When Richard Thaler, today a distinguished professor in behavioral science and economics at the University of Chicago, was still in college and heard that renowned psychologists Daniel Kahneman and Amos Tversky would be at Stanford for a year, he made his way out there to “stalk them,” he told a Morningstar ETF conference luncheon crowd. “We became good friends,” he said, and today he and Kahneman are still best friends.
Thaler is widely known as the “father of behavioral finance” and was instrumental in Michael Lewis’ writing of “The Undoing Project,” which is about Kahneman and Tversky’s psychological impact on the world. After reading Lewis’ book “Moneyball,” Thaler and friend and legal scholar Cass Sunstein wrote a review of it in the New Republic, stating the method Lewis described was founded by Kahneman and Tversky. The rest is history, as Lewis then met with the two psychologists and wrote the book.
But Thaler believes the two’s impact on his own studies, and his move to behavioral economics, helped give the area rebirth. He pointed out that behavioral economics isn’t new and was followed by Adam Smith and John Maynard Keynes, until the “period of the great ‘mathemazation’” came in with economists like Paul Samuelson. But he believes theoretical economics is flawed.
“If you’re going to write down mathematical models, the easiest ones to write are that people are rational … but people are doing something more complicated than that,” he said.
For example, history has shown people are more apt to purchase stocks with more memorable ticker symbols than those with random symbols or names, even though the later may perform better. Another example is when deciding which credit card balance to pay, people typically will opt to pay more on the one with the higher balance, as opposed to the one with the higher APR.
“Behavioral economics is messy,” he said. “Traditional economics is precisely wrong.”