Richard Thaler discusses the importance of behavioral economics
Richard Thaler, one of the most accomplished behavioral economists in the world, came to Carnegie Mellon on Thursday to give a lecture on “The Past, Present, and Future” of his field of study. In the talk, Thaler described his debates with skeptics of behavioral economics, illustrated fascinating examples of human irrationality, and outlined his vision for improving economics by making the field more evidence-based.
Thaler, a professor at the University of Chicago’s Booth School of Business, is renowned for co-authoring Nudge: Improving Decisions about Health, Wealth, and Happiness with Cass Sunstein, a law professor at Harvard University. The book explains how insights from behavioral economics can be used to make better public policy, and was one influence that led to the creation of the White House’s Social and Behavioral Sciences team and the equivalent Behavioral Insights unit in the UK. Both of these teams draw from research conducted by behavioral economists like Thaler to make government services more effective and cost-efficient.
Thaler began his talk by explaining that even economists like Adam Smith and John Maynard Keynes, who lived long before the modern field of behavioral economics rose to prominence, incorporated insights from psychology into their work and recognized that humans often behave irrationally. Economics was behavioral from the start; however, economists in the mid twentieth century failed to develop realistic models of human behavior, which led economists like Richard Thaler and psychologists like Daniel Kahneman and Amos Tversky to re-invent the field of behavioral economics.
Thaler also mentioned that the late Herbert Simon, who he described as a “legendary” Carnegie Mellon professor (after whom half of Newell-Simon Hall is named) also played a pivotal role in the revival of behavioral economics.
Many amusing examples of how people behave irrationally were sprinkled throughout the talk. In one example, which resulted in laughter from the audience, Thaler displayed a graph showing the changes over time in the price of a stock with the abbreviation CUBA. Despite the fact that the stock has no connection to the caribbean country, investors in this stock nevertheless responded to political events such as President Obama’s announcement of the easing of bilateral relations in 2014 and more recently, the death of Fidel Castro with huge fluctuations in stock price. In another example, Thaler illustrated his claim that default settings matter by telling the audience that on his flight to Pittsburgh, he observed that the majority of passengers were watching CNBC — the channel that the in-flight TVs were set to by default.
A consistent theme in Thaler’s talk was that many economists, even today, are skeptical of behavioral economics research and dismiss the field’s findings by using “explainawaytions” — a term coined by Harvard University behavioral economist Matthew Rabin that refers to flawed criticisms of behavioral economics.
Thaler concluded his talk by predicting that eventually, all economists will include evidence-based psychological insights in their work. In Thaler’s words, “All of economics will be as behavioral as it should be.”