If there's one thing to know about world-renowned behavioral economist Richard Thaler, it's that he's human.
Just as important? He thinks you are too. And that's more profound than it seems.
Economic theory long held that consumers behave like smart robots, always making rational and logical decisions. But as Thaler began observing more than 30 years ago, that's not what happens in real life. Instead, humans make irrational decisions in systematically warped ways, time and again, for the same reasons.
His insertion of human psychology into the hard-core mathematical field of economics was once so heretical that Thaler couldn't even get his ideas published.
But it made sense to him.
"I'm pretty stubborn, and this was fun," he said. "Besides, I enjoy stirring the pot."
A Lincoln Park resident and professor at the University of Chicago Booth School of Business, Thaler is now revered as a founding father of the relatively new field of behavioral economics. It considers biases, lack of willpower and a host of other human frailties that lead people to make bad decisions about everything from the money they spend to the food they eat.
For his contributions, Thaler, 66, is likely in line for a Nobel Memorial Prize in Economic Sciences, some colleagues say.
"It would be a scandal if he were not short-listed," said Daniel Kahneman, a Nobel laureate and longtime friend and collaborator of Thaler. "I'm sure he is."
He's an informal adviser to President Barack Obama's administration and to his re-election campaign, and a formal adviser to the "Behavioural Insight Team" in Prime Minister David Cameron's administration in the United Kingdom.
Thaler is famous for devising easily understood scenarios that show how human behavior bucks economics and, sometimes, logic. Consider:
* Why, during a hazardous snowstorm, would we skip driving to a concert if the tickets were free, but risk life and limb to go if we had paid for the tickets? The risk on the roads is the same, and we don't get the money back either way. This illustrates the "sunk cost fallacy."
* Experiments repeatedly show that people will pay $3 to buy a coffee mug but demand $6 to sell a mug they have been given. The phenomenon is called the "endowment effect," where we assign greater value to things we possess.
* You bring $200 to a casino to gamble. You win another $200. If you separate the money and lose only the winnings, you may not feel much pain because you consider that money to be the casino's anyway. Yet you still lost $200. This is a good example of "mental accounting."
The wide-ranging implications of such behavior stretch to decisions made daily by consumers, marketers, companies and governments. In recent years, Thaler has turned to weightier issues of public policy.
He explains how governments can use behavioral economics to "nudge" citizens into making better choices for themselves. His ideas and those of Cass Sunstein, now Obama's regulation czar, are outlined in his best-selling book, "Nudge: Improving Decisions about Health, Wealth and Happiness." This led Thaler, along with Sunstein, to be named a finalist for Time Magazine's most influential people in the world in 2009.
"During most of the 1980s he was dismissed as a crank," said David Laibson, economics professor at Harvard University. "It takes a lot of courage to get a decade of rejection and to stick to your guns. Dick kept fighting, and eventually almost everyone came around to his view."
Not by the numbers
Thaler was born and raised in northern New Jersey with two younger brothers. His mother was a school teacher turned stay-at-home-mom. His father rode the train daily to Newark, where he was an actuary at Prudential.
"He thought that if I was a real man, I would have become an actuary, that economics was a poor-man's actuary," Thaler said, seemingly only half joking. "He was an influence in that I knew I didn't want to do that."
Reflecting further, he said, "It's not so much that I didn't want to be an actuary, it's that I didn't want to be a businessman."
"Lousy subordinate," Thaler said of himself.
His telling of the story is typical of his speech pattern: Slow. Contemplative. Halting. Until he unloads a zinger.
Thaler graduated in 1967 from Case Western Reserve University in Cleveland with a degree in economics. "I was interested in psychology, but I thought economics was more practical, in the sense that you could probably get a job if you studied economics."
He received master's and doctorate degrees from the University of Rochester in upstate New York and taught there before moving to teaching positions at Cornell University and then in 1995 at the University of Chicago.
"I always tell my students I've never had a real job in my life," Thaler said.
Still, the high-level mathematics of economics weren't exactly up Thaler's alley. "I'm not going to win any math contests among my colleagues," he said. "By any normal standard, I'm pretty good at math. But if you put me in a group of economists, I'm going to be below average."
So he continued his quest to explain economic phenomena with more words and fewer numbers.
Early in his career, Thaler began keeping a list of "anomalies," real-life examples of how people made decisions about their money that couldn't be explained by the logic of economics. "It was a professional activity, but I couldn't figure out how to do anything with it," Thaler said.
Then he learned about two Israeli psychology researchers, Kahneman and Amos Tversky, who were doing groundbreaking work on human decision-making. When he found out the duo would be spending a year at Stanford University in 1977-78, he arranged "by hook or by crook" to join them, persuading the University of Rochester to let him leave and others to pay his salary for what ended up being a year of collaboration.
"They didn't know anything about economics. I didn't really know anything about psychology. We were equally ignorant of each other's fields," Thaler said.
Despite the lack of familiarity, or perhaps because of it, behavioral economics was born.
"In many ways, Dick played the key role in bringing behavioral economics to life, since he was the bridge between psychology and economics," said Laibson, the Harvard professor.
Concepts come to life
During that academic year, the trio worked on several important concepts, including mental accounting and the endowment effect, putting labels and frameworks to some of the items on Thaler's list of anomalies. They came up with examples that were obviously true but that flew in the face of traditional economics.
Resistance was more aimed at the ideas than the man, said Kahneman, who has described Thaler as "blessed with a sharp and irreverent mind" and having an "ironic eye" and "boisterous temperament."
"People always took him seriously because he's so obviously intelligent and so funny," Kahneman said. "So, people never ignored him personally. They thought the ideas were not important. And that took some time."
Eric Wanner has known Thaler for about 30 years and funded some of Thaler's early work. He is president of the Russell Sage Foundation, a group devoted to research in social sciences. Wanner calls Thaler "the key ingredient, the indispensable person," in the birthing of behavioral economics.
"Dick's strong suit is this incredible, intuitive, innovative capacity to look at human economic behavior and see its quirks -- and then make some good social science out of it," Wanner said.
Eventually, Thaler landed a regular column about economic oddities in the well-respected Journal of Economic Perspectives. The columns, which ran from 1987 to 1990, "were beautifully written, and they tended to be quite funny," Kahneman said. "I think that got behavioral economics started as a field. Then, it became respectable."
Nicholas Barberis, a behavioral finance professor at Yale University, said the difficult early days should not be overlooked. "It is only now that he is rightly lionized," he said of Thaler. "He took a lot of hits back then, but he paved the way and made life much easier for the next generation of behavioral scholars."
Said Thaler: "I don't want to give the impression that life has treated me unfairly. It's obviously not true. I have a great job at a top university, live a good life. But like all new ideas, it was a struggle to get it accepted."
A growing influence
Through the 1980s and 1990s, Thaler evangelized behavioral economics, carefully choosing research to advance the field.
"I always say that one of the things that makes him great is he doesn't like to work," Kahneman said. "He hits only home runs, because the small stuff isn't worth his time. If you want to tease him, you'll say he's lazy, but if you want to praise him, you'll say he has very good taste in problems. He's very selective in the things he invests energy in."
Along the way, Thaler also contended that behavioral economics applies to financial markets, and a related field became known as behavioral finance. Indeed, Thaler is a principal of Fuller & Thaler Asset Management, a California firm that manages money for pension funds and other clients. It attempts to make money by investing in stocks that are mispriced because investors have biased expectations about a firm's future.
Russell Fuller, who conducts daily operations of the firm, said Thaler has changed the economics profession. "People now accept that you have to think about human behavior when you're thinking about economics ... that's a major contribution," Fuller said. "He doesn't write papers that are full of math. He writes papers that are full of common sense."
As behavioral economics gained approval, applying it to governments and other organizations of power became a natural progression. And it was a way to help people make better decisions, given their sometimes irrational natures.
That's what Thaler's best-selling book was largely about.
"Nudge" was born during lunch at a booth in the back of the restaurant Noodles Etc. on East 57th Street in Chicago. That's where Thaler and Sunstein, then a law professor at the University of Chicago, discussed an odd term Thaler had come up with, "libertarian paternalism," a combination of seemingly opposite ideas. The phrase attempted to describe how a government or employer could structure choices for people so they were more likely to make good decisions.
In short, people would receive a "nudge."
Skeptics say the whole thing sounds socialistic, that you can't trust employers and government to be benevolent or competent enough to guide choices. That may be true, Thaler said, but any method of presenting options to consumers will inherently influence what they choose. Given a list of choices, for example, people will often choose the first one whether it's good or not. So you might as well design a system that will likely lead to something good.
For example, most people agree that saving for retirement is good. But many young workers don't sign up for their employer's plan. What if employers made enrollment in a 401(k) plan automatic for new employees, requiring them to opt out if they didn't want to participate? By changing the 401(k) default from opt-in to opt-out, participation grows.
Thaler, with frequent collaborator Shlomo Benartzi, went a step further with "Save More Tomorrow," which invites participants to commit in advance to a series of automatic retirement contribution increases, timed to coincide with pay raises. That way, workers contribute more to savings but never see their take-home pay decrease.
The idea has been adopted by thousands of employer retirement plans, with an estimated 9 million workers enrolled.
"He has successfully challenged the assumption of economic theory, and, more importantly, he has explained otherwise unexplainable phenomena in the market," Kahneman said. "He has provided a framework for understanding what happens when the housing market dries up, for understanding why people don't save enough, for why negotiations quite often fail."
Kahneman cites Thaler's idea of applying behavioral economics to public policy as yet another major contribution.
Will his numerous accomplishments be enough to earn that Nobel Prize one day?
"The Nobel Prize in economics is typically awarded at least 30 years after the research has been published, so at my age there is nothing I can do to increase my chances," Thaler said. "As a result, I devote more time to filling in my NCAA basketball bracket than to worrying about whether I will win a Nobel Prize."
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Richard Thaler, the Ralph and Dorothy Keller Distinguished Service Professor of Economics and Behavioral Science at the Booth School of Business, University of Chicago.
Personal: Father of three by his first marriage. Married to France Leclerc, a former marketing professor at the University of Chicago.
On wine: Thaler belongs to a wine-tasting group, although he says his wife has the expert palate. But don't call him a wine collector. "My view is the purpose is to drink it. At my age, what that means is there are some kinds of wines I no longer buy because they are wines that I don't like to drink until they're 20. ... I'm now in the drawing-down-inventory phase."
Odd pairing: One of Thaler's frequent golf partners is Eugene Fama. Fama, also a U. of C. economics professor, is known as the father of the "efficient market hypothesis." Each man is world-renowned, but for contradictory points of view. They once warned a young guest they'd be quizzing him for 18 holes about economics, until Thaler let him off the hook: "I told him he shouldn't worry because we won't agree on any of the answers." Another golf partner: "Freakonomics" author Steven Levitt.
On prospects for a Nobel Prize: "Having been invited by my friend Daniel Kahneman to join his entourage when he won in 2002, I can tell you that the Swedes throw a great party. So if they do call, I will not turn it down."
Richard Thaler, Keller Professor of Economics and Behavioral Science, Booth School of Business
U. of C. professor spent years convincing peers that economics is more than math
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