Richard Thaler has won the Nobel memorial prize in economics, an award that had been anticipated for some time. Mr Thaler is a behavioural economist, one of the group of economists who applies insights from psychology, or perhaps plain common sense, into the idealised world of economic modelling.
One trivial behavioural insight that Mr Thaler is fond of mentioning concerns a large bowl of cashew nuts he once served to dinner guests over drinks. Observing his guests hoovering up the contents of the bowl, he removed it to the kitchen so as not to spoil everyone’s appetite. The guests could in principle have stopped of their own accord; nevertheless they were pleased to see temptation removed.
Early in his career, he started making a list of “Dumb Stuff People Do” on the blackboard in his office. The cashew nut example was on the list, and it is a classic piece of Thaler thinking: obvious, trivial, fun and yet completely beyond the scope of traditional economics to model. Mr Thaler’s insight is that such trivia might lead to important analytical and policy insights.
Thomas Schelling, Nobel laureate in 2005, was also a master of these deceptively simple observations of human nature. And Daniel Kahneman — a psychologist, mentor for Mr Thaler, and winner of the prize in 2002 — had with Amos Tversky laid the foundations for behavioural economics.
Mr Thaler advanced the field in two important ways. He campaigned for behavioural economics to be taken seriously within the economics profession. He also brought it into the policy environment with his book Nudge (co-authored with Cass Sunstein) and his support for behavioural policy units in the White House and 10 Downing Street.
Within the profession, Mr Thaler found a pulpit in the Journal of Economic Perspectives, an academic journal supplied to all members of the American Economic Association. His Anomalies column was witty and sharply reasoned, highlighting strange features of the economic and financial world that standard economic theory could not explain, and rigorously debunking unconvincing attempts at rationalisation.
His evangelism for behavioural economics has been successful, at least in microeconomics: it is commonplace to see economic models incorporate psychological realism, and Mr Thaler himself was president of the American Economic Association in 2015.
In the policy world, Mr Thaler’s most famous idea was to use behavioural insights in pensions policy — for example, by enrolling people in a pension scheme by default, while giving them the choice to opt out. The stakes here are much higher than with cashew nuts: default enrolment has, according to the UK pensions regulator, increased participation in private-sector pension schemes from 42 per cent to 73 per cent between 2012 and 2016.
Rational economic man does not care — or even notice — whether a pension is opt-in or opt-out. He simply calculates (instantly) whether it pays to participate and chooses accordingly. Mr Thaler’s insight is not only that people are not perfectly rational (that much is obvious, even to the most traditional of economists) but that apparently small departures from rationality can have outsized impacts.
Mr Thaler’s catch-all advice: whether you’re a business or a government, if you want people to do something, make it easy. This year’s choice of Nobel Prize winner is an easy one to like.
Written for and first published in the Financial Times on 9 October 2017.