The economics of Richard Thaler
Richard Thaler has challenged the way we think about the economy, and has helped revolutionize the field of economics
Richard Thaler has challenged the way we think about the economy, and has helped revolutionize the field of economics
The winner of the Nobel Prize in economics this year, Richard Thaler of Chicago University is widely recognized as one of the chief protagonists of the behavioural economics revolution that has challenged some of the standard assumptions and theories of economic theory.
Along with the 2002 Nobel Prize winner in economics Daniel Kahneman, his co-author Amos Tversky (who would have likely shared the prize with Kahneman had he not died in 1996) and Jack Knetsch, Thaler has pioneered a new way of looking at economics by drawing on insights from psychology and psychological experiments.
Unlike several other geniuses in the field who have gone on to win the ultimate recognition in the profession, Thaler had a rather tame beginning to his academic life. His doctoral thesis was on evaluating the monetary value of a human life—which is often used by regulators to measure the benefits of interventions that prevent deaths, say on highways or from air pollution. Based on his thesis, Thaler published in 1976, a fairly influential research paper on the theory and techniques of valuing a life statistically.
For instance, Thaler showed that people are far more likely to opt in for retirement savings plans when opting in was the default option in such schemes. In an influential 1991 paper, Kahneman and Thaler listed several such “anomalies" where the actual outcomes differed starkly from what standard economic theory predicted.
Thaler’s work has been particularly influential in finance, helping explain why markets may often over-react to dramatic news. Along with another recent Nobel laureate, Robert Shiller, Thaler has been one of the pioneers in the area of behavioural finance, helping us understand market phenomena that conventional economics could not explain well.
Thaler’s insights are based not just on anecdotes, but spring from a long body of research on these issues. In a landmark 1986 study conducted jointly with Kahneman and Knetsch, Thaler showed that community standards of fairness dictated when and how far firms could raise prices.
After defending surge pricing early on, Uber has tried to tweak this feature in its app. Thaler’s criticism may be prompting a rethink within the company. Even the Indian government in its regulations relating to cab aggregators such as Uber and Ola seems to have stuck to Thaler’s thumb rule of capping prices to three times the base fare (during daytime rides).