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,” his famous and also bestselliing book co-authored with Cass Sunstein.
Here are previous MR posts on Thaler, we’ve already covered a great deal of his research. Here is Thaler on Twitter. Here is Thaler on scholar.google.com. Here is the Nobel press release, with a variety of excellent accompanying essays and materials. Here is Cass Sunstein’s overview of Thaler’s work.
Perhaps unknown to many, Thaler’s most heavily cited piece is on whether the stock market overreacts. He says yes this is possible for psychological reasons, and this article also uncovered some of the key evidence in favor of the now-vanquished “January effect” in stock returns, namely that for a while the market did very very well in the month of January. (Once discovered the effect went away.) Another excellent Thaler piece on finance is this one with Shleifer and Lee, on why closed end mutual funds sell at divergences from their true asset values. This too likely has something to do with market psychology and sentiment, as the same “asset package,” in two separate and non-arbitrageable markets, can sell for quite different prices, sometimes premia but usually discounts. This was one early and relative influential critique of the efficient markets hypothesis.
Another classic early Thaler piece is on a phenomenon known as “mental accounting,” for instance you might treat a dollar in your pocket as different from a dollar in your bank account. Or earned money may be treated different from money you just chanced upon, or won that morning in the stock market. This has significant implications for predicting consumer decisions concerning saving and spending; in particular, economists cannot simply measure income but must consider where the money came from and how it is perceived by consumers, namely how they are performing their mental accounting of the funds. Have you ever gone on a vacation with a notion that you would spend so much money, and then treated all expenditures within that range as essentially already decided? The initial piece on this topic was published in a marketing journal and it has funny terminology, a sign of how far from the mainstream this work once was. It is nonetheless a brilliant piece. Here is more Thaler on mental accounting.
Thaler, with Kahneman and Knetsch, was a major force behind discovering and measuring the so-called “endowment effect.” Once you have something, you value it much more! Maybe three or four times as much, possibly more than that. It makes policy evaluation difficult, because as economists we are not sure how much to privilege the status quo. Should we measure “willingness to pay” — what people are willing to pay for what they don’t already have? Or “willingness to be paid” — namely how eager people are to give up what they already possess? The latter magnitude will lead to much higher valuations for the assets in question. This by the way helps explain status quo bias in politics and other spheres of life. People value something much more highly once they view it as theirs.
This phenomenon also makes the Coase theorem tricky because the final allocation of resources may depend quite significantly on how the initial property rights are assigned, even when the initial wealth effect from such an allocation may appear to be quite small. See this Thaler piece with Knetsch. It’s not just that you assign property rights and let people trade, but rather how you assign the rights up front will create an endowment effect and thus significantly influence the final bargain that is struck.
With Jolls and Sunstein, here is Thaler on a behavioral approach to law and economics, a long survey but also constructive piece that became a major trend and has shaped law and economics for decades. He has done plenty and had a truly far-ranging impact, not just in one or two narrow fields.
Thaler’s “Nudge” idea, developed in conjunction with Cass Sunstein over the course of a major book and some articles, has led policymakers all over the world to focus on “choice architecture” in designing better systems, the UK even setting up a “Nudge Unit.” For instance, one way to encourage savings is to set up pension systems for employees so that the maximum contribution is the default, rather than an active choice people must make. This is sometimes referred to as a form of “soft” or “libertarian paternalism,” since choice is still present. Here is Thaler responding to some libertarian critiques of the nudge idea.
I first encountered Thaler’s work in graduate school, in the mid-1980s, in particular some of his pieces in the Journal of Economic Behavior and Organization; here is his early 1980 manifesto on how to think about consumer choice. I thought “this is great stuff,” and I gobbled it up, as it was pretty consistent with some of what I was imbibing from Thomas Schelling, in particular Thaler’s 1981 piece with Shefrin on the economics of self-control, a foundation for many later discussions of paternalism. I also thought “a shame this work isn’t going to become mainstream,” because at the time it wasn’t. It was seen as odd, under-demonstrated, and often it wasn’t in top journals. For some time Thaler taught at Cornell, a very good school but not a top top school of the kind where many Laureates might teach, such as Harvard or Chicago or MIT. Many people were surprised when finally he received an offer from the University of Chicago Business School, noting of course this was not the economics department. Obviously this Prize is a sign that Thaler truly has arrived at the very high levels of recognition, and I would note Thaler has been pegged as one of the favorites at least since 2010 or so. When Daniel Kahneman won some while ago and Thaler didn’t, many people thought “ah, that is it” because many of Thaler’s most famous pieces were written with Kahneman. Yet as time passed it became clear that Thaler’s work was holding up and spreading far and wide in influence, and he moved into a position of being a clear favorite to win.
Here is Thaler’s book on the making of behavioral economics. Excerpt:
…my thesis advisor, Sherwin Rosen, gave the following as an assessment of my career as a graduate student: “We did not expect much of him.”
Very lately Thaler on Twitter has been making some critical remarks about price gouging, suggesting we also must take into account what customers perceive as fair. Here is his earlier piece about fairness constraints on profit-seeking, still a classic.
Thaler has written many columns for The New York Times, here is one on boosting access to health care. Here are many more of them. Here is “Unless you are Spock, Irrelevant Things Matter for Investment Behavior.” Here is Thaler on making good citizenship fun. He also told us that trading up in the NFL draft isn’t worth it.
Thaler is underrated as a policy economist, here is an excellent NYT piece on the “public option” for health insurance, excerpt: “…instead of arguing about whether to have a public option, argue about the ground rules.”
A well-deserved prize and one that is relatively easy to explain, and most of Thaler’s works are easy to read even if you are not an economist. I would stress that Thaler has done more than even many of his fans may realize.