The winner of this year’s Nobel Memorial Prize in Economic Sciences,
Richard Thaler of the University of Chicago, is a controversial choice.
Thaler is known for his lifelong pursuit of behavioural economics (and
its subfield, behavioural finance), which is the study of economics (and
finance) from a psychological perspective. For some in the profession,
the idea that psychological research should even be part of economics
has generated hostility for years.
Not from me. I find it wonderful that the Nobel Foundation chose Thaler.
The economics Nobel has already been awarded to a number of people who
can be classified as behavioural economists, including George Akerlof,
Robert Fogel, Daniel Kahneman, Elinor Ostrom, and me. With the addition
of Thaler, we now account for about 6% of all Nobel economics prizes
ever awarded.
But many in economics and finance still believe that the best way to
describe human behaviour is to eschew psychology and instead model human
behaviour as mathematical optimisation by separate and relentlessly
selfish individuals, subject to budget constraints. Of course, not all
economists, or even a majority, are wedded to this view, as evidenced by
the fact that both Thaler and I have been elected president, in
successive years, of the American Economic Association, the main
professional body for economists in the United States. But many of our
colleagues unquestionably are.
I first met Thaler in 1982, when he was a professor at Cornell
University. I was visiting Cornell briefly, and he and I took a long
walk across the campus together, discovering along the way that we had
similar ideas and research goals. For 25 years, starting in 1991, he and
I co-organised a series of academic conferences on behavioural
economics, under the auspices of the US National Bureau of Economic
Research.
Over all those years, however, there has been antagonism – and even what
appeared to be real animus – toward our research agenda. Thaler once
told me that Merton Miller, who won the economics Nobel in 1990 (he died
in 2000), would not even make eye contact when passing him in the
hallway at the University of Chicago.
Miller explained his reasoning (if not his behaviour) in a widely cited
1986 article called “Behavioural Rationality in Finance.” Miller
conceded that sometimes people are victims of psychology, but he
insisted that stories about such mistakes are “almost totally
irrelevant” to finance. The concluding sentence of his review is widely
quoted by his admirers: “That we abstract from all these stories in
building our models is not because the stories are uninteresting but
because they may be too interesting and thereby distract us from the
pervasive market forces that should be our principal concern.”
Stephen A Ross of MIT, another finance theorist who was a likely future
Nobel laureate until he died unexpectedly in March, argued along similar
lines. In his 2005 book Neoclassical Finance, he, too, eschewed
psychology, preferring to build a “methodology of finance as the
implication of the absence of arbitrage.” In other words, we can learn a
lot about people’s behaviour just from the observation that there are
no ten-dollar bills lying around on public sidewalks. However
psychologically bent some people are, one can bet that they will pick up
the money as soon as they spot it.
Both Miller and Ross made wonderful contributions to financial theory.
But their results are not the only descriptions of economic and
financial forces that should interest us, and Thaler has been a major
contributor to a behavioural research programme that has demonstrated
this.
For example, in 1981, Thaler and Santa Clara University’s Hersh Shefrin
advanced an “economic theory of self-control” that describes economic
phenomena in terms of people’s inability to control their impulses.
Sure, people have no trouble motivating themselves to pick up a
ten-dollar bill that they might find on a sidewalk. There is no
self-control issue there. But they will have trouble resisting the
impulse to spend it. As a result, most people save too little for their
retirement years.
Economists need to know about such mistakes that people repeatedly make.
During a long subsequent career, involving work with UCLA’s Shlomo
Benartzi and others, Thaler has proposed mechanisms that will, as he and
Harvard Law School’s Cass Sunstein put it in their book Nudge, change
the “choice architecture” of these decisions. The same people, with the
same self-control problems, could be enabled to make better decisions.
Improving people’s saving behaviour is not a small or insignificant
matter. To some extent, it is a matter of life or death, and, more
pervasively, it determines whether we achieve fulfilment and
satisfaction in life.
Thaler has shown in his research how to focus economic inquiry more
decisively on real and important problems. His research program has been
both compassionate and grounded, and he has established a research
trajectory for young scholars and social engineers that marks the
beginning of a real and enduring scientific revolution. I couldn’t be
more pleased for him – or for the profession. – Project Syndicate
* Robert J Shiller, a 2013 Nobel laureate in economics and Professor of
Economics at Yale University, is co-author, with George Akerlof, of
Phishing for Phools: The Economics of Manipulation and Deception.
Richard Thaler, George Akerlof, Elinor Ostrom, Daniel Kahneman and Robert Fogel