Richard Thaler, Nobel winner from Chicago, fought to get heretical economic theories published
Just as important? He thinks you are too. And that’s more profound than it seems.
Economic theory long held that consumers behave like smart robots, always making rational and logical decisions. But as Thaler began observing more than 30 years ago, that’s not what happens in real life. Instead, humans make irrational decisions in systematically warped ways, time and again, for the same reasons.
His insertion of human psychology into the hard-core mathematical field of economics was once so heretical that Thaler couldn’t even get his ideas published.
But it made sense to him.
“I’m pretty stubborn, and this was fun,” he said. “Besides, I enjoy stirring the pot.”
A Lincoln Park resident and professor at the University of Chicago Booth School of Business, Thaler is now revered as a founding father of the relatively new field of behavioral economics. It considers biases, lack of willpower and a host of other human frailties that lead people to make bad decisions about everything from the money they spend to the food they eat.
For his contributions, Thaler, 66, is likely in line for a Nobel Memorial Prize in Economic Sciences, some colleagues say.
“It would be a scandal if he were not short-listed,” said Daniel Kahneman, a Nobel laureate and longtime friend and collaborator of Thaler. “I’m sure he is.”
He’s an informal adviser to President Barack Obama’s administration and to his re-election campaign, and a formal adviser to the “Behavioural Insight Team” in Prime Minister David Cameron’s administration in the United Kingdom.
Thaler is famous for devising easily understood scenarios that show how human behavior bucks economics and, sometimes, logic. Consider:
•Why, during a hazardous snowstorm, would we skip driving to a concert if the tickets were free, but risk life and limb to go if we had paid for the tickets? The risk on the roads is the same, and we don’t get the money back either way. This illustrates the “sunk cost fallacy.”
•Experiments repeatedly show that people are willing to pay $3 to buy a coffee mug but demand $6 to sell a mug they have been given. The phenomenon is called the “endowment effect,” where we assign greater value to things we possess.
•You bring $200 to a casino to gamble. You win another $200. If you separate the money and lose only the winnings, you may not feel much pain because you consider that money to be the casino’s anyway. Yet you still lost $200. This is a good example of “mental accounting.”
The wide-ranging implications of such behavior stretch to decisions made daily by consumers, marketers, companies and governments. In recent years, Thaler has turned to weightier issues of public policy.
He explains how governments can use behavioral economics to “nudge” citizens into making better choices for themselves. His ideas and those of Cass R. Sunstein, now Obama’s regulation czar, are outlined in his best-selling book, “Nudge: Improving Decisions about Health, Wealth and Happiness.” This led Thaler, along with Sunstein, to be named a finalist for Time Magazine’s most influential people in the world in 2009.
“During most of the 1980s he was dismissed as a crank,” said David Laibson, economics professor at Harvard University. “It takes a lot of courage to get a decade of rejection and to stick to your guns. Dick kept fighting, and eventually almost everyone came around to his view.”
Not quite by the numbers
Thaler was born and raised in northern New Jersey with two younger brothers. His mother was a school teacher turned stay-at-home-mom. His father rode the train daily to Newark, where he was an actuary at Prudential.
“He thought that if I was a real man, I would have become an actuary, that economics was a poor-man’s actuary,” Thaler said, seemingly only half joking. “He was an influence in that I knew I didn’t want to do that.”
Reflecting further, he said, “It’s not so much that I didn’t want to be an actuary, it’s that I didn’t want to be a businessman.”
“Lousy subordinate,” Thaler said of himself.
His telling of the story is typical of his speech pattern: Slow. Contemplative. Halting. Until he unloads a zinger.
Thaler graduated in 1967 from Case Western Reserve University in Cleveland with a degree in economics. “I was interested in psychology, but I thought economics was more practical, in the sense that you could probably get a job if you studied economics,” he said.
He received master’s and doctorate degrees from the University of Rochester in upstate New York and taught there before moving to teaching positions at Cornell University and then in 1995 at the University of Chicago.
“I always tell my students I’ve never had a real job in my life,” Thaler said.
Still, the high-level mathematics of economics weren’t exactly up Thaler’s alley. “I’m not going to win any math contests among my colleagues,” he said. “By any normal standard, I’m pretty good at math. But if you put me in a group of economists, I’m going to be below average.”
So he continued his quest to explain economic phenomena with more words and fewer numbers.
Early in his career, Thaler began keeping a list of “anomalies,” real-life examples of how people made decisions about their money that couldn’t be explained by the logic of economics. “It was a professional activity, but I couldn’t figure out how to do anything with it,” Thaler said.
Then he learned about two Israeli psychology researchers, Kahneman and Amos Tversky, who were doing groundbreaking work on human decision-making. When he found out the duo would be spending a year at Stanford University in 1977-78, he arranged “by hook or by crook” to join them, persuading the University of Rochester to let him leave and others to pay his salary for what ended up being a year of collaboration.
Despite the lack of familiarity, or perhaps because of it, behavioral economics was born.