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, 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.
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 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.”
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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 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
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.
“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.
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.
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.
“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.”
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.
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Professor
Thaler’s academic work can be summarized as a long series of
demonstrations that standard economic theories do not describe actual
human behavior.
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.
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.
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.
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.
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.
But
workers regard wage cuts as unfair. And employers, seeking to avoid
angering the workers they keep, prefer to cut people rather than wages.
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.
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.
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.
In
1995, Professor Thaler joined the faculty at the University of Chicago,
the institution most associated with a rationalist approach to
economics.
“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.”
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
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.
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