Story by Susie Allen | Photos by Jean Lachat and Anne Ryan
University of Chicago Prof. Richard H. Thaler has been awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2017.
The Royal Swedish Academy of Sciences honored Thaler, the Charles R. Walgreen Distinguished Service Professor of Behavioral Science and Economics at the University of Chicago Booth School of Business, “for his contributions to behavioural economics,” a relatively new field that bridges the gap between economics and psychology. Thaler’s research investigates the implications of relaxing the standard economic assumption that everyone in the economy is rational and selfish, instead entertaining the possibility that some of the agents in the economy are sometimes human.
“Richard’s original, broadly influential and paradigm-defining work has richly earned this recognition,” President Robert J. Zimmer wrote in a message to the UChicago community. “We look forward to celebrating Richard’s work and his place in the distinguished legacy of eminent economics research at the University of Chicago.”
He is among the 90 scholars associated with the University to receive Nobel Prizes, and among the 29 who have received the Nobel Memorial Prize in Economics. In addition to Thaler, five current UChicago faculty members are Nobel laureates in economics: Profs. Eugene Fama and Lars Hansen (who won in 2013), Roger Myerson (2007), James Heckman (2000) and Robert E. Lucas Jr. (1995).
Thaler learned of the award after his cell phone rang at 4 a.m. The phone number was from Sweden, so “I had a pretty good idea what that might be,” he said Monday. The award was particularly meaningful because behavioral economics was “really out in the wilderness 40 years ago,” when Thaler began his research.
“It’s been a long journey,” he said, “so I’m happy about that.”
‘Knowledge with enduring impact’
At a news conference Monday morning in the Charles M. Harper Center, Chicago Booth Dean Madhav Rajan said Thaler “represents the quintessence of Chicago Booth’s mission: to produce knowledge with enduring impact, and to influence and educate current and future leaders.” Rajan also credited Thaler with helping to build Chicago Booth’s faculty in behavioral science, “vastly expanding the school’s footprint and stature in this field.”
Thaler, who took the stage to cheering from the excited students and faculty who had lined the staircases of the Winter Garden, described the experience of being a Booth faculty member as one of “tough love. The behavioral science group, it’s a little less tough, but only a little.”
He admitted he hadn’t persuaded all of his colleagues and fellow economists of the importance of behavioral economics, so instead, “I’ve used the strategy of corrupting the youth, whose minds aren’t already made up,” he said. “Many great, young economists have embraced behavioral economics…The growth of the field is really due to the work of the people that followed me.”
Spotting fellow Nobel laureate Eugene Fama, the Robert R. McCormick Distinguished Service Professor of Finance, in the front row, Thaler added, “It’s been good to be here all these 20 years, arguing with guys like Fama. It’s good for me.” These days, however, “[we] try to keep our arguments to the golf course.”
‘The father of behavioral economics’
Thaler, who has been dubbed the “father of behavioral economics,” wrote the bestselling books Misbehaving: The Making of Behavioral Economics (2015) and Nudge: Improving Decisions About Health, Wealth and Happiness (2008). He is renowned for creating easy-to-understand scenarios that show how human behavior often contradicts traditional economic logic.
Many economic models, Thaler told National Public Radio last year, assume people are rational, unemotional, and self-controlled. “I believe that for the last 50 or 60 years, economists have devoted themselves to studying fictional creatures,” he said. “They might as well be studying unicorns.” Every day, his research reveals, we behave in ways that violate economic principles.
In keeping with his research into these human idiosyncrasies, Thaler joked in a Nobel news conference Monday morning that he planned to spend the 9 million Swedish krona (about $1.1 million USD) he will receive with the prize “as irrationally as possible.”
In Misbehaving, which Financial Times named one of the six most influential business books of 2015, Thaler chronicles the struggle to bring the academic discipline of economics back down to earth and reveals how behavioral economic analysis can change the way we think about everything from household finances to the NFL draft.
For instance, Thaler’s research has challenged the classical economic notion that money is fungible—that is, that one dollar is the same as any other dollar. But Thaler’s work on mental accounting, one of the areas of research highlighted by the Royal Swedish Academy of Sciences in its Nobel citation, has shown that, in practice, people don’t treat money this way. Instead, they mentally earmark money for specific purposes, such as housing, food, and travel, and make financial decisions based on how those decisions will affect each small fund. “Money in one mental account is not a perfect substitute for money in another account,” Thaler wrote in a 1999 paper.
Thaler illustrated the point with his own Nobel win. Most economists, he said at the news conference, would challenge the premise of a question like, “What do you plan to do with your prize money?” Because they view money as “fungible,” they wouldn’t—in theory—distinguish prize money from any other money.
Not Thaler. “I believe in something called mental accounting, which is precisely people putting labels on money,” he explained. “Anytime I spend any money [on something] that’s really fun, I’m going to say that came from the Nobel Prize.”
‘Make it easy’
Nudge, coauthored with Harvard Law School Professor Cass R. Sunstein, explores how the concepts of behavioral economics can be used to tackle many of society’s major problems and influence public policy. Ranked as the Best Book of the Year by The Economist and Financial Times, the research prompted the United Kingdom’s government in 2010 to establish a Behavioral Insight Team, or “Nudge Unit,” to create policies that nudge British citizens to make better choices and, in turn, save the state money. Thaler served as an advisor in setting up the unit’s guiding principles.
At the heart of Nudge is what Thaler calls his “mantra”: “If you want to get people to do something, make it easy. Remove the obstacles,” he explained. “Nudges” push people toward better choices by making those choices easy. For example, employers can “nudge” employees by automatically enrolling them in a retirement savings plan, rather than requiring them to opt in; schools can “nudge” kids toward healthy food choices by putting fruit at eye level in the cafeteria.
Thaler’s other books include Quasi-Rational Economics and The Winner's Curse: Paradoxes and Anomalies of Economic Life. His work has been published in the American Economics Review, the Journal of Finance, and the Journal of Political Economy.
Thaler was named in 2015 to Bloomberg Markets 50 Most Influential People; he also was the American Economic Association’s president for 2015. He was elected to the American Academy of Arts and Sciences in 2000.
Before joining the Chicago Booth faculty in 1995, Thaler taught at the University of Rochester and Cornell University. He also served as a visiting professor at the University of British Columbia, the Sloan School of Management at MIT, the Russell Sage Foundation, and the Center for Advanced Study in Behavioral Sciences at Stanford University.
Originally from New Jersey, Thaler attended Case Western Reserve University where he received a bachelor's degree in 1967. Soon after, he attended the University of Rochester where he received a master's degree in 1970 and a PhD in 1974.
Originally published on October 9, 2017.