American Richard Thaler Wins Nobel In Economics
STEVE INSKEEP, HOST:
In Stockholm this morning, the Nobel Prize in economics was announced.
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UNIDENTIFIED MAN: The Royal Swedish Academy of Sciences has decided to award the Sveriges Risbank Prize in Economic Sciences to Richard H. Thaler for his contributions to behavioral economics.
INSKEEP: Richard H. Thaler gets the prize. And we're going to talk about him with Kenny Malone from our Planet Money team, who's in New York. Good morning.
KENNY MALONE, BYLINE: Good morning.
INSKEEP: So when you hear the Nobel Prize in economics, you don't always know the name. People generally don't always know the name. But this is a pretty famous guy.
MALONE: Yeah. Richard Thaler's a bit of a rock star in the field. And if you have heard the name, it's because probably he's written a number of very accessible books, one of which is called "Nudge." But Thaler's also a professor at the University of Chicago. He's 72 years old. He's a Jersey boy - born in Jersey and got his Ph.D. from Rochester. But definitely known for his contributions to this field that we call behavioral economics.
INSKEEP: Behavioral economics, which seems to point to what he got the Nobel Prize for because they talked about his work trying to understand the psychology of economics, which is what?
MALONE: Well, OK. And this is where we have to dip our toe just a little bit into economic theory. I know it's early for econ.
INSKEEP: Taking off the shoe, going in - it's fine.
MALONE: I know.
INSKEEP: It's fine.
MALONE: So you need to understand that, traditionally, economics is about making models that predict how we are going to interact with the world of finance. And to do that, you have to make some assumptions. And one of the assumptions that we have long made is that people act rationally. We act in our self-interest. And it's not that economists necessarily think that we are not irrational. They know that we are. It's just that, sometimes, it doesn't really matter. And, you know, also, it's just very hard to include that stuff.
So this is where Richard Thaler comes in and where behavioral economics comes in. This is the study of how we're irrational and incorporating those into our models. It's a huge breakthrough in the field. And it's becoming more mainstream thanks to Richard Thaler. And some of the things that he has observed include, you know, our own selfishness and our own lack of self-control, this idea of sort of bounded rationality that we're rational sometimes and not others and then also that we have these social preferences. Like, we find it unfair when prices are going up. Let's say you're selling umbrellas, and someone starts gouging the price when it goes - when it starts raining. And we start to act irrationally when these things enter.
INSKEEP: (Laughter) I'm angry just hearing you talk about that.
MALONE: I know. It's crazy making.
INSKEEP: So this is taking the science of numbers and bringing human nature in. Has this affected the way that economists or policymakers, for that matter, approach the real world?
MALONE: Well, in terms of economists, yeah, absolutely. It's basically developed into this whole field. In terms of real-world implications, I mean, once you start to understand the ways that we are little, weird, irrational beings, you can structure policies to move people towards the ends that you would like. So one example that the committee talked about is a program that Thaler is responsible for called Save More Tomorrow. And it's, like, a pension program that that lets you put future salary increases towards your pension. So the idea is that you don't feel the loss because...
INSKEEP: You never had the money.
MALONE: ...You never had the money. And it plays right into this feeling that we overvalue things that we have on our hands. And it's just a small example of the kinds of things that you can start to do once you understand this.
INSKEEP: Kenny Malone, thanks very much.
MALONE: My pleasure.
INSKEEP: Kenny Malone is with our Planet Money team. And he's delivering the news that Richard H. Thaler has received the Nobel Prize in Economics for 2017.
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