Richard Thaler

Making a list on his blackboard of people’s irrational decisions was capable of driving the economist, Richard Thaler, to one of the most provocative economic conclusions of the time. In fact, his conclusions, though rejected by many people in his field, were the reason for his simple but effective ideas, which are continuously suggesting new strategies to improve human behavior. Through these ideas, Thaler considered to be the founder of a new branch of economics called behavioral economics. Whereas, his research, though started as economically based, had narrowed the gap between economics and psychology, leading economists to consider understanding human beings’ nature before making any conclusion. Such contributions to the economic world were the reason for his recognition as the 2017 Nobel Prize winner in economics.

Thaler believes that humans are complicating the world, making it difficult for themselves to select good decisions through making the paths toward these decisions complex. This view seems to be the reason behind many decisions in Thaler’s life. As a child, Thaler mentioned that he was not well behaved, and many people did not “expect much from him.” Even his father who worked as an actuary and grasped Thaler’s interest in mathematics was than disappointed that Thaler decided to take a different path. When asked in an interview with Malcolm Gladwell for the reason behind his decision, Thaler stated that he shifted his interest from being an actuary because he had to take nine difficult exams. When he discovered his interest in psychology, Thaler decided to study economics because it’s “practical” and he thought it would make it easier for him to find a job. This may be the reason behind Daniel Kahneman describing Thaler as “lazy” “genius”, or someone who always take the easiest path.For Thaler, taking the easiest decisions was what guided him to his most success. His understanding of human beings as imperfect creatures who have limited capabilities guided Thaler, not only to make good decisions that made it possible for him to come up with his unique ideas but also to notice what assistance people need to minimize their irrational decisions making process.

On 1967 Thaler earned his degree in economics from Case Western Reserve University in Ohio and continued his study at The University of Rochester, which were described by Dubner, in an interview with Thaler at Freakonomics radio as “not quite elite.” When Dubner asked Thaler of how he was capable of initiating his path and forming the person he is now, he responded that through what he was not good at, which is economy, he was capable of introducing and apply something that he is good at, which is psychology. Through that, he was capable of creating a successful influential path for himself and a field of study for new generations to come.

As a graduate student at the University of Rochester on 1970, Thaler’s thesis was on an unusual topic: the prices humans are willing to pay to save their lives or a beloved one (Thaler, 1970). Despite that his thesis was essentially investigating an economic issue, it opened the gate for various questions regarding human behavior, returning Thaler to his interest in psychology. Through this paper, Thaler noticed the inconsistency between human behavior or their decision-making process and the economic theories. He realized that people’s decisions do not come from a rational thinking process, as standard economics claims, but from environmental factors that shapes and influences human decisions. This contradicts traditional ideas of economics, which shaped the free market, including Adam Smith’s invisible hand theory that views humans as a self-interests decisions maker who corrects the market. In other words, Thaler opposed the idea that decisions, made by humans, always leads to good consequences for the benefit of the whole society, because, as Thaler mentioned, people make their decisions irrationally, without studying them.

For that reason, in 1977 Thaler traveled to Stanford University to discuss his theory with psychologists such as Daniel Kahneman and Amos Tversky. Through communicating with such figures, who were also studying human decision-making process, Thaler was then capable of approaching economic theories from a psychological angle. In 1985, Thaler published a paper arguing with evidence from the stock market the misbehavior that comes from “overconfidence.” He indicated that company’s success lead to human overestimating their abilities. After a year of winning the market, a company would lose the next year because the human decision process leads them to put less effort in studying their choices after winning. (Thaler, Werner, De Bondt, 1985). Through this paper, Thaler’s ideas started to gain popularity in his field, and he joined The University of Chicago Booth School of Business in 1995.

Even though it was not until 2015 that Richard Thaler published his book on all the misbehaving stories that he documented since graduate school, in 2008 he presented to us one of his most important conclusions from these stories. Thaler and the Harvard Professor Cass Sunstein introduced “nudging”, or the idea of influencing people’s behavior through building environmental factors that helps people make better decisions. Thaler and Sunstein provided two methods to guide people toward healthy decisions. The first method is Choice Architect, which reflects Thaler’s idea that people prefer the decisions that requires them less to no effort. The method manifests building the environment in a way that makes it easier for people to select the good decisions.  An example that Thaler mentioned in his book suggests nudging elementary students to eat healthier food not by creating laws that prevent the student from eating what they like, or by providing presents or bribing students, but by rearranging the food cafeteria in a way where reaching the healthier food is easier than the unhealthy food. For instance, by putting the fruit closer to the eye than the brownness. The second method is giving feedbacks. For example, to minimize the electrical energy use in a neighborhood, instead of putting fines on people or spending money on awareness community events, Thaler discussed presenting each household with a comparison of their house energy use and other houses. This comparison tells each household that they are using energy more than others in the neighborhood, with this feedback there is a frowny face that indicates emotional disapproval of the household shift from social norms. (Thaler, Sunstein. 2008)

Since 2015 countries such as The United States, The United Kingdom, Australia, Germany, and The Netherlands established nudging units to help direct people’s decisions. For that reason, Thaler and many others started measuring the effect of nudging in compare to other traditional governmental or institutional interventions to organize the public, such as penalty fines or bans that are used to prevent people from making bad decisions. This led them to indicating that nudging is extremely powerful and effective in corresponding to other interventions (Thaler et al., 2017). Meaning that when compared to other methods used to lead the public into taking better decisions, nudging proved to be more effective, and Thaler’s idea on making the world a place where good decisions making is easy appeared to come to application.

However, this irritated many people at the University of Chicago, especially Liberals who approached Thaler with their concern that his idea put uncontrolled power on the hand of the government, where the government would be able to exploit people’s psychological behaviors to manipulate their decisions, diminishing Laissez-faire or the market control over itself. In an interview on the BBC British show, Newsnight, such a concern was mentioned to Thaler, but he confirmed the good intention behind the idea of nudging, declaring that he is against controlling people’s decisions, stating that nudging is meant to guiding the public with them possessing the power of making their own decisions. Thaler and Sunstein in the book Nudgingmade the comment that nudging does not attempt to control the public, on the contrary, by keeping the government from placing fines or penalties on people for making irrational decisions, using nudging to alter these decisions in a simple way gives the people more freedom. In other words, the government would not force the individual to spend money as a penalty for throwing wastes on the street but would prevent such a case from happening by making it extremely easy for people to throw wastes to the recycle bin. In this case, there is no control over the people’s will, but facilitations that led to better decision making. (Thaler, Sunstein. 2008)

Thaler’s unique points on humans specifically and the world in general, promise a change if exploited for the good of society. It is understandable that his ideas are against traditional economics that set the basics for the market freedom from the government, which is the reason behind the disagreement around nudging. When, Thaler, was asked on Freakonomics radio if through his ideas he was able to alter people’s perspectives, he asserted that “it is hard to change people’s mind,” pointing that he met an economist who was especially concerned with his career, considering the possibility that nudging came to be applicable. However, Thaler seems not to be concern with the short-term effect of his ideas but the long-term outcome that will eliminate restrictions on people’s choices, increase guidance, lead into facilitation and improves understanding of human limits and needs for support. For that reason, Thaler joked that he is “turned to the strategy of corrupting the youth,” conveying that it is the next generation perspective that is important to him.

 

References:

Thaler, R., & Rosen, S. (1976). The value of saving a life: evidence from the labor market. In Household production and consumption(pp. 265-302). NBER.

De Bondt, W. F., & Thaler, R. (1985). Does the stock market overreact?. The Journal of finance, 40(3), 793-805.

Benartzi, S., Beshears, J., Milkman, K. L., Sunstein, C. R., Thaler, R. H., Shankar, M., & Galing, S. (2017). Should governments invest more in nudging?. Psychological science, 28(8), 1041-1055.

Sunstein, C., & Thaler, R. (2008). Nudge. The politics of libertarian paternalism. New Haven.