Nobel in Economics Is Awarded to Richard Thaler
Asked how he would spend the prize money of about $1.1 million, Professor Thaler replied, “This is quite a funny question.” He added, “I will try to spend it as irrationally as possible.”
The economics prize was established in 1968 in memory of Alfred Nobel by Sweden’s central bank and is awarded by the Royal Swedish Academy of Sciences. One of Professor Thaler’s frequent collaborators, Daniel Kahneman, was awarded the prize in 2002. Another behavioral economist, Robert J. Shiller, who was among the winners in 2013, hailed Professor Thaler on Monday as “one of the most creative spirits in modern economics.”
Mainstream economics was built on the simplifying assumption that people behave rationally. Economists understood that this was not literally true, but they argued that it was close enough.
Professor Thaler has played a central role in pushing economists away from that assumption. He did not simply argue that humans are irrational, which has always been obvious but is not particularly helpful. Rather, he showed that people depart from rationality in consistent ways, so their behavior can still be anticipated and modeled.
“Thaler more than anyone has disciplined the idea of animal spirits,” said Cass Sunstein, a Harvard law professor who wrote “Nudge” with Professor Thaler. The 2008 book argued that governments could use behavioral insights to improve the efficiency and quality of a wide range of public services. Two years later, the British government created a department to pursue the experiment. Other countries, including the United States, followed suit.
Britain’s former prime minister David Cameron described the inspiration as a “very simple, very conservative thought — go with the grain of human nature.”
Some nudges are relatively minor. The British government found that people were more likely to pay automobile registration fees if billing letters included a picture of the vehicle. Other nudges are far-reaching. Observing that inertia limited participation in beneficial programs, like retirement savings plans or school lunch programs, Professor Thaler proposed that governments and employers should make participation the default option. People are free to opt out, but inertia is on the side of the preferred outcome.
A similar proposal, “Save More Later,” offsets the tendency to place a relatively high value on current income by allowing people to commit to setting aside more money next year.