For Richard Thaler, economics has always been a field that needed to touch ground with the more practical realities of life.
The University of Chicago professor and winner of the 2017 Nobel Memorial Prize in Economic Sciences says he first began believing this while a graduate student, when he noticed that many economic theories seemed disconnected from how people behaved. While economists looked at life decisions in a very predictable and rational way, he saw people’s behavior not matching economic patterns and trends. In addition to the study of economics, Thaler said he also became interested in the field of psychology.
Thaler is now one of the names synonymous with behavioral economics, a field that relies on the assumption that people don’t always know what they want or what’s the best decision for them, and that policymakers should pay more attention to the choices they give to people rather than assume rational economic behavior will occur.
As one of the most irrational consumer spending times of the year approaches, we sat down with Thaler to discuss his theories, his Nobel and your future unreasonable spending for these holidays.
Q: So why should we even care about behavioral economics?
A: The need was that there were many parts of human behavior that economics was leaving out. For example, retirement saving is a huge issue. Economic theory assumes people have the expertise to figure out how much they need to save and the willpower to implement it. Both of those assumptions are clearly false. Even an economist would find it hard to figure how much he should be saving, much less what he should do after the financial crisis or something like that. Most people aren’t very good at saving unless the money is withdrawn from their paycheck automatically. So these are just common-sense observations that don’t seem surprising to anybody except if you are an economist.
Q: How long does it take to win a Nobel prize?
A: Well, I am 72. But a big difference between economics and other fields is that the research is always given a long time after it was done. Like the physics guys [who won the Nobel] made their big breakthrough a year and a half ago. Now, they were working on it for 30 years but when they got it everybody in physics knew that there was a Nobel in their future. In economics, they’re working their way through the 1980s and no one has won for work that was done after 1990. It’s not that you stopped working, but if you read the scientific citation, the work that they [the Nobel committee] point to is the work that I did in the 1980s. You work hard for decades and then start drinking and hope.
Q: What can you tell me about research investment?
A: The good news is that much of economic research isn’t very expensive , unlike the physics prize that cost $1 billion. We’re cheap, but if you are at a major research university you can usually find funding. But there are some large-scale expensive studies that require outside funding , and many people are worried that with the current administration the government funding will dry out.
Q: What were you doing when you found out you received the award?
A: Sleeping. The only person I talked to was my wife. We were both awakened by the call at 4 a.m. and the cellphone said ” Sweden.” You don’t see a number. Now , it’s no secret what the day is and economics is the last prize. So there’s been a week of these in case you’d have forgotten. So yes, I plugged my cell phone in and turned the ring on, which I never do. I heard of people setting their alarm so that they would be awake. It never occurred to me to do that because chances are there’s not going to be a phone call and I might as well sleep.
Q: What do you think is the least rational purchasing decision you are going to make after receiving the award?
A: I haven’t really thought about it. What I will say is to a traditional economist , this is kind of a silly question. The reason is that we economists believe money is fungible. So suppose I go buy a fancy sports car. Was that with the Nobel money or with some other money? And how would we know? Still, I have no intention to buy a Ferrari.
Q: How irrational do you think people are when it comes to their purchases?
A: You know, I don’t really like the word “rational.” And the reason is that it gets us into all kinds of debates that are not very useful. For example, it used to be, like in the 1970s and earlier, that there were these things called Christmas clubs. So the way a Christmas club would work is you would sign up around Thanksgiving and agreed to put $10 a week into this account, and then a year later they would give you back your $520. No interest, you couldn’t take money out and you had to go physically to the bank and hand them a $10 bill. There were savings accounts that paid 4-5 percent interest. So on one level you’d say, “This is really stupid. Why would anybody put their money in that account when they could put it into a savings account where they could get interest and wouldn’t have to go to the bank and could take their money out if they needed? ” Well, Christmas clubs are hard to find now. Why is that? Credit cards. So now after Christmas , people have big credit card bills. So who do you think was rational and irrational? People behave in ways that are not predicted by rational choice models.
Q: Does economic behavior change in different times of the year, such as the holiday season?
A: You can think of gift-giving as a way of dealing with self-control problems. Suppose you have a family, middle-class, and you have kids. And kids have an unlimited demand for toys. A gift-giving time like a birthday or Christmas is a way of saying, “OK, we’re going to consume some special things on special occasions.” In some ways , it’s to have guiltless consumption. If we were married and I gave you a set of earrings that are five times as much as you would normally pay for yourself, you might say, “Wow, that’s great!” even though it’s coming out of the same checking account.
Q: What advice do you have for our readers who are getting ready to enter the spending season?
A: Don’t overdo it. I think there are many gift-giving arrangements that are welfare-reducing, and in large families , when they exchange gifts , almost everybody is unhappy with everything they get. Just stop giving those gifts. Donate the money to some good charity. You’ll feel better about it.
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Holiday Shopping Advice From a Nobel Prize Winner in Economics originally appeared on usnews.com
