Making economics human again
Thaler wins Nobel Prize for insight into people’s behaviour
STOCKHOLM — People make poor economic choices. They don’t save enough for retirement. They refuse to cut their losses on plummeting investments because they won’t own up to mistakes. They buy houses and stocks when prices are high, thinking that what’s going up today will keep going up tomorrow.
Richard Thaler of the University of Chicago on Monday won the Nobel economics prize for documenting the way people’s behaviour doesn’t conform to economic models that portray them as perfectly rational. As one of the founders of behavioural economics, he has helped change the way economists look at the world.
“Thrilling news,” said Thaler’s collaborator, Cass Sunstein of Harvard Law School. “He changed economics, and he changed the world.”
Far from being the rational decision-makers described in economic theory, Thaler found, people often make decisions that don’t serve their best interests.
Illogical human behaviour has economic consequences: Baby boomers haven’t saved enough for old age. Americans kept buying houses even as prices soared in the mid-2000s, creating a bubble that burst and triggered the biggest economic downturn since the 1930s. To limit the damage, behavioural economists say, economic policy needs to take human foibles into account.
“I try to teach people to make fewer mistakes,” Thaler told The Associated Press. “But in designing economic policies, we need to take full account of the fact that people are busy, they’re absentminded, they’re lazy and that we should try to make things as easy for them as possible.”
Thaler’s work is grounded in day-to-day reality and connected to popular culture in a way that isn’t always true of Nobel-winning economists.
“He’s made economics more human,” said Peter Gardenfors, a member of the prize committee.
Thaler had a cameo alongside pop star Selena Gomez in the film “The Big Short” and once analyzed the flawed strategies of participants in the game show “Deal or No Deal.” He’s looked into how taxi drivers decide to spend their days and how school cafeterias should display their food.
Thaler won the nine-million-kronor ($1.1-million US) prize for “understanding the psychology of economics,” Swedish Academy of Sciences secretary Goran Hansson said Monday. He is the 13th Nobel-winning economist from the University of Chicago.
Oddly, the University of Chicago is closely associated with the classical economic views that Thaler has challenged. “There’s nothing people like better at the University of Chicago than a good argument,” Thaler says. In fact, Thaler is golfing buddies with an intellectual rival, Eugene Fama, the classical Chicago economist who won the Nobel in 2013 for arguing that financial markets are rational.
Asked what he planned to do with the prize money, Thaler joked that he intended to spend it “as irrationally as possible.”
Speaking with AP later, he said “in traditional economic theory, it’s a silly question. And the reason is that money doesn’t come with labels. So once that money is in my bank, how do I know whether that fancy bottle of wine I’m buying (is being paid for by) Nobel money or some other kind of money?”
Thaler’s research has implications for economic policy. In their 2008 “Nudge” book, Thaler and Sunstein suggested that policymakers find ways to coax, rather than coerce, people into making the right decisions.