An economics heathen wins the economics Nobel
Given how many prizes various psychologists and economists have already won the Royal Swedish Academy of Sciences Sveriges Riksbank Prize in Economic Sciences—Daniel Kahneman (2002), Robert Shiller, Eugene Fama (2013)—it seems contradictory to suggest that the Nobel Committee is finally recognizing the impact of behavioural psychology on economic decision-making by handing its 2017 award to Richard H. Thaler.
Counter-intuitive as that history may make this proposal, it is consistent with the history of the Nobel prize. It is, after all, funded by money made in dynamite. If any group wants its legacy to be that organizations, governments and companies need to pay more attention to how humans operate in the real world, it’s this one.
Officially, the Riksbank prize was for Thaler’s work on “the consequences of limited rationality, social preferences, and lack of self-control, he has shown how these human traits systematically affect individual decisions as well as market outcomes.”
Unofficially, Thaler, perhaps more than anyone else, is best described as the father of behavioural economics. The repercussions of his work in helping organizations better understand human behaviour—and why traditional economics has failed so badly at this—are hard to overstate.
Economics starts off with a deeply flawed initial premise: humans are rational, profit-maximizing actors who use the best information and knowledge available to make disciplined and informed economic decisions. Start off with that model, which solves many problems, and occasionally allow for the outliers that are exceptions to the rule.
Ironically, Thaler, the economic heathen, found a home at the University of Chicago, the epicentre of the rational human as a decision maker in the economy. The godfather of this thesis, Eugene Fama, is Thaler’s regular golf partner. That should tell you something important and wonderful about Richard Thaler the person, who enthusiastically embraces different ideas even as he slowly pulls the thread that helps to unravel them.
I have been fortunate enough to have spent time with Thaler, asking him questions about his work and career, most recently at the Morningstar conference last month in Chicago. He is also one of my favourite guests on Masters in Business (MiB Thaler), equal parts distinguished academician and mischievous raconteur. This creates an unusual and delightful combination of insight and joy.
My Bloomberg View colleague Cass Sunstein, who co-authored Nudge: Improving Decisions About Health, Wealth, and Happiness with Thaler, made an astute observation before the prize was announced: “Over recent decades, the rise of behavioural economics has been the most interesting development in economic theory. More than anyone else, Thaler has been responsible for that development.”
Economics provides a robust but problematic model for analyzing the world in a deep and broad way. No one has done more to help us understand the issues with the basic economic model than Thaler. That alone is a sufficient reason to have awarded the prize to Thaler. It is long overdue. Bloomberg View
Barry Ritholtz is a Bloomberg View columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He blogs at the Big Picture and is the author of Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.