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,” 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  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.”

His last pre-Nobel tweet was: “The web site is using lots of . Advertised rates include cashing in of “points”, cancellation policies not salient if bad…”

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.


and for “Nudge,” his famous book co-authored with Cass Sunstein.

Is there an argument, for or against, that Sunstein should have been included? I can see the argument going both

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 ... Chicago.

Is Chicago _in general_ clearly better than Cornell? In the fields I know best, Law and Philosophy, Chicago is better than Cornell in law by a fair amount (though Cornell is still very good, better in a few things), and has traditionally been (and currently is) a fair amount better than Chicago in Philosophy. I don't know well enough about other areas, but if we are talking about "school" and not "department", it would surprise me if Chicago was _clearly_ better than Cornell. (I mean, US News says so, but I am not that big of a believer in that, and don't think the difference in over-all rank makes that much difference for the university as a whole.) Which departments or schools are _clearly_ better at Chicago, on generally accepted grounds? (This is a real, not a rhetorical question.)

Argument against Sunstein to be included: while he did co-author one book helping Thaler apply some of his ideas to politics, Sunstein does not have the breadth of academic economics work to be even considered.

that's plausible. Sunstein has done a lot of other work in "law and (behavioral) economics", but it does seem to mostly be applying other's work. Some people do seem to seriously suggest Richard Posner as a possible winner, though, and that seems no more plausible to me.

TC is likely referring to Economics Departments and/or Business Schools. Cornell actually has had a good number of noble prize winners in the natural sciences.

And Japanese elected a war criminal prime minister!!

Whoa - talk about filling in the gaps. Clearly merely a minor addendum not worth noting before people calling up this web site at work on the East Coast.

'his famous book co-authored with Cass Sunstein'

Shades of Buchanan and Tullock. Though it is nice to see that any hopes of a GMU threepeat which includes the law and econ faculty is likely to exclude the law faculty side.

And who might that be, considering the Swedish National Bank's Prize in Economic Sciences in Memory of Alfred Nobel has only been awarded to since 1969?

Or is this the sort of claim that the preceding pope was a Nazi because of his growing up in Germany during the Nazi era? Particularly since only one German citizen has ever won this prize - And strangely enough, his father was Jewish, making it extremely unlikely that Selten was ever actually a Nazi.

And it seems that the 'Thaler!' was just a touch too undignified for a GMU econ faculty member, hmm?

You'd know.

No nudging.

"To respect the limits of the First Amendment, the union should have sent out a new notice allowing nonmembers to opt in to the special fee rather than requiring them to opt out. Our cases have tolerated a substantial impingement on First Amendment rights by allowing unions to impose an opt-out requirement at all. Even if this burden can be justified during the collection of regular dues on an annual basis, there is no way to justify the additional burden of imposing yet another opt-out requirement to collect special fees whenever the union desires."
-Knox v. Service Employees International Union, Local 1000

Yeah, but surely the union thought the workers would be better off paying those "special fees," and should have thought so themselves. From "Fear of Falling": "The Nudge philosophy here is that the person who designs the plan, whom we call the choice architect, should choose the default that she thinks, all things considered, will make the participants best off. Does Professor Whitman have a better suggestion?" I do. Stop nudging.

Cass Sunstein's most recent paper, Unleashed, which borrows heavily from Thaler and behavioral economics, may prove far more important in predicting world political events. Yesterday's Gospel lesson was the parable of the vineyard from the Gospel of Matthew. The parable and other words in Matthew have long been interpreted as support for Jewish deicide and to incite antisemites to violence against Jews. Of course, faithful Christians deny that the words in Matthew are antisemitic or intended to incite violence against Jews, just as those who speak or write provocative words today against any particular individual or group deny that they are meant to incite violence. Sunstein's thesis is that provocative words can unleash hidden preferences: social norms may hide preferences, but words can unleash the hidden preferences and incite all manner of anti-social behavior. In economics, we know that expectations can be self-fulfilling and that words can create expectations (such as predictions of a coming financial crisis or recession). Words matter because words shape human behavior, positive as well as negative. Yesterday our priest prayed for the victims and their families in Las Vegas, and, as an aside, defended those who called for prayer after tragic events. Implicit in his aside is that words, in the form of prayer, can inspire acts of humanity. He did not mention the words in Matthew that have incited violence against Jews.

I'm happy to hear your attend religious services on Sundays.

Cowen: "We should also consider that the politically relevant alternative to nudge may indeed be violence, rather than freedom of choice."

"Significant social change often comes from the unleashing of hidden preferences" - Sunstein in his Unleashed paper

"Samantha Power, who was the US Ambassador to the UN under former President Barack Obama, averaged more than one “unmasking” request for every working day in 2016 — even going so far as to seek the names of Trump associates just before his inauguration, a report says." - the NY Post on Sustein's wife.

This unleashing or unmasking of hidden preferences to trigger change seems to run in the family.

"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."

But, of course, what is perceived as 'fair' is can change dramatically based on politics and culture. For long-periods of time, and in many different countries, charging any interest on loans was considered profoundly unfair. But interest on mortgages and other types of loans has been normalized and now produces no sense of outrage in the developed world. Similarly, charging higher prices for a commodity (whether oil or frozen orange juice) when there is a supply shock doesn't seem to upset anybody -- even when some fortunate vendors are selling out of existing stocks for which they paid a lower price. It seems to be only in the case of essential goods during temporary emergencies that outrage arises. But that reaction may be culturally contingent as well. It's possible that people may come to accept temporary price rises as an appropriate means of preventing hoarding and black markets, encouraging resupply, and not wasting precious time searching and in queues when there's a lot of work to do. The phenomena Thaler and other behavioral economists have discovered are interesting and important, but it seems a mistake to assume that they're permanent aspects of human nature.

Yeah, I think Thaler merits the prize, but I think you have hit on the soft underbelly of behavioral economics.

The whole "cognitive bias" thing started out as "irrational things we do". Implicit in this is that maybe we could make better decisions if we recognize and overcome these biases. The twist is that, at least in some cases, recognizing these biases is not sufficient to overcoming them.

At some point, both Kahneman and Thaler subtly finesse their view and start suggesting that these biases need to be accommodated in some cases, a la peoples' irrational biases about unfair treatment. Wait what?

"interesting and important, but it seems a mistake to assume that they’re permanent aspects of human nature."

As opposed to a rigid Homo Economicus?

I had not read much economics before I read The Winner's Curse, but I was shaped enough by old rational agency that it was world changing for me.

Human nature is bigger than economics, and BE is a readjustment to accept that. As Tyler says, that recognition has held up.

"As opposed to a rigid Homo Economicus?"

I think he means as opposed to being culturally rather than biologically determined.

I wouldn't take that one either. Modern BE has good experimental connections to proto-economics in other social species.

Sometimes it does, sometimes it doesn't.

That is a line I like, especially after reading a lot of BE. There are inputs from rational analysis and game theory, but also social trends and underlying biological motivation. That we don't know which one is driving a fairness argument or a price movement in a particular moment makes things much less predictable, less exploitable.

Perhaps people unfamiliar with BE expect it to be a constant force, or that a BE perturbation will regress on schedule to an efficient norm.

Not at all. Sometimes it does, sometimes it doesn’t.

Even where there are inherent predispositions, culture can be much more powerful. People probably have a mild predisposition to 'fair prices' rather than market-determined prices, but the vast majority manage to get along just fine in market economies without being constantly outraged that prices vary according to supply and demand rather than there being one fixed, 'fair' price' for each particular product or service.


I always thought Thaler was interesting but hard to meaningfully apply in the real world. In the constraints of the artificial world of the lab or a college campus his ideas are nice thought experiments. For example, compare his ideas investments strategies to Fama, I go with Fama.

Thaler may finds times that individuals or segments of the population may not be ideal actors, but that does not mean that markets aren't efficient.

Still congratulations for getting people to think.

I think you miss a few things, possibly because you do "need an applicable theory."

It's funny, because the original Fama was about an unpredictable random walk. Why should you demand more predictability from an alternative view?

(It seems likely to me that markets are doubly unpredictable, both in the way Fama and "efficiency" implies, and with the constant risk of BE anomalies on top.)

To be clear about what this means, we might create a diversified portfolio for an efficient market, and hope for the best. The hoping for the best part is implicit recognition that markets are not mechanical beasts that spit efficient returns year in and year out.

We all know that 2007s happen, because we saw them with our own eyes.

I'm sure Thaler enriched the lunch discussions at the Quadrangle Club.

Thaler may have been very good at fleshing out why transaction costs are so high (psychology plays a role) in a Coase world, but I don't think it makes fundamental changes in Coase. Worse, Thaler would, as the lawyers say, use tough cases to make bad laws. I will return to the issue of nudges in a second.

Markets are dynamic and changing. They respond to new information quickly. However nothing about efficient markets invalidates Barnum's rule. There is a sucker born every minute. Markets are efficient, see Becker, but not every participant in the market is an optimal actor. Markets are not perfect, they are efficient. Trying to beat or time the market in the long run is in practice impossible. Short term fluctuations, random movements, should be expected because assumptions may prove false, events happen, things change.

Thaler can attempt to demonstrate where an anomaly may have occurred. It may even be interesting. But by the time he discovers an anomaly the market is, absent some barriers (often government), correcting it.

I understand why the Nobel committee would like Thaler. His "nudges" can be used to justify paternalistic government. If reading Thaler, I would remember Stigler's warning that government programs are started with good intentions but unintended consequences, moral hazards, system gaming, public choice theory, etc all demonstrate how simple "nudges" can become convoluted, counter productive, inefficient programs.

If private firms want to use "nudges" to achieve some end that they desire, I don't much care (from a public policy perspective). However drifting toward paternalistic government programs, scares me.

Thaler is interesting. But to me, he helps explain some anomalies without really having long term predictive power. His "nudges" are interesting but I prefer a less paternalistic society.

You central error is thinking that a new price is a corrected price.

Wrong. Market prices are a forever rolling mix of rational and irrational inputs.

Anomalies are not easily exploitable because there is no schedule for their resolution.

So anomalies may be unresolved indefinitely? Forever even? Sounds like a fascinating line of thinking for a scholastic.

Didn't Keynes say something famous about rationality and time horizons?

Keynes said a lot of things. Careful lest you find yourself in thrall to some dead economist.

We're talking about investing strategies here, and above you are talking about things that are un-actionable. Angels on a pin head.

The funny thing, in retrospect, was the interlude between Keynes and Thaler when Common Sense was forgotten.

BTW when Thaler invests his Nobel winnings I bet it looks like a portfolio that Fama would recommend rather then based on Thaler's research.

his name is on a fund that manages close to 4 billion dollars, and claims to apply an investment strategy based on findings in the behavioral research . .

after correcting for fees, his small cap fund gave you about the same rate of return, the last 5 years, as a Vanguard S&P 500

I don't know about you Dan, but if anybody ever offers me big bucks to run a fund, and I know that I will be compared to the S&P 500 index funds, I am going to run my fund internally much like the S&P 500 indexes. And then I'll play with tilts.

That is probably the story of most managed fund these days, and the reason for higher correlations.

The agency problem leads to pseudo index funds, possibly with higher expense ratio skim, possibly with experimental tilts.

A small cap fund should be compared to the Russell 2000 or other small cap index, not the S&P 500, which is a large cap index.

They benchmark their small-cap fund (FTHSX) against the Russell 2000:

Solid outperformance over lots of horizons. Unless Thaler is charging 2% plus, his investors should be happy.

They charge 3.12% for private investors, 2.87% for institutional

low cost, index fund does as well for most investors

If those fees are accurately reported, they're unconscionable.

You guys are working on incorrect information. The real fees are not 3.12% for an individual investor. According to the company website: those are "gross fees". The real fees paid (i.e, "net fees") by an individual is 1.07% in the investor share class (FTHNX) and 0.92% in the Institutional share class (FTHSX) which has a minimum investment of $100,000. The fees are low compared to most actively managed small cap funds. The net returns put it in the top decile in all time periods against other small cap managers. It has handsomely beat any passive option out there and on top of that beats most Private Equity options! Yes Fama and Vanguard both are very jealous!!

The Nobel committee was heavily influenced by Thaler's performance with Selena Gomez in "The Big Short."

Congrats to professor Thaler, his co-authored book "Nudge" is one of the best books I've ever read.

>or won that morning in the stock market

I love it when Ty's mask slips.

This is half true and half not. The award was established after the others and therefore not by Nobel himself - but the actual Nobel Foundation still makes the award as it makes the others, announces the award and presents it at the same ceremony. The same Royal Academy that picks the winner in Physics picks the Econ winner as well.

Thank you, Dan.

Exactly so. If they were truly German they'd be precisely accurate. Standards are slipping.

In defensive of defensive tautology:
To state that that in an age of information and technology, that technology innovations are mere trifles, such as the electric car, the Tesla. Is to misunderstand the idea there is no distance in either space or geography, no prolongation of time for distance to exist in, no muscular fatigue to establish its accomplishment. TH=hey are moving not toward a destintation in space but a destination in time, toward the sleight hand of May shapes shades.

The production of these oils and solid paraffin wax from coal formed the subject of his patent dated 17 October 1850. In 1850 Young & Meldrum and Edward William Binney entered into partnership under the title of E.W. Binney & Co. at Bathgate in West Lothian and E. Meldrum & Co. at Glasgow; their works at Bathgate were completed in 1851 and became the first truly commercial oil-works in the world with the first modern oil refinery, using oil extracted from locally mined torbanite, shale, and bituminous coal to manufacture naphtha and lubricating oils; paraffin for fuel use and solid paraffin were not sold until 1856

"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."

Serious question, not a troll bout economics -- if this January effect existed, why did he tell people instead of starting up some sort of financial fund and make huge profits off of it? It's not anything academic that the public "needed" to know. It's not as if he'd have been withholding the cure for polio.

(Mixed up phrase "cure for cancer" and polio vaccine obviously, my apologies.)

There was a guy, and maybe someone knows who I am half-remembering, who made huge hedge fund profits on similar ideas in the "early BE" time period.

In an interview he said that he had competition, and that obvious things tended to be found, exploited, and closed. That now it was much harder, with algorithms exploiting much thinner anomalies.

I might have been thinking of Ed Thorp

I don't think there was a chance to make "huge profits" from the January effect. One can't go long January and short other months to hedge out market risk. At most, one can be longer in January than in other months to slightly increase one's expected return, but one will still be bearing market risk.

A better question is how one can distinguish between (1) the January effect was real and disappeared after market participants responded to its publication vs. (2) the January "effect" was a spurious result of data snooping (looking for lots of "effects" until one is found) and its disappearance is an(other) example of failed replication.

Just in case you like to read a review in spanish...


Question, do we assume the same behavioral issues that afflict private markets also impact government? Or do we assume the omnipotent and benevolent political class that will always bring us perfect regulation that is drawn up in graphs and charts in textbooks?

You need to get another tool to go with that hammer.

From what I understand the nudges applied in Britain were more a way of changing behavior of government agencies than the citizenry, ie. stop being an asshole and you will get more cooperation from people.

What is remarkable is that it took someone like Thaler with his books and Sunstein as a prominent promoter to get bureaucrats to stop being jackasses.

Of course the eager read his stuff as a recipe for societal control. They, and we, will learn the hard way that it is a wonderful idea but rather mundane and useless in practice, hopefully, or worse a nasty manipulation tactic that ends up with the practitioners hanging from lampposts with a surprised look on their faces.

Samuelson wrote this great short puzzler decades ago:

Thaler and Benartzi wrote a pretty good follow-up:

Framing matters.

No way. Then why does everyone call it a Nobel prize? Answer THAT, smart guy!

Thanks for that comment that everyone makes a million times every year.

Curses! I have no time for the petty prizes of the Swedish central bank. Dead Swedish dynamite magnates on the other hand . . .

LOL the pedants aren't usually this angry. Barro, is that you?

I've never understood why libertarians have been so critical of the "nudge" argument. The entire point of Thaler & Sunstein's nudge theory, whether done by private institutions or the government, is that the individual must retain the ability to completely opt out of whatever is being "nudged". Given that there will be a default setting regardless of the choice being made, there's no good reason not have that default option that most rational people would agree is the better choice. If the opt out right is maintained, there is no meaningful distinction between an individual choosing to participate vs choosing to opt out of a particular program.

+1. A certain strain of libertarians like to complain. Actually to be fair a lot of people of all kinds like to, just about different petty things. Like how to refer to certain annual prizes.

Cowen approves the nudge: “We should also consider that the politically relevant alternative to nudge may indeed be violence, rather than freedom of choice.”

I suggest you look at all the "nudges" built into the tax system.

There is no Economics Nobel Prize but neither is it "from" the Swedish central bank. Geez, if you want to be pedantic at least put a little effort into it.

The Nobel Committee talks about "Limited Rationality" as one of the areas of Thaler's focus.

What is the difference between "limited rationality" and "bounded rationality" (Herb Simon, 1978 Nobel) ?

Regarding the endowment effect, all present may be entertained by the clear example of it in the saga of Gudmund dyri, which contains the following story:

Some Norwegian merchants chopped off Skaering's hand. Gudmund dyri was given self-judgment in the injury case. Haf Brandsson and Gudmund together adjudged compensation in the amount of thirty hundreds, which was to be paid over immediately. Gudmund then rode away from the ship. But the Norwegians confronted Haf, who had remained behind; they thought the judgment had been too steep and they asked him to do one of two things: either reduce the award or swear an oath. Haf refused to do either. Some people rode after Gudmund and told him what had happened. He turned back immediately and asked Haf what was going on. Haf told him where matters stood. Gudmund said, "Swear the oath, Haf, or else I will do it, but then they will have to pay sixty hundreds. The oath of either one of us will have the same price as Skaering's hand. The Norwegians refused the offer. "Then I shall make you another proposal," said Gudmund. "I will pay Skaering the thirty hundreds that you were judged to pay, but I shall choose one man from amongst you who seems to me of equivalent standing with Skaering and chop off his hand. You may then compensate that man's hand as cheaply as you wish." This did not appeal to the Norwegians and they decided to pay the original award immediately. Gudmund took Skaering with him when they left the ship.

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