Making economics more human

The Washington Post

Richard Thaler, who won the Nobel Prize for economics this week, turned the dismal science “on its head,” said Roger Lowenstein. Often called the father of behavioral economics, Thaler was one of the first to incorporate insights from psychology to show that humans don’t always act rationally when it comes to money, as economic models rigidly assumed for decades. His pioneering research demonstrated that people are often predictably irrational, consistently behaving in ways that defy economic theory. PreThaler, economists assumed that people believed it was either “worth spending 30 minutes to save $20— or it was not.” Thaler showed that people “would

drive across town to buy a cheaper sweater—yet not think of doing so to save $20 on an automobile,” even though the $20 saved was the same. Economists used to believe that a person who found $100 on the street would dutifully deposit the cash in a savings account. “Thaler knew that if he ever found that bill, he would splurge on dinner.” He’s also credited with showing how people can be “nudged” to make better decisions, such as saving more for retirement through default deposits. Economists haven’t abandoned their rational-man models. But thanks to Thaler, they increasingly “put down their formulas and look out the window to see people as they really are.”