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Thaler Changed My Life (and Everybody Else’s)

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I first heard about Richard Thaler in the 1980s, in a locker room at the University of Chicago.

I had run into Steve Shavell, an economist at Harvard Law School, who asked me what I was working on. I mumbled some question I had, about whether people really behaved as rationally as economists said they do. Shavell responded without a lot of enthusiasm: “Oh, you should be reading Thaler, that guy from Cornell.”

That afternoon, I looked up Thaler’s work. It was like a burst of sunlight, or the first chord of the Beatles’ “A Hard Day’s Night.”

Focusing on what he called “mental illusions,” Thaler explained that human beings make a lot of blunders. With clear examples, a sense of play and a little math, he showed that people just don’t act in the way predicted by standard economic theory.

If you give people a mug or a lottery ticket, they will demand a lot more to give it up than they would pay to get it in the first place. People are planners as well as doers, and their decisions can be radically different depending on whether they are planning or doing.

Because people have self-control problems, they adopt “precommitment strategies” like the ones used by Alcoholics Anonymous, drug abuse centers, diet clubs and smoking-cessation clinics. People care about fairness, and they will punish people who have acted unfairly, even at their own expense. People choose not to choose, because they do not want to suffer regret. Investors overreact to the most recent, dramatic events.

Each one of these ideas – and there were plenty more – opened up a whole new world. They did not mean that people are “irrational,” but they did show that we aren’t nearly as rational as economic theories assume, in ways both concrete and predictable. Drawing on psychological findings, above all on the work of Daniel Kahneman and Amos Tversky, Thaler became the most important force behind the creation of behavioral economics.

Eventually, Thaler, who was awarded the Nobel Memorial Prize in Economic Science on Monday, brought his ideas to bear on public policy and law.

He developed the idea of “Save More Tomorrow” – a retirement plan by which employees are asked if they want some portion of their future wage increases to be devoted to savings. Save More Tomorrow plans build directly on findings in psychology, which suggest that while people will be reluctant to lose access to current earnings, they don’t care so much about future gains.

Thaler also drew attention to the potential impact of automatic enrollment: Because inertia is an important force, employees will stay in a retirement plan if they are automatically enrolled, even if they would not sign up in the first place. All over the world, employers are now using Save More Tomorrow and automatic enrollment. As a result, workers will have more comfortable retirements.

These ideas can be seen as forms of libertarian paternalism, interventions that insist on preserving freedom of choice but that steer people in directions that make their lives go better. I have been privileged to collaborate with Thaler on the exploration of how those interventions – more simply, nudges – can help address some of the world’s large challenges, including poverty, unemployment, consumer protection, addiction, education, corruption, national security, and environmental degradation.

In these and other areas, Thaler’s research is now being used by governments all over the world. Some of this work is being done by “nudge units,” but many of the largest and most promising initiatives come from the very highest levels, where some of Thaler’s findings have become common knowledge, even to people who have never heard his name.

In the U.S., for example, over 11 million poor children are obtaining access to the free school meals to which they are legally entitled, largely because of a program directly inspired by Thaler’s work. In terms of the use of behavioral economics in public policy, we have just gotten started; the next decades will see incalculably more.

More than anyone I know, Thaler’s academic interests are a direct outgrowth of his personality. He’s full of mischief and a ton of fun. He’s an intensely close observer of human behavior, and nothing delights him more than people’s foibles. He’s the Charles Dickens of the economics profession.

Who else would develop a theory of human behavior by observing how at a dinner party, supposedly rational economists gobble up cashews before dinner – and are immensely grateful when the host takes the half-eaten bowl away?

Asked what advice he would provide to graduate students in economics, Thaler said, “Make your research about the world, not the literature.” That’s precisely what he’s done – and he’s made the world a lot better in the process.

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