An Economics Heathen Wins the Economics Nobel
Richard Thaler’s prize was long overdue.
Bloomberg, October 9, 2017
Given how many psychologists and economists have already won the Royal Swedish Academy of Sciences Sveriges Riksbank Prize in Economic Sciences 1 — Daniel Kahneman (2002), Robert Shiller, Eugene Fama (2013) 2 — it seems contradictory to suggest that the Nobel Committee is finally recognizing the impact of behavioral psychology on economic decision-making by handing its 2017 award to Richard H. Thaler.
Counterintuitive as that history may make this proposal, it is consistent with the history of the Nobel Prize. It is, after all, funded by money made in dynamite. If any group wants its legacy to be that organizations, governments and companies need to pay more attention to how humans operate in the real world, it’s this one.
Officially, the Riksbank prize was for Thaler’s work on “the consequences of limited rationality, social preferences, and lack of self-control, [showing] how these human traits systematically affect individual decisions as well as market outcomes.”
Unofficially, Thaler, perhaps more than anyone else, is best described as the father of behavioral economics. The repercussions of his work in helping organizations better understand human behaviors — and why traditional economics has failed so badly at this — are hard to overstate.
Economics starts off with a deeply flawed initial premise: Humans are rational, profit-maximizing actors who use the best information and knowledge available to make disciplined and informed economic decisions. Start off with that model, which solves many problems, and occasionally allow for the outliers that are exceptions to the rule.
Thaler’s approach as an academic was to find specific errors, taking them apart slowly and methodically. Once he demonstrated the errors were not mere anomalies, he came up with simple unobtrusive ways to overcome many critics of those modeling errors. Being both a critic of the traditional economic model and a practitioner who could help repair its fundamental flaws is a highly unusual combination.
Ironically, Thaler the economic heathen found a home at the University of Chicago, the epicenter of the rational human as a decision maker in the economy. The Godfather of this thesis, Eugene Fama, is Thaler’s regular golf partner. That should tell you something important and wonderful about Richard Thaler the person, who enthusiastically embraces different ideas even as he slowly pulls the thread that helps to unravel them.
I have been fortunate enough to have spent time with Thaler, asking him questions about his work and career, most recently at the Morningstar conference last month in Chicago. He is also one of my favorite guests on Masters in Business (MiB Thaler), equal parts distinguished academician and mischievous raconteur. This creates an unusual and delightful combination of insight and joy.
My Bloomberg View colleague Cass Sunstein, who co-authored “Nudge: Improving Decisions About Health, Wealth, and Happiness“ with Thaler, made an astute observation before the prize was announced: “Over recent decades, the rise of behavioral economics has been the most interesting development in economic theory. More than anyone else, Thaler has been responsible for that development.”
Economics provides a robust but problematic model for analyzing the world in a deep and broad way. No one has done more to help us understand the issues with the basic economic model than Thaler. That alone is a sufficient reason to have awarded the prize to Thaler. It is long overdue.
1. See also:
2. See this discussion of how Shiller helped Fama with their Nobels: How Shiller helped Fama win the Nobel.
Originally: An Economics Heathen Wins the Economics Nobel