Source: Chicago-Booth School
Richard Thaler is the Chicago-Booth economist who helped popularized the notion of “nudging” us to make better choices. He’s best known for his work on behavioral economics, the area of study that looks at anomalies in our decision making. For example, if someone gives us tickets to an event worth $500, we tend to keep the tickets. We don’t sell them, but we’re unlikely to spend money on additional tickets. This is called the “endowment” effect: we tend to value things more highly once we own them, and it explains why people hoard their possessions, and why it’s easier to take gains than realize losses on our investments.
He also showed how we tend to favor the status quo, and how we’re usually more with fairness than maximizing our personal gain – at least, when we can afford to be. Thaler won the 2017 Nobel Prize in Economics for this work. He’s helped us understand that our financial and economic decisions are human decisions first, even if they are made in an economic context. Whether we’re saving for retirement or buying a new home or voting for President, we all have personal limits and preferences that must be accounted for.
Thaler’s work focusses on how people behave in the real world, with all the pressures and pratfalls of real life. His writing doesn’t prove that we’re irrational, so much as emotional. Animal spirits can infect consumers and businesses as well as markets.
When he was asked how he would spend his $1 million prize, Thaler responded with an ironic twist: “As irrationally as possible.”
Douglas R. Tengdin, CFA