Richard Thaler

Richard Thaleris an American economist who was awarded the 2017 Nobel Prize for Economics for his contributions to behavioral economics, a field of microeconomics that applies the findings of psychology and other social sciences to the study of economic behaviour. In published work spanning more than four decades, Thaler explored how economic decision making by both individuals and institutions is systematically and significantly influenced by natural human cognitive limitations and biases, among other psychological factors. His findings consistently refuted the common assumption within economic theory that individuals always act rationally and selfishly, an idealization that most economists had nevertheless accepted as valid for predictive purposes. Thaler’s identification of specific ways in which people’s real economic behaviour deviates from rational norms had important practical implications, suggesting that many public and private social policies could be made more effective by incorporating subtle inducements, or “nudges,” designed to steer people toward good decision making without ultimately depriving them of their freedom to choose, an approach that Thaler and others called libertarian paternalism.

Thaler received a bachelor’s degree in economics from Case Western Reserve University in Cleveland, Ohio (1967), and master’s (1970) and doctoral (1974) degrees in economics from the University of Rochester, New York. He taught at the Graduate School of Management at Rochester (1974–78) and at the Graduate School of Business and Public Administration at Cornell University, where he was appointed associate professor in 1980 and full professor in 1986. He served as Henrietta Johnson Louis Professor of Economics at Cornell (1988–95) and thereafter held distinguised service professorships of behavioral science and economics at the University of Chicago’s Booth School of Business.

Among the nonrational influences on economic behaviour identified by Thaler, some were examples of bounded (or limited) rationality, the use by both individuals and organizations of simplified decision procedures (e.g., rules of thumb) in situations characterized by limitations of time, information, or calculating effort. Boundedly rational procedures produce results that are generally acceptable or satisfactory but are sometimes less than optimal. In the phenomenon of “mental accounting,” for example, individuals mentally divide their expenses into different categories, or accounts (e.g., mortgage, home maintenance, food, clothing, entertainment, and savings), and make spending decisions based solely on the effects on the relevant account rather than on total assets. Although mental accounting may have the benefit of preventing a person from spending too much in one account (because it prohibits transferring money from one account to another), it can result in increased costs in some situations, as when a person decides to pay unexpected bills with an expensive consumer loan rather than with money from a savings account.

Thaler pointed out that individuals are also influenced in their economic behaviour by their social preferences, in particular their perception of fairness, and that they will knowingly make decisions that are detrimental to themselves (and so strictly speaking “irrational”) if they believe that doing so will help to maintain a fair situation or to prevent an unfair one. People will even make personally detrimental decisions to “punish” an economic actor whom they believe has behaved badly. An illustration of that phenomenon is consumer boycotts of businesses that are perceived to have taken advantage of their customers—e.g., by drastically raising the price of goods or services that are suddenly in high demand because of an emergency.

Another nonrational influence, lack of self-control, results in the common failure to save adequately for retirement or to reach other long-term financial goals. Reflecting the view of many psychologists and other social scientists, Thaler held that the phenomenon of poor self-control regarding financial decisions is explained by the fact that experiences in the present or near future tend to be perceived as more significant than those in the more-distant future. Along with Canadian economist Hersh Shefrin, Thaler devised a behavioral model—the “planner-doer” model—that captures the tension that most people experience between their long-term desire for security or well-being and their short-term desires for other things. According to Thaler, people are both far-sighted planners and myopic doers, and the goal of intelligent social policy ought to be to assist the planning self without unduly frustrating the doing self, in light of what is known about nonrational influences on the doing self’s behaviour. The planner-doer approach has found practical application in the design of a retirement savings program, called Save More Tomorrow (SMarT), that allows individuals to commit themselves to save (through payroll deductions) a certain percentage of their future pay increases, thus increasing their overall savings contributions. Given people’s general bias toward the present, it is easier for them to accept reductions in disposable income that will occur in the future than those that would occur now.

Thaler’s insights have been applied by policy makers in many other areas, including health care, energy, environmental protection, consumer protection, education, unemployment, and national security. Some countries, including the United States, have even created select bodies of experts, called “nudge units,” to improve social policies by augmenting them with nudges.

Thaler was the author of scores of papers and several books, including Nudge: Improving Decisions on Health, Wealth, and Happiness (2008, coauthored with Cass R. Sunstein) and Misbehaving: The Making of Behavioral Economics (2015).