Economists have, for a long time, thought of themselves as scientists. They work in hard data and numbers—why wouldn’t they?
But one of them proved there was so, so much more art to economics than anyone in that field ever wanted to admit. And that was the kind of thinking that just won him the 2017 Nobel Prize in Economic Science—and irreversibly changed the world of economics, and basically, the world.
Professor Richard Thaler is a 72-year-old professor of economics at the University of Chicago’s Booth School of Business, and he’s being (rightly) celebrated thanks to his Nobel win on Monday. Thaler was already a giant in the world of economics and psychology—he’d previously had some mainstream success with his New York Times bestselling book, “Nudge.” He’s also a great follow on Twitter at @R_Thaler. And he’s gotta be the only economist who’ll ever gonna get to share screen time with a pop star in a major movie, as he did when he was featured during one of the explainer segments in The Big Short, alongside Selena Gomez.
Thaler’s main contribution was bringing more human elements to economics, and in the process, bringing economics closer to understanding the people it uses for data. And if this sounds totally esoteric, that’s because it is.
But here’s the thing: Thaler’s work has led to very real improvements in everything from how governments provide effective public services to creating retirement programs that people actually use. And understanding it can help you—and the rest of the world—understand the very nature of decision-making, and why we do the things we do.
Thaler looked at human behavior, and what it meant for understanding economics. Before Thaler, economists simplified humans as rational actors who generally made the right choices for their well being. In other words, they assumed people, at any given moment, did the thing that was best for them.
But people are nuts. And Thaler knew that. Why didn’t the rest of the world’s economists?
Building on the work of legendary Israeli psychologists Daniel Kahneman and Amos Tversky, Thaler showed that not only was everyone else wrong—that people don’t always make the right decisions, and that they’re not always rational—but that people were often predictable in how they made bad, rash decisions.
For example: people value the stuff they already have more than the things they don’t yet have. There’s no good reason for this kind of thinking, but that’s just how the human mind tends to work. And that kind of thing has major ramifications for how markets work.
This kind of work is now known as behavioral economics, and it is an area of study that is still producing important discoveries. Some of it can seem painfully obvious, but that’s why Thaler’s work was so crucial—sometimes the most revolutionary answers to the understanding the world is right under our noses. Getting people to make the right choices isn’t as simple as just, you know, waiting for them to make the right choices. But simple steps could be taken to steer people into the direction of making the right choices, and producing positive results.
“If you want to get people to eat healthier foods, then put healthier foods in the cafeteria, and make them easier to find, and make them taste better,” Thaler told consulting firm McKinsey in an interview.
Sounds obvious. And yet, it wasn’t, to a lot of people. But those simple concepts have gone on to inspire a growing range of policies, including California’s plan to provide an automatic retirement plan for people working at private companies.
The one thing I’ll say is Thaler’s work is *so* accessible that it can be hard to convince people it was genuinely groundbreaking.
— Matthew Yglesias (@mattyglesias) October 9, 2017
Thaler’s win helps seal not only his place in the pantheon of U.S. economists, but also, firms up the validation of behavioral economics, which like all relatively new fields of study, had to endure plenty of skepticism before emerging as the hot new thing. The debate Thaler and his contemporaries used to face was whether or not behavioral economics is even important. These days, it’s more about honing the theories of behavioral economics pushing its assumptions.
That wouldn’t have happened without Thaler, which is the kind of accomplishment that scores you a Nobel Prize. When asked how he’s gonna spend the 9 million Swedish kronor cash price (about $1.11 million), Thaler landed a perfect joke, that only he could pull off: “I will try to spend it as irrationally as possible,” he cracked.
If anyone deserves to do that, today, it’s definitely him.
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