Richard Thaler Wins Nobel!

by on October 9, 2017 at 5:57 am in Current Affairs, Economics | Permalink

Richard Thaler wins the Nobel for behavioral economics! An excellent choice and one that makes my life easier because you probably already know his work. Indeed his work may already have influenced how much you save for retirement, how you pay your taxes and whether you will donate a kidney or not. In Britain, Thaler’s work was one of the inspirations for the Behavioral Insights Team which applies behavioral economics to public policy. Since being established in 2010 similar teams have been created around the world including in the United States.

Thaler’s intellectual biography Misbehaving (available free as kindle for Amazon Prime members is this a nudge?) is a fun guide to his work. Thaler will be the first to tell you he isn’t that smart. Relative to other Nobel prize winners that might even be true. None of his papers are technically difficult or excessively math heavy and most of his ideas are pretty obvious–obvious once you have heard them! Thaler cannot have been the first person in the world to notice that people like cashews but also like it when you take the cashews away to prevent them from eating more than they really want to eat (preferences Thaler noted at a dinner party of economists). But other people, especially economists, dismissed the evidence in front of their noses that people weren’t as rational as their theories suggested–People will be more careful with big decisions. Errors will cancel. Markets will take care of that–There were plenty of reasons to go back to pondering the beautiful austerity of theory. Thaler, however, especially after reading Kahneman and Tversky’s Judgment under Uncertainty: Heuristics and Biases realized that their could be a theory of misbehaving, a theory of irrational choice.

That theory is now called behavioral economics. It’s not as clean and straight as neo-classical theory. We still don’t know when one bias, of the many that have been documented, applies and when another applies. So much depends on context and what we bring to it that perhaps we never will. Nevertheless, there is no longer any question that some features of choice and the economy are better explained via systematic biases than by purely rational decision making.

In addition to Misbehaving and Nudge (the latter with Cass Sunstein who brought these ideas to law and government) you can find many of Thaler’s key ideas in the Anomalies column of the Journal of Economic Perspectives. Probably this is the first economics Nobel to be given for a popular column! In many ways, however, these columns made Thaler’s reputation. The anomalies column was always a highlight of the issue and I remember discussing and debating these columns with Tyler and many others as they appeared. The same was true throughout the economics profession. Even economists like an anomaly.

One of the most important applications of behavioral economics has been to savings. Savings decisions are difficult because it’s not obvious how much to save or even how to save (bank accounts, mutual funds, Roth IRA, 401k etc. etc.). In addition, the decision can be administratively complex with annoying paperwork, and the benefits of good decision making don’t occur until decades into the future. Perhaps most importantly, we don’t receive clear and quick feedback about our choices. We don’t know whether we have saved too little or too much until it’s too late to change our decision. As a result, many of us fall back on defaults. These are the motivating ideas behind Thaler’s recommendations to set default rules such that people are automatically enrolled in pension plans that invest in low-cost market indices. Such default rules have changed saving behavior in the United States and around the world. Thaler’s Save More Tomorrow plans also ask people whether they want to plan today to save more of their raises, a simple yet profound change in default that makes it easier to save by lowering the perceived cost.

Thaler’s research is even changing football. His paper with Cade Massey, Overconfidence vs. Market Efficiency in the National Football League looked at “right to choose decisions” in the player draft. On the one hand, millions of dollars are made and lost on these decisions and they are being made repeatedly by professionals; thus, the case for rational decisions would seem to be strong. But on other hand, people are overconfident, they tend to make extreme forecasts, there is a winner’s curse, there is a false consensus effect (you think that everyone likes what you like), and there is present bias. These biases all suggest that decisions might be made poorly, even given the big stakes. Massey and Thaler find that it’s the latter.

Using archival data on draft-day trades, player performance and compensation, we compare the market value of draft picks with the historical value of drafted players. We find that top draft picks are overvalued in a manner that is inconsistent with rational expectations and efficient markets and consistent with psychological research.

Moreover, and this is the kicker, Massey and Thaler’s research has passed the market test! Bill Belichick started to pay attention first (econ undergrad natch) and now other smart teams are applying Thaler’s research to improve their choices.

Few economists have had more practical influence than Richard Thaler and behavioral economics is still on the upswing.

1 That guy October 9, 2017 at 6:06 am

*Swedish National Bank’s Prize in Economic Sciences in Memory of Alfred Nobel

2 James Harangueton October 9, 2017 at 6:15 am

The nudge is always the micro-way effort to fudge the issue. What’s really needed now is the only macro-macro incentive that matters today i.e. a head on confrontation with the most dangerous anti-capitalist tendency known to humankind, i.e. the reversal of the giant BAIL OUT of society perpetrated by defective deficit-loving progressives and centrally planned central banks. What’s needed today is not the celebration of another behavioural failure like Thaler but rather a brave visionary, realist, rationalist, and a warrior for the capitalist cause. YES folks … another Schumpeter! Why is today’s brave and visionary Schumpeterian ruthlessly NUDGED out of every journal, every prize-giving, and every government and political party? SAD!

3 Matt October 9, 2017 at 6:29 am

available free for Amazon Prime members is this a nudge?

Available free in kindle or as an audio book, two formats that I really dislike, but that Amazon would like people to buy more of, I suspect, so probably a nudge, but maybe of not exactly the sort you had in mind here.

4 prior_test3 October 9, 2017 at 7:08 am

Nice to see that exclamation marks remain a part of this GMU econ faculty member’s writing style, without any second guessing.

5 Thor October 9, 2017 at 11:56 am

That’s your takeaway from a decent blog intro to Thaler?! (!)

6 msgkings October 9, 2017 at 12:49 pm

That’s our prior!!!!!!!

7 prior_test3 October 9, 2017 at 3:14 pm

Here was the original blog entry from Prof. Cowen this morning, who has been steadily bulking it up all day long – ‘Nobel Prize awarded to Richard Thaler!

This is a prize that is easy to understand. It is a prize for behavioral economics, for the ongoing importance of psychology in economic decision-making, and for “Nudge.”’

Prof. Tabarrok has not seen any reason to clean up his enthusiasm.

8 msgkings October 9, 2017 at 3:36 pm

No need to!!!!!!!

9 prior_test3 October 10, 2017 at 2:46 am

Which is fine – it was interesting to see how Prof. Cowen removed his exclamation mark when reworking his post compared to Prof. Tabarrok keeping his. But generally, Prof. Tabarrok seems less concerned about constantly burnishing his image – which could be a seen as a data point on the differences between growing up in America or Canada.

10 Punch Out October 9, 2017 at 7:30 am

Thank God Americans wanted Trump’s free-will rather than Thaler’s “nudging”.

11 Jason October 9, 2017 at 9:38 am

Actually, there’s no Nobel prize in economics. It’s awarded by the central bank of Sweden in memory of Nobel. It’s separate from the actual Nobel prizes.

12 wiki October 9, 2017 at 10:30 am

Better than the Peace Prize which has long strayed from the intentions and in some cases instructions of the original. At least the Nobel for Econ is still decided in Sweden and not some clowns in Norway who give it to giant organizations, whereas the Swedish prizes stick to the original 3 person limit.

13 msgkings October 9, 2017 at 11:34 am

Why hasn’t anyone mentioned this before?!?!?!?

14 Cjones1 October 9, 2017 at 9:41 am

I could envision a nudge where a mandate to fund health saving accounts with EITC payments is implemented. That may ease problems encountered with Medicaid funding.

15 The Other Jim October 9, 2017 at 10:09 am

Which is the most horrifying?

That Alex thinks that the drafting strategy used by Bill Belichick for his entire life was inspired by an econ paper that came out 4 years ago, or that Alex thinks that this is definitively true because he read it in a Boston Globe article, or that Alex thinks it’s cool to use the word “natch”?

16 Jon Murphy October 9, 2017 at 10:37 am

Excellent news to see Thaler win. Well-deserved.

17 Odd Utgård October 9, 2017 at 1:20 pm
18 Tim October 9, 2017 at 1:27 pm
19 Odd Utgård October 9, 2017 at 1:50 pm
20 Enrique October 9, 2017 at 2:32 pm

Great choice, but you gotta feel bad for Cass Sunstein …

21 Ray Lopez October 9, 2017 at 3:13 pm

But Cass Sunstein is more a popularizer of works than an originator.

For some reason I thought Thaler already won the Nobel Prize in Economics.

22 Tim October 9, 2017 at 4:27 pm

Belichick does seem to pay some attention to academic studies, probably via the mysterious Ernie Adams. But that paper was inspired by Belichick, not the other way around. Belichick’s been doing it for years.

23 Jr October 10, 2017 at 12:07 pm

And when will they start punting less? Is there some reason that advice on who to draft is more palatable than advice on how to coach?

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