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Thaler - a creative spirit in modern economics

Thaler - a creative spirit  in modern economics

NYT Syndicate

Richard H Thaler, whose work has persuaded many economists to pay more attention to human behaviour, and many governments to pay more attention to economics, was awarded the Nobel Memorial Prize in Economic Sciences.
Thaler is the rare economist to win a measure of fame before winning the prize. He is an author of a best-selling book, Nudge, about helping people to make better decisions. He also appeared in the 2015 film The Big Short, delivering what is surely one of the most widely viewed tutorials in the history of economics, on the causes of the 2008 financial crisis.
The Nobel committee, announcing the award in Stockholm, said that it was honouring Thaler for his pioneering work in establishing that people are predictably irrational ” that they consistently behave in ways that defy economic theory. People will refuse to pay more for an umbrella during a rainstorm; they will use the savings from lower gas prices to buy premium gasoline; they will offer to buy a coffee mug for $3 and refuse to sell it for $6.
The committee credited Thaler, who teaches at the University of Chicago Booth School of Business, for moving economics toward a more realistic understanding of human behaviour, and for using the resulting insights to improve public policies, notably a sweeping shift toward the automatic enrolment of employees in retirement savings programmes.
"In order to do good economics, you have to keep in mind that people are human," Thaler said at a news conference after the announcement.
Asked how he would spend the prize money of about $1.1 million, Thaler 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 by Sweden's central bank and is awarded by the Royal Swedish Academy of Sciences. One of Thaler's frequent collaborators, Daniel Kahneman, was awarded the prize in 2002. Another behavioural economist, Robert J Shiller, who was among the winners in 2013, hailed Thaler as"one of the most creative spirits in modern economics."
Mainstream economics was built on the simplifying assumption that people behave rationally. Economists understood that this was not literally true, but they argued that it was close enough.
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 their behaviour can still be anticipated and modelled.
"Thaler more than anyone has disciplined the idea of animal spirits," said Cass Sunstein, a Harvard law professor who wrote Nudge with Thaler. The 2008 book argued that governments could use behavioural insights to improve the efficiency and quality of a wide range of public services. Two years later, the British government created a department to pursue the experiment. Other countries, including the United States, followed suit. Britain's former prime minister, David Cameron, described the inspiration as a"very simple, very conservative thought ” go with the grain of human nature."
Some nudges are relatively minor. The British government found that people were more likely to pay automobile registration fees if billing letters included a picture of the vehicle. Other nudges are far-reaching. Observing that inertia limited participation in beneficial programmes, like retirement savings plans or school lunch programmes, Thaler proposed that governments and employers should make participation the default option. People are free to opt out, but inertia is on the side of the preferred outcome.
A similar proposal, 'Save More Later,' offsets the tendency to place a relatively high value on current income by allowing people to commit to setting aside more money next year.
Thaler's academic work can be summarised as a long series of demonstrations that standard economic theories do not describe actual human behaviour.
One of Thaler's most profound findings involves the importance of fairness. He showed that people will penalise unfair behaviour 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 so employers, seeking to avoid angering the workers they plan to keep, prefer to cut employees rather than wages.