Nobel in Economics Is Awarded to Richard Thaler <
Post# of 51156
(Total Views: 219)
Posted On: 10/09/2017 1:06:09 PM
Nobel in Economics Is Awarded to Richard Thaler < >
WASHINGTON — Richard H. Thaler was awarded the Nobel Memorial Prize in Economic Science on Monday for incorporating a more realistic understanding of human behavior into economic theory, and for using the resulting insights to improve public policy.
Professor Thaler, an economist at the University of Chicago’s Booth School of Business, is a pioneer of the discipline known as behavioral economics, which marries the work of psychologists with that of economists to produce better models of human decision-making.
The Nobel committee, announcing the award in Stockholm, credited Professor Thaler with taking the field from the fringe to the academic mainstream. The committee also noted that his work had driven a wide range of public policy improvements, notably a sweeping shift toward the automatic enrollment of workers in retirement savings programs.
Professor Thaler said on Monday that the basic premise of his approach to economics was that, “In order to do good economics, you have to keep in mind that people are human.”
Asked how he would spend the prize money, he replied: “This is quite a funny question.” He added: “I will try to spend it as irrationally as possible.”
The economics prize was established in 1968 in memory of Alfred Nobel and is awarded by the Royal Swedish Academy of Sciences. One of Mr. Thaler’s frequent collaborators, Daniel Kahneman, was awarded the prize in 2002.
Mainstream economics was built on the simplifying assumption that people behave rationally. Economists understood this was not literally true, but they argued that it was close enough.
Professor Thaler has played a central role in pushing economists away from that assumption. He did not simply argue that humans are irrational, which has always been obvious but is not particularly helpful. Rather, he showed that people depart from rationality in consistent ways, so that their behavior can still be anticipated and modeled.
“Thaler more than anyone has disciplined the idea of animal spirits,” said Cass Sunstein, a Harvard law professor who is another of Professor Thaler’s frequent collaborators. The two men wrote a best-selling 2008 book, “Nudge,” which argued that behavioral economics could be applied to public policy, improving lives at little cost.
Two years later, the British government created a behavioral economics unit based on Professor Thaler’s advice. Other countries, including the United States, followed suit. Some victories are relatively minor. The British government found that people were more likely to pay automobile registration fees if the billing letters included a picture of the vehicle and a reminder that unregistered cars could be seized. Other measures, like automatic enrollment in savings programs or in school lunch programs, have had far-reaching benefits.
In a presidential address to the American Economic Association in January 2016, Professor Thaler predicted that behavioral economics would succeed so well that it would eventually disappear.
“I think it is time to stop thinking about behavioral economics as some kind of revolution,” he said. In time, he added, “all economics will be as behavioral as the topic requires.”
On Monday, he said that moment already had arrived for most economists under 40. But as his own work predicted, it has been harder to change older economists’ minds.
Professor Thaler’s academic work can be summarized as a long series of demonstrations that standard economic theories do not describe actual human behavior.
For example, he showed that people do not regard all money as created equal. When gas prices decline, standard economic theory predicts that people will use the savings for whatever they need most, which is probably not additional gasoline. In reality, people still spend much of the money on gas. They buy premium gas even if it is bad for their car. In other words:, they treat a certain slice of their budget as gas money.
He also showed that people place a higher value on their own possessions. In a famous experiment, he and two co-authors distributed coffee mugs to half the students in a classroom, and then opened a market in mugs. Students randomly given a mug regarded it as twice as valuable as did the students who were not given a mug. This pattern, which Professor Thaler labeled an “endowment effect,” has since been demonstrated in a wide range of situations. It helps to explain why real markets do not work as well as chalkboard models.
A related finding — that people prefer the status quo — is the basis of Professor Thaler’s most important contribution to public policy: automatic enrollment in benefits program. People can choose to leave, but changing the default greatly increases participation.
One of Professor Thaler’s most profound findings involves the importance of fairness. He showed that people will penalize behavior they regard as unfair even if they do not benefit from doing so.
This has important economic implications. It explains, for example, why an umbrella store may choose not to raise prices during a rainstorm. It also illuminates the mechanics of unemployment. Standard economic theory predicted that during an economic downturn, employers would cut wages to a level consistent with the demand for goods or services, meaning there was no reason to think a downturn would produce unemployment.
But workers regard wage cuts as unfair. And employers, seeking to avoid angering the workers they keep, prefer to cut people rather than wages.
Professor Thaler, 72, was born in East Orange, N.J. He graduated from Case Western Reserve University and then earned a doctorate in economics at the University of Rochester. At the time, the field was gripped by an enthusiasm for mathematical models based on the assumption that people were rational actors. A standard piece of economic reasoning asserted that people would adjust their own spending habits whenever the government adjusted fiscal policy, because they would foresee the consequences.
Professor Thaler has written that he began to have “deviant thoughts” in graduate school. He would ask people about their economic preferences, an exercise that most economists regarded as irrelevant, and he found that the answers he got were different from what was in textbooks.
His career was shaped by his discovery of the work of Professor Kahneman and his longtime collaborator, Amos Tversky, who were advancing the idea that economics needed to grapple with actual human behavior. Professor Thaler became their collaborator, and played the central role in bringing the work into the economic mainstream.
In 1995, Professor Thaler joined the faculty at the University of Chicago, the institution most associated with a rationalist approach to economics.
“I knew I was going to be in for a fight and I thought it would be good for me and good for them,” he said. “The best way to sharpen your skills is to play against the best.”
He made a cameo appearance, alongside the actress and singer Selena Gomez, in the 2015 film “The Big Short,” in which he used behavioral economics to help explain the causes of the 2008 financial crisis. Asked on Monday about his “short Hollywood career,” Professor Thaler joked that he was disappointed that his acting prowess had not been mentioned during the summary of his achievements when the award was announced.
He said he planned to spend some of his winnings taking his family to Sweden for “the party of a lifetime.” And then, he said, he planned to keep working. One of his current interests, he said, was understanding how employees choose among health care plans.
WASHINGTON — Richard H. Thaler was awarded the Nobel Memorial Prize in Economic Science on Monday for incorporating a more realistic understanding of human behavior into economic theory, and for using the resulting insights to improve public policy.
Professor Thaler, an economist at the University of Chicago’s Booth School of Business, is a pioneer of the discipline known as behavioral economics, which marries the work of psychologists with that of economists to produce better models of human decision-making.
The Nobel committee, announcing the award in Stockholm, credited Professor Thaler with taking the field from the fringe to the academic mainstream. The committee also noted that his work had driven a wide range of public policy improvements, notably a sweeping shift toward the automatic enrollment of workers in retirement savings programs.
Professor Thaler said on Monday that the basic premise of his approach to economics was that, “In order to do good economics, you have to keep in mind that people are human.”
Asked how he would spend the prize money, he replied: “This is quite a funny question.” He added: “I will try to spend it as irrationally as possible.”
The economics prize was established in 1968 in memory of Alfred Nobel and is awarded by the Royal Swedish Academy of Sciences. One of Mr. Thaler’s frequent collaborators, Daniel Kahneman, was awarded the prize in 2002.
Mainstream economics was built on the simplifying assumption that people behave rationally. Economists understood this was not literally true, but they argued that it was close enough.
Professor Thaler has played a central role in pushing economists away from that assumption. He did not simply argue that humans are irrational, which has always been obvious but is not particularly helpful. Rather, he showed that people depart from rationality in consistent ways, so that their behavior can still be anticipated and modeled.
“Thaler more than anyone has disciplined the idea of animal spirits,” said Cass Sunstein, a Harvard law professor who is another of Professor Thaler’s frequent collaborators. The two men wrote a best-selling 2008 book, “Nudge,” which argued that behavioral economics could be applied to public policy, improving lives at little cost.
Two years later, the British government created a behavioral economics unit based on Professor Thaler’s advice. Other countries, including the United States, followed suit. Some victories are relatively minor. The British government found that people were more likely to pay automobile registration fees if the billing letters included a picture of the vehicle and a reminder that unregistered cars could be seized. Other measures, like automatic enrollment in savings programs or in school lunch programs, have had far-reaching benefits.
In a presidential address to the American Economic Association in January 2016, Professor Thaler predicted that behavioral economics would succeed so well that it would eventually disappear.
“I think it is time to stop thinking about behavioral economics as some kind of revolution,” he said. In time, he added, “all economics will be as behavioral as the topic requires.”
On Monday, he said that moment already had arrived for most economists under 40. But as his own work predicted, it has been harder to change older economists’ minds.
Professor Thaler’s academic work can be summarized as a long series of demonstrations that standard economic theories do not describe actual human behavior.
For example, he showed that people do not regard all money as created equal. When gas prices decline, standard economic theory predicts that people will use the savings for whatever they need most, which is probably not additional gasoline. In reality, people still spend much of the money on gas. They buy premium gas even if it is bad for their car. In other words:, they treat a certain slice of their budget as gas money.
He also showed that people place a higher value on their own possessions. In a famous experiment, he and two co-authors distributed coffee mugs to half the students in a classroom, and then opened a market in mugs. Students randomly given a mug regarded it as twice as valuable as did the students who were not given a mug. This pattern, which Professor Thaler labeled an “endowment effect,” has since been demonstrated in a wide range of situations. It helps to explain why real markets do not work as well as chalkboard models.
A related finding — that people prefer the status quo — is the basis of Professor Thaler’s most important contribution to public policy: automatic enrollment in benefits program. People can choose to leave, but changing the default greatly increases participation.
One of Professor Thaler’s most profound findings involves the importance of fairness. He showed that people will penalize behavior they regard as unfair even if they do not benefit from doing so.
This has important economic implications. It explains, for example, why an umbrella store may choose not to raise prices during a rainstorm. It also illuminates the mechanics of unemployment. Standard economic theory predicted that during an economic downturn, employers would cut wages to a level consistent with the demand for goods or services, meaning there was no reason to think a downturn would produce unemployment.
But workers regard wage cuts as unfair. And employers, seeking to avoid angering the workers they keep, prefer to cut people rather than wages.
Professor Thaler, 72, was born in East Orange, N.J. He graduated from Case Western Reserve University and then earned a doctorate in economics at the University of Rochester. At the time, the field was gripped by an enthusiasm for mathematical models based on the assumption that people were rational actors. A standard piece of economic reasoning asserted that people would adjust their own spending habits whenever the government adjusted fiscal policy, because they would foresee the consequences.
Professor Thaler has written that he began to have “deviant thoughts” in graduate school. He would ask people about their economic preferences, an exercise that most economists regarded as irrelevant, and he found that the answers he got were different from what was in textbooks.
His career was shaped by his discovery of the work of Professor Kahneman and his longtime collaborator, Amos Tversky, who were advancing the idea that economics needed to grapple with actual human behavior. Professor Thaler became their collaborator, and played the central role in bringing the work into the economic mainstream.
In 1995, Professor Thaler joined the faculty at the University of Chicago, the institution most associated with a rationalist approach to economics.
“I knew I was going to be in for a fight and I thought it would be good for me and good for them,” he said. “The best way to sharpen your skills is to play against the best.”
He made a cameo appearance, alongside the actress and singer Selena Gomez, in the 2015 film “The Big Short,” in which he used behavioral economics to help explain the causes of the 2008 financial crisis. Asked on Monday about his “short Hollywood career,” Professor Thaler joked that he was disappointed that his acting prowess had not been mentioned during the summary of his achievements when the award was announced.
He said he planned to spend some of his winnings taking his family to Sweden for “the party of a lifetime.” And then, he said, he planned to keep working. One of his current interests, he said, was understanding how employees choose among health care plans.
(0)
(0)Scroll down for more posts ▼