The first time I spoke to Richard H. Thaler, I was writing an article for The New York Times. It was 2001, and the field he was pioneering, behavioral economics, was still new to almost everyone outside of the academic community. But it was gaining attention — fast.
We had just witnessed the popping of the Internet bubble, and the efficient market hypothesis, long the centerpiece of mainstream economics, seemed insufficient to explain what was actually going on. The idea that markets are efficiently incorporating all relevant information to rational ends seemed somehow instinctively at odds with an era that produced Pets.com.
The theory of rational markets, it was becoming increasingly clear to all but its most ardent supporters, had a big problem: It excluded the way actual people acted. The dot-com bust was yet another painful case study in irrational exuberance and its costly aftermath. The time was ripe for new ideas that blended insights from both cognitive psychology and economics, and Thaler was a key champion.
Thaler is the Charles R. Walgreen distinguished service professor of behavioral science and economics at the University of Chicago’s Booth School of Business. His most recent book, Misbehaving: The Making Of Behavioral Economics follows more than four other books he wrote or edited including Quasi-Rational Economics, The Winner’s Curse: Paradoxes and Anomalies of Economic Life along with articles published in leading academic journals. He co-wrote the bestseller, Nudge: Improving Decisions About Health, Wealth, and Happiness with Harvard Law School’s Cass R. Sunstein. Before joining the University of Chicago in 1995, Thaler taught at Cornell and the University of Rochester, where he received his master’s degree in and PhD. His undergraduate work was at Case Western Reserve University.
Talking on the phone back in 2001, he readily admitted that he hardly had all the answers, and the field he was developing was a long way off from anticipating or solving the riddles of why people acted the way they did. “If we had a model that would have been able to tell us when the Internet bubble would break, believe me, we would have used it,” he told me at the time. “So it’s easy to say in hindsight that there was some sort of euphoria for two or three years and that euphoria has died. But nobody has the tools, at least as far as I know, that allow you to forecast these changes in these moods.''
Sixteen years later and another financial meltdown later, behavioral economics has yet to develop the tools to predict financial disaster. Yet it has begun to explain more of why we do what we do, the gap between the rational, ideal economic option, and the decision we may make anyway, even when it’s not in our best interests. It’s become deeply woven into the very fabric of our everyday lives, even if we don’t notice it.
Thaler’s Nobel in economics, announced today, more than acknowledges that fact. The ability of those using the research pioneered by Amos Tversky and Daniel Kahneman as well as Thaler and Robert J. Shiller, to name a few, (Kahneman, who won the same prize in 2002 and Shiller in 2013,) to shape human behavior has influenced nearly every field. From the “Moneyball” masters of professional sports to the “gamification” of apps so you can’t put your phone down, behavioral economics is everywhere. When you’re subtly pushed to put more in your 401(k) plan, or when government programs promote vaccines or communicate information more clearly during a public health emergency, that’s behavioral economics at work on you. It is literally everywhere these days.
That’s why, when I heard the news this morning, it wasn’t that first conversation I’d had with Thaler back in 2001 that came to mind. It was a more recent one, one we’d had last spring.
In discussing what he was working on now, he’d said one of his big areas of focus is the ethics of behavioral economics. In a column published in The New York Times he advocated that people using behavioral economics “nudge for good,” as he puts it, and laid out guiding principles for its use. Thaler wrote that “nudges,” or subtle ways of influencing behavior using research from his field, should be “transparent and never misleading,” easily opted out of and with a “good reason to believe that the behavior being encouraged will improve the welfare of those being nudged.”
It seemed decades of research into human behavior left Thaler worried about our historical propensity for using breakthroughs in less-than-altruistic ways.
During the conversation, I commented on how quickly I thought the field had matured. “It wasn’t that fast,” he said, and for someone who had spent decades developing it, it must feel that way.
But given the power that has been unleashed, by anyone’s measure behavioral economics has come a very long way in a very short time. Thaler’s Nobel is a great reminder that for better — and potentially for worse — it has come of age. And there’s plenty of work still to be done.
