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Nobel in Economics Is Awarded to Richard Thaler Nobel in Economics Is Awarded to Richard Thaler
(about 4 hours later)
WASHINGTON — Richard H. Thaler was awarded the Nobel Memorial Prize in Economic Science on Monday for his contributions to behavioral economics. WASHINGTON — Richard H. Thaler was awarded the Nobel Memorial Prize in Economic Science on Monday for incorporating a more realistic understanding of human behavior into economic theory, and for using the resulting insights to improve public policy.
Professor Thaler, born in 1945 in East Orange, N.J., works at the University of Chicago’s Booth School of Business. The Nobel committee, announcing the award in Stockholm, said that he was a pioneer in applying psychology to economic behavior and in shedding light on how people make economic decisions, sometimes rejecting rationality. Professor Thaler, an economist at the University of Chicago’s Booth School of Business, is a pioneer of the discipline known as behavioral economics, which marries the work of psychologists with that of economists to produce better models of human decision-making.
His research, the committee said, had taken the field of behavioral economics from the fringe to the mainstream of academic research and had shown that it had important implications for economic policy. The Nobel committee, announcing the award in Stockholm, credited Professor Thaler with taking the field from the fringe to the academic mainstream. The committee also noted that his work had driven a wide range of public policy improvements, notably a sweeping shift toward the automatic enrollment of workers in retirement savings programs.
Professor Thaler said on Monday that the basic premise of his theories was that, “In order to do good economics you have to keep in mind that people are human.” Professor Thaler said on Monday that the basic premise of his approach to economics was that, “In order to do good economics, you have to keep in mind that people are human.”
Asked how he would spend the prize money, he replied: “This is quite a funny question.” He added: “I will try to spend it as irrationally as possible.”Asked how he would spend the prize money, he replied: “This is quite a funny question.” He added: “I will try to spend it as irrationally as possible.”
The economics prize was established in 1968 in memory of Alfred Nobel and is awarded by the Royal Swedish Academy of Sciences. The economics prize was established in 1968 in memory of Alfred Nobel and is awarded by the Royal Swedish Academy of Sciences. One of Mr. Thaler’s frequent collaborators, Daniel Kahneman, was awarded the prize in 2002.
Mainstream economics for much of the 20th century was based on the simplifying assumption that people behaved rationally. Economists understood that this was not literally true, but they argued that it was close enough. Mainstream economics was built on the simplifying assumption that people behave rationally. Economists understood this was not literally true, but they argued that it was close enough.
Professor Thaler has played a central role in pushing economists away from that assumption. He did not simply argue that humans are irrational, which is obvious but also unhelpful. Rather, he showed that people depart from rationality in consistent ways, so their behavior can still be anticipated. Professor Thaler has played a central role in pushing economists away from that assumption. He did not simply argue that humans are irrational, which has always been obvious but is not particularly helpful. Rather, he showed that people depart from rationality in consistent ways, so that their behavior can still be anticipated and modeled.
For example, he showed that people do not regard all money as created equal. When gas prices decline, standard economic theory predicts that people will use the savings for whatever they need most. In reality, people still spend much of the money on gas. They buy premium gas even if it is bad for their car. In other words: they treat a certain slice of their budget as gas money. “Thaler more than anyone has disciplined the idea of animal spirits,” said Cass Sunstein, a Harvard law professor who is another of Professor Thaler’s frequent collaborators. The two men wrote a best-selling 2008 book, “Nudge,” which argued that behavioral economics could be applied to public policy, improving lives at little cost.
Professor Thaler also showed that people place a higher value on their own possessions. In a famous experiment, he and two co-authors distributed coffee mugs to half the students in a classroom and then opened a market in mugs. In general, the students who had randomly been given a mug regarded it as being twice as valuable as did the students who were not given a mug. Two years later, the British government created a behavioral economics unit based on Professor Thaler’s advice. Other countries, including the United States, followed suit. Some victories are relatively minor. The British government found that people were more likely to pay automobile registration fees if the billing letters included a picture of the vehicle and a reminder that unregistered cars could be seized. Other measures, like automatic enrollment in savings programs or in school lunch programs, have had far-reaching benefits.
Professor Thaler named this phenomenon, since documented across a wide range of human experience, an “endowment effect.” One of his co-authors, Daniel Kahneman, was awarded the Nobel prize in economics in 2002. At the time, some argued that Professor Thaler should have shared in the award. In a presidential address to the American Economic Association in January 2016, Professor Thaler predicted that behavioral economics would succeed so well that it would eventually disappear.
The importance of fairness is another key area of Professor Thaler’s research. He showed that people care deeply about fairness and will penalize behavior they regard as unfair even if they do not benefit by doing so. “I think it is time to stop thinking about behavioral economics as some kind of revolution,” he said. In time, he added, “all economics will be as behavioral as the topic requires.”
This has important economic implications. It explains, for example, why an umbrella store may not raise prices during a rainstorm. On Monday, he said that moment already had arrived for most economists under 40. But as his own work predicted, it has been harder to change older economists’ minds.
It also illuminates the mechanics of economic recessions. Standard economic theory predicts that during an economic downturn, employers will cut wages to a level consistent with the demand for goods or services, so there is no reason to think a downturn will produce unemployment. Professor Thaler’s academic work can be summarized as a long series of demonstrations that standard economic theories do not describe actual human behavior.
Why then does unemployment rise during downturns? Workers regard wage cuts as unfair. Employers, seeking to avoid angering the workers they keep, prefer to eliminate people rather than cutting the wages. For example, he showed that people do not regard all money as created equal. When gas prices decline, standard economic theory predicts that people will use the savings for whatever they need most, which is probably not additional gasoline. In reality, people still spend much of the money on gas. They buy premium gas even if it is bad for their car. In other words:, they treat a certain slice of their budget as gas money.
The Nobel committee described how Professor Thaler’s theory of “mental accounting” explained how people simplify financial decisions by focusing on the narrow impact of each decision rather than on its overall effect. He also showed how aversion to losses can explain why people value the same item more highly when they own it than when they do not, a phenomenon called the endowment effect. He also showed that people place a higher value on their own possessions. In a famous experiment, he and two co-authors distributed coffee mugs to half the students in a classroom, and then opened a market in mugs. Students randomly given a mug regarded it as twice as valuable as did the students who were not given a mug. This pattern, which Professor Thaler labeled an “endowment effect,” has since been demonstrated in a wide range of situations. It helps to explain why real markets do not work as well as chalkboard models.
Professor Thaler’s theories also shed light on why New Year’s resolutions can be hard to keep and on the tension between long-term planning and short-term doing. A related finding — that people prefer the status quo — is the basis of Professor Thaler’s most important contribution to public policy: automatic enrollment in benefits program. People can choose to leave, but changing the default greatly increases participation.
Succumbing to short-term temptation is an important reason many people fail in their plans to save for old age, or to make healthier lifestyle choices, according to Professor Thaler’s research. He also demonstrated how seemly small changes in how systems work, or “nudging” — a term he invented — could help people exercise better self-control when, for example, saving for a pension. One of Professor Thaler’s most profound findings involves the importance of fairness. He showed that people will penalize behavior they regard as unfair even if they do not benefit from doing so.
Professor Thaler had a cameo appearance, alongside the actress and singer Selena Gomez, in the film “The Big Short,” in which he used behavioral economics to help explain the causes of the financial crisis. Asked about his “short Hollywood career,” he joked that he was disappointed his acting prowess had not been mentioned during the summary of his achievements when the award was announced. This has important economic implications. It explains, for example, why an umbrella store may choose not to raise prices during a rainstorm. It also illuminates the mechanics of unemployment. Standard economic theory predicted that during an economic downturn, employers would cut wages to a level consistent with the demand for goods or services, meaning there was no reason to think a downturn would produce unemployment.
Mr. Thaler’s work has forced economists to grapple with the limits of traditional analysis based on the assumption that people are rational actors. But workers regard wage cuts as unfair. And employers, seeking to avoid angering the workers they keep, prefer to cut people rather than wages.
He has also been unusually successful in directly influencing public policy. Professor Thaler, 72, was born in East Orange, N.J. He graduated from Case Western Reserve University and then earned a doctorate in economics at the University of Rochester. At the time, the field was gripped by an enthusiasm for mathematical models based on the assumption that people were rational actors. A standard piece of economic reasoning asserted that people would adjust their own spending habits whenever the government adjusted fiscal policy, because they would foresee the consequences.
One of his most important contributions is his influence on the shift to retirement plans that automatically enroll employees, and to policies that offer employees the option of increasing their contributions over time. Both reflect Mr. Thaler’s insight that inertia can be used to shape beneficial outcomes without limiting human choice. Professor Thaler has written that he began to have “deviant thoughts” in graduate school. He would ask people about their economic preferences, an exercise that most economists regarded as irrelevant, and he found that the answers he got were different from what was in textbooks.
In a 2008 book, “Nudge,” written with Cass R. Sunstein, Mr. Thaler argued governments had many opportunities to improve the design of public policy. His career was shaped by his discovery of the work of Professor Kahneman and his longtime collaborator, Amos Tversky, who were advancing the idea that economics needed to grapple with actual human behavior. Professor Thaler became their collaborator, and played the central role in bringing the work into the economic mainstream.
Two years later, the British government created a behavioral economics unit based on Mr. Thaler’s advice that pursued such opportunities. Other countries, including the United States, have followed suit. Some victories are relatively minor, such as sending to people who have not paid auto registration fees a letter with a picture of the car, which has been found to increase the rate of payment. Others are more profound, like automatically enrolling eligible children in school meal programs. In 1995, Professor Thaler joined the faculty at the University of Chicago, the institution most associated with a rationalist approach to economics.
Mr. Sunstein, a Harvard law professor, jokingly described the honor for his longtime collaborator as “unboundedly rational.” “I knew I was going to be in for a fight and I thought it would be good for me and good for them,” he said. “The best way to sharpen your skills is to play against the best.”
“Before Thaler, economics had been using the rational actor models, assuming that people make rational decisions about whether to buy drugs, how to invest, what jobs to take,” he said. “Thaler, more than anyone, systematically dismantled that assumption, not ever by saying that people are irrational. What he did was to say that people depart from rationality in predictable and systemic ways.” He made a cameo appearance, alongside the actress and singer Selena Gomez, in the 2015 film “The Big Short,” in which he used behavioral economics to help explain the causes of the 2008 financial crisis. Asked on Monday about his “short Hollywood career,” Professor Thaler joked that he was disappointed that his acting prowess had not been mentioned during the summary of his achievements when the award was announced.
He added that Professor Thaler had “disciplined the idea of animal spirits.” He said he planned to spend some of his winnings taking his family to Sweden for “the party of a lifetime.” And then, he said, he planned to keep working. One of his current interests, he said, was understanding how employees choose among health care plans.
■ Jeffrey C. Hall, Michael Rosbash and Michael W. Young were awarded the Nobel Prize in Physiology or Medicine last Monday for discoveries about the molecular mechanisms controlling the body’s circadian rhythm.
■ Rainer Weiss, Kip Thorne and Barry Barish received the Nobel Prize in Physics on Tuesday for the discovery of ripples in space-time known as gravitational waves.
■ Jacques Dubochet, Joachim Frank and Richard Henderson were awarded the Nobel Prize in Chemistry on Wednesday for developing a new way to construct precise three-dimensional images of biological molecules.
■ The English novelist Kazuo Ishiguro, known for his spare, elliptical prose style and his inventive subversion of literary genres, was awarded the Nobel Prize in Literature on Thursday.
■ The Nobel Peace Prize was awarded on Friday to the International Campaign to Abolish Nuclear Weapons, a moment of vindication for the advocacy group responsible for the first treaty to prohibit such arms.
■ Oliver Hart and Bengt Holmstrom were honored for their work on improving the design of contracts, the deals that bind together employers and their workers, or companies and their customers.