Economics Nobel Prize Recognizes Behavioral Transformation of Economics
On Dec. 9, behavioral economist Richard Thaler will be awarded the Nobel Prize in Economics. For many reasons, this event is special. The award is for behavioral economics, which focuses on the application of psychological ideas to economics, and is the area in which I have worked for my entire professional career. The recipient is the most important behavioral economist of our time.
On a personal note, Dick and I were each other’s first behavioral collaborators. We began our collaboration in the 1970s while we were both on faculty at the University of Rochester, and worked together for over fifteen years. Moreover, two of the three behavioral themes that the Nobel committee cites for the award pertain to work that we did together. I am proud to say that much of that work was done while I was on faculty here at Santa Clara.
Over more than four decades, he has worked to transform behavioral economics from a fringe movement involving fewer people than the number of fingers on your hand to a mainstream movement.
Dick’s contributions to the field of economics go beyond the themes specifically mentioned in connection with the award. Dick combines a keen intellect, farsighted vision, organizational leadership skills, and a unique personality. Over more than four decades, he has worked to transform behavioral economics from a fringe movement involving fewer people than the number of fingers on your hand to a mainstream movement.
The heart of the work that Dick and I did together focuses on the relationship among concepts such as self-control, temptation, willpower, habits, and conflicts that stem from being of two minds. We applied these ideas to a variety of economic and financial issues such as personal saving, income tax withholding, bonuses, Social Security, obesity, alcoholism, and miserliness. The approach we developed explained all kinds of behavior patterns that struck mainstream economists as particularly puzzling. Examples of such patterns include saving inadequately for retirement, foregoing interest because of tax over withholding, overeating that leads to obesity, and consuming like a miser during retirement despite having adequate wealth.
Some readers will no doubt be familiar with the works of psychologists Daniel Kahneman and the late Amos Tversky, whose lives were recently documented by writer Michael Lewis in his book The Undoing Project. Lewis describes how Thaler applied the two psychologists’ ideas to economics, noting that Thaler’s work effectively consists of two streams, one involving applications of Kahneman and Tversky’s work and the other being applications of the self-control approach.
Thaler’s and my framework featured a neurological-based structure, which preceded by more than a decade the emergence of the field of neuroeconomics
The Nobel committee points out that years after Dick and I introduced our theoretical self-control framework into the economics literature, Kahneman popularized the two-system approach in his book Thinking, Fast and Slow. Kahneman, too, is an Economics Nobel laureate, having won the prize in 2002. The committee also notes that Thaler’s and my framework featured a neurological-based structure, which preceded by more than a decade the emergence of the field of neuroeconomics. I have to admit that this is a source of particular pride for me. At the same time, I feel fortunate and grateful to have been in the right place at the right time.
Thaler’s Nobel Prize is well deserved, and we are all the better for it.