When Nobel Committee representatives called Professor Daniel Kahneman to ask him for a succinct description of his fellow economist Richard Thaler, Kahneman replied without hesitation – “The most important thing to know about Richard is that he is lazy!”
Indeed, Thaler’s career is no less than fascinating, with characteristic humor he tells the story of a talented young student who did not want to follow the usual and safe line of economic research and was looking for an exciting topic that would satisfy his intellectual curiosity without killing from boredom anyone who was not familiar with the secrets of the profession.
The search paid off, at one point, after he had already completed his doctorate on the objective cost of life, he happened to hear about a pair of Israeli psychologists who claim that there is solid evidence that our mindset is irrational. Among psychologists, this claim was interesting, though not innovative (Herbert Simon, Richard Dawes and others have already hinted at these directions), but for economists – Thaler is first and foremost an economist – it is nothing short of revolutionary. Thaler obtained through a friend a draft of their last paper and the rest is history.
In fact, Thaler had already started behavioral economics long before he heard about heuristics, but he didn’t know it yet. As a talented student and nonconformist, he paid attention to anecdotal examples of human behavior that violate critical assumptions in economics. He collected the examples in a long list on a blackboard in his office, and slowly the existence of the list became known among his colleagues. Nor did he hesitate to illustrate how common and common these behaviors are to laymen and experts alike. On one occasion he embarrassed a lecturer of his, himself a Nobel Prize winner, by showing him that he was willing to pay less for a certain bottle of wine than he himself would demand for such a bottle from his personal collection, if that makes sense to you – you are probably not an economist, for an economist the price of a product does not depend on who owns it, and certainly the same person is supposed to name the same amount to sell and buy.
When Thaler compared the heuristics—mental shortcuts—discovered by Kahneman and Tversky, to the list formed on his blackboard, he realized he had gold in his hands. The social psychologists’ studies actually accurately described the mechanisms underlying the “irrational” behaviors he had been documenting for years.
The enormous value Thaler had in developing behavioral economics is evident from the very name of the field. Although most of the breakthroughs were made by psychologists, the insights did not make their way beyond the boundaries of psychology faculties until the moment they caught the eyes of economists. For historical reasons, economists are the ones who have had to ask questions of policymaking, and politicians and market people have not been inclined to listen to the advice of psychologists, after all, a psychologist is paid to listen, not to speak…
Thanks to Thaler’s hard work, Kahneman and Tversky’s findings were translated and adapted to the world of economists and shook the standards of the field.
But like any good success story, here too there was quite a bit of luck, after years of working in the field, and six years after Kahneman was already recognized for his work in 2002 when he was awarded the Nobel Prize in economics, Richard Thaler and Cass Sunstein, a legal friend and expert on public policy, wrote a book that described how we make decisions and how we can all be helped to make better decisions by shaping choices. The book – “Nadge” – was intended to be an internal manifesto, and the two authors did not believe it would be read by more than 40 people. But in September of that year, Lehman Brothers Bank collapsed, triggering a chain reaction that wiped out trillions of dollars, left tens of millions of Americans without work, and opened a huge hole in the U.S. economy. People were looking for explanations, and Nadge was there with the answers, and at the right time.
The book was hijacked, became a cultural phenomenon, Obama pulled Sunstein out of academia and appointed him head of the White House Social Sciences Unit, and behavioral economics officially became a public darling. Thaler received the Nobel Prize in Economics in 2018. You’ll read about all this and much more at Thaler’s.
