic statements, and times when it is not.”

“As prices continue to rise, the level of exuberance is enhanced by the price rise itself.”

“The increasingly large role of speculative markets for homes, as well as of other markets, has fundamentally changed our lives.”

“The ascent in home prices after 1997 was much faster than the increase in incomes, and this raises concerns about the long-run stability of home prices, especially in the most volatile states.”

3 – Phishing for Phools | By George Akerlof and Robert Shiller

Phishing for Phools: The Economics of Manipulation and Deception

Award-winning economists George Akerlof and Robert Shiller team up to co-author this fascinating book on the economics of manipulation and deception. They cover a variety of popular scams and lures intended to influence the judgments of the people whether as consumers, voters, investors, or even patients. Akerlof and Shiller emphasize the power of these phishers to con, swindle, and manipulate people. Using a behavioral economic and psychological paradigm, they lift the veil off these deceits and reveal how they work. This helps readers spot the scams early on to avoid falling prey to them. Their book recommendations are insightful and valuable. 

Quotes from the book;

“If we have a weakness – if we have a way in which we are phishable – the phishermen will be there in waiting.”

“There are about 12,000 lobbyists, which is more than 20 for each member of Congress.”

“Free markets make people free to choose. But they also make them free to phish and free to be phished. Ignorance of those truths is a recipe for disaster.”

“Just as phishing for phools is a major factor in making markets less attentive to people’s real needs, so it plays a similar role in undermining democracy.”

“Free markets produce continual temptation.”

4 – Misbehaving | By Richard Thaler

Economist and professor Richard Thaler dispel the idea that behavioral economics, just as standard economics, is mathematical, rational, and predictable. In the Misbehaving: The Making of Behavioral Economics, Thaler proposes an alternative ideology regarding the economics of human behavior. He believes that humans are prone to error and do not always behave rationally. Based on work from his previous book Nudge Thaler demonstrates – through captivating stories from his personal experiences with rigid economic beliefs – how behavioral science can be applied to a wide range of areas including economics, public policy, business, and finance to provide them all with a very necessary dose of the human touch. 

Quotes from the book;

“In physics, an object in a state of rest stays that way, unless something happens. People act the same way: They stick with what they have unless there is some good reason to switch, or perhaps despite there being a good reason to switch.”

“One of the things MBAs learn in business school is to think like an Econ, but they also forget what it is like to think like a human.”

“Even when investors can know for sure that prices are wrong, these prices can still stay wrong or even get more wrong.”

“Economists are really good at inventing rational explanations for behavior, no matter how dumb that behavior appears to be.”

5 – The Winner’s Curse | By Richard Thaler

Published in 1994, this book is a classic in economic literature. Thaler challenges economic sensibility by exposing many of the contradictions involved in even the most thought-out and rational economic transactions. The Winner’s Curse: Paradoxes and Anomalies of Economic Life, the title of the book is an example of one of the anomalies Thaler describes in his book – albeit in a humorous and enthralling manner. His work is based on literature that seeks to confront the established foundation of economics: rationality. He uses real-life examples to illustrate that economists have been wrong all along. The book requires patience and a deep understanding of economics but it is worth it.

Quotes from the book;

“A simple way of thinking about how people actually behave with respect to various types of wealth is to assume households have a system of mental accounts.”

“Economists of prior generations offered much more behavioral treatments of saving behavior.”

“It seems that economic theory yields the following paradoxical prediction: No one will choose the most popular numbers.”

“A simple way of thinking about how people actually behave with respect to various types of wealth is to assume households have a system of mental accounts.”

6 – Thinking, Fast and Slow | Daniel Kahneman

This best-selling book, Thinking, Fast and Slow,  is a summary of decades of research by Kahneman and a rich source of information on behavioral science. The book dismantles the human psyche and puts it back piece-by-piece resulting in a complex but indispensable analysis of the mind. Kahneman focuses on two functions of thought – fast thinking (intuitive and emotional) and slow thinking (logical and intentional). He challenges the reader to analyze their own patterns of thinking and identify moments of contradiction, distortion, deception. Kahneman in this book is articulate, meticulous, and pleasantly sincere using his own personal experiences as examples. It is a fascinating read.  

Quotes from the book;

“People who are ‘cognitively busy’ are…more likely to make selfish choices, use sexist language and make superficial judgments in social situations.”

“We are confident when the story we tell ourselves comes easily to mind, with no contradiction and no competing scenario. But ease and coherence do not guarantee that a belief held with confidence is true.”

“The idea that the future is unpredictable is undermined every day by the ease with which the past is explained.”

“When an unpredicted event occurs, we immediately adjust our view of the world to accommodate the surprise.”

7 – Animal Spirits | By George Akerlof and Robert Shiller

Akerlof and Shiller again come together to explain how human psychology impacts the economy. In Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism, the book provides insight into how emotions affect financial decision making. Traditional economic theories place a great deal of weight on reason with economic choices, but the authors believe that emotional and psychological factors have a bigger role to play and provide evidence to support their claims. This idea was revolutionary decades ago but in recent times it has become widely accepted. However, Akerlof and Shiller’s analysis on the emotional drivers of economics, or ‘animal spirits’, is still noteworthy considering how accomplished they are in the field.

Quotes from the book;

“You pick the time. You pick the country…you will see at play in the macroeconomy the animal spirits that are the subject of this book.”

“The crisis was not foreseen, and is still not fully understood…because there have been no principles in conventional economic theories regarding animal spirits.”

“People have noneconomic motives. And they are not always rational in pursuit of their economic interests.”

“But at the level of the macroeconomy…confidence comes and goes. Sometimes it is justified. Sometimes it is not. It is not just a rational prediction.”

8 – Predictably Irrational | Dan Ariely

Ariely challenges everything we know about decision making in this outstanding book, Predictably Irrational: The Hidden Forces That Shape Our Decisions. Once again, the idea that our decisions are based on rational thought is disputed. The book is comprehensive and addresses psychology, behavior, and economics in relation to decisions. Predictably Irrational is an easy read thanks to Ariely’s clear, concise, and approachable style of writing. Even those with limited knowledge of the areas mentioned above will be able to grasp the ideas presented in the book. It crosses over from academia to become a practical everyday guide to conscious decision making in personal, professional, nutritional, or even romantic situations. 

Quotes from the book;

“My goal…is to help you fundamentally rethink what makes you and the people around you tick…Once you see how systematic some mistakes are – and how we repeat them…I think you will begin to learn how to avoid some of them.”

“Relativity helps us make decisions in life. But it can also make us downright miserable. Why? Because of jealousy and envy spring from comparing our lot in life with that of others.”

“We are far less rational in our decision making than standard economics assumes.”

“It can be rather depressing to realize that we all continually make irrational decisions…but there is a silver lining: the fact that we make mistakes also means that there are ways to improve our decisions.”

9 – Nudge | By Richard Thaler and Cass Sunstein

This popular best-selling book, Nudge: Improving Decisions About Health, Wealth, and Happiness, provides Thaler and Sunstein’s valuable perspective on human behavior and reasoning based on extensive research in psychology and behavior economics. It addresses the common limitations to human thinking and supports them with not only evidence but examples from the authors’ lives. The book is extremely amusing but tackles this serious and complex issue in an illuminating way. It fundamentally alters how you perceive the world, offering suggestions on how to avoid being a victim of the methodical errors in judgment. While some of these suggestions may not be completely feasible, they are still valuable to decision making. 

Quotes from the book;

“A nudge…is any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding options or significantly changing their economic incentives.”

“Humans are easily nudged by other humans. Why? One reason is that we like to conform.”

“Good choice architecture doesn’t need to originate with a wonkish professor and a powerful computer algorithm. It can be the brainchild of a local school official or two.”

“Even the most sophisticated investors can sometimes find the decision about how to invest their money daunting, and they resort to simple rules of thumb.”

10 – Your Money and Your Brain | Jason Zweig

Neuroeconomics is a complex subject matter but Zweig manages the difficult task of tackling it in a simple and comprehensible manner, making this book ideal for a broad audience. Using a variety of empirical and real-world studies, Zweig draws a comprehensive map for readers showing the relationship between neural activity and financial decisions. He analyzes the changes in the brain and the body go through when making investment decisions. Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich is an insightful, credible, and well-written analysis of cognitive neuroscience and behavioral economics. It is full of valuable examples and anecdotes on the role of emotions and intuition in investing. 

Quotes from the book;

“The sad fact is that those who can least afford to lose the little money they have are most prone to put it at high risk.”

“The more closely the analysts agree on what a company’s earnings will be, the worse the stock will get walloped if the actual numbers fall short.”

“Over three years, a chimp flinging darts in the dark has a 12.5% chance of outperforming the market average.”

“One of the clearest signals that you were wrong about an investment is having a hunch that you’re right about it.”

11 – Minding the Markets | By David Tuckett

Tuckett stresses the role of emotions in economics in this easily readable book. He argues that the essential element of human psychology is greatly overlooked in financial crises, giving the example of the 2008/2009 crisis. Tuckett offers a more profound explanation of financial market behavior basing it on the innate and subconscious desires and worries that fuel human behavior and decision making. The developments on the current financial theory proposed in, Minding the Markets: An Emotional Finance View of Financial Instability, are thought-provoking but the style of writing seems to take away from this. Attentive reading would improve understanding of the financial market theories and forensic analysis Tuckett presents. 

Quotes from the book;

“The catastrophic economic events unleashed by the financial crisis of 2008 appeared to many people to make clear what theories about financial markets had come to ignore. Emotions really matter.”

“What is being traded are stories – competing imaginative accounts about the news and its impact on an uncertain future.”

“When individuals pursue excitement with no thought of loss (or, conversely, are preoccupied only with loss to the detriment of the opportunity for reward), they are thinking within a divided state of mind.”

“Asset price bubbles occur because people pursue reward without fully realizing the risk.”

12 – Behavioral Finance and Wealth Management | By Michael Pompain

Pompain’s Behavioral Finance and Wealth Management: How to Build Optimal Portfolios for Private Clients serves more as a functional guide than an academic piece of work. In Behavioral Finance and Wealth Management, he teaches readers how to use behavioral finance theory in their own wealth management. Pompain provides a comprehensive explanation of the principles of behavioral finance and then uses these principles to offer practical financial advice in investment decision making. One of the key topics the book covers is behavioral biases and how to either balance them out or adjust to them to enhance investment outcomes. Pompain accompanies his advice with a collection of significant investor biases, making this book extremely valuable. 

Quotes from the book;

“If you think you may have made a bad investment decision…confront the problem head on and rectify the situation.”

One of the best ways to prevent your biases from affecting your decisions is to keep the rational side of your brain engaged as often as possible.”

“Women are more susceptible to the hot-hand fallacy than men are; men look at their portfolios more often than women do; men are more likely to cut losses immediately, whereas women are more likely to buy and hold.”

“We want to identify relevant psychological biases and investigate their influence on asset allocation decisions so that we can manage the effects of those biases on the investment process.”

13 – Beyond Greed and Fear | By Hersh Shefrin

Most investors encounter unprofitability in their journeys, both pros, and amateurs. In this book, Shefrin analyzes the habits that jeopardize the profitability of investors, particularly emotions. He uses behavioral finance, a relatively novel concept, to examine the act of investing and the role of emotions in investment decisions. He uses numerous real-life examples, which make the book easy and enjoyable to read. The tips Shefrin provides are relevant to any individual handling stocks. Some of the harmful habits identified in the book include heuristic biases and representativeness. Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing is great for both personal investors and those managing large accounts. 

Quotes from the book;

“Many think that the main lesson from behavioral finance is about how to beat the market. This is a dangerous misconception.”

“There was a lot of California gold waiting to be discovered in 1849, but how many prospectors actually got rich? Precious few.”

“There are two aspects to the bandwagon effect. First, there is a belief that the crowd must know something. Second, misery loves company. Because of the potential for regret, there is safety in numbers.”

“Although to err is indeed human, financial practitioners of all types, from portfolio managers to corporate executives, make the same mistakes repeatedly.”

14 – Behavioral Trading | By Woody Dorsey

Dorsey is no stranger to the world of money markets and is supportive of the market semiotics theory. In Behavioral Trading: Methods for Measuring Investor Confidence, Expectations, and Market Trends, he provides readers with insight into his profitable trading techniques and compares Wall Street with a medieval carnival where people meet and exchange items based on psychological motivators. He believes the same instinctive emotions that guided trade are the same ones driving trade in today’s money markets, making behavior trading predictable. The principles and techniques provided by Dorsey in this book rationalize investor behavior and while they may divisive, Dorsey’s innovative take on economics and markets is worth reading.  

Quotes from the book;

“Cognitive science concurs with what the ancient thinkers have told us.”

“The market, just like a dramatic production, repeats itself over and over again.”

“At the price bottom, there is a sentiment impulse followed by a steeply rising sentiment slope.”

“Although behavioral finance is all about heuristics, few have made the connection to human addiction.”

15 – Mean Markets and Lizard Brains | By Terry Burnham

Burnham takes the conventional rationality in investing head-on, demonstrating how the new school of behavioral science diverges from the traditional school. The idea that investors are rational in their decisions, the markets are well-organized in their function, and reward cannot be attained without risks characterizes the conventional wisdom. In this book, Burnham introduces us to the evolved science of behavior which is founded on the principles of psychology. Cognitive research has shown that human reasoning is far more complex than imagined. Burnham’s advice in the Mean Markets and Lizard Brains: How to Profit from the New Science of Irrationality, contravenes conventional rationality and takes on a lighter-hearted approach than other behavior economic works. 

Quotes from the book;

“Moving beyond simply describing financial irrationality, we find an underlying logic for costly behavior in what I label the ’lizard brain’ – an ancient, often unconscious thought process that exerts a powerful influence on us.”

“The question remains: Are financial markets more similar to stampedes where small problems multiply, or to miraculous plane loadings where crazy people are guided to efficient outcomes?”

“Twenty years of Goldilocks has lulled most of us into exactly the wrong position. We have come to expect price stability.”

“The bull market in bonds that began in the early 1980s has largely run its course. The majority of possible profits has already been made.”

16 – Inside the Investor’s Brain | By Richard Peterson

As the title suggests, Inside the Investor’s Brain: The Power of Mind Over Money, this book takes a deeper look into the minds of investors, focusing on the emotional and cognitive processes that occur during an investment and how these processes impact the decisions made. Most of the points that Peterson brings up are concepts that have been discussed extensively by other behavioral economists, but others are simple and indirect that even experienced investors are sure to be captivated by them. Peterson’s work is based on studies in neuropsychology and behavioral psychology, and he presents the ideas from these studies in a clear and understandable way with plenty of examples provided.

Quotes from the book;

“While the focus of market manias changes, the psychology of speculators remains remarkably similar over the centuries.”

“People preferentially remember events that have a strong emotional association…As a result, they overweight the significance of these events when referencing the past to make forecasts about the future.”

“Among investors, greed leads to financial losses through overtrading, entering investments too late and inadequate due diligence.”

“How each person deals with changes in wealth depends on how they create personal meaning out of losses and gains.”

17 – Fooled by Randomness | By Nassim Nicholas Taleb

In Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life, this book deals with the unreliability of human knowledge. Taleb proposes that humans tend to underestimate acts of randomness and are always attempting to justify them as not random. This failure in human thinking is carried into the world of money markets and investments. Randomness is common in markets but people will often chalk up these events to luck or expertise. Taleb suggests leaving space for randomness in financial decisions and avoid looking for explanations where they don’t exist. This book is incredibly eye-opening especially for investors, and Taleb’s relaxed writing style and numerous examples make it easy to read. 

Quotes from the book;

“Researchers of the brain believe that mathematical truths make little sense to our mind, particularly when it comes to the examination of random outcomes. Most results in probability are entirely counterintuitive.”

“I view people distributed across two polar categories: on one extreme, those who never accept the notion of randomness; on the other, those who are tortured by it.”

“Realism can be punishing. Probabilistic skepticism is worse. It is difficult to go about life wearing probabilistic glasses, as one starts seeing fools of randomness all around, in a variety of situations – obdurate in their perceptual illusion.”

“One cannot judge a performance in any given field (war, politics, medicine, investments) by the results, but by the costs of the alternative (i.e. if history played out in a different way.)”

18 – Freakonomics | By Steven Levitt and Stephen Dubner

Perhaps saving the best, if not the best, maybe the best selling in the category of books on behavioral economics. This book, Freakonomics: A Rogue Economist Explores the Hidden Side of Everything, takes a truly unique approach to economics by applying it to areas that are not normally covered by economists. Freakonomics combines pop culture with economics to create an interesting take on different subjects including the Ku Klux Klan, cheating, raising and naming children, sports, delinquency, and drug dealing. It features a collection of articles authored by Levitt along with commentary by both authors. Levitt and Stephen examine the conundrums of daily life through the prism of economics to show how humans acquire the things they want and need. The storytelling and ironic insight make Freakonomics a must-read book. 

Quotes from the book;

“Morality, it could be argued, represents the way that people would like the world to work, whereas economics represents how it actually does work.”

“After all, your chances of winning a lottery and of affecting an election are pretty similar. From a financial perspective, playing the lottery is a bad investment. But it’s fun and relatively cheap: for the price of a ticket, you buy the right to fantasize how you’d spend the winnings – much as you get to fantasize that your vote will have some impact on policy.”

“An incentive is a bullet, a key: an often tiny object with astonishing power to change a situation”

Final Thoughts

This article was an attempt to consolidate the best books on behavioral economics. Obviously, the list is not an exhausted list of every book on the subject. The list attempts to orchestrate all sides, all corners, both inside and on the best books on behavioral economics. 

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Books Best Books on Behavioral Economics – Summaries – Quotes