“I basically have made a career stealing ideas from psychologists.”
So joked Richard Thaler at a recent news conference to discuss his 2017 Nobel Prize in Economics. The University of Chicago economist helped found a branch of research called behavioral economics which, as he writes in his 2016 book Misbehaving: The Making of Behavioral Economics, “acknowledges the existence and relevance of Humans.”
As Thaler puts it, “I try to teach people to make fewer mistakes. But in designing economic policies, we need to take full account of the fact that people are busy, they’re absent-minded, they’re lazy and that we should try to make things as easy for them as possible.”
Thaler, director of two major Templeton-funded projects (including this), has shown how those “Humans” lack self-control and fear losing what they already have, leading to economic decisions that may not turn out well in the long run. We “Humans” operate in real life, in real economies, and we make real mistakes for a variety of reasons.
Meanwhile, theoretical “Econs”—idealized, rational agents that make up so much of economic theory and modeling—don’t make such mistakes. They have the mathematical acumen of an economics professor and the self-control of Gandhi. While Econs maximize gain in every decision, irrational Humans have poor self-control and are easily nudged, as Thaler describes in his 2009 best-seller, Nudge, written with Cass Sunstein.
The New York Times wrote that Thaler “showed that people depart from rationality in consistent ways, so their behavior can still be anticipated and modeled.” By attending to human behavior, integrating all those ideas stolen from psychology with real economic experiments, Thaler has made a number of contributions not just in scholarly economics but also in public policy. There are now more than 50 “nudge units” implementing insights from behavioral science into public policy around the globe. One of his most basic recommendations to these policy makers is to keep it simple.
One example of this simplicity is the relatively new practice in HR departments where new hires are, by default, automatically signed up for the company’s retirement savings plan—almost always a good economic choice. Traditionally, new hires had to choose to participate in such a plan, and were given a pile of paperwork to fill out. This simple nudge, making “opt-in” the default, has significantly increased participation in 401(k) and related savings plans. Similarly, Thaler helped increase college applications by having tax return data auto-filled into federal financial aid applications.
In other words, Thaler’s principles make it easier for us “Humans” to make wise economic choices . . . to act a little more like “Econs.”
Thaler’s work—which considers a “sense of fairness,” rather than solely economic theory of supply-and-demand—by Thaler and other behavioral economists has informed recent laws to limit price gouging. Thaler also learned that exercising self-control in the future is much easier than at present—the diet seems to always start tomorrow, or next month. As a result, he encourages people to increase retirement savings contributions whenever they receive a raise, something he and Shlomo Benartzi dubbed “Save More Tomorrow.”
The Royal Swedish Academy of Sciences, which awarded the Prize to Thaler, said his “contributions have built a bridge between the economic and psychological analyses of individual decision-making. His empirical findings and theoretical insights have been instrumental in creating the new and rapidly expanding field of behavioral economics, which has had a profound impact on many areas of economic research and policy.”
Many resources summarize Thaler’s application of human psychology to economics. Some even give a glimpse of his dry wit (in one interview, when asked how he’d spend his $1.1 million Nobel Prize award, Thaler quipped, “As irrationally as possible”).